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 Campbell (chair), Stanley Bonnema, David
Chapman, Daniel Feeney, Steve Fitzgerald, Joseph Konstan, Michael Korth,
Timothy Nantell, Richard Pfutzenreuter, Terry Roe, Charles Speaks, Alfred
Sullivan, Kate VandenBosch
Absent:
Calvin Alexander, Brittny McCarthy Barnes, Thomas
Klein, Yi Li, Cleon Melsa, Kathleen O'Brien, Thomas Stinson, Susan Van Voorhis,
Warren Warwick, Michael Volna, Susan Carlson Weinberg
Guests:
none
[In these minutes: (1) legislative update; (2) revised debt
policy; (3) biennial request planning; (4) internal taxes on gifts; (5) update
on the 2004-05 budget (with a focus on graduate assistant fringe benefit rates)]
1. Report on the Legislature
Professor
Campbell convened the meeting at
MNSCU,
by comparison, was recommended to receive $114 million, but it submitted a much
larger request. MNSCU is recommended to
receive about $114 of $300 million; the University $90 of $155 million.
2. Revised Debt Policy
Mr.
Pfutzenreuter next explained that a number of Regents' policies are being
updated. One of them is the debt policy,
he reported, and he would like feedback on the proposed changes. He reviewed the changes.
One
change involves a distinction between "core debt" and "special
purpose debt." Right now all
University debt is general obligation debt, which means that it has the full
faith and credit of the University behind it.
This proposal calls for two kinds of debt, general obligation debt and
special purpose debt issued for a specific project and not backed by the full
faith and credit of the University. For
example, a hypothetical football stadium could rely on special purpose debt;
the payment would rely on the income from the stadium. The goal is to preserve the University's core
debt, which carries a better interest rate, for the academic mission and use
special purpose debt for project-based expenditures supported by revenues. So is the collateral a stadium or a parking
ramp, Professor Roe asked? It would be,
Mr. Pfutzenreuter said, but the University would never allow a default on the
debt. But this debt could carry a
slightly lower rating and a slightly higher interest rate.
What
does "full faith and credit" mean, Professor Chapman asked? That all of the University's resources are
behind the debt, Mr. Pfutzenreuter explained.
What is different about this proposal, Professor Chapman asked? The University has always used only general
obligation debt, which carries the institution's full faith and credit.
What
is the difference between core and special purpose debt interest rates,
Professor Speaks inquired? The rates are
so compressed right now that there is not much difference, Mr. Pfutzenreuter
said; they calculated that the difference might amount to about $46,000 per
year at current rates.
Professor
Konstan said he could imagine two purposes for the distinction between the two
kinds of debt. One, some debt could be
isolated; if a hypothetical stadium did not generate as much revenue as
expected, the University could negotiate a longer repayment schedule (if it did
not choose to bail out the costs). Second, if debt is segregated, would rating
agencies say that the University does not have as much general obligation debt
and help it keep higher ratings? Would
agencies buy into the distinction, keep the University's rate low, and thus
extend its debt capacity?
The distinction would extend the debt
capacity, Mr. Pfutzenreuter agreed, but one of the principles in the new policy
is that the University would never incur new debt that would affect the core
debt rating. It might be possible to do
more special purpose debt, but never so much that it would endanger the core
debt rating. The University would talk
with debt advisors and the agencies about this, Mr. Pfutzenreuter said. So this puts a subjective bound on debt
capacity, Professor Roe said. Debt can
be acquired until it would affect the University's AA rating, Mr. Pfutzenreuter
agreed. That is current policy; this
policy provides that for the hypothetical stadium, the University could issue
debt and perhaps receive money over a number of years for naming rights, and
pledge that income to debt retirement.
So there can be greater risks with some kind of debt, Professor Roe
said.
If the University's debt rating
declines, how much of the decline is because of too much debt and how much
because of other factors, Professor Konstan asked? What is the effect of a decline in state
funds? Mr. Pfutzenreuter said that a lot
is based on balance sheet ratings but more on the level of state support, so
external factors can cause a slip in the rating. If the debt rating slips because of a decline
in state funding or a decline in student demand, the University is free to
issue all the debt it wants because it is no longer at the goal of AA. Mr. Pfutzenreuter said the policy would
prevent the University from issuing any more debt until it regained the target
rating level (unless the policy itself were changed).
