These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on Finance and Planning
238A Morrill Hall
Present:
Charles Speaks (chair), Stanley Bonnema, Charles
Campbell, Robert Cudeck, Tom Gilson, Cynthia Jara, Thomas Klein, Joseph
Konstan, Marvin Marshak, Brittny McCarthy Barnes, Richard Pfutzenreuter, Thomas
Stinson, Warren Warwick, Susan Carlson Weinberg
Absent:
Prince Amattoe, Jean Bauer, Bruce Brorson, David
Chapman, Tim Church, Gary Jahn, Abu Jalal, Michael Korth, Tim Nantell, Kathleen
O'Brien, Daniel O'Connor, Terry Roe, Sue Van Voorhis, Michael Volna
Guests:
none
[In these minutes: (1) capital request; (2) U plan and
performance report; (3) upcoming budget issues; (4) state economic outlook]
Prior
to convening the meeting at
1. Continued Discussion, Capital Request
Professor
Speaks then turned to Professor Marshak, chair of the Subcommittee on Capital
Projects, to continue the discussion of the capital request. Professor Marshak repeated what he said at
the last meeting: the Subcommittee needs
guidance on what this Committee wishes it to do.
When
the Subcommittee has recommendations, each should be tied to its view of why
that project is important to the University, Professor Speaks said. Something would not necessarily be important
just because it is low cost. In
addition, he said, the Subcommittee should consider the annual debt service and
operating costs of a new building: can
the University absorb that cost at this time?
For the 2004 capital request, if all the projects were funded, the
annual debt service would be slightly over $3 million and the annual operating
costs about $4.5 million. Those amounts
have implications for the following biennia.
Professor
Konstan said he would like to see a 20-year total cost, net of closed space,
vis-à-vis how important projects are.
Over 20 years, these projects cost a great deal of money.
The
philosophy of the University has always been to try to always get its fair
share, or as much as it can, from the state, Professor Speaks said (and Mr.
Pfutzenreuter affirmed that that appears to be what the University has done);
will there be any subsequent restraints on biennial requests as a result? One thing the University is doing right is
increasing the HEAPR requests, Professor Konstan said, which carry no debt
service.
For
some projects, Professor Konstan continued, it would be helpful if the
Subcommittee would outline HOW they should be evaluated (rather than simply
"preserves physical plant," for example). There are other criteria that could be used
(e.g., improving working space, which affects the quality of the experience of
those working at the University, affects productivity, and affects recruitment
and retention). Another criterion might
be how the project will enhance the student experience, and for how many
students (e.g., 20 versus 2000).
Professor Speaks pointed out that an earlier set of criteria, used by
the now-defunct Capital Improvements Advisory Committee, might be helpful; they
can be obtained from Mr. Miller in Physical Planning.
Professor
Campbell commented that the Committee was largely aware of how capital request
decisions were made under President Yudof; how will such decisions be made
under President Bruininks? Mr.
Pfutzenreuter said that the majority of items in the 2004 request reflect the
views of President Yudof; the 2006 request will be more influenced by President
Bruininks. The expectation is that the
items on the 2004 request will remain, because they reflect expectations,
planning, and momentum, and are unlikely to come off the table unless there is
no money, Professor Campbell asked? Mr.
Pfutzenreuter said that was true.
Professor
Konstan said he assumed that every additional student costs the University more
money and that more students eventually mean there must be additional
facilities. Is there on any of the
coordinate campuses the possibility of additional growth but at a break-even
rate? The University loses money on
every student, Professor Marshak said, and it loses more with more students,
but every dean believes that he or she can make money on the margins. That is compounded by the fact that programs
see many goods as free, Mr. Pfutzenreuter commented (e.g., buildings). Then all this information needs to be brought
together to inform decision-making, Professor Konstan responded; that is the
only way to factor in the cost per student.
Ms.
McCarthy Barnes objected that it is not just cost per student; there are also
infrastructure costs support research, classrooms, and the like.
Following
additional discussion about attribution of costs, the political elements (both
internal and external) of capital requests, and the failure of many to see the
relationship between taxes, costs, and common goods, the Committee agreed it
would receive recommendations from the Subcommittee at an upcoming meeting.
