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

Tuesday, October 26, 2004

3:30 – 5:00

238A Morrill Hall

Present:

Charles Campbell (chair), Kendal Beer, Rose Blixt, David Chapman, Arthur Erdman, Scott Fine, Steve Fitzgerald, Seth Haskell, Lincoln Kallsen, Thomas Klein, Ian McMillan, Cleon Melsa, Terry Roe, Charles Speaks, Kate VandenBosch, Warren Warwick

Absent:

Calvin Alexander, Daniel Feeney, Joshua Jacobsen, Joseph Konstan, Michael Korth, Kathleen O'Brien, Diane Parker, Richard Pfutzenreuter, Thomas Stinson, Alfred Sullivan, Susan Van Voorhis, Michael Volna

Guests:

Elizabeth Eull (Intercollegiate Athletics); Senior Vice President Frank Cerra, Brian Swanson (Office of Budget and Finance)

[In these minutes: (1) return on the investment in football; (2) plans for clinics]

1. Investment in Football

Professor Campbell convened the meeting at 3:30 and began by welcoming the new student members of the Committee, Messrs. Beer, Fine, and Haskell. He then welcomed Professor Erdman and Ms. Eull to report to the Committee on the return from the investment in football that was made several years ago.

Professor Erdman started by noting that he serves as chair of the Advisory Committee on Athletics, which last year split its activities into several subcommittees, one of which deals with finances. Professor Speaks serves as a representative from this Committee on the subcommittee. Athletic Director Joel Maturi and Ms. Eull, chief financial officer for intercollegiate athletics, have been keeping the subcommittee up to date on financial matters.

Three years ago then-Vice President Tonya Brown prepared a report on athletics that revealed the University was investing a lot of central money in athletics. That surprised many and led to a plan to reduce the subsidy by about $500,000 per year. This Committee requested a report on the return on the investment that has been made in football to help track whether that investment as achieved its intended goal. In addition, has this past investment the department helped it deal with the current reduction in the institutional subsidy.

Ms. Eull distributed a one-page handout on football finances and told the Committee that about ten years ago a blue-ribbon panel convened by then-President Hasselmo prepared a report on the future direction of football at the University. Its findings were that increased financial investment in football would create a more competitive football program and that a more competitive football program had the potential to generate increased revenues. Glen Mason was hired as the football coach in 1997 and there was an increased investment in football: from 1997 to 2001 the football budget increased from $3.5 to $7.3 million (from 2001 to 2004 it increased only from $7.3 to $7.7 million, which reflects largely the increase in the cost of grants-in-aid for players). There was a big acceleration in spending followed by a leveling out.

Professor Speaks asked what new spending occurred during 1997-2001. It was primarily increased coaching salaries, Ms. Eull said, along with increases in travel and recruiting costs (where the coaches went and how often). They spent more money in the same places that their competitors were spending more. Unlike a number of other institutions, however, the University has a limited deal for football equipment and apparel.

Professor Speaks jumped ahead to information about the University of Michigan football program, which generates $28.5 million in ticket revenue, compared to $5.8 million at Minnesota. Minnesota ranks 9^th in the Big Ten in ticket revenues (ahead of all but Indiana and Northwestern); Michigan is first. Does Michigan spend that money or is it net profit, Professor Speaks asked? They spend it around their athletic program, Ms. Eull said. All the athletic programs tend to spend what they have; as a result of Vice President Brown's report, the University of Minnesota is trying not to do that. As an auxiliary, the department should also not be without reserve funds.

One thing about the University of Minnesota in football is that it is not like other schools around the country. Most Division I athletic programs have two primary revenue sources, football and men's basketball; Minnesota has three sources because it also has a revenue-producing men's hockey program. Minnesota realized more profit from men's hockey than football. It is this broader base of revenue that allows Minnesota to have a broad based athletics program.

Professor Speaks asked if it is true that the loss of the two football games in Michigan this year would mean $1 million less in revenues, as reported in the news. Ms. Eull said they budget very conservatively, not in expectation of going to the Rose Bowl. If a team goes to the Rose Bowl, the sale of season tickets increases dramatically, as do royalty/trademark/licensing income. It would have meant a considerable amount of money to the program if the team had gone to the Rose Bowl, although how long such an increase is sustainable is unknown.

The plan for the allocation of central funds to athletics calls for the amounts to be reduced from $8.3 million in 2002-03 to $7.2 million during the current year to $5.7 million by the end of 2007-08. Along with that reduction, Professor Erdman pointed out, there will be the loss of income that was raised to pay for the three sports that were selected for elimination a few years ago; unless that income is replaced, the $900,000 cost of those three sports will be added back to the budget as well.

