In November, the university released a statement painting a troublesome picture of its financial state. This came months after USC began implementing several cost-cutting measures, including laying off about 180 employees.
“While USC remains financially stable, we are operating with a structural deficit, meaning our normal operating expenses exceed our typical revenues,” the Office of the Provost wrote in an email.
The office presented an exhaustive list of costs that had led to this “structural deficit,” such as “inflation,” “financial aid growth” and “the rising cost of college athletics.” Apart from “investment in compensation” and “investment in critical infrastructure,” USC indicated that the costs were strictly out of the university’s control. Costs were “external,” not active decisions made by the university.
However, it is clear months later that USC has been actively deepening its operating deficit despite being aware of the structural issues that would be caused. Namely, USC continues to grow its debt beyond $3.2 billion and has been expanding its managerial staff at extraordinary rates.
In a statement to student media, Erik Brink, the university’s chief financial officer, said “USC has been making changes since 2017” to combat the current deficit.
In 2017, the university’s operations were turning a profit.
The next year, USC turned its first operating loss due to more than $200 million in legal settlements tied to George Tyndall who had abused hundreds of students as a campus doctor. However, excluding the costs of legal settlements, 2019 was the university’s first — and most severe — year of loss in recent history.
USC ran a deficit of almost $400 million, thanks in no small part to losses in contributions, sales, and auxiliary enterprises — which include USC Bookstores, Hospitality and Housing. Around that time, USC was dealing with the fallout of the Tyndall and Varsity Blues scandals.
Though USC never turned a worse deficit than in 2019, the financial state of its operations never rose to the profits it had seen previously. The deficits persisted.
The university’s changes in response to these deficits included pausing automatic retirement contributions in 2021, cutting many future employee benefits in 2024 and enacting a staff hiring freeze last month.
However, some disagree that USC’s deficits are “structural” or concerning at all. Howard Bunsis, an accounting professor at Eastern Michigan University, recently compiled a report on the university’s financial state for the USC chapter of the American Association of University Professors.
In the report, Bunsis claimed that “USC is in very strong financial condition” as evidenced by strong credit ratings, expanding revenues and high cash flows.
While the report became public March 7, USC AAUP had commissioned it long beforehand. Christina Dunbar-Hester, the chapter president, said the commission came before the university’s statement about its deficit.
“The context, actually, for commissioning the report was feeling like university budgets were being balanced on the back of faculty and staff,” Dunbar-Hester said. “When the university was more flush, it wasn’t necessarily sharing that around as generously or fairly as we might hope.”
Dunbar-Hester and two other tenured professors wrote an op-ed for the student-run Morning, Trojan website calling for university administration to take pay cuts similar to those taken at the beginning of the pandemic to help shoulder the current financial burden.
According to Bunsis, reports like the one he compiled take “about 100 hours” to complete, and Bunsis has compiled similar reports for over 100 universities throughout the past 20 to 25 years.
“This structural deficit that they talk about, that’s a completely made-up construct,” Bunsis said. “If they had these huge structural deficits, do you really think they’d have an Aa2 bond rating? Not a chance.”
The bond ratings that credit rating agencies give to USC are estimates of the university’s ability to pay principal and interest payments on the bonds that they issue. Despite some turbulence, these ratings remained strong throughout the years.
Moody’s Ratings downgraded USC to the Aa2 bond rating last spring after expressing concerns with the university’s investment in its health care services. With their Aa2 and AA categorizations, the university currently holds the third-highest bond ratings at Moody’s Ratings and S&P Global Ratings — two of the “Big Three” credit rating agencies.
These agencies analyze the almost $3.2 billion worth of bonds that the university is obligated to pay back to investors. That amount has grown since Carol Folt became the president of USC in 2019.
USC’s debt sat at $1.6 billion for three years in a row before Folt arrived. In the five years since, the debt doubled. On April 3, USC issued an additional $600 million in bonds. According to S&P Global Ratings, USC now has about $3 billion more debt than the median similarly rated private university.
That amount varies widely from university to university. Whereas Emory University — which has the same bond rating but more assets than USC — holds over $3 billion in debt, Vanderbilt University — which has a higher rating but fewer assets — holds $600 million in debt. Meanwhile, the University of Notre Dame has more assets than USC, a higher debt rating and $1.2 billion of debt.
Some professors at USC believe that the university’s debt portfolio grew as a result of the cost of legal settlements. For a time, this was accurate, as USC prepared a $421 million line of credit to supplement settlement payment, but this line of credit was never drawn on, as the university could pay for the settlement out of pocket. Furthermore, most of the bonds were not issued during or immediately following the years that USC reported substantial settlement costs.
