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), Rose Blixt, Joseph Konstan, Michael
Korth, Cleon Melsa, Richard Pfutzenreuter, Warren Warwick, Susan Carlson Weinberg
Absent:
None counted for a summer meeting
Guests:
Senior Vice President for Academic Affairs and
Provost-designate E. Thomas Sullivan
[In these minutes: (1) committee bylaw; (2) internal taxes and
the University's budget model]
1. Bylaw Review
Professor
Campbell convened the meeting at
2. Internal Taxes & the University's
Budget Model
Professor
Campbell turned to Vice President Pfutzenreuter, who said he would like to have
a discussion of taxes, in part in an attempt to dispel myths. He distributed three one-page handouts with
tables of data.
Mr.
Pfutzenreuter began by reviewing the history of assessments. The first tax assessed was on business
services, which began in the 1980s.
There was, however, no consistent rule in who paid how much; the rate
was negotiated with each unit on an ad hoc basis. With the adoption of IMG, the rate was
standardized, changed to a "sales and service" tax, and set at 2.0%
in 1999-2000. It rose to 3.25% the
following year, and to 3.75% in 2002-03, where it has remained since. The tax is paid on certain revenue streams,
regardless of whether the unit is academic or support.
Is it
paid on clinical income, Professor Campbell inquired? Mr. Pfutzenreuter said he would have to look
at the list of units that pay. Ms. Blixt
commented that some clinical services are exempt from the sales and service
tax.
Is
there a difference between sales and service from a support unit and from an
academic unit, Professor Konstan inquired?
Mr. Pfutzenreuter said they talked about that when formulating the
tax. What is the difference between the
bookstore selling a sweatshirt and a department selling something? They could not identify a principle on which
to discriminate between different kinds of sales. Does the University pay the light and heat
for an academic unit and not a support unit, Professor Konstan asked? It does, Mr. Pfutzenreuter said. He recalled the Brenner report, which defined
"supported" and "non-supported" units; the latter must pay
their own way, but they still pay the tax.
It is not specifically for "overhead"; it is essentially a
franchise fee for being part of the University.
Some of the money is for overhead, Professor Konstan said, such as
central services; Mr. Pfutzenreuter agreed that it does help pay for human
resources, budgeting, the President's office, etc., but they have not tried to
identify those costs by unit and link them to the sales and service tax.
What
about other revenues to academic units, taxed at the current Internal Revenue
Sharing (IRS) tax rate of 8.5% on academic units, Professor Konstan asked? Since the IRS is on ALL revenues, Mr.
Pfutzenreuter said, academic units in effect pay 8.5% on sales and service as
well as tuition, etc. But they are not
taxed twice--they do not pay the 3.75% sales and service tax AND the IRS tax of
8.5%.
The
Enterprise Assessment was adopted in 1997-98, set at 0.7%, waived in 1998-99,
resumed in 1999-2000 at 0.7%, and then raised to 1.25% in 2000-01, which is the
level it has remained at since. It has
been held constant, Mr. Pfutzenreuter said, and he saw no reason why it would
be increased--with the caveat that ALL taxes/assessments will be on the table
as the University considers adopting a new budget model. The Enterprise Assessment generates about $7
million per year and is assessed on salaries (not including sponsored research
or student work-study). It pays for the
new human resources, student services, and financial systems. The University spent about $60 million on
those systems, created an account with a negative balance (essentially the
University borrowed money from itself), and the Enterprise Assessment is
repaying that account.
The
IRS tax began in 1999-200 at 1%. In the
succeeding years, it increased to 2.25%, 3.75%, 6.35%, 7.5%, and now stands
(2004-05) at 8.5%.
Mr.