Professor Speaks thanked Professor
Marshak for his report.
2. University Plan and Performance Report
Mr. Pfutzenreuter distributed copies
of an excerpt from the University's Plan and Performance report; the excerpt
dealt with financial matters. He briefly
reviewed the various tables in the report and Committee members asked a few
questions.
3. Upcoming Budget Issues
The Committee then held an informal
discussion with Mr. Pfutzenreuter about the upcoming budget issues, the state
budget shortfall, the possibility of unallotment, and the like. What is this Committee's responsibility with
respect to a shortfall, Professor Campbell asked? Has its role been
pre-empted by the Budget Advisory Task Force? Professor Speaks said it had not, in his
view. Up to now the BATF has been
looking only at next year's budget, not this year's, and he said he did not
know if an cuts due to unallotment will be on the BATF
agenda. He maintained, however, that
this Committee should be involved in any decisions about making cuts. The BATF is outside the governance
system.
In previous years the Provost has
discussed the budget with this Committee, Professor Campbell recalled; will Dr.
Maziar do so? Professor Speaks said he
did not know. The last time there was a
mid-year cut, President Yudof did not want public
discussion in committees so he organized a small group of representatives from
this Committee and the Faculty Consultative Committee to advise him. What President Bruininks and Provost Maziar
will want to do he said he did not know.
He commented that he understood the difficulties presented with
premature public discussion of specifics, especially when one does not know the
magnitude of a possible cut, but that justification cannot be used too often or
the governance system will be rendered impotent.
Professor Campbell pointed out that
this Committee kept confidential the information it received about athletic
finances and about the stadium, as part of its planning responsibilities; the
finance responsibilities require that it hear about impending cuts. Professor Speaks agreed and said that if
there is a need to present sensitive information, he will not hesitate to
request a motion to close the meeting so the Committee can treat such matters confidentially.
4. State Economic Outlook and Budget Status
Professor Speaks turned next to
Professor Stinson to review for the Committee the state's economic outlook (as
of November, 2002).
Professor Stinson reviewed the
numbers that have been reported widely in the state. The forecast deficit for
The reason for the $356 million
deficit in the current year is because income taxes are down $769 million,
health care spending is up $107 million, and all other budget changes are up
$226 million. Reserves offset some of
the shortfall, leaving $356 million.
There are three items that account
for most of the projected $4.2 billion shortfall: the projected end-of-session deficit, the
decrease in income tax receipts, and an increase in health care costs. Professor Stinson recounted that he had tried
to make people aware of these numbers some time ago but was not successful. These numbers are not a lot higher than what
he had expected. It is distressing and
disillusioning when information is provided but people do not use it.
Professor Stinson also emphasized
that the numbers are predicated on real economic growth (2.5% each year) over
the next two years. That level of growth
is sustainable. But because the
predictions assume modest economic growth, one cannot hope the state can grow
its way out of the problem. The predictions
also explicitly assume there is no war with
One of the revenue problems has been
a decrease in capital gains. The
economic forecast is conditioned on a fairly optimistic stock market outlook;
if the market does not perform, there will not be the expected growth in
revenues. Minnesotan's capital gains in
tax year 2000 were about $9 billion; by fall of 2002 it appears they had fallen
to about $4 billion. They are predicting
a decline to about $3.3 billion before they begin to recover in 2003. This appears to have meant a reduction in tax
revenues of about $400 million.
Professor Stinson next talked about
wage and salary growth. He noted that
since 1959, comparing the first quarter of one year with the first quarter of
the next, in only one year (1983) was wage and salary growth under 3% (and even
then it was greater than 2%). From 2001
to 2002, however, there was zero wage growth, which also helped to create the
shortfall last winter. Why have they
fallen so dramatically when this has not been that much of a recession? Inflation is less and there has been a change
in the structure of compensation--there are more bonus or option payments in
the compensation stream, and in a weak economy, such payments decline. The current projections assume 6% growth in
wages and salaries (which is approximately the norm over the last 40 years),
but the projections are not for a particularly strong recovery.
The projected spending increases,
2004-05 over 2002-03, total about $3.9 billion.