Professor Konstan noted there is a
change in life expectancy. At present,
the University will not issue debt for longer than the expected life of what is
being financed, but this policy provides that the debt can be issued for 120%
of the expected life. Why the
change? In part because the federal
government allows it, Mr. Pfutzenreuter said, but the University has not issued
any debt longer than the expected life of the facility. He said he cannot recall any time the debt
life has exceeded the facility life.
Mr. Pfutzenreuter said he will be
discussing the policy with the chair of the Debt Advisory Committee and there
could be modifications to the policy; he promised to bring any significant
changes to the Committee. He also
invited Committee members to send him emails with any comments or suggestions
about the proposed policy.
3. Biennial Request Planning
Vice
President Pfutzenreuter reported next that the President asked Senior Vice
President Jones to convene a group to think about planning for the biennial
budget request and to develop principles that can be presented to the Regents
in June. In May the administration will
review for the Board the cuts what have been made and what will be brought
forward this year; in June the President wants to start a discussion with the
Board about the next biennial request.
There will be a two-part approach:
how to preserve and protect the current level of state support, and how
define the best and most compelling arguments in support of the next request.
Professor
Speaks inquired if there is still a Provost's Budget Advisory Committee, and if so, the difference in charge to it and Dr.
Jones's committee. The Jones committee
is just asked to develop principles and thoughts about messages, Mr.
Pfutzenreuter said, not put together the biennial request. Once the principles have been accepted, then
consultation with the Budget Advisory Committee, this Committee, and so on,
will begin. This simply launches the
effort a little earlier than usual. He
said he did not know yet what group would turn the principles into the biennial
request. The Jones committee consists of
Robert Jones, himself, Julie Tonneson, Christine Maziar, Frank Cerra, Kathy
O'Brien, and Donna Peterson. There are
no deans or faculty because the group is simply doing some first thinking about
messages.
Mr.
Pfutzenreuter reviewed the timeline for the biennial request. The University is beginning the preparation
process earlier this year. He noted that
the University's actual state appropriation for 2003-04 was approximately the
same as in 1998, in nominal dollars. The
Department of Finance planning estimates for the next biennium project a state
budget deficit, if inflation is included, of about $1.3 billion. The amount could be higher if more funds are
needed for high-profile programs. State
general funds appropriations for the University as a percentage of total state
funds has declined from about 8.5% in 1971 to less than 4% projected for the
next biennium. There was a slight uptick
in the graph of the percentages in the mid-1980s, but in general the line is
steadily downward over the last 30+ years.
Basically the University has only been able to affect the slope of the
line, not its direction, Mr. Pfutzenreuter observed. In 2005, the state will provide about $550
million and tuition revenues will total $500 million; he said he expected that
those two lines will cross in the next biennium.
Mr.
Pfutzenreuter then reviewed the various ways the University has organized its
biennial request in the past. The
approach has varied, and been a mix over the years, but in general the
University has had to be cognizant of the Governor's priorities and legislative
priorities so that decision-makers will be receptive to the requests. Professor Konstan asked if there was any way
to track the approaches to see if they made any difference. There is the "urban legend" that
the University will always only get what MNSCU gets; funding for health care
and prisons would probably provide a mirror image graph of the one for the
University. Mr. Pfutzenreuter said that
in general, when the state has a surplus, the University does well; when it has
a deficit, the University does poorly.
But it is nonetheless important that the University have an opportunity
to talk about its request. The single
biggest determinant of the appropriation, however, is whether the state has a
surplus or a deficit.
Does
it also depend on what the University asks for, Professor Konstan asked? Does the University make a mistake when it is
respectful of the state's financial situation, or should it submit a big
request every year and let the state debate what it will fund? In capital appropriations, Mr. Pfutzenreuter
said, no matter the size of the bonding bill, the University gets about
15%. The fraction moves a little from
one biennium to the next, but not much.
The only factor is how big the bonding bill is.
If
the University were to receive the House recommendation on the bonding bill,
how much would that obligate the University to take off the top of the biennial
request next year in additional expenses, Professor Speaks asked. The debt service would be about $2.5 million
and operating costs of the space would be about the same, Mr. Pfutzenreuter
said.