Pfutzenreuter then turned to a table identifying the sources of funds that
units have used to pay the IRS tax. For
2002-03, about 90% of the IRS payments were with O&M funds (primarily state
dollars). About 3% came from ICR funds,
a small amount from other funds, for a total of 94% from unrestricted unit
funds. About 1.2% came from
non-sponsored foundation and endowment income; in the three previous years, the
percentages from foundation/endowment income were 0.48%, 1.35%, and 1.51%. The actual DOLLAR amounts from these sources
(as from all sources) increased significantly:
from $28,000 in 1999-2000 to $698,000 in 2002-03. The remainder of the IRS funds came from
State Specials, business and industry and related, and
private practice. The total IRS funds
for 2002-03 were about $57 million, up from $5.7 million in 1999-2000. The projected IRS funds to central
administration for 2003-04 are projected to be about $73 million and about $87
million in 2004-05.
Next,
Vice President Pfutzenreuter explained that when the IRS tax was established,
he decided not to create a separate fund into which funds would be deposited
and from which payments would be made.
That would have meant sending the bill to the deans, putting the money
in an account, creating more orgs and more paper and more to track, and would
have meant charging parts of salaries and expenses to different accounts. That seemed like it would have created more
work than it was worth. Given the
confusion about IRS funds since, however, maybe that is what they should have
done. But he had aimed for simplicity. What they did do, however, is keep track of
where the IRS funds were spent; he drew the attention of Committee members to a
table and graph that identified where the money went. Since the budget model is up for discussion,
he said he thought it might be helpful to identify how the funds were
used.
Most
of the IRS funds went for facilities, debt, and technology but they bounced
around different uses. 16% of the money
was used for compacts in 2001-02; 21% and 55% to make up revenue loss in
2002-03 and 2003-04, respectively; 18% for compensation in 2002-03.
Do
these numbers mean anything, Professor Konstan asked? The University needed to spend the money on
these things, and these were not the lowest priority items, so the money would
have been spent anyway. In a way they do
not mean anything, Mr. Pfutzenreuter agreed, but they do identify how the money
was spent. And many of the items on the
list would not receive state funding. So
these are arbitrary choices, Professor Korth observed. Mr. Pfutzenreuter agreed, although said there
was some rationale for the choices. They
knew the legislature would ask the University what it spent increased state
funding on, so they tracked the money in order to prepare an accurate
report.
Professor
Campbell said that he has heard about the "budget challenge" of about
$80-100 million in a number of presentations, some of which arises because of
cuts in the state appropriation. Some of
the challenge arises because of state budget cuts; what is the actual number,
he asked? It appears that the IRS
increment for 2004-05, $15 million, covers part of it. [The total projected IRS revenue in 2004-05
is about $87 million, but the increase over the previous year will only be
about $15 million, and since most of the IRS funds are put into recurring
commitments, only the increment is available for use in any fiscal year.] The total budget challenge is about $70
million, Mr. Pfutzenreuter said, of which about $50 million will be covered by
tuition and fees. The budget
"challenge" each year is made up of three items, he explained: state budget cuts, core infrastructure costs
(which includes salaries), and new academic programs and compact
investments.
Mr.
Pfutzenreuter next commented that there has been considerable dispute about the
supposed imposition of the IRS tax on gift funds. In fact, the way the IRS was established
leaves deans and chancellors total flexibility about what funds they will use
to pay the bill. The vast majority of
the IRS tax is paid with O&M funds.
A few have decided on their own to pay the IRS from gifts or endowments. He said he has told units to be very careful
about doing so and to check to make sure there are no donor restrictions. If a donation is "for right-handed
tennis players in CLA," the unit should not use the money for the
IRS. Some donations provide general
purpose program support funds that the dean has discretion over how to spend; that
is a fuzzier case that the attorneys are working on. The University Foundation would like a letter
saying that units can spend NO private funds on the IRS tax; Mr. Pfutzenreuter
said he needs to talk with the President about the issue.
How
much of the IRS bill to units is generated by endowment income, Professor
Campbell asked? That varies by college,
Mr. Pfutzenreuter said; Law and the
Professor
Konstan asked if the University has ever made an assessment against the
PRINCIPAL of the endowment. Harvard, he
noted, is doing so in order to buy land.
The Committee has talked about purchasing land, which can be seen as a
long-term investment. Is the University
set up to make those kinds of decisions?