According to the university, the most recent bonds issued are paying for “strategic capital projects,” which include renovations to Keck Hospital and Norris Cancer Center, as well as a new soccer stadium and a baseball field. Previously, Brink wrote that the university issued the bonds primarily to pay for property.
“Bonds issued since 2019 have funded both new facilities and maintenance of existing ones,” Brink wrote. He cited the Ginsburg Computer Science building and Pasadena medical office building, as well as acquisitions like the Capital Campus in Washington, D.C., which is expanding to include a television studio setup.
USC made all of these purchases while it was aware of the operating deficits it was running. In addition to the operating costs related to running and maintaining a building, the university had to pay interest.
Throughout Folt’s tenure, USC’s interest on its debt has also nearly doubled from $64 million to $118 million. That increase contributes to the current $158 million deficit that the university has called “structural.” Over a third of that deficit can be accounted for by the growth in interest alone.
When questioned by Annenberg Media, the university did not provide any specific revenues used to pay off interest payments.
Compared to its debt history and the current debt of other universities, USC’s debt and interest payments are strikingly high. According to Brink, they are not expected to wane any time soon.
“USC is continuing to grow, and the university will be expected to borrow at the pace that it grows,” Brink wrote.
Meanwhile, pre-existing programs at the university continue to shrink, as Dunbar-Hester noted.
“It’s pretty insulting to faculty and staff and to students to be out there making new capital commitments and going into debt and then turning around and telling us, ‘Oh, we don’t have enough money,’” Dunbar-Hester said.
While the interest payments will continue to intensify the deficits that appear on the university’s financial statements, Bunsis says they do not indicate poor financial standing.
“The level of debt, even though it seems high, [is] certainly much less than the level of assets,” Bunsis said. “[The interest is] a pimple on an elephant. It just doesn’t matter.”
According to the university’s financial statements, USC’s largest expenses are “salaries and benefits.” In the most recent statement, these accounted for $4.3 billion — over half of USC’s total expenses. The statement splits compensation and benefits and breaks each of them down into three categories.
Academic, health care and student services are in a singular category. The other two are support services and fundraising activities. When compiling the report, Bunsis noted the lack of transparency in the way these expenses are broken down.
“They’re one of the least transparent universities I’ve ever seen in terms of what they put in their audited statements,” Bunsis said. “They put their total expenses into three different categories. That’s it. Most universities have 10 and 15 different expense categories. USC has three. So when you put things in three categories, it’s hard to really know what’s in them.”
Information from the Integrated Postsecondary Education Data System sheds more light on how employees are compensated at USC. The U.S. Department of Education created and conducts IPEDS using data gathered from surveys that are mandatory for institutions that participate in federal student financial aid programs.
Since 2019, the number of non-medical management employees at USC has grown by 15%. Meanwhile, the number of all other nonmedical employees grew by 1%.
In a statement to Annenberg Media, the university noted that “since 2017, USC has decreased administrative unit headcount by more than 100 positions.” The management staff measured in the IPEDS data is defined as “staff whose job it is to plan, direct, or coordinate policies, programs, and may include some supervision of other workers.” As such, university administration is not equivalent to management staff.
The average salaries of these employees rose by over a fifth, as did the salaries of the management employees, according to the IPEDS data. However, the average management salary began at $60,000 more than the average non-management salary.
Furthermore, because of the size of the management pool at USC — which is currently the second largest occupational category at USC, behind “primarily instruction” — growing management costs increased USC’s expenses more than any other occupation at USC in the last five years.
The phenomenon is shown explicitly when looking at the five highest compensated employees at USC, as reported in the university’s tax forms.
In 2019, these employees were paid over $15 million collectively. In 2023, the latest publicly available tax form, USC paid the top five over $35 million, most of which can be attributed to football Head Coach Lincoln Riley. However, even when excluding Riley’s $19.6 million compensation, the increase outpaces typical raises significantly.
Dunbar-Hester said the cutbacks enacted during the pandemic gave faculty the sense that USC was rewarding certain “higher level” positions while punishing many other employees.
“Inflation really started to shoot up in that period, and so we’ve had our retirement contributions frozen for a year. We’re seeing inflation go up. We’ve had raises frozen,” Dunbar-Hester said. “All of that, again, was understandable in that context, but it seemed like [USC] wasn’t sharing the relative comfort that the university found itself in equally.”
The size and cost of administration at USC stood out from peer institutions that Bunsis had previously researched. He said the figures suggested a misplaced focus regarding the university’s cutbacks.
“I don’t think they need to be making core mission cuts at USC. If they want to cut anything, the administrative salaries at that place are astronomical, and the administrative costs are astronomical,” Bunsis said. “[If] they want to cut anything, go ahead. Knock yourself out. Cut that.”