Of that, $2.1 billion would be for education, $1.1 billion for health
care, and $644 million in all other areas.
Of the $2.1 billion for education, $1 billion reflects changes in the
property tax system and $454 million results from a shift in payments from
2002-03 (because of how the financial problems were solved LAST year); without
these "mechanical" changes, the increase in education spending would
be about $670 million, or about 6.3%. The increase in health care costs is not
health insurance for employees; it is health services for people of the state
who qualify for them.
For fiscal year 04-05, projected
spending is $926 million above end-of-session estimates. Five areas account for 86% of general fund
spending: education finance (41%),
higher education (9%), intergovernmental aids (10%), health care (19%), and
health and human services. There is a
predicted 15% shortfall, Professor Stinson said, and it will be nearly
impossible to deal with it if K-12 education, health and human services, and
higher education are taken off the table.
This cannot be corrected without a revenue increase, Professor Speaks
asked? The Governor is committed to
solving the problem without a revenue increase and it would be difficult for
the legislature to adopt revenue increases that could withstand a veto,
Professor Stinson surmised, so there will be serious cuts. The cuts will amount to 25% if K-12 education
is off the table.
Professor Konstan asked if cuts in
education payments to counties would be a spending cut or a tax increase. They would be a cut in spending, Professor
Stinson said. So if the state solves its
problems without a tax increase, individuals could see a tax increase through
property taxes; Professor Stinson concurred.
Professor Stinson reviewed the
planning estimates for revenues and spending through 2006-07. Revenues are based on a normal economic
growth pattern, nothing special; spending is based on current law (including
any escalators in existing law). Even
with projected economic growth, these assumptions predict a $1 billion deficit
in 2006-07. It will take the state a
long time to get back to where it was.
If the entire current problem were solved with a tax increase, the state
would have an $800 million surplus in 2006-07; there would need to be about a
30% increase in tax revenues from all sources to solve the problem through
taxes. There are not a lot of good
choices, he said. One problem with the
current forecast, he added, is that it ignores the effect of layoffs. They do have an effect, historically, and
likely will now as well; they serve to put a brake on recovery.
What happens if the state books are
not balanced on June 30, Professor Konstan asked? Professor Stinson said he did not know who
would be personally responsible. There
is a flat prohibition on doing so in the state constitution and it will not
happen; if people see it coming, the legislature could hold up payments or the
Governor could unallot.
Professor Stinson said he has tried
to make the point that the projections of tax payments were wrong by $300
million last year. He said he did not
believe that would happen again but they will not know until May; the
projections could be off by $100 million, a problem that would have to be
solved by the end of June. That would be
a serious problem; he has told the Governor and his staff
that they need to solve the $356 million problem as well as build a
cushion to solve any last-minute problems.
He pointed out that the projections of revenue could also be $100
million too low.
Professor Campbell asked Professor
Speaks if the Provost's Budget Advisory Task Force will pre-empt this
Committee's responsibilities to discuss the shortfall. Professor Speaks said he did not believe
so. The BATF is not looking at this
year's budget; it is looking at next year's as well as how to demonstrate
reallocation. He said he did not know if
cuts this year would be on the agenda.
This Committee, however, should not be excluded from the deliberations
because the BATF is outside the governance system. In previous administrations the provost has
discussed budget issues with the Committee, Professor Campbell recalled; will
Dr. Maziar do so, he asked? Professor
Speaks said he did not know. Last time,
when the University faced a $24-million cut, the President did not want it
publicly discussed by committees so he organized a small group of
representatives from this Committee and the Faculty Consultative Committee to
consult with; he said he did not know what Drs. Bruininks and Maziar
planned. He said he understood the
difficulties of talking publicly about specifics when the size of the reduction
is not known, but one cannot use that excuse too often or the governance system
will be rendered impotent.
Professor Campbell noted that the
Committee kept confidential information about the athletics program and the
stadium; the "Finance" part of the Committee's name suggests it
should hear about the administration's plans.
Professor Speaks agreed and said he would not hesitate to close a
meeting in order to treat such information confidentially.
Professor Speaks adjourned the
meeting at
--
Gary Engstrand