Everything is set up to retain a certain percentage for the principal of
the endowment, Mr. Pfutzenreuter said; an investment must earn an average of
8-10% per year over 30 years. If an
endowment were assessed by buy land, the investment could not be realized until
the University sold the land. There
would need to be a change in investment strategy or in the payout in order to
use the endowment in that way. Or a
change in the model, Professor Konstan said.
One can argue that some purchases increase the value of the University
and are thus in line with the use of endowment funds. If the University needs to expand the Twin
Cities campus by 20-30%, it will be hard to do so without a lot of state
support over 30 years. Mr. Pfutzenreuter
said he would not advocate such a path.
There is a question about who owns endowment funds.
Professor
Warwick asked for a brief history of the IRS.
Mr. Pfutzenreuter explained that it began in 1999-2000, and was
established because when the administration gave away tuition and ICR revenues
(under IMG), it did not also give away expenses. The plan was that the state funds would grow
and thus cover central administrative/common goods expenses. State funds in some areas did grow, but for
specific units, not administrative overhead.
So the administration decided that rather than cut (the state funds for)
academic units, or push the costs to the units, it
would impose a tax to recover the funds it needed. Mr. Pfutzenreuter said he did not see any
solution to an increasing IRS unless there is a slowdown in the fastest-growing
part of the budget supported by the central administration--debt and
facilities--or unless there are cuts to programs. Does he see a limit on how far the IRS could
rise, Professor Warwick asked? Mr. Pfutzenreuter
said he would prefer to get rid of it altogether in a new budget model. They know how much they need to take from the
colleges, but it would be better to just take it and not send a bill. Professor Konstan agreed, saying that there
wouldn't be a need to send these bills if the administration hadn't already
sent the flexible revenue streams (notably tuition) directly to the units
without retaining enough centrally. Mr.
Pfutzenreuter said the administration could also continue to send the revenues
but also make cuts in budgets.
What
is the percentage of state funds allocated to tuition-generating units, Ms.
Blixt asked? At the start it was 50/50,
Mr. Pfutzenreuter said; today it is more like 60-40, with administration
keeping 60%, the amount driven by the bills it has to pay. 40% goes to tuition-generating units, before
the imposition of the IRS tax. He
emphasized that he would not want to create the IRS all over again in a new
system. And the distribution of funds,
at the beginning in a new system, would be about the same as it is now, no
matter what one called it, Professor Korth asked? It would be, Mr. Pfutzenreuter affirmed.
Professor
Konstan said that if an academic unit can generate new revenues, and gets to
keep all of them, then Facilities Management (and other central support units)
must pay the incremental costs; this seems to create poor incentives. If all were better off when new revenues come
into the units, that would be better. He also urged that pressure remain to make
decisions rather than across-the-board cuts--and at the same time said that he doubted
any budget system could resist the urge to make across-the-board cuts. That is especially true in large
organizations, Mr. Pfutzenreuter said; the people in Morrill Hall cannot know
what is going on in the colleges and departments. The tax is across-the-board but the
reallocation is differential, so there is a net difference, Professor Campbell
observed. How much of a differential, he
asked? There is
about $9 million for compacts/academic programs and about $5 million for
students, Mr. Pfutzenreuter said. What
is the gap between the largest and smallest percentage of their base budgets
that colleges received in these reallocation funds, Professor Konstan
asked? In terms of a net position, after
all funds and taxes are calculated, but before compact decisions, the variation
between units is very small, Mr. Pfutzenreuter said. He did not have the variance once the compact
funds were awarded.
If
funds will not be reallocated dramatically, and depending on whether one thinks
IMG created positive incentives, what are the reasons for changing the budget
model, Professor Korth asked? The
University has gotten away from the transparency it sought, Mr. Pfutzenreuter
said; the budget system has become very complicated and budgeting has become
very difficult. Is the point better
information, Professor Korth asked? If
so, he said he was concerned that people would ask MORE questions, thus
generating even more work. Transparency
makes for more work, and while he would not argue against transparency, does it
create a more constructive dialogue? Has
it done so?
Because
everyone hates the system and all feel worse off because of it is enough reason
to change, Professor Konstan maintained.
