Minutes

Charles Speaks (chair), Prince Amattoe, Stanley Bonnema, Charles Campbell, David Chapman, Daniel Feeney, Stephen Gudeman, Wendell Johnson, Michael Korth, Elo Charity Oju, Richard Pfutzenreuter, Terry Roe, Rose Samuel, Susan Carlson Weinberg, J. Peter Zetterberg

Brittny McCarthy Barnes, Jean Bauer, Eric Kruse, Michael Volna

Sheila Warness (Asset Management); Executive Vice President Robert Bruininks

Florence Funk (Office of the Executive Vice President and Provost)

[In these minutes: (1) asset and debt management and status of University investments; (2) work plans for legislative accountability riders; (3) financial trends and comparisons (much data about the University, comparisons with other top public institutions)]

Professor Speaks convened the meeting at 2:20 and welcomed Ms. Sheila Warness to report on asset and debt management.

Mr. Pfutzenreuter explained that this is an annual report to the Board of Regents; a similar presentation will be made for the University’s annual report both at this Committee and to the Board of Regents. Regent O’Keefe, chair of the Finance and Operations Committee of the Board, asked the administration to make the presentation a tutorial as well as a report, inasmuch as there are several new members on the Board committee. He concluded by cautioning that one must think long-term about these issues.

Ms. Warness distributed copies of 29 PowerPoint slides and walked the Committee through the contents. [These minutes will provide a brief narrative summary of the content of the slides and will not reproduce the many tables of data concerning University investments.]

-- In terms of investment oversight, Regents' policy is central. The administration implements the policy, in concert with an Investment Advisory Committee, a consultant, and the portfolio managers.

-- Domestic equity funds can be divided between "value" and "growth." In the year ending June 30, 2001, the return on Growth funds was down between 36.2% and 23.3%, depending on whether they were large cap, mid cap, or small cap. For the same year, Value funds were up anywhere from 10.3% to 30.8%, again depending on whether they were large cap, mid cap, or small cap. The small cap Growth funds declined the least and the small cap Value funds increased the most; performance of the large cap funds was the reverse. Across all six indices (Growth and Value, large-, mid-, and small-cap in each category) there was a 13.9% decline in value.

-- World equity indices for the year ending June 30, 2001, were almost all down. Only Mexico saw an increase. By comparison, the fixed income market benchmarks were up for the same period; domestic equity fared better than world equity markets.

-- The University manages three funds:

-- The Consolidated Endowment Fund (CEF)

-- Long-Term Reserves (GIP)

-- Short-Term Reserves (TIP)

The value of CEF is down from $779.5 million in June, 2000, to $657.3 million in June, 2001, primarily due to market conditions and distributions for spending. The value of GIP is down from $57.5 million to $42.7 million, primarily due to a large withdrawal in addition to negative market returns. TIP is down from $382.2 million to $360.4 million. TIP is the University's working capital and fluctuates daily; changes in TIP say nothing about the market.

Assets related to indebtedness have declined as well, but that reflects spending for construction rather than market changes.

-- Other assets managed separately are

U of M Foundation (at $802 million, up from $790)

MN Med Foundation (at $245 million, down from $283)

RUMINCO Ltd. (no significant change)

Basic Faculty Retirement Plan (at $1840 million, down from $1984)

RUMINCO is the University's captive insurance company.

Mr. Pfutzenreuter explained that the reason the CEF is down but the Foundation funds are up is because the CEF strategy has been to invest in Growth funds more than Value and more international funds; the Foundation invests more in Value funds and less in international funds, so it is up. Across the CEF, the Foundation, and the Medical Foundation there is a good diversification across all asset classes. There is no plan at present to change investment strategies, he said. Over periods of time, Ms. Warness commented, Growth and Value funds produce about the same return.