What
about other agencies funded by the state, given surpluses or deficits,
Professor Campbell asked? State agencies
suffer the most when there are deficits, Mr. Pfutzenreuter said; given the cuts
that have been imposed on some of them, it is difficult to see how they can
continue to carry out their tasks.
Is
there any notion of how the perceived elasticity of tuition figures into the
state decision about the University's appropriation, Professor Campbell
asked? That was clearly a factor in the
Governor's recommendation for the last biennium, Mr. Pfutzenreuter recalled; he
explicitly said that back-to-back tuition increases of no more than 15% were
acceptable. What does he think about the
future, Professor Campbell asked Mr. Pfutzenreuter--can the University continue
to raise tuition at double-digit rates?
As long as the University takes care of needy students, Mr. Pfutzenreuter
said, he doubted the state cares how far the University drives up tuition
rates, because higher education is increasingly seen as a private benefit.
Professor
Konstan asked if anyone had thought about using a chart with elected leaders
showing the timescale of the return-on-investment in the University. It might show the amount that is returned to
the state within a year (e.g., income taxes, sales taxes, etc.), then data on
employment, higher incomes, and so on.
Would it help the University's case if, for example, it could show each
dollar returning to the state in taxes or reduced expenditures in seven years? Mr. Pfutzenreuter said such a chart has not
been used, to his knowledge, but there has been talk in the Executive Committee
about doing such a study.
If
the University consistently receives about 15% of the capital appropriation and
if state operating funding does not relate to the strategies, Professor Speaks
asked, then what other than superstitious behavior
causes the University to spend as much time on the request as it does? Mr. Pfutzenreuter said he believes the
process the University goes through to develop the biennial request is good for
the University community in that it helps build understanding and support. One could make it more of a marketing piece,
and less a strategic planning document and process, but that would probably
mean there was less understanding of it in the University and less underpinning
for the request. Professor Speaks said
he agreed with that statement if "University community" is defined as
Morrill Hall, the deans, and a few governance committees; beyond that, he said
he doubted that there was much understanding among the faculty about what is in
the biennial request. There has been
broader involvement some years and less in other years, Mr. Pfutzenreuter
agreed.
All
the average faculty member gets is a PR blitz about the campaign and a message
saying "don't undermine it," Professor Konstan said. On the issue of whether themes work or if PR
has an effect, the University should not conduct the study of doing nothing and
seeing if it receives the money. But it
is not clear that town meetings, telephone calls, etc., get money for the
University. Mr. Pfutzenreuter
contradicted Professor Konstan on the last point; he said they matter a lot for
the capital budget. It is more difficult
to see the effect on the biennial budget, but members of the legislature do get
calls about the capital budget that have an effect. The
The
biennial request effort also leads to more education of legislators, Professor
Campbell said, so they better understand the University's mission. There was a much poorer understanding of the
mission 20-25 years ago than there is now.
If nothing else, that puts the University in a better position to fend
off its adversaries.
His
question about the biennial request is about the Business Partnership model of shifting
more of higher education funding into financial aid, Professor Campbell
said. Mr. Pfutzenreuter said he has not
heard much about it.
It
would be discouraging to think of the preparation for the biennial request as a
PR blitz, Mr. Klein said. Rather, it is
an opportunity for the University to look at itself and to identify
opportunities and how it might grasp them, both for the University and the
state. It is good for the state and
institution to think about these things.
Mr. Pfutzenreuter agreed and said that going through the process is
better than simply preparing a one-page request.
Professor
Speaks said that he was aware that applications to the University have
increased even with large tuition increases.
Has the number of applications from
4. Internal Taxes on Gifts
Mr. Pfutzenreuter
turned next to the subject of IRS (internal revenue sharing) taxes on gifts; he
said he has been increasingly hearing concerns expressed by the
Foundation. When the administration
calculates the IRS bill for a college, they look at all funds except sponsored
research. The administration does not
tax each revenue source; the total revenues are a proxy and the colleges
typically (in 95-97% of the cases) send O&M money to pay the IRS
assessment. One other source has been gift funds. The Foundation is concerned about donor
perceptions that the University will tax some percentage of the money
donated. That is the perception, even if
not the reality.