(It cannot be true that all are worse off because of the system, he
added--they are worse off because of the budget cuts, not the budget system.) But the current model makes everyone feel
worse off. People want more
transparency, simplification, and stability; the AHC Finance and Planning
Committee model would make it more complicated, Mr. Pfutzenreuter said. There is also a need to avoid perverse
incentives, Professor Konstan said (e.g., units put all their available funds
in tenured faculty lines because those funds cannot then be cut, or units do
things that are wrong in order to avoid paying the IRS and other taxes). Perverse incentives can't be avoided but the
system can at least eliminate the ones that are known. The taxes created perverse incentives, Mr.
Pfutzenreuter said. That situation
should not be made worse, and taxes cannot be used to cut budgets. One reason for a new budget model is to get a
single tax, Professor Campbell said; if there is to be a model that uses taxes,
one question is whether it should tax revenues or expenditures. Mr. Pfutzenreuter said he did not know that
it would make much difference. There are
strong feelings about that, Professor Campbell observed. How high must taxes get to reach the point
where the units quit spending money, Mr. Pfutzenreuter asked? That is not the main problem with
expenditure-based taxes, Professor Konstan responded; when the budget is
uncertain, people cut spending, and then tax revenues plummet, so taxes have to
be increased, and there is a vicious cycle.
If
the tax is on expenditures, funds will have to be set aside, Mr. Pfutzenreuter
said. Or there would have to be a
minimum tax, Professor Campbell said.
The notion of whether there should be an IRS tax should stay on the
table, Mr. Pfutzenreuter said; it could be mitigated by pushing costs out to
the units as well. The budget model
committee must define overhead and decide how to pay for it. The AHC model pushes the costs to the units.
Professor
Konstan said he took up Professor Feeney's challenge at the last meeting to
develop an alternative model to the one presented by the AHC Finance and
Planning Committee; he distributed copies of a chart proposing the distribution
of revenues and expenses. This is the
counterpoint to the AHC proposal, he said, and it may not be exactly right,
either.
The
chart provided:
-- 100% of O&M, University fee (the
fee portion of tuition), and other central funds flow to the central
administration.
-- Central administration would pay
completely for research administration/compliance, libraries, energy, landscaping,
and central administrative costs.
-- 50% of tuition and ICR funds go to the
administration and 50% to the campuses/colleges. Of other local funds, 15% go to the
administration and 85% go to the units (with the caveat that different splits
could be negotiated for different classes of local activities).
-- Of the funds flowing into central
administration, allocations would be made to colleges, with the restriction
that the administration could not cut any college by more than X% per year (5?
10? 20?).
-- Campuses/colleges would receive 100%
of direct grants funds and unit fees.
-- Campuses/colleges would be responsible
for 100% of salary and fringe pool charges, direct operating expenses,
purchased goods and services, and leased (non-University) space. There would not be direct charges for fringe
benefits.
-- In certain core services (e.g.,
janitorial, security, classrooms), the University would provide a stipulated
level of service at no charge. If units
wish a higher or lower level of service, they would pay more/be charged
less. In some areas, if units can
control consumption, they can make decisions about the use of funds. (This is a new concept, Mr. Pfutzenreuter
commented.)
-- For some resources, the market could
be used in allocation (e.g., space, perhaps classroom use).
Professor
Konstan said that for the items fully funded by central administration
(libraries, research administration/compliance, energy, landscaping, etc.), he
assumed there would be a governance/advisory board overseeing whether the
budgets are reasonable--they should not receive unlimited funding, but unlike
today, they should also not be starved.
This model does not put money into units and then take it back, so it
eliminates taxes. The numbers for
central administration should be set high enough that there is never again the
need for funds to flow from the units back to the administration; people are
not happy when they must pay taxes.
At
this point Senior Vice President for Academic Affairs and Provost-designate E.
Thomas Sullivan joined the meeting; Professor Campbell introduced him and
called for a round of introductions. He
noted that the Committee has had a wide-ranging discussion for several meetings
about budget principles (which it settled on after revisions by the Faculty
Consultative Committee). More recently,
it has begun discussing a budget model presented by the AHC Finance and
Planning Committee. He said he
understood there will be a central-administration-appointed committee to advise on a new budget model; it is to be hoped that these
Committee discussions can help guide the group.
