Minutes

Charles Speaks (chair), Brittny McCarthy Barnes, Jean Bauer, Charles Campbell, Daniel Feeney, Elo Charity Oju, Richard Pfutzenreuter

Stanley Bonnema, David Chapman, Stephen Gudeman, Wendell Johnson, Michael Korth, Terry Roe, Susan Carlson Weinberg

Eric Kruse, Michael Volna, J. Peter Zetterberg

Executive Vice President Robert Bruininks; Vice President Charles Muscoplat

none

[In these minutes: (1) discussion with Dr. Bruininks about the report on research universities, accountability riders, role of the Budget Advisory Committee, tuition reduction proposal, U-MnSCU relations; (2) overview of the University's budget with Mr. Pfutzenreuter]

Professor Speaks convened the retreat at 8:30 and welcomed Dr. Bruininks. The Committee talked with Dr. Bruininks about a number of topics.

-- The University of Florida report on research universities. Dr. Bruininks told the Committee that the University knew the study was being conducted; the University tracks the data that the report used. The University is in an elite group of universities, among the top five publics in the country. The University gets a much higher ranking in studies when there is solid empirical research and an evaluative study. It is a step in the right direction in terms of restoring sanity to the rankings game and the methodology is better than that used by U. S. News & World Report (and there is even considerable subjectivity in the National Research Council rankings, arguably the best available system); the Florida study also counteracts the east/west coast effects that seem to affect other rankings. (The full text of the study can be found at http://thecenter.ufl.edu/research2001.html) One former Big Ten chancellor described ranking systems as "fraudulent" when applied to public research universities.

Where the measures used in the rankings make sense and where they are reliable, the University will build them into its own evaluation. One hopes to get beyond rankings; a student can go to an institution ranked 20^th and get just as good an education as from an institution ranked in the top 5, and the differences between rankings when carried to the third decimal place have no significance whatever.

-- Will there be graduate reviews again? Dr. Bruininks said he has talked with Vice President Maziar about conducting reviews over a longer period of time; some departments do not need to be reviewed every five years while others, facing problems, may need more frequent review. They are also thinking about measures to be used and believe that review should come through the compact planning process. In any event, he concluded, the process should come from the units, not from the top down.

-- There will be a written work plan to respond to the accountability riders from the most recent legislative session. The University anticipated the accountability emphasis and talked about it with the legislature. One of the riders requires reporting information; one requests the University to identify five areas of undergraduate education that are high priority (how does one define these?); another asks about the status and future of the Minnesota Extension Service. In the case of the last, there are challenging questions given flat or declining state and federal funding and a county-based system that also relies on local government for a percentage of salaries). These three riders have reporting deadlines in February but the University expects some aspects of these riders to recur. Dr. Bruininks said there would be a written work plan ready next week that would include how consultation with Senate committees would take place. It may be that joint working groups may be appropriate for some of the riders. He said he would bring the plan back to the Committee in early September.

On the Extension Service, Professor Campbell pointed out that there is a political dimension to the decision: extension agents ARE the University to the people they serve; one worries about the political impact when one talks about cutting back the Extension service. Dr. Bruininks agreed that any actions should be thoughtful and long-term; the state and federal government have invested a lot in the programs over the last 100 years. The future of extension is related to the shift in population to the suburbs, to outreach, and to civic engagement.

-- The Budget Advisory Committee will remain in place for now, Dr. Bruininks said, and he will consult with the Committee on the role and future of the Budget Advisory Committee (BAC). Originally, the Budget Management Task Force was charged to look at the University's budget structure and process. The BAC should also look at internal assessments and evaluate the budget model for funding overhead costs. In general, it should look at issues of design; ultimately, however, these issues should be brought back to the Committee on Finance and Planning as part of the normal governance process.

Dr. Bruininks agreed that it is often difficult to tell the difference between this Committee and the BAC in terms of jurisdiction. He said the membership of the BAC should be clarified and that its continued existence, after it considers issues of design and impact, should be reconsidered. It maybe that it should be reconstituted from time to time to work on specific projects.

-- Dr. Bruininks said there will be a proposal to re-think the charges levied by the Office of Information Technology.