Compounding
the problem is the Regents' policy providing that donated funds may not be
spent for anything other than the purpose intended unless there is a specific
provision in the donation to allow other expenditures. The Foundation is worried, and it has seen
requests from colleges for gift funds to pay the IRS even though the Regents'
policy says the money must be spent for the intended purpose. There are, however, some general purpose
gifts that could be used to pay the IRS bill.
People
wonder what the right thing to do is.
Mr. Pfutzenreuter said he is contemplating a letter indicating that if a
college has a restricted gift, it cannot use the funds to pay the IRS
bill. If there are unrestricted funds,
the unit should contact the Foundation to be sure the money can be used for the
IRS tax. If units are using gift money
now, is that a violation of the Regents' policy, Professor Speaks asked? That needs an interpretation, Mr.
Pfutzenreuter said. Who pays for
overhead? It is a fuzzy line. The Foundation says it has been told to raise
money to add a margin of excellence to the University; they assume the
University is covering indirect costs.
That is an important value for the University to pursue through
Foundation fund-raising, but one must ask where the University is today. Tuition revenue will soon exceed state funds;
can the University sustain private giving with no expectation that it will help
with overhead costs? Some gifts carry a
lot of overhead expenses (e.g., buildings); others do not. But the IRS is a poor tool to account for
overhead costs.
Professor Konstan observed that overhead costs exist, no
matter what revenue is used to pay them.
But the University is very reluctant to say "no" to dollars;
it takes the money and finds other sources to pay overhead costs. If the University does not attribute overhead
to gift funds when they are received, the University is still obligated to pay
the expenses. Most donations do not
cover the full cost of what they are donated to, Professor Campbell observed,
so University funds are needed. This is
an accounting issue, he commented. It is
time to revisit the issue, Mr. Pfutzenreuter said. Today, when the University is increasingly
dependent on tuition and sponsored research, and likely to be more dependent on
private giving, how is it to cover overhead?
Professor Campbell said tPage: 6
he same issue arises when contracts and grants are negotiated with
reduced or no overhead charges. Mr.
Pfutzenreuter agreed. Deans and faculty
are getting better at getting ICR funds.
It is true that donations carry extra costs, Professor Roe said, but the
IRS is a crude instrument. If each
college knew its overhead costs, there would be less controversy about who
should pay. The problem is the crudeness
of the instrument.
Mr.
Pfutzenreuter said he will do some communication on the gifts issue because it
is one that needs to be addressed.
5. 2005 Budget Update
Vice
President Pfutzenreuter next reported that the 2004-05 budget will go to the
Regents in May; all units have responded with tuition and ICR estimates as well
as the impact of reallocation, base cuts, and the need to fund compensation
increases. They are now trying to
understand those reports. Departments
sometimes do not do a good job of describing the pain of cuts. Professor Campbell said one reason may be that
departments cannot articulate the pain until the cuts are delivered.
The
biggest issue they heard about was the graduate assistant fringe rate, Mr.
Pfutzenreuter reported. They are working
on how it could be addressed and have done some modeling. The fringe benefit rate is going up 22%; to
buy down the tuition rate increase costs about $2.4 million (for all graduate
assistants regardless of how they are funded).
Professor Feeney recalled that this has been discussed before; is this a
fringe pool issue again? What is driving
the change? The Committee talked in the
past about a direct charge system; is that a solution? Do units pay what fringes cost versus
averaging the costs? In part the
increase is due to an over-recovery in the past, so the excess has to be
refunded through higher rates now, in accord with government regulations. The other part of it is the tuition
increase. Would a direct charge system
fix the problem? It would not stop the
growth in rates, Mr. Pfutzenreuter said, but it would eliminate the volatility.
The tuition component is a transfer
from the research budget to the teaching budget, Professor Roe said, and it is
difficult to see why that is a burden to the University. It costs research grants, Mr. Pfutzenreuter
said. They are being taxed, Professor
Roe agreed, but part of the funds go back to the
college. They are a tax on research, and
since research funding is greater than tuition revenue, the University is
risking a revenue stream by not remunerating the research accounts that
generated the income in the first place.
