These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on Finance and Planning
Tuesday, February 22, 2005
2:30 – 4:15
238A Morrill Hall
Present:
Charles Campbell (chair), Rose Blixt, Arthur Erdman,
Daniel Feeney, Steve Fitzgerald, Lincoln Kallsen, Thomas Klein, Joseph Konstan,
Michael Korth, Richard Pfutzenreuter, Charles Speaks, Kate VandenBosch, Michael
Volna, Warren Warwick
Absent:
Calvin Alexander, Kendal Beer, David Chapman, Scott
Fine, Seth Haskell, Joshua Jacobsen, Ian McMillan, Kathleen O'Brien, Diane
Parker, Terry Roe, Thomas Stinson, Alfred Sullivan, Susan Van Voorhis
Guests:
Associate Vice President Steve Cawley (Office of
Information Technology); Senior Vice President and Provost E. Thomas Sullivan
[In these minutes: (1) annual capital financing and debt
management report; (2) annual financial report; (3) update on the new financial
system; (4) update on strategic planning]
1. Annual Capital Financing and Debt
Management Report
Professor
Campbell convened the meeting at 2:30 and turned first to Vice President Pfutzenreuter
for a discussion of the Annual Capital Financing and Debt Management
Report.
Mr.
Pfutzenreuter distributed copies of a set of slides that had been used to make
this report to the Board of Regents in December and turned to a page that contained
a histogram with the University's projected debt levels for the next 36 years
(assuming no additional debt is incurred).
The total debt is about $726 million.
The weighted average cost of capital is 4.4%; the average life of the
debt is 11.2 years, and 93% of the debt is at a fixed rate. The University has debt at a low interest
rate and short life, Mr. Pfutzenreuter told the Committee. As a matter of policy the University sells
debt for 20 years, but it structures the P&I payments to pay it off faster
in order to recycle the debt.
Mr.
Pfutzenreuter reviewed the University's credit ratings from Moody's (Aa2) and
Standard and Poor's (AA). These are
excellent ratings, he said, and the University has had them for quite awhile. He also reviewed the factors that go into a
credit rating for a university; they include student demand, financial
statement analysis, state support, and management analysis. Debt capacity is not fixed or a function of
ratios but depends on a lot of other assessments by the rating agencies.
Professor
Speaks inquired if any of the top-30 research universities are rated only
"adequate" or worse. Mr.
Pfutzenreuter said that only two public institutions (
Mr.
Pfutzenreuter reviewed quickly a few more complicated analyses of the credit
rating and noted the charts comparing
How
much would state support have to decline in order to drive the University's
ratings down, Professor Campbell asked.
That factor is balanced by high student demand and the fact that
tuition, in the view of rating agencies, has not gone "off the
chart," Mr. Pfutzenreuter said.
They see the University's market position as very good and will be pleased
to see that the University may get back some of the state funding it lost.
In
response to questions from Professor Erdman, Mr. Pfutzenreuter explained that
even though
Professor
Speaks asked what would happen if the University's rating dropped from
excellent to good—and what likelihood is there that that will happen. Mr. Pfutzenreuter said that interest rates
are so compressed right now that a drop from excellent to good (that is, a drop
of one step on the scale) would have little effect on the interest rate the
University would have to pay on debt. He
said he sees no evidence that the University's rating will drop. There is no concern on the part of the
agencies about the increased debt that will be required by the University's
capital plan.
Do
unsecured bonds (such as might be issued for a stadium) affect the University's
rating, Professor Campbell asked? The
rating agencies like the stadium proposal because it targets new revenue
streams to pay the debt, Mr. Pfutzenreuter said—it will increase both debt and
revenue. They do NOT like such proposals
when there is no funding plan. There has
been talk about not having the full faith and credit of the University behind
stadium bonds, Professor Konstan recalled, so if revenues are not adequate,
payment of the debt could be at risk.
That might mean the University will have to pay a higher interest rate
but the arrangement protects the core of the University. Is that still an option? It is, Mr. Pfutzenreuter said. The Board of Regents has established two
categories of debt, core debt and subsidiary debt with a revenue stream. The two together still affect the
University's credit rating and debt capacity.
Is it
possible to identify the weighted dollar value of a change in the credit
rating, Professor Konstan asked? If the
University were to issue debt for a stadium, which debt knocked down the credit
rating, would it be possible to attach the increased cost of University debt to
the project? Mr. Pfutzenreuter said he
could model such a proposal but he would not know what assumptions to use. Linking it to a percent change in rates would
be arbitrary, Mr. Pfutzenreuter said.