-- Dr. Bruininks said he has been hearing support for the proposal to offer tuition reduction for children of faculty and staff. It is a good idea, he said, but something the University should not support. Committees sometimes make proposals, which go to the Faculty Senate, without analysis of the fiscal implications or the trade-offs required. In terms of this particular proposal, he said he does not believe the University has an employee turnover problem and if there were funds saved by reducing turnover, they would be put into the programs. There is also the question of the symbolism: the University raises tuition 13% and then gives a benefit to its own employees. He asked if there were not a number of items this Committee might find more important priorities for spending (such as diversity, spousal hiring, retirement benefits for new faculty, Regents' scholarships for employees, academic infrastructure, libraries, classrooms and technology, and so on).

When proposals with monetary implications are made, Dr. Bruininks suggested that they be routed to the Committee on Finance and Planning for a fiscal analysis. There are a lot of important things the University can spend money on and there should be more analysis before proposals are presented to the Senate and the Regents.

-- Are there overlapping missions between the University and MnSCU? Dr. Bruininks said that Dr. Zetterberg in Institutional Research and Reporting did an analysis and found that there is very little overlap between the two systems. Both Morris and Winona have essentially a liberal arts focus, but that kind of overlap will be found in comparison of ANY systems. The real issue is mission differentiation and mission creep; a considerable amount of the latter will be seen as time passes. The cost profiles of institutions will also need to be examined, especially when the return on investment for the student is not that high. Another issue that may have to be reconsidered is the number of campuses in Minnesota, although the possibility of closing a campus is always fraught with political difficulties.

If there were pressure on the University to limit or decrease enrollment in order to encourage students to attend MnSCU campuses, it is just as likely that the result would be that students would be "exported" to other states rather than choosing local campuses. His view, Dr. Bruininks said, is that the University should INCREASE enrollment in selected areas and nurture partnerships with MnSCU institutions. For the University to cut enrollment would mean students may well attend schools out of state, especially if those schools discount non-resident tuition, and the result could be a brain drain for Minnesota.

Professor Speaks thanked Dr. Bruininks for joining the retreat.

Professor Speaks turned next to Mr. Pfutzenreuter for "Finance 101," a review of the University's budget. Mr. Pfutzenreuter distributed to each Committee member a spiral notebook of slides containing budget information and provided commentary. Herewith a brief summary of the data and information:

-- How big is the University's budget? It is about $2.1 billion per year and consists of two major pieces: current non-sponsored expenditures ($1.75 billion, which includes virtually all of the state appropriation) and current sponsored expenditures ($334 million). The latter expenditures include multi-year contracts from various agencies; the University was awarded about one-half billion dollars in multi-year contracts last year. The $2.1 billion total does NOT include capital expenditures or plant funds.

-- The budget consists of two large categories

I. Current Funds (the $2.1 billion, above)

Current funds include

-- Sponsored funds (restricted grants and contracts)

-- Non-sponsored funds, which includes

II. Non-Current Funds (plant funds, endowment and similar funds, and loan funds).

The current funds can fluctuate considerably, depending on appropriations from the state and include funds that are being spent over several years. Faculty and regental attention is most focused on the centrally-distributed and attributed funds (I. 1., above).

The current non-sponsored funds for 2001-02 total $1.813 billion (expenditures in this same category, noted above, are about $1.75 billion). They come from the following sources:

36% operations and maintenance

5 state specials

1 central reserves

16 tuition

4 indirect cost recovery

10 auxiliary enterprises

9 internal service organizations

7 other unrestricted

5 gifts/endowments

There is a growing myth that the University does not receive much money from the state, Mr. Pfutzenreuter observed, and that is not true. The state provides about 41% of the non-sponsored funds, through the operations and maintenance and state specials appropriations. How these funds are spent can be tracked either by object of expenditure (salaries, student aid, supplies, utilities, and so on) or by function (academic support and student services, instruction, research, public service, and so on). Mr. Pfutzenreuter said he had much more confidence in the first numbers than in the second.