-- In terms of comparisons with benchmarks:
-- except for the last year, CEF returns have outperformed the benchmark

-- GIP performance the last five years has consistently been below the benchmark

-- TIP yields have consistently been higher than the benchmark for the last five years

-- The University's outstanding debt has not changed significantly in the last year; as of June 30, 2001, it totalled $538.2 million. The interest rate on the variable rate debt (about 8% of the total debt) has declined to 2.68%, which has helped keep debt costs low. The University-issued fixed-rate debt is at 4.45%; the state-issued debt, 10% of the total, is at 5.26%. A more complete report on debt will be brought back to the Committee next month.

-- By Board of Regents' policy, the endowment fund investment objectives are (1) "to preserve the inflation-adjusted value of the fund" and (2) to "maximize total return (income plus capital appreciation") with a goal of at least 500 basis points annually above inflation" over a 3-5 year period. The second point relates to the spending policy: to retain the inflation-adjusted value and allow spending at 5.5% (the current rate), the funds need to increase more than the rate of inflation. The return on the CEF in the last year has been negative; over the last 10 years, however, there has been tremendous value added.

At one point Professor Gudeman asked about the usefulness of the distinction between international and domestic equity in an increasingly globalized world where "domestic" corporations, for example, may do as much or more business outside the U.S. as they do inside. In addition, the international equity markets are seriously affected by the strength of the U.S. dollar. Ms. Warness said these are discussions that are continually taking place; she agreed that the domestic and international markets have appeared to be more closely correlated in recent years. Ms. Warness commented that the U.S. is only a portion of the available investment universe; if one does not invest in foreign markets, it limits opportunities. She said the University fund managers are not required to hedge foreign investments against currency risk, although they may do so, at their discretion, for a portion of their portfolio.

-- The spending guidelines: endowment funds are distributed for current operations at a rate between 5 - 6% (currently 5.5) on a three-year trailing basis. There is a contingency: if at the end of any quarter the return is lower than what is necessary to protect the purchasing power of the endowment, the spending rate will be reduced at the next January 1 or July 1 by .25%, and again in the following six months, to a level of 5%. Ms. Warness speculated that such a reduction may be necessary on January 1, 2001, if returns and value continue to decline. Asked what the actual dollar amounts would be, Ms. Warness said--with the caveat that a lot of assumptions have to be made--that for 2001-02 the amounts allocated will actually be slightly higher than in the previous year by about $80,000; if there is no increase in market value, the amount of funds available for spending in the following year could decline by about $4.9 million.

Will departments be affected by the decrease, Professor Gudeman inquired? Ms. Warness said she did not know how departments budget; if they projected the same amount they had last year, they will be fine; if they projected an increase, they will be short of money.

-- Ms. Weinberg inquired about the Faculty Mortgage Program, funded through GIP; do these data increase the pressure to change the program? Will she be returning to the Committee with a proposal? Ms. Warness recalled that the Committee on Faculty Affairs had recommended that the University hire someone to help faculty find the best mortgage rate, in lieu of the Faculty Mortgage Program; that is something that is not within her bailiwick. Mr. Pfutzenreuter said the issue will be brought back to the Committee on Faculty Affairs.

Professor Speaks thanked Ms. Warness for her presentation and commented that the Committee would have to think about the material before it could raise questions.

Professor Speaks now welcomed Executive Vice President Bruininks to discuss the plans for responding to the legislative accountability riders adopted last spring.

Dr. Bruininks distributed a handout summarizing the riders, who is responsible for preparing the response, and when the responses would be brought to the governance system and Board of Regents. The notations about which governance committees will be involved are suggestions; FCC is of course welcome to suggest alternatives.

One of the riders concerns long-term planning for the Academic Health Center and how the funds from the tobacco endowment will be used. That same rider also calls for the University to identify high-priority undergraduate programs (out of the approximately 200 programs at the University). The Senate Committee on Educational Policy will be the lead governance group to be consulted on this rider; it as well as the response concerning the Academic Health Center will be brought to FCC.