Mr. Volna added that when interest rates are compressed there is only a
miniscule difference between ratings; it would not be worth the extra effort to
get into the top ranking and a slight drop would have almost no effect. It would not be worth the work the University
would have to do in order to climb from the excellent to the exceptional category. It would be possible, Mr. Pfutzenreuter said,
if the University paid off its existing debt and took on no more—but that must
be compared with what the University would get if it built a new research
building or something else. It would not
be worth trying to improve the rating, he concluded. And the University would take a beating
politically and reputationally if it let the rating drop.
Professor
Campbell thanked Mr. Pfutzenreuter for his presentation.
2. Annual Financial Report
Mr.
Volna next reviewed the University's Annual Financial Report. 2004 was an excellent year for the University
financially, he said. Finances are not
the only way to look at the University, he cautioned, it is only one piece of
the picture, but it ties to the institution's ability to fund construction,
debt, and so on.
The
University saw a net increase in assets of $239 million. That does not mean there was additional money
to spend but it does reflect the fact that tuition revenue was up (by $59
million) and operating expenses were down (by almost $20 million). Of the $239 million increase in assets, $93
million was in unrealized investment gains; another $63 million was in grant
funding. Other revenue and expense
changes reduced the gain by $48 million, resulting in the total of $239
million.
Professor
Konstan expressed surprise that expenses only increased by $48 million. That seems low, he said; what happened? Why weren't expenses up $200 million? If grant revenues go up, expenses go up along
with them; tuition increases are related to salary increases. Mr. Volna pointed out that there was a salary
freeze.
Mr.
Klein asked for an estimate of the respective amounts of realized and
unrealized gains; Mr. Volna promised to provide the information.
If the University's assets increased by $239 million,
Professor Speaks asked, what is the argument with the Governor and legislature
that the University is in trouble and needs an increased appropriation? Mr. Volna said the Board of Regents asked the
same question. One reason for the
increase was that investment returns—where they aim to get 8-9%--were almost 20%
last year. That, however, can't be predicted or banked on.
Expenses went down, just as the University promised they would. In the case of tuition, Mr. Kallsen noted,
the increases were both in volume and rate.
Professor Konstan said that the message is that the University was
planful, and decided to defer money for raises until it had the cash in hand
(from tuition increases) rather than start spending it in the first year of the
biennium (when the revenue was more uncertain). That suggests that the
University expects to use up those assets in fiscal 2005 (which was the plan)
and may well see negative asset growth as that money is spent. The
snapshot makes it look like the University has money, but this was planned and
is an artifact of looking at things in the middle of the biennium rather than
at the end.
When
the University goes through a cut of $185 million, one expects the reductions in
expenses to be gradual, Mr. Volna said.
It is not possible to make cuts of that magnitude quickly in an
organization this complex. No one expected expenses to drop as fast as
they did—a corporation probably could not react as fast as the University did. If the University had acted more slowly, the
asset numbers would have looked different.
Various
questions were addressed to Mr. Volna about the information on some of the
slides, copies of which he had distributed.
Does the University receive capital project funds when it spends the
money? The University does not record it
as revenue until it is eligible to draw it from the state; it is like sponsored
projects money: it is earmarked and
can't be drawn until it is spent. Is
depreciation charged? Or if not, do
property, plant, and equipment go to zero value the next year? These items are depreciated over time. Auxiliary units set aside funds for
depreciation because they are expected to pay for buildings in the future. Only 20% of the University's expenses are
identified for research. That seems odd,
since the University also spends state funds on research; is this a result of
the accounting system or is research being under-counted? It is not; there are national standards on
how to identify expenses, standards that the University follows. What about faculty salaries—are they counted
one-half for teaching and one-half for research? That depends on effort. What about non-sponsored departmental
research? That depends on how a
department codes expenditures in CUFS accounts.
The History Department, for example, might not receive a lot of external
grant funding but the History faculty certainly do research and they are paid
by O&M funds; is there work coded as research? That depends entirely on how the department
sets up accounts.
Professor
Campbell thanked Mr. Volna for this report, and continued the discussion with
him on the next item.
3. Update on the New Financial System
Mr.
Volna distributed copies of slides providing information on the new financial
system. He reviewed the goals of the
system, the phases in which it has been and is being implemented, and the plans
for achieving full implementation by July 1, 2007.
Professor
Speaks asked if the new system is being funded entirely by the enterprise
tax. Part of it is being funded that
way, Mr. Volna said. Mr. Cawley reported
that part of it is being funded by an O&M allocation to his office. Professor Speaks asked if they anticipated