He asked Dr. Sullivan if he had any comments.
Dr.
Sullivan said he was at the meeting to listen.
He said he had read the revised budget principles and the minutes of the
discussions. He recalled that he was
serving as a dean when the University made the change to IMG and served until
two years ago; since then, there have been significant changes to IMG. He said he has always thought that any model
should start with clarity, transparency, predictability, and low transaction
costs. Those criteria, he said, should
be used with any budget model the University may choose to develop in the
future.
The
same criteria appear in the Budget Management Task Force report, Professor
Campbell commented. Now this Committee
has before it two models at opposite extremes for implementation of the budget
principles. The discussion is
particularly difficult, however, when state funds are declining--it is
difficult to separate the pain of decreased funding from the problems of the
budget system.
Ms.
Blixt asked about how funds are allocated in the model that Professor Konstan
set out. A unit would decide what it
needs and the central administration would transfer the funds? Basically that is correct, Professor Konstan
said. One problem unrelated to the
budget model is that the administration has not led by example. It told the deans to make hard choices, but
spread the pain evenly to the deans; what happened in the colleges is not
apparent. There is a responsibility on
the part of the University's leadership to make hard, long-term decisions about
investing in areas of the University, rather than the model "you can grow
if you can get the money and you can't if you can't." That has gotten the University in trouble in
the past (e.g., in relying on clinical income in the AHC) and it could again
(relying on tuition dollars). There
should be negotiation and then a lot of money flowing to the colleges; the goal
of central administration is not to grow central administration.
Professor
Konstan's proposal takes the University full circle back to the day when all
money flowed to the President's office and was then distributed to the
units. Professor Konstan said it was
half-circle; he suggests that the units can keep some of the money they
generate (e.g., one-half the tuition and ICR funds). 50% is probably enough to pay TAs, etc., but
not enough to hire tenure-track faculty--that should be decided in negotiations
with the administration.
Mr.
Pfutzenreuter pointed out that the administration is not now paying any salary
or fringe benefit costs for the units.
Professor Konstan said he believed that was a mistake. That was the model for non-tuition-generating
units before, such as when it was thought clinical income would be endless and
the AHC hired people on those revenues.
One might predict that in 15-20 years students will not take liberal
arts degrees because they will be pressured to get job training and CLA would
lose a significant percentage of its tuition revenue. (Professor Konstan said he was not predicting
that would happen, just that it was an example of something that might occur.)
Professor
Warwick said that Professor Konstan's plan identifies the independence of units
and ways the University leadership can influence them; it can support places
that must be preserved as well as give entrepreneurial encouragement. He said this was the best budget plan he had
seen. Ms. Blixt said the University has
become too decentralized to go back to this kind of model; many goods and
services are now paid for by the colleges.
She said she liked a model, however, where common goods are defined and units responsible pay for their proportionate share. She asked Mr. Pfutzenreuter his opinion.
Mr.
Pfutzenreuter said that the University has become very
decentralized but that he liked parts of Professor Konstan's proposal, such as
the idea of the University providing core services at a certain level, and then
allowing units to opt for more or less.
He said he liked Professor Konstan's proposal more than the one from the
AHC; the University tried charging for space and it did not work. He said he also liked the mix of common goods
and entrepreneurship in Professor Konstan's model; he does not like taxes and
wish they were eliminated. He said he
would like to see overhead defined and who is responsible for it, who is
responsible for what costs, and a stabilization of the system--with the acknowledgement
that if the state cuts the University's budgets, there would have to be
adjustments in the understandings.
One
function of the central administration is to make differential allocations that
reflect new programs and reduce support for old ones, especially when those
programs cross unit boundaries. Is that what happens in this model, Professor
Campbell asked? If so, he said, it is a
retrenchment and reallocation model. If
the administration takes 50% of tuition, there would be no need for
reallocation or taxes, Mr. Pfutzenreuter commented.