Professor Speaks asked if Ms. Eull is projecting a balance for the end of the next fiscal year. She said that last year the department had a balance of about $850,000 and put money into a facilities depreciation account (the athletic department pays for all of the buildings it uses except the Bierman Building, which houses the administrative offices). They have a department reserve, for which she is glad, Ms. Eull commented, given the volatility of their revenue sources. The coaches are managing their budgets well; none went over their budgets. She said she hoped the department could bank another $300,000 this year. Next year they face salary and tuition increases as well as the loss of the $900,000 in revenue generated by fund-raising for the three teams, so there will be a challenge of about $2.5 million on a budget of $50 million.

Does the athletic department pay non-resident tuition for students who come from outside Minnesota or reciprocity states, Professor Campbell asked? It does, Ms. Eull affirmed; they pay whatever the student's costs are. They have 322 grants-in-aid across 25 sports. The proportion of student-athletes who pay the non-resident rate is higher than in the student body generally, Mr. Kallsen observed. (Students who come from the Midwest Consortium—Minnesota, Nebraska, Kansas, Missouri, and Michigan—pay 150% of resident tuition.)

Mr. Klein asked about the status of efforts to raise private funds to endow the grants-in-aid. They are very enthusiastic about the President's efforts to raise money for student aid, Ms. Eull said, and welcome any steps that take the grants-in-aid out of the operating budget of the department. One difficulty is that while the coaches are long-term thinkers, and appreciate the long-term view, they are generally hired and fired on the basis of competitive success,. It is difficult to get them to assist in raising money for endowments as opposed to money for this year that they can spend on the team. The President's initiative drives home how important financial aid is. When they look at a new facilities project now, they also require that a certain percentage of endowed grants-in-aid come with it. That will be true for a new football stadium or any other new facility.

Professor Speaks noted that the central subsidy to athletics this year is $7.2 million; in the meantime, colleges are deriving a tuition benefit of $8.5million from student-athletes. He said he made the point because regardless of how one feels about the subsidy, tuition does flow back the other direction. But those dollars must pay for educational costs, Professor Campbell observed. How many other such transfers are there during the year, Mr. Klein asked. Room, board, and books are also paid by athletic grants-in-aid, Ms. Eull said.

How much of the annual budget comes from gifts and endowments, Professor Campbell asked? About 10%, Ms. Eull reported, and that number needs to increase. From sponsorships, Professor Campbell asked? About $3.2 million of the $50 million budget, Ms. Eull said.

How much income comes from the Big Ten, Professor Campbell asked. About $10 million of the $50 million, Ms. Eull said. It is very good for the University to be a member of the Big Ten. Is that revenue stable, Professor Campbell asked? The biggest share comes from the media agreements with the Big Ten; there was concern about all media income, given the many outlets, but the Big Ten signed a multi-year deal that assures the income will be stable for the next several years.

Professor Erdman said that as a footnote to this discussion, he wanted the Committee to know that the Advisory Committee on Athletics is very pleased with its relationship with Ms. Eull and Mr. Maturi, both of whom have been very open with the subcommittee in providing information about personnel, facilities plans, and so on. He said he believed the athletic department is in good hands and the Committee should feel free to call on him any time it wishes to receive information.

Professor Campbell thanked Professor Erdman and Ms. Eull for making their report.

2. Plans for Clinics

Professor Campbell now welcomed Senior Vice President Cerra to the meeting to discuss plans for medical clinics, an idea that Vice President Cerra introduced to the Committee about a year ago.

Dr. Cerra distributed copies of a diagram illustrating the centrality of the clinical sciences in training health professionals. One major mission of the schools in the health sciences is the education and training of the next generation of health care professionals, which they do through research and education. Basic research has meaning in only one context: to discover something that will lead to the prevention or cure of disease. Clinical sciences are core to what the health sciences do, have a mandate from the state to conduct their work, and are supported by clinical revenues.

Academic program needs drive the facilities needs of the clinical sciences. At present the clinics are in the Phillips-Wangensteen Building, built in the 1960s, which does not support health care delivery or education. They have about 250,000 – 300,000 patient visits per year, which occur in the middle of the location of the training of about 6,000 health professions students. This situation creates problems both with customer satisfaction and with the educational enterprise.

Fairview-University Hospital is about 20 years old and at the point where it needs $25-30 million in improvements. The problem is that it has the largest pediatric care system in the state and its adult clinics are widely known. Two-thirds of the hospital has semi-private rooms, which people do not want, and which results in a 15-20% loss of efficiency in running it. In addition, the School of Public Health is spread all over and needs more research space (about 200,000 square feet)

Fairview has other needs as well. The Riverside Campus is very old, and Fairview would like to consolidate all of its activities in the East Bank site. This need on their part, and the University's needs, led to a joint facilities planning process that started in January, 2004. The CEOs, CFOs, and program heads worked together and looked at a lot of sites where new clinics could be located. When the Department of Health building opened up, that created the possibility of swing space and space that could be remodeled. They also involved the Boynton Health Service in the effort, which is also in an old building that needs remodeling.