In response to a question, Dr. Bruininks said the University would take the riders seriously, because the legislature asked for a response and the Board of Regents will perforce take them seriously. Professor Gudeman inquired if there were any accountability for the accountability process, any cost-benefit analysis of the riders themselves. Dr. Bruininks surmised that there would be an exceedingly low benefit for the cost involved and that the University could probably spend the effort more productively. However, given that the University must respond, it will do so to the best of its ability and as accurately and completely as possible.

Another rider concerns the University of Minnesota Extension Service, something in which the legislature has a long-term interest. There is recognition that state needs are changing dramatically and a need to think about the alignment of academic programs and outreach funds across the state. The Regents are so committed to addressing issues related to outreach, including future directions for the Extension Service, that they have appointed an ad hoc committee on outreach; he has also appointed an administrative committee to take it up, Dr. Bruininks said. This one will also be brought to FCC.

One of the riders concerns coordination of post-secondary education in the state, especially in the metropolitan area. Are higher education funds being used with the most effect? The response will be discussed with FCC.

The Commission on Excellence has not begun its work; neither the House of Representatives nor the Governor has appointed representatives. Vice President Maziar will be the lead administrator responsible for working with the Commission, which also has as a member Professor W. Andrew Collins; the work of the Commission (if it ever gets going) will come to FCC.

Reports on all but the last of the riders are due in February. The University will deal with the issues to the best of its ability; where it is not ready to make a firm decision, it will likely explain why and how it will deal with remaining questions. Why, Dr. Bruininks asked, would anyone want a premature judgment about the Extension Service, undergraduate programs, or metropolitan education?

The challenge with these riders is to tell the public that the University is about more than just growing the economy, that it has broad-based activities across the state. It is unclear whether the investment in the riders will pay off this way, Dr. Bruininks concluded.

Professor Speaks thanked Dr. Bruininks for joining the Committee.

Professor Speaks now turned to Dr. Zetterberg for a presentation on the University's financial trends and comparisons.

Dr. Zetterberg distributed copies of 52 PowerPoint slides and narrated the contents for the Committee. [As with the slides on assets, this will be a narrative summary of a large number of graphs and tables of data; the text from some of the slides will be reproduced here.]

1. BACKGROUND: FINANCIAL TERMS AND COMPARISON GROUP

Dr. Zetterberg began by noting financial terms and the comparison group.

Only about three institutions come close to being the same size as the Twin Cities campus: Ohio State, Wisconsin, and the University of Florida; most others are notably smaller in enrollment and programs.

Dr. Zetterberg explained the source of the financial information he would be presenting; the data are collected nationally and the "accounting standards for higher education institutions are quite standard across the country. It is actually easier to compare financial information than student information or HR information." There is no national definition of a "full year equivalent" student, so all student data are headcount. He also explained the terms used in comparing institutions: "Education and General" and "Other"; the latter includes such things as auxiliary enterprises, hospitals, independent operations, etc., and varies widely across campuses. "Education and General" revenue includes tuition and fees, state and local appropriations, grants and contracts, federal grants, contracts, appropriations, private gifts, grants, and contracts, endowments, and sales of educational activities. "Education and General" expenditures include instruction, research, public service, academic support, student support, institutional support, physical plant, and scholarships/fellowships.

The campuses (specifically CAMPUSES, not systems) in the comparison group are the Big Ten public universities, the other Top 30 public universities (by National Research Council ranking), as well as the University of Florida at Gainesville, Iowa State, Maryland-College Park, and Virginia. The other top 30 public research universities include California-Berkeley, California-Los Angeles, California-Santa Barbara, California-San Diego, North Carolina-Chapel Hill, SUNY-Stoney Brook, Texas-Austin, and the University of Washington.

2. INSTITUTIONAL CHARACTERISTICS: FACTORS THAT DETERMINE REVENUE AND EXPENSES

Dr. Zetterberg then explained how university campuses are organized and administered. There are university systems, where the campuses are administered by a separate system office (e.g., University of California, University of Texas, University of Wisconsin). There are multi-campus universities, universities with a "main" campus and "branch" or "coordinate" campuses, where the senior officers for the main campus are also the senior officers for the university (e.g., University of Michigan, University of Minnesota--and although the title is never used, Mark Yudof is also chancellor of the Twin Cities campus). Finally, there are single-campus universities, such as the University of Iowa and Michigan State University. These organizational arrangements affect budget comparisons, as noted previously: the University of California has a $500 million system budget; the University of Wisconsin system budget includes extension and the hospital.