What
changes would result from this model, Professor Campbell then asked? The first year it were in effect the
administration should redirect the flow of money so that each unit would
receive the same funding, Professor Konstan said. After that, if O&M declines and tuition
revenue increases, some of the tuition income would go to central
administration for allocation to units or to make up central costs; funds would
not given to units and then taken back.
There would need to be active management, phasing
some units down slowly and increasing others.
There would be no net increase in funds to central administration, but
it would not necessarily give units the same amount of funding each year--and
it would not distribute funds across the board.
Active management has a role in the University; the alternative is that
units that have the revenue may grow without regard to whether that makes sense
for the future of the University.
Dr.
Sullivan said he has heard that one criticism of the current budget model is
that it is not publicly accountable and transparent in how the taxed funds are
spent. That may not be true, but it is a
rumor. He wondered,
if the system had more transparency, if people would believe the money went
into overhead, investments, and common goods.
He said he has never seen a report on the use of the funds and that
transparency would help. Mr.
Pfutzenreuter handed him a copy of one of the tables he had earlier distributed
to Committee members, a table that presented exactly what Dr. Sullivan said was
needed.
Dr.
Sullivan said that in his experience faculty and staff compensation increases
have been paid for by the colleges, largely from tuition increases. If the colleges receive only 50% of tuition
revenues, would that have a negative effect on their ability to increase salary
funds? Professor Konstan said it should
not be assumed that the other half of tuition revenues (the portion going to
central administration) would not come back to the colleges as well, in a
managed way. Any budget system that
would lead to less money for the colleges would not be good, he said, except
perhaps for an initial adjustment to pay for common goods. He said he has also heard the complaint about
the lack of transparency but does not believe the complaints would go away even
if the system were more transparent unless the money were spent as the colleges
want. That is why they would be less
unhappy if the administration simply took the money off the top. But that could lead to another criticism, Dr.
Sullivan observed: that "the
government" took 50% off the top.
The current system puts some tension on the ability of central
administration to pay for central costs and common goods, Mr. Pfutzenreuter said, which is why the IRS tax has gotten so high. Professor Konstan's proposal would eliminate
that tension. Professor Konstan
speculated that this proposal could be sold (using different arguments) to the
various units. Faculty
from the AHC have complained that tuition is privileged over research
funds (because tuition revenue isn't split and ICR money is). This model would fix that discrepancy. His proposal would also help CLA, he said,
because if tuition revenues decline, CLA is protected more than it is now and
it reduces the risk to the college. Mr.
Pfutzenreuter agreed that sending only 50% of tuition to CLA would reduce its
risk because now it relies very heavily on tuition.
Professor
Konstan said that no matter the numbers used, any proposed budget model should
aim for simplicity and avoiding a tax bill to the units. Mr. Pfutzenreuter pointed out that the
University Fee (assessed with tuition) was a way to get money to the central
administration without increasing the IRS.
The result is that the administration is now attributing 100% of 90% of
the "tuition" to colleges; he agreed with Professor Konstan that the
net, after assessment of the IRS, could be in the 70/30 range. The University actually quit attributing 100%
of tuition revenues to the colleges quite awhile ago. The University has been undoing IMG ever
since it was adopted, Professor Korth observed.
Mr.
Pfutzenreuter said that the charge letter to the budget model committee would
go out in the next week or so; he did not know who would be on the
committee. Professor Campbell said this
Committee would be interested in seeing the charge, even if after it has
already gone out. Mr. Pfutzenreuter said
the charge would be based on the work this Committee has done; it will revisit
the principles that it and FCC approved.
The
Committee also asked for a values statement, Professor Campbell recalled, and
was told it should ask the Provost. Dr.
Sullivan said the work on such a statement has begun and that he would work
with the Committee on it this summer.
The Committee also asked that the size and role of the Provost's Budget
Advisory Committee be expanded in the future, consistent with the
recommendation of the Budget Management Task Force report; is it too soon to
tell if that will happen? Dr. Sullivan
said he did not know yet.
Professor
Campbell thanked Dr. Sullivan for joining the meeting and adjourned it at
--
Gary Engstrand