Nearly a year before Jersey City-based New Jersey City University declared a financial emergency, top administrators prepared a budget showing a surplus even though they knew it contained a likely unlawful allocation of federal COVID-19 funds, a state official said Thursday.
Improper budgeting caused a deficit of nearly $14 million by the end of the fiscal year at the university, according to an investigation by the New Jersey Office of the State Comptroller.
The investigation found that in the spring of 2021, New Jersey City University was in deep financial trouble as a result of years of declining student enrollments coupled with steady and dramatic increases in spending.
Facing severe financial pressures, senior administrators at the university submitted a budget for the 2021-22 fiscal year the month before the fiscal year started. The budget, approved by the school’s board of trustees, called for using nearly $14 million in federal COVID-19 funds from the Higher Education Emergency Relief Fund to pay for existing institutional student scholarships.
A state comptroller review of more than 50,000 pages of documents, including emails, shows that the university’s top administrators, including the then-president, chief financial officer, and vice president of enrollment, were told that using the federal COVID-19 funds for an existing scholarship program would likely violate federal law.
The COVID-19 funds were not spent on this unlawful purpose. Instead, university officials began draining the school’s cash reserves to fund the scholarship program in the fall of 2021. There is no evidence that top administrators disclosed the budget shortfall — which amounted to about eight percent of the budget — to the board of trustees until a new interim CFO was hired in April of 2022, officials said.
In June of 2022, the interim CFO of the university informed the board of trustees that the adopted budget’s year-end projection of a $480,000 surplus would likely turn into a nearly $14 million deficit. With just 25.5 days of operating cash on hand, the university’s board declared a financial emergency.
Enrollment at the school had declined from 8,328 students in 2011 to 6,918 students in 2021. The state comptroller also discovered that the university’s real estate and capital expenses were financed, in part, with bonds that added to its debts. Interest paid on capital debt was $9.8 million in 2021, an increase of 78 percent over 2011.
In 2015, New Jersey City University’s net assets totaled $104 million. By 2021, the school’s net assets plummeted to $69 million due to years of budget deficits. Officials at the state comptroller’s office discovered that as student enrollment began declining in 2016, university officials started spending heavily in an unsuccessful effort to attract more students.
The university began offering more tuition discounts to attract students. The school also raised tuition rates by an average of three percent every year since 2011, but net tuition revenue only increased by $1 million due to the increase in student tuition discounts. Tuition comprises, on average, 60 percent of the university’s operating revenues. The number of undergraduate minor programs offered at the university also jumped from six in 2011 to 50 in 2020, but a university consultant’s review found 71 percent of the students were enrolled in just 15 of those programs.
“NJCU’s senior administrators’ conduct was remarkably irresponsible. They prepared a budget based on a risky and incorrect assumption, then failed to change course for 10 months, which thrust the university into crisis,” Acting State Comptroller Kevin Walsh said. “Senior administrators fundamentally failed in their duties to protect NJCU. OSC’s investigation found that long before the pandemic, NJCU was on shaky financial footing.”
In 2021, the then-CFO sent at least three emails to the president and others advising them that the federal COVID-19 funds should not be used to pay for institutional scholarship expenses. Despite these warnings, no action was taken to correct the budget or inform the board of trustees about serious budget issues.
The board of trustees for the university failed to exercise proper oversight over the administration, according to state officials. The board of trustees received insufficient training and failed to appreciate its fiduciary responsibilities by not conducting annual written performance evaluations of former President Sue Henderson. Without exploring the causes of the financial crisis, the board allowed Henderson to resign immediately before it declared the financial emergency. Henderson’s separation benefits included a $288,000 “transitional sabbatical,” a car, and a housing subsidy.
Walsh said the decision by university leaders about how to use the federal funds in June 2021, and the failure to alter course were the primary causes of the financial emergency. Walsh said the timeline shows that in March of 2021, the university learned it would receive $25 million in federal funding. Then there were several emails about the allowable use of the funds. Senior administrators seemed to come to an agreement that they couldn’t use the funds for the existing scholarship program.
“And yet the budget was submitted in June, using the funds for the very purpose they had earlier concluded that they couldn’t be used for,” Walsh told reporters Thursday. “Then administrators continued to have more conversations about whether they could use the funds for this purpose. Notably, no one says they can, and there are plenty of indications that it is not permitted by federal law.”
Walsh said the guidance on using the federal funds was clear. “Half of the money was for the students. They got to decide what to do with it. The funding was to meet their emergency needs, not the university’s emergency.,” Walsh said.
“The administration presented it in the budget and didn’t correct course, for 10 months. In the fall of funds in the fall of 2021, they actually started using cash reserves, not the federal funds they had budgeted to use, another strong sign that they were aware this use was wrong,” Walsh said. “And yet despite emails, despite how the funds were actually used, we found no evidence that the administration told the board about the problem until April of 2022 when the interim CFO joins the administration. Then in June, the new CFO told the board that there was no surplus as projected and that they would have a $14 million deficit. That then led the university to declare an emergency.”
Walsh said It’s important to note that the $14 million budget cap was not inevitable. “It was the result of poor decision-making by leadership and a breakdown in governance,” Walsh said, adding that leaders could have been doing something else to reduce and prepare for the deficit.
“Instead, inaction led the university to drain cash reserves and spend money it didn’t have they chose inaction over dealing with reality,” Walsh said. “We also found the Board of Trustees failed in its oversight responsibilities. It was in the dark about something that was a real threat to the university. Its members weren’t trained properly, even though state law required training.”
Walsh said the board failed to conduct an annual written review of the president, even though her contract required it. The board allowed the president to resign then with a six-figure separation package. without looking into the causes of the crisis she led the university into, Walsh said.
“All of this helps show some of the risks that are inherent in how New Jersey has structured our higher education system, Walsh said. “The decentralized structure of higher education in New Jersey has created an environment in which it was possible for administrators to make irresponsible financial decisions without detection by the state.”