Dr. Zetterberg then drew the attention of Committee members to a table that illustrates the programmatic differences between institutions.

The same core programs exist in most of these institutions, but in other ways they vary dramatically. Only two campuses are directly comparable to the Twin Cities campus in terms of breadth of program: Ohio State University and the University of Florida at Gainesville.

The determining factors affecting revenues and expenditures are number of students, the presence of agriculture, a medical school, and a hospital, and all administrative costs. Having both medicine and agriculture at one campus is relatively rare and a very expensive combination. Putting together these factors, Ohio State is the largest institution in the country; Minnesota is second (followed by Florida, Michigan State, Washington, and Penn State; the smallest in this comparison group are Indiana, North Carolina, Berkeley, and Santa Barbara). Dr. Bruininks has the second worst job in the United States, Dr. Zetterberg joked; the worst is the Provost at Ohio State.

3. UNIVERSITY OF MINNESOTA FINANCES 1945-2000

If one looks at revenues by source since 1945, adjusted for inflation, the University's funding has increased significantly. Total state appropriations for the same period have tended to follow enrollment, although less so in recent years; the same is true for tuition revenue and enrollment.

If one looks at the total state appropriation as a percentage of the University's "Education and General" revenues, there have been three trend lines since 1945: the percentage declined up to the late 1960s, it increased until about 1980, and has been declining ever since. Tuition revenues as a percentage of "Education and General" revenues has slowly been increasing since the mid-1950s, up from around 10% in the late 1950s to about 15% for the last several years.

One surprising graph documents federal appropriations and grants as a percentage of "Education and General" revenues: the low point was the late 1940s, the percentage climbed steadily from less than 10% to over 30% at the time of the moon walk, and has been declining ever since. Federal funds currently account for about 20% of the "Education and General" revenues, a percentage that has been fairly stable for the last decade.

One place there has been a significant upward trend has been in the percentage of the "Education and General" revenues represented by private gifts and contracts: it has increased from about 5% of these revenues in the late 1940s to about 15% in the last few years. This is because of an increase in giving and an increase in grants from private industry.

Sales and service of educational activities (e.g., non-credit instruction, workshops, the veterinary teaching hospital and dental clinics) as percentage of "Education and General" revenues has fluctuated around 10% for about 40 years. Endowment income has declined steadily since the mid-1950s; it now stands at about 1% of the total.

4. COMPARISON INFORMATION: PROGRAMMATIC

Institutions differ in the role they play within the state. The following table illustrates one aspect of those differences: the percentage of bachelor's degrees from the campus as percentage of the state-wide total number of bachelor's degrees (public and private).

Washington 27.2

Maryland 23.5

Iowa State 23.0

Minnesota 21.0

Wisconsin 20.3

Iowa 18.3

Purdue 16.6

Indiana 16.5

Mich State 14.1

Ohio State 13.6

Florida 13.1

Penn State 12.4

Michigan 12.2

Illinois 11.7

N Carolina 11.0

Virginia 10.1

Texas 10.1

Berkeley 5.2

UCLA 5.1

UCSB 3.8

UCSD 3.0

SUNY SB 2.5

One could argue, Dr. Zetterberg said, that the University of Minnesota is more important to the State of Minnesota than UCLA is to the State of California, even though both are fine academic institutions.

Another way to measure the role the institution plays in the state is to look at the doctoral degrees the campus awards as a percentage of the state-wide total doctoral degrees granted, public and private (middle omitted).

Wisconsin 82.1

Minnesota 73.7

Washington 71.7

Iowa 53.2

Maryland 50.5

. . . .