They put out a Request for Proposals and hired a group of consultants to help develop a plan. The consultants' report identified four potential sites each with benefits and challenges. The contiguous sites (Diehl Hall, Pioneer Hall, the triangle on the River Road) were more acceptable. The Pioneer Hall site, which offers the best potential connection to the existing hospital, would require the demolition and reconstruction of existing residence halls. The process has now started to engage the broader internal and external communities, as well as to look at a fifth scenario that would construct the new facility on the site of Diehl Hall, Masonic Center, and VFW building.

The next step is that the processes continue. At the next Regents' meeting there will be a presentation to the Board about the mission and policy considerations. They hope to reach a conclusion about the site and a financial plan in the next two to three months. There is no plan to use University money for the clinics, but University money could be used for education and research. There will have to be fund-raising; the Minnesota Medical Foundation will have to raise about $150 million for the plan to be feasible.

Professor Warwick asked if there had been any thought given to adding floors to Mayo or the hospital. Dr. Cerra said there had, thorough thought. Mayo will not support additional floors and it would be prohibitively expensive to renovate the space for research. It would be possible to add two floors to the hospital but that would not solve the problem. There is also a problem with converting Phillips-Wangensteen into research space because of fire codes.

Professor Roe asked what the ballpark number would be for the bonding required to pay for the research and education components of the program. Dr. Cerra said he did not know yet. The total cost of the project is $500-600 million, including all the necessary infrastructure and relocation costs, that is only a very high level of analysis. They need to compare the plans and determine who pays for what. But they are not at a level of analysis where they can answer that question yet.

Professor VandenBosch asked about the alternative of using the Diehl/Children's Rehab site rather than the dorm (Pioneer Hall) site. There is not a lot of life left in those buildings, Dr. Cerra said, so it would be possible to put the clinics in new facilities on those sites. As for swing space, the Department of Health building is in good shape; without it being available, they would have no chance of considering the option of using the existing building sites. They are also cognizant of residence hall life and believe it would be best if they did not disrupt it.

With new facilities, would there be the same number of faculty and professional personnel, Professor Roe asked? There would not; there would be growth in the number of personnel, Dr. Cerra said, because of an expected investment of about $10 million in clinical science faculty over the next 5-8 years. In 1997-98 they lost about 85 faculty, clinical scientists, and that has been a problem in revitalizing the Medical School and in moving the clinical sciences forward.

Professor Campbell said he recalled that the clinics are owned by Fairview. That is correct, Dr. Cerra said. He explained what is a very complicated financing arrangement using some additional flexibility in the University created by Medicare law. Will that relationship be preserved, Professor Campbell asked? Most likely, Dr. Cerra said. In 8-10-12 years the rules could change, but right now the $25-30 million additional cost if the University were to own the clinics is not small.

What brought the three parties (the University, Fairview, and University of Minnesota Physicians) together, Mr. Swanson reported, was a visit to the clinic at Northwestern University. It includes the practice plan for Northwestern faculty and a hospital; they created a seamless, integrated service model, they share equipment and medical records and so on. It is the only hospital in Chicago without a nursing shortage because it is such a pleasant place to work. Minnesota can do the same, he said. Dr. Cerra agreed; he reported that the University's relationship with Fairview was featured at a national health care meeting as one of four around the country that supported health care education.

What impact would this have on the University's debt capacity, Professor Campbell asked? These plans are part of the six-year capital plan, Dr. Cerra said, identified as AHC projects. They are part of and within the University's debt capacity. The debt limit will, however, drive part of the financial model they eventually approve. One problem is that inflation in the price of steel alone is changing the prices daily; the sooner they lock into projects, the better they will be able to balance what is best for the University and for health care programs.

Professor Erdman commented that one could take the position this is all "across the street" and only affects the health sciences, but that is not true; the plans affect many elsewhere in the University. Many faculty outside the health sciences have collaborations with health sciences faculty (e.g., in IT, the Carlson School, etc.). It is extraordinarily important that those relationships continue. The fact that they can walk across the street to have a meeting and get something done is very important. This affects the faculty and graduate students the University can attract. This decision is tremendously important.

Do the various geographic alternatives affect what Professor Erdman said, Professor Campbell asked? If some of the programs moved to the Riverside Campus, Dr. Cerra said, it would; the data suggests there would be lost opportunities and travel time that would amount to millions of dollars.

Professor Campbell thanked Dr. Cerra for keeping the Committee posted. He adjourned the meeting at 4:40.

-- Gary Engstrand

University of Minnesota