For fiscal year 2001-02, the University's operating budget is this:

revenues and net transfers 1,777,419,415

Of the current non-sponsored revenues, 56.8% are generated by the units and 43.2% are centrally-distributed. The local unit revenues consist of restricted income, tuition, fees, auxiliary operations, sales and services, business and industry, grant and contract, endowment and gifts, clinical income, indirect cost recovery (the units' 51% share of ICR funds), and other sources. The centrally-distributed funds come from O&M, state specials--which together comprise 93% of funds available to the administration to distribute--central reserve income, and indirect cost recovery funds (central administration's 49% share of ICR funds, which amounts to about 5% of the total funds available for central allocation). That the central administrative distributes as much money as it does is what has created problems in paying for common goods.

Of the O&M funds, 82% of what the central administration has to distribute, the state provides 87%. The internal revenue sharing tax provides 6%, the enterprise assessment provides 1%, and 6% comes from various other sources. The O&M funds used to be exclusively state funds, but they now also include the various internal assessments; all these funds are commingled and then allocated for expenses. There is no separate fund for the IRS money, the enterprise tax, the new $75-per-semester student fee, and so on. People have wondered if that new student fee is for student-related expenditures; it is not.

Of the centrally-allocated funds: about 1/2 of O&M funds go to academic units, about 1/2 to support units; about 1/2 of the ICR funds go to the academic units and 1/2 to the administration; all of the state special appropriations and all of the tuition income go to academic units. The central administration will allocate $366.3 million to support units for 2001-02.

Mr. Pfutzenreuter then reviewed the University's chart of accounts. Centrally, they pay attention to 49 "Resource Responsibility Centers" (colleges plus support units); within those units there are 783 areas and nearly 41,000 different "orgs." The total chart of accounts of the University is thus a table of about 41,000 rows by 783 columns; there are numbers in each cell of the table for fringe benefits, supplies, etc. There are so many accounts because of the many reporting requirements the University must meet, Mr. Pfutzenreuter explained; managing 41,000 accounts requires a lot of time and money.

In terms of the state's general fund budget of $13.1 billion, higher education receives about 10% (K-12 education receives 32%, property tax aids and credits 13%, health and human services 22%, criminal justice 3%, transportation 7%, state government 3%, and 2% each to environment/DNR/ag, debt, family/early childhood, and other). In the late 1980s, higher education received about 15-16% of the total; while the actual dollars to higher education have increased, its SHARE has declined with increased funding to K-12 education, property tax relief, and so on--items with which it is difficult for the University to compete. Nor will be it be good for higher education that the state took over funding for K-12 education.

The title of one slide: "All indicators of state support for higher education point in the same direction--Down. In Minnesota the change has been greatest since 1990." Appropriation of state tax funds for higher education as a percentage of personal income has been declining both in Minnesota and nationally since 1980. As a percentage of state spending, the University's portion has been declining since 1970, with only a slight increase in the last 1980s. Over the course of the 1990s, state appropriations (except for 1999 and 2000) have not kept pace with inflation.

Mr. Pfutzenreuter reviewed the history of the budget development process over the last 10 years. He said that from 1992 to 1997 the "rules of engagement" were not well understood and were somewhat erratic, with a number of side deals. That situation in part led to the development of Incentives for Managed Growth (IMG), which made the rules clearer. For the last year or so, however, there has been an increasing concern about funding for common goods: how does the administration pay for all-University expenses?

The basic change, in the conversion to IMG, was that instead of (1) state funds, (2) tuition, and (3) ICR funds all going to the administration and then being allocated to academic and support units, only (1) state funds and about half of (3) ICR funds go to the administration with the other half of (3) ICR funds and all of (2) tuition going to the academic units. The administration allocates the state funds between academic and support units. Vice President Muscoplat observed that few people realize that the Law School, for example, receives only about 5% of its budget from state funds--the state has a world-class law school for only a couple of million dollars a year, which is a great bargain.

When the change to IMG was made, it was known that there would be stress on the ability of the administration to make academic investments and pay for common goods. At one point there was a per-square-foot charge for facilities on the Twin Cities campus but that part of IMG was abandoned because it was an administrative nightmare. Giving up that income, however, meant the administration had to create a tax to pay its bills.