Florida 24.8

Penn State 22.8

Berkeley 15.1

UCLA 12.0

SUNY SB 6.1

UCSD 5.1

UCSB 4.3

The same graph was presented for federal research funds as a percentage of the state-wide total, public and private:

Minnesota 83.5

Wisconsin 77.8

Washington 66.6

Michigan 42.3

Iowa 37.5

Florida 37.3

Purdue 28.6

Illinois 24.0

Ohio State 24.0

Virginia 23.3

Iowa State 21.4

N Carolina 19.4

Penn State 19.1

Mich State 17.3

Texas 14.3

Indiana 13.8

Maryland 13.3

UCLA 9.7

UCSD 9.3

Berkeley 8.8

SUNY SB 5.2

UCSB 2.5

In terms of total undergraduate enrollment (headcount), the Twin Cities campus is third in the country (data from Fall, 1999).

Texas 49,009

Ohio State 48,003

Minnesota 45,361

Florida 43,382

Mich State 43,038

Penn State 40,658

Wisconsin 40,099

. . . .

N Carolina 24,652

Virginia 22,433

UCSB 20,056

UCSD 19,894

SUNY SB 19,139

Another way to measure how comprehensive an institution is is by looking at graduate and professional degrees as a percentage of the total degrees awarded by the institution. The data are from 2000.

Minnesota 45.8

N Carolina 44.7

SUNY SB 42.0

Michigan 41.9

Virginia 40.9

Iowa 35.9

Wisconsin 35.0

UCLA 34.5

Ohio State 33.8

. . . .

Iowa State 21.3

UCSD 19.1

Penn State 15.8

UCSB 13.6

Another measure on which to compare institutions is the number of tenured and tenure-track faculty (for 1999-2000):

Ohio State 2596

Florida 2307

Michigan 2208

Minnesota 2144

Wisconsin 1866

Illinois 1836

Mich State 1778

Texas 1680

Penn State 1672

N Carolina 1655

Purdue 1591

UCLA 1594

Washington 1528

Iowa 1415

Maryland 1408

Virginia 1340

Berkeley 1301

Iowa State 1214

Indiana 1065

UCSD 847

SUNY SB 821

UCSB 687

5. COMPARISON INFORMATION: REVENUE

The 1998-99 total revenues of the comparison group are as follows (in millions of dollars):

Michigan 2765

UCLA 2499

Washington 1832

Ohio State 1790

Minnesota 1574

UCSD 1347

Wisconsin 1347

Iowa 1283

N Carolina 1215

Berkeley 1204

. . . .

Indiana 949

SUNY SB 904

Purdue 864

Maryland 849

Iowa State 659

UCSB 437

What is interesting about this list, Dr. Zetterberg told the Committee, is that Minnesota is fifth on the list even without a hospital. The Michigan total includes $850 million in hospital revenues; the other top schools on the list also have a hospital. With some minor jockeying around in the ranks, the institutions rank similarly in "Education and General" revenues.

In a graph impossible to reproduce in minutes, Dr. Zetterberg illustrated the differences in sources of funding for the comparison group schools. Ranked by percentage of the "Education and General" revenues received from a state appropriation, Florida ranked first (at about 40%) and Minnesota ranked 7^th (at about 35-36%, behind Iowa State, SUNY SB, UCSB, North Carolina, and Michigan State); last were Penn State, Virginia, Washington, and Michigan, which rely on state appropriations for about 21-22% of their budgets.

6. COMPARISON INFORMATION: EXPENDITURES

For 1998-99 expenditures on teaching, research, and public service--the "Education and General" category, roughly--Minnesota ranked second (amounts in millions of dollars):

UCLA 1555

Minnesota 1495

Michigan 1482

Washington 1241

Wisconsin 1219

Berkeley 1106

Ohio State 1105

. . . .

Virginia 575

Indiana 572

Iowa State 539

SUNY SB 467

UCSB 374

In terms of ranking by "Education and General" expenditures on instruction, Minnesota ranks 20^th of the 22 institutions. The reason is that Minnesota spends more on public service than almost any other institution and because it spends more on its physical plant than most institutions.