As long as tuition is used to balance the budget, one can say the same
thing about undergraduate education, Professor Campbell pointed out.
Professor VandenBosch reported that she has seen the data
for what it will cost to support a graduate student next year (a 12-month RA
will be $39,000 [including $18,000 stipend, plus fringe, plus 48.5% ICR on
stipend]) and a TA will be over $25,000 for the academic year [at the same
stipend rate]). With the increased
tuition and stipends, the cost goes so high that faculty cannot support them so
often choose to hire postdocs or technicians instead, which results in a net
loss of tuition income to the University.
She said she was also troubled, besides losing momentum in some graduate
fields, by the fact that if one funds a RA, one pays double because a grant
pays ICR on stipend, in addition to the cost of the tuition waiver. Moreover,
when departments have to pay more for each TA, they can support fewer TAs. This may limit
undergraduate course offerings and tuition revenues. The net impact on graduate programs will be
to weaken the University. She suggested that the University needs to look at
graduate tuition separately from undergraduate tuition and use a different
model. Professor Roe reported that in
his department the number of RA offers has declined from an average of 15 to 5
this year.
Vice
President Pfutzenreuter said that for the 2004-05 budget,
the issue needs to be resolved within the next 5-6 days. There is a clear sense in the University that
there should be some budget relief; the most effective way would be to
subsidize the fringe pool, he said; that would require recurring funds. He said he would welcome other ideas on how
to deal with the problem. If they target
part of the payments to the unit, is that for paying overhead, Professor Roe
asked? Then it is not so clearly a
subsidy. Mr. Pfutzenreuter said that
money from the compact pool and other O&M sources would be allocated to the
fringe pool. It would be better to
allocate the money to the units and let them figure out how to use it,
Professor Roe said. Or they could do a
targeted allocation to the units with problems, Mr. Pfutzenreuter said.
Professors
Roe and VandenBosch agreed to draft a statement for consideration by the
Committee. Within three days of the
meeting, the Committee voted in favor of the following resolution:
The cost of tuition waivers for graduate assistants
contributes to the already high fringe benefit rates for Graduate Assistants at
the
The proposed increase poses an extreme hardship both
for units that hire teaching assistants (TAs) and research assistants (RAs) and
for faculty who hire RAs with extramural funds.
With current budget limitations, departments may be forced to hire fewer
TAs, which is likely to limit some course offerings. This could reduce undergraduate tuition
revenues and impede graduation rates.
Similarly, with fixed funding for RAships, programs can support fewer
graduate students.
For faculty who hire RAs on grants, the situation is
more complicated. The charging of tuition
waivers against grants amounts to an internal transfer of funds from research
accounts to teaching programs in a way that may not benefit research and
graduate studies. Faced with a fixed
budget, more faculty members will make the choice to hire a technician or
post-doc who can be more productive than a graduate student for nearly the same
cost. Moreover, it should be noted that
for funding sources allowing maximum rates of indirect costs, the University
already recovers ICR on stipends, an amount equaling $9,700 for a $20,000
stipend. Faculty resentment over the
high cost of supporting students may affect retention of some of our most able
researchers.
Graduate programs at the
The Senate
Committee on Finance and Planning strongly suggests that the
In
terms of data for the University, Dr. Zetterberg will have the numbers,
Professor Speaks said. As will Associate
Dean George Green, Mr. Pfutzenreuter added.
Professor
Campbell noted that there is a May 18 Regents' budget forum, at which he and
Professor Martin will likely have time to speak. He said he would be willing to include this
subject in his remarks.
Professor
Feeney said that this brings up a concern:
the Committee hears about the same problems every year and the
University provides some short-term solution.
The AHC Finance and Planning Committee is
saying the institution should look for long-term solutions. The Committee has seen this fringe benefit
pool problem forever; if there are solutions, someone should look for them. The Committee has been told it has 5 days
this time--it can offer a statement for a short-term fix, but it should insist
on a LONG-TERM solution. Part of the
Committee's role is to seek solutions so problems are not recurring. One way to approach a long-term solution in
this case is to look at what other universities do, Professor VandenBosch
said. Anecdotally, she hears that
Mr.
Pfutzenreuter provided a brief stadium update, after which Professor Campbell
adjourned the meeting at
--
Gary Engstrand