Mr. Pfutzenreuter distributed a one-page sheet with a comprehensive summary of the central budget process and cycle for both operating and capital budgets; it, he said, provides guidance to the Committee on what it needs to pay attention to, and when. Consultation on the biennial request is difficult, he said, because much of the work takes place in the summer, for review by the Regents in September and October. One can arrange the request in a lot of ways, he said, and it is not clear which way works best. It often serves an explanatory function to the citizens of the state. Vice President Muscoplat commented that no one has found a successful pattern for making biennial requests.

Institutional revenue-sharing consists of two parts for 2001-02. First, a tax of 3.25% on "sales and service" revenue is calculated (estimated yield of $9.1 million). Second, a 3.75% tax on all revenues is calculated, from which the amount paid under part 1 is subtracted; the balance is the internal revenue sharing assessment (estimated yield of $30.3 million).

Mr. Pfutzenreuter reviewed the timelines for budgets and reported that the administration will not prepare the six-year capital plan this fall because there is so much activity around the legislative accountability riders. The University will let the Pawlenty commission do its work and then link its capital request to whatever recommendations it accepts that come from the commission. The biennial request would be similarly linked to whatever recommendations the University accepts.

Mr. Pfutzenreuter briefly reviewed the process for development of the capital plan and the stages through which a capital project must go before it is actually built. The considerations and constraints that affect a capital project are many: academic and service unit strategic directions are one, but there are many others, such as legal obligations, availability of unit resources, health and safety concerns, project interdependencies, prior planning or partial funding, ability to leverage private funds, annual operating and debt costs, geographical balance, project readiness, potential for staging, traditional share of state bonding, bond rating, and the 1/3 state matching requirement. It is NOT just a case of "it's my turn," Mr. Pfutzenreuter concluded.

Over the last 10 years, the University has received about 14-15% of any state bonding bill. The least it received (although the largest percentage, at 19.1% in 1992, but of a small amount) was $44.5 million; the largest amount was $138.8 million (14.7%) in 1998. In the 2002 legislative session, the University is requesting $186 million.

Mr. Pfutzenreuter next reviewed the University's debt. It totalled $538.2 million on June 30; the majority of it (92%) is in fixed rate debt. 90% of the debt is University-issued; 10% is the University's share of the one-third it must pay for some state-funded capital projects. The University is aggressively retiring its debt; much of it has been sold for 20 years, so the total would be reduced by 89% by the year 2020. The debt capacity is, however, recycled, so there is no expectation that the debt would actually be eliminated.

By October of this year, the University will have about $780 million in debt when additional obligations are incurred. Both Moody's and S&P have maintained the University's bond rating even with the increased debt; the agencies have a positive and optimistic view of the University's financial management. The University does not have an AAA rating; its rating is Aa/AA. The University could probably have argued itself into an AAA rating but the change would have a negligible effect on the interest rates it pays and the process of obtaining the rating is quite political.

The peak year for debt service payments will be 2004-05; about half of the payments come from central funds and about half from auxiliaries.

Is the University about at its debt limit now, Professor Feeney inquired? Mr. Pfutzenreuter outlined the Regents' policies concerning debt and then explained that debt capacity is an estimate, not a precise dollar amount, determined by a variety of objective and subjective factors. In addition, access to low-cost financing for capital projects is a key element in strategic investment decisions. Large demand for capital investments, however, cannot be met at the same time, and there is a need to balance the impact of debt service against other University spending priorities.

Mr. Pfutzenreuter then talked with the Committee about the University's investments and associated policies and identified web sites where much information about the University's finances can be found.

Professor Campbell asked that the Committee be provided with information about how each capital project is being paid for.

Ms. Oju recalled that earlier in the meeting Dr. Bruininks suggested the Committee conduct fiscal impact studies when other Senate committees make proposals. Mr. Pfutzenreuter said he thought this is the appropriate committee to discuss priorities but that it was not in a position to conduct analyses. Committee members concurred. The point Dr. Bruininks made, Professor Campbell said, is that Senate committees push particular proposals but there is no place in the Senate structure to look at the range of possibilities and recommend choices. In that vein, Mr. Pfutzenreuter suggested the Committee needs to look each year at what has become known at "Fitz's list," items that the University MUST fund but that the legislature will not pay for (e.g., make the student financial aid computing system work).

End of Part I of the minutes.