Salaries and fringe benefits as a percentage of total "Education and General" expenditures is about the same for all of the institutions. UCLA and Virginia spend slightly more than the rest; Indiana, Michigan, and SUNY SB spend slightly less. Most spend 48-52%.

7. COMPARISON INFORMATION: RATIOS AND MEASURES

It is dangerous but natural to ask about expenditures per head count student, Dr. Zetterberg commented; ideally, one would want full-year-equivalent student data but those do not exist. If they did exist, he speculated, these amounts would probably be much more similar across institutions. The data which follow include graduate/professional students, part-time students, and so on; the amounts are dollars per student.

N Carolina 16,683

UCLA 16,622

UCSD 12,503

Michigan 10,789

Washington 10,622

Berkeley 10,090

Ohio State 9,426

Minnesota 8,890

SUNY SB 8,717

Florida 8,436

. . . .

Texas 6,236

Penn State 6,227

Iowa State 5,644

Another measure of expenditure is cost of instruction per degree granted. The schools at the top of the list award expensive degrees; when a high percentage of the degrees granted are graduate or professional, a high cost-per-degree is not surprising. (1998-99)

N Carolina 67,172

UCLA 63,650

UCSD 57,025

Minnesota 44,776

SUNY SB 42,612

Ohio State 42,368

Michigan 42,347

Washington 41,584

Iowa 37,689

. . . .

Texas 26,479

Illinois 25,692

UCSB 24,507

Penn State 23,558

1998-99 expenditures for research per tenured/tenure-track faculty member were as follows:

UCSD 408,405

Washington 261,997

Wisconsin 236,057

Berkeley 222,331

UCLA 222,186

Michigan 176,131

Penn State 163,225

Minnesota 153,234

Maryland 146,213

. . . .

Iowa 101,218

Mich State 90,004

Ohio State 82,265

Purdue 74,646

Indiana 52,406

Expenditures for public service per tenured/tenure-track faculty member were as follows (1998-99):

Mich State 67,842

Minnesota 65,934

Illinois 62.472

Iowa State 53,401

N Carolina 52,001

Purdue 48,761

Wisconsin 42,957

Iowa 40,455

Florida 37,036

. . . .

Washington 9,416

UCSD 8,238

SUNY SB 5,804

UCSB 5,246

Total gifts, grants, and contracts per tenured/tenure-track faculty member were as follows (1998-99):

UCSD 516,496

Washington 397,988

UCLA 334,609

Berkeley 314,342

Wisconsin 267,084

Michigan 247,037

N Carolina 238,373

Minnesota 230,242

Illinois 199,308

. . . .

Florida 112,449

Purdue 112,061

Iowa State 102,434

Indiana 88,653

8. PRIVATE UNIVERSITY FUNDING

Dr. Zetterberg presented a graph illustrating how four private institutions (Stanford, Princeton, Harvard, and Northwestern) are funded compared to the University of Minnesota. The percentage by source varies considerably among private institutions, but they all rely on an endowment more than virtually all public institutions other than Texas.

9. TWIN CITIES COLLEGE FINANCES

Dr. Zetterberg presented another graph illustrating the funding sources by Twin Cities campus colleges. The sources vary widely. The Medical School, the Institute of Technology, and the College of Liberal Arts (the size of the budgets rank in that order) account for 60% of the total Twin Cities campus revenue.

In terms of which units are most heavily reliant on the state appropriation, the most dependent colleges are Duluth Medicine, Nursing, Continuing Education, Dentistry, Architecture, Biological Sciences, and Liberal Arts. Least reliant (from least upwards) are Public Health, the Medical School, the Humphrey Institute, Agriculture, and Education.

10. WHAT DOES THE FUTURE HOLD?

Dr. Zetterberg presented information about revenue by major source. There was little speculation on what the future might hold.

Professor Speaks thanked Dr. Zetterberg for his presentation and adjourned the meeting at 4:20.

-- Gary Engstrand

University of Minnesota