These minutes reflect discussion and debate at a meeting of a committee of the University of Minnesota Senate or Twin Cities Campus Assembly; none of the comments, conclusions, or actions reported in these minutes represents the views of, nor are they binding on, the Senate or Assembly, the Administration, or the Board of Regents.
Minutes
Senate Committee on Finance and Planning
Special Meeting
Thursday, September 23, 2004
3:15 - 5:00
238A Morrill Hall
Present:
Charles Campbell (chair), Rose Blixt, David Chapman, Daniel Feeney, Steve Fitzgerald, Lincoln Kallsen, Thomas Klein, Joseph Konstan, Michael Korth, Ian McMillan, Cleon Melsa, Richard Pfutzenreuter, Terry Roe, Charles Speaks, Alfred Sullivan, Warren Warwick
Absent:
Calvin Alexander, Arthur Erdman, Joshua Jacobsen, Kathleen O'Brien, Diane Parker, Thomas Stinson, Kate VandenBosch, Susan Van Voorhis, Michael Volna
Guests:
Professor Michael Murphy (Academic Health Center Finance and Planning Committee)
[In these minutes: (1) revised charge to the subcommittee on capital projects; (2) University budget model]
1. Charge to the Subcommittee on Capital Projects
Professor Campbell convened the special meeting at 3:15 and turned first to a small business item, a change in the charge to the Subcommittee on Capital Projects. The Committee agreed unanimously that the charge should be revised to include campus master planning, but that it would deal only with Twin Cities campus master planning. Both Professors Korth and Melsa agreed that the subcommittee, composed predominantly of Twin Cities representatives, would probably not be in a good position to evaluate master plans from the Crookston and Morris campuses. Professor Korth expressed some ambivalence about having a subcommittee with a University-wide charge deal with matters affecting only one campus. Professor Konstan asked if there is a place where the various committees dealing with campus master plans come together; it is this Committee.
2. University Budget Model
Professor Campbell then turned to the major agenda item of the meeting, the University's budget model. There is an internal budget model working group, he noted, that has met once and will meet 4-5 more times before the end of the year; it is expected to provide advice to the President on the University's budget model. This Committee has had lengthy discussions and has been invited to contribute its views to the working group; he hoped the Committee might come to a consensus. He said he also hoped to see a draft budget model from the working group brought to this Committee, and pointed out that several members of this Committee (Professors Campbell, Feeney, and Speaks, along with Messrs. Kallsen and Pfutzenreuter, are also members of the working group.
What does he want from this meeting, Professor Konstan asked Professor Campbell. The Committee has before it two models, and while there may not be agreement on those, there is agreement that the current system is broken. He suggested that the Committee could outline the merits and disadvantages of each system. The Committee could try to come to a consensus, and take a vote, or it could hash out the pros and cons of each model so that all of the issues are on the table; the working group could then decide what to recommend to the President. Professor Campbell said he called this special meeting because he sensed there was a desire to continue the discussion of the budget model; the Committee could adopt a statement or resolution or could send a letter to the President, but the main target is the working group. He has been asked to summarize the discussions for the working group.
Professor Konstan said that unless someone suggests a third model, the Committee has two models with very different philosophies.
-- One is built around an entrepreneurial, cost-allocation model. If a unit generates revenue, the revenue belongs to the unit. If it generates expenses, to the extent possible those expenses are also charged to the unit. Things are run more like a business, where units try to avoid costs and to generate revenues.
-- One calls for a strong and well-funded center, with revenues going to the center and then distributed to the units. Units can make money in some ways and the administration puts the brakes on other ways they might make money. The model says the University is a whole, because there are externalities that come from the whole, but the model also tries to keep incentives to raise revenues.
Ms. Blixt asked if a new model would be implemented before a new financial system is in place.
Does the Committee need to worry about technological limits to what it can recommend? Mr. Kallsen said he believed the intent, when the University switches to a new budget model, is to arrange the technology so the principles of the budget model can be implemented.
How does this discussion link to the budget model working group, Professor Roe asked? Is it interested in the discussion or intent on developing its own model? It is, Professor Feeney said, but he did not know if it would develop a model de novo, work from what the Committee provides, or what it would do. His sense is that the working group wants to know what this Committee thinks; he and Professor Campbell are charged to present the views of their committees. These are two alternative philosophies, Professor Roe commented; the numbers that are plugged into the formulae are for the technicians to figure out; this Committee should discuss philosophy.
There are models not here, Professor Konstan pointed out: the current system, which the Committee is all too familiar with, and the previous system, where ALL funds went to the central administration and were then doled out through budget requests. He said he has heard no sentiment in favor of either of those models.
Professor Feeney suggested the Committee hash out the virtues and drawbacks of each model. Should there be mechanisms to generate/conserve revenue? What mechanism should be used to distribute O&M funds? Should common goods be funded through central administration or paid for by the units? The Committee should discuss the incentive-driven model, and whether there are particular incentives that should be included.
Professor Speaks noted that Senior Vice President Cerra and Vice President Pfutzenreuter are co-chairs of the budget model working group. They heard at the first meeting about the current structure and about the principles that have been discussed at the AHC Finance and Planning Committee and by this Committee; they also learned about principles developed by the Twin Cities deans. The deans say the budget model should support the long-term mission of the University, which he thought made sense. He also heard Dr. Cerra say that the budget model is a tool; the mission changes over time and the University needs a tool flexible enough to accommodate those changes. Professor Speaks said he disagreed; if one looks at the three sets of principles, he would like to see which model will best allow the University to carry out its mission. That is place where the discussion should start, he said: what the University wants to do, what the President's initiatives are.
Vice President Pfutzenreuter asked at what level one wants to look at what the University wants to be. And how the model should support what it wants to be. He said he did not know how to get his hands around this issue. Professor Speaks recalled President Hasselmo's initiative in undergraduate education: if that is the priority, the University must be sure the model fits. If the goal is that the University has the best professional schools in the country, then the model should support the goal. Currently the University does everything for everybody and does not change anything. It would help to know what it is the University is trying to accomplish.
Professor Warwick said he worried about the power in colleges becoming so great that they could distort the University's mission. He said he would prefer to see common projects and colleges encouraged to work together (something that NIH encourages). This is a university and all are part of one institution; the whole is greater than the sum of the parts and he would not like to see the parts grow like cancer.
Ms. Blixt said that as an RRC manager, she thought the Committee was looking for a new mechanism whereby the dollar flow was more transparent and there was more accountability as well as one that would clarify how to pay for common goods. The example of increased emphasis on the professional schools would be a change in admissions, not in the budget model. She did not think of this as a philosophical conversation as much as a practical one; the budget model need not drive or be driven by the mission.
The budget model, as a tool, should be able to support undergraduate education and professional education and other key elements of the University, Mr. Klein said, and should guide the flow of funds with accountability, transparency, and efficiency. Emphases in the University could change and the budget model should be able to function under changing conditions. He said he would be surprised if Dr. Cerra said the mission of the University changes. Perhaps the operational strategy changes, but the mission of the University seems well established. Budget models should have the ability to direct dollar flows so they are consistent with the mission. The model should not be expected to answer the question of whether funds are directed to professional education versus undergraduate education.
There are three things a budget model can deal with, Professor Konstan said.
-- Who steers? The University is a big fleet; how much the President steers and how much the deans steer depends on the model. When the deans have more money, they have more autonomy. Some say the University is better if the units are more free to do what they wish; Professor Konstan said he did not believe that and sees the President as an admiral who makes the fleet move by giving or taking money from the colleges.
-- The tie to efficiency: reducing consumption of what a unit can do without, which works best if the savings go to those who reduce consumption. The market functions to increase efficiency, but sometimes there can be adverse effects. If, for example, a large college decides it can manage its own human resources function, diminishing or eliminating the function at the central level, then the small colleges are hurt by the absence or inefficiency of the central service. Also, there is the challenge of managerial efficiency, which things are more efficient when managed centrally and provided at a designated level to relieve the deans, department heads, and others of the burden or distraction of tinkering.
-- The psychology of the system: The University "blew it" with this system because no one likes taxes—no one knows where the money goes and what it pays for. What is needed is a model where people get what they need as well as funds for strategic initiatives. Any mechanism that starves the center and then takes money back is a trap. Neither model determines whether money goes into the biosciences or education. But in one case, it is easier: the President decides. In the other, there is limited power on the part of the deans and market forces will control the decision. If a unit/field cannot generate revenue and grants, it will not go very far.
When the AHC Finance and Planning Committee looked at the budget model issue, it saw a zero-sum game with shrinking state dollars, Professor Feeney said. Their proposal calls for the central administration to control O&M funds, charging for services, and placing the incentives in the colleges. This is the difference between states' rights and federalism, and perhaps there could be a hybrid. One must bear in mind, however, that the very different ways in which colleges generate revenues affect the nature of the impact of the budget model on them. The AHC model forces discussion of O&M funds, overhead, space, and so on. The Committee needs to discuss the two models. Either could be pushed to an extreme, or there could be a hybrid, but if there are no incentives in the system it will stifle revenue generation. The Faculty Consultative Committee heard earlier today about the status of the CLA budget [it was said that about 10% of the CLA budget now comes from the state]. Does anyone want to go back to the earlier model, Professor Feeney asked? No one has suggested downsizing, so the system has to generate and conserve revenue.
Professor Speaks said he agreed with Professor Konstan's three points, especially the first one. Former President Yudof talked about the privatizing of public universities; what will happen, Professor Speaks said, is colleges will be privatized within public universities, which will make it very difficult for the President to steer the fleet. The AHC model raises the question, if units keep all the money, in what sense they are integral parts of the University.
There is a history of units keeping money in the University, Professor Konstan said. There have been units that trade on the good name of the University by bringing good students into programs that are below the level of University academic programs, which dilutes the University's name. There should be a point at which the University can say "no" to a college.
Professor Konstan said there are common principles:
-- There should be a public statement and discussion about the allocation of central funds to the units and to central services.
-- There must be increased efficiency in the use of space, which might happen if units are allowed to rent or sell it (and perhaps the same is true of classrooms).
He also introduced additional concepts:
-- The market is great for efficiency but not for fairness; there is need for a central mechanism to achieve fairness.
-- The model should tie support for faculty and departments to faculty lines—a unit should receive more money when it adds faculty and it should have funding reduced when it is shrinking. (That decision could be made either by a dean or by the President.)
-- There is need for a mechanism to slow down semi-soft faculty positions (those funded on research or tuition), where the funding may not be there for the (life) term of the appointment of the faculty member. (Professor Konstan conceded that tuition may be a more enduring revenue source than state funds at this point.) This problem could occur in CLA in the future: tuition is high and enrollment is dependable today; if enrollment plummets, other units could be taxed to support a college with faculty it no longer has sufficient revenues to support. There are various mechanisms that could be used to ensure that faculty positions are paid for. (Professor Speaks cautioned about what one says about CLA, because it could increase enrollment a great deal, hire faculty, and end up in a precarious position, but in fact it caps enrollment.)
Vice President Pfutzenreuter said that central administrators only have so much time to make decisions, so much must be left up to the deans. The question is how to efficiently get dollars from Morrill Hall to the deans. He said he knew that the IRS would get too high and would have to be fixed. The system is now so complicated that people work with spreadsheets to tweak revenues in order to minimize the impact on units. The focus is so much on tweaking the spreadsheet that it would be a good idea to go back to the big ideas.
Mr. Pfutzenreuter said he thought the President should focus on one or two things in addition to the compacts. One item could be the amount of state funds to be delivered to academic units. The AHC model calls for 100% of tuition, ICR, and so on, to go to the academic units; the President would look at revenues and costs and decide how much state money to give to academic units to help them meet strategic objectives and meet their costs (which would include central services such as the libraries). If there would be no taxes, Professor Speaks said, how much money would central administration retain? None, said Mr. Pfutzenreuter; it would operate on charges back to the colleges for central services. The cost of the services would be known so a college could buy more if it wished. Would all common goods be in central services, Mr. Fitzgerald asked? They would be, Mr. Pfutzenreuter said, and each year there would be a decision to increase or decrease them and figure out the charges for them. The President would then decide how much state money would go to each unit. This proposal turns the IRS into charges to the colleges (the IRS is not now based on anything); the colleges would receive the money and pay bills based on services. Professor Konstan's proposal would only give part of the money to the colleges, he noted.
If state funds were to decline to some very low level, Professor Konstan said, at some point the President would say the administration does not have enough O&M money to reach its goals and would have to assess units for strategic objectives. Mr. Pfutzenreuter said there could be one charge, levied through the compact process.
The budget model lays out the rules of the game, Professor Roe said; if it only achieves efficiency in getting funds from Morrill Hall to the deans, it is not a very good model, because there is inefficiency below the level of the deans. Those levels must also be reviewed. And right now the incentive is to put money in faculty lines because those are difficult to take away. That would be hard to do in this environment, except through the compact process, Mr. Pfutzenreuter said. The compact process does not succeed in allocation money from one college to another, Professor Roe responded. Mr. Pfutzenreuter agreed; that is the spreadsheet approach, with very small changes so there is no impact on the units.
There are universities where budgets do not include faculty lines, Professor Konstan said. Perhaps faculty lines should be owned centrally and the administration should make decisions by positions. The deans can do that now, but in many colleges department budgets include faculty lines. The model could separate discussions of budget from faculty lines. He said that he believed Mr. Pfutzenreuter's model, while simple, could create perverse incentives for colleges to take actions that benefit themselves but that hurt the University as a whole. Mr. Pfutzenreuter said that none of the units have enough money to do that. No model will substitute for clear decisions and directions. If one wants a model that will make good decisions for the President and the Provost, that won't happen.
If there are charges to units, Professor Konstan predicted, each dean and department head will believe that the charges are too high and they fall disproportionately on their unit. A flat tax would lead to less grumbling; a lot of taxes will not. One objective of the model should be to reduce the grumbling. The point is what things should the central administration focus on and what will help the colleges to understand costs, Mr. Pfutzenreuter said.
There is a point when a college could keep growing but it should not, Professor Konstan said. When it is a part of the University, it should be managed. Colleges should not get bigger because they can make more money. Mr. Pfutzenreuter pointed out that the Carlson School is not enrolling twice as many students as it has (which it could) in order to make more money, and could not do so without the approval of the President or Provost. Have there been such incidents in the past, Professor Konstan asked? Schools have tried to get such things in their compacts, Mr. Pfutzenreuter said, but not entirely successfully.
There are a number of common points of view, Professor Campbell said, such as transparency, but he said he did not see a letter to the President emerging from the discussion. The Committee could try for endorsement of a model, or let it go as a jump ball, which it was when the two models came to the Committee, Mr. Klein said. There is also agreement the current system does not work, Professor Roe added. Because it does not look at what it should look at, Mr. Pfutzenreuter said. And the Committee cannot expect the model to do the work of making decisions, Mr. Klein said.
One big failure of the current system is that it induces each dean to have a savings account for a rainy day, Professor Roe maintained, but the total of the college savings accounts is much larger than what the administration would need for the institution, which means that money is withdrawn from production. Neither model would eliminate that problem, Professor Konstan responded. The question is not whether there will be fluctuations, Professor Roe said, but who will be responsible for them. Now the deans are, and must save accordingly. Faculty also save because they know the department will not bail them out; departments save because they know the college will not bail them out, and colleges save because they know the administration will not bail them out, Professor Konstan said. And the central administration saves because it knows the state will not bail out the University. In other organizations, Mr. Klein commented, these forces require closing a unit or they force an organization into bankruptcy.
Professor Speaks said he liked the suggestion from Mr. Pfutzenreuter that places responsibility on the President to identify priorities. Right now reallocation/rescission is across-the-board. When the system consists of tweaking a spreadsheet, everything is across-the-board. The University must get away from that approach. No model solves that problem, Professor Konstan said. The President knows where the O&M funds are but he can't just suddenly shift them and do harm to a college.
The current model is oriented to having a minimal impact on units, Mr. Pfutzenreuter said. Changes come through investments. Dr. Sullivan said that the University has the biggest compact pool in its history, $9 million, but it is amazing how far that money will not go, given presidential initiatives, needs coming to the Provost, Senior Vice President for the Health Sciences, and the Senior vice President for System Administration from the coordinate campuses. $9 million is not very much (on a total of $2.3 billion, Mr. Pfutzenreuter said in response to a query).
The big problem is the so-called "budget challenge" each year, Professor Campbell said, what used to be called "Fitz's list"—things that must be paid for, such as increases in utilities, health care, debt service, etc. That total is usually closer to $100 million, of which the compact pool is just one part. That was the chief reason the IRS was imposed. Another big problem is time zero: how are the funds allocated at the inception of model? With the current system, the administration did not have enough money to start with because it sent all the tuition to the colleges, and subsequently had to deal with legislative cuts. That may happen again, he said, and so the change to the new system must deal carefully with the time zero problem. The AHC model requires an enormous amount of information: if all the money is to be allocated to the colleges, and they are then charged for administrative services, the cost of those services must be identified. Mr. Pfutzenreuter said that was not true of what he would propose, which would allocate administrative costs to the colleges (for some costs, colleges might not use them and the charge would be zero). This would be done for all services. The President then decides to allocate state funds to the units.
How big a percentage cut would he allow, Professor Konstan asked? Would cuts only be allowed so they did not make a college far from whole? Mr. Pfutzenreuter agreed that there could be a problem of focusing only on the levers and schemes to keep things in balance. That is what is happening now, Professor Konstan said, and he was not sure any model would change it.
At time zero, Professor Konstan said, the system needs to start where all units now are or all will oppose it and the University does not want to engender scheming and fighting about how to allocate unit costs. Or one can say there is $X million and develop a mechanism that the President or Provost focuses on. The difference is between stopping points and not taking away money.
What happens if there were 6% growth in funds to the administration, Professor Konstan asked. There would probably be a holiday from the IRS, Mr. Pfutzenreuter said, and lower fees. So it is likely the units would be more dependent on tuition, Professor Roe commented; does that say something about the model? It indicates the model has a revenue-generating mechanism, Mr. Klein said. Revenue can come in various forms -tuition, clinical practice fees, grants, etc., but these budget models build in an expectation that units will generate revenue. Professor Feeney's proposal recognizes different mechanisms and provides for a smaller pool of central dollars to allocate, thus potentially reducing squabbling. To the extent units generate more money, they are more independent; to the extent they do not, they are not.
The University cannot let a college sink, Professor Konstan said; it might be possible to set up an insurance fund, or take tuition funds to bail out a college, but if all are tied together (like boats), then none will sink. The extreme example of the system would be that all funds go to the central administration, which gives them out to the colleges. A budget decision model would require the administration to decide on the value of a unit to the institution, Professor Roe said, and some might be seen as so valuable they would be subsidized indefinitely. Those discussions need to be between the Provost and the colleges or the Senior Vice President for the Health Sciences and the colleges, Mr. Pfutzenreuter commented.
What if the University decided it did not need the Law School, but concluded that if it could get 10% of the revenue going to the Law School, it would retain the Law School, Professor Konstan asked. If one goes to the extreme end of the AHC model, the University could not do that. Mr. Pfutzenreuter said he still believes in a "franchise fee"—all units must contribute to the pool that the President uses for strategic initiatives, which might consistently be $10-15 million. That sounds like perpetual retrenchment and reallocation, Professor Campbell responded.
If there are no taxes, Professor Melsa said, the system will depend on how well costs and fees are defined ahead of time, and how well they are tracked. Mr. Pfutzenreuter said he did not believe there should be a lot of formulae; that gets too complicated. But it would be possible to see how expenses are growing—if costs to colleges go up, they could see them. Now, with the IRS, they do not. Professor Konstan said he did not believe that anything charged for is would be better than plus or minus 75%. How would the administration allocate the costs of University Relations? By the number of press releases it did per college? Any way the numbers are negotiated, each unit will negotiate with data that gives it the lowest charge. That is the AHC approach, so they use the number of people involved.
Perhaps there is need for a discussion about what things cost rather than about taxes, Mr. Pfutzenreuter suggested. That is more likely to be productive. If there is good information, Professor Campbell said; there is, Mr. Pfutzenreuter assured him.
Professor Roe commented, apropos decision points in the model, that if all positions were held centrally, and someone retired, that would affect how funds are allocated because then in response to shorter-run cyclical changes in the budget, resources could more easily be taken from this pool as opposed to extracting funds from departments. Departments with “soft” money in graduate programs and support, tend to loose these resources in times of cuts, but if they are locked into positions, central must find the funds elsewhere. Thus, the system generates incentives for departments to lock resources into tenure tack positions. Mr. Pfutzenreuter said he did not believe the central administration would exercise position control. Professor Campbell noted that the CLA dean does so. Professor Roe said that the Graduate School used to play a role in the budget reallocation process through its evaluation of units. It was the one central unit with the most knowledge of the quality and national standing of departments.
All of these examples come back to common goods, Mr. Fitzgerald said. Regardless of the model there are two principles: the model should support the mission and priorities of the University, and common goods need a structural mechanism of support on a recurring basis so they are not subject to the vagaries of budget discussions. The second one gets to the AHC model: should professional schools bear part of the cost of undergraduate education? If something is a central mission of the University, all units should support it in terms of its value to the entire institution.
Professor Campbell said he would try to abstract the discussion for the working group. He said he appreciated the good discussion, which he described as superb. He congratulated Committee members for "hanging in there" and promised the subject would be back at a future meeting. He adjourned the meeting at 4:45.
-- Gary Engstrand
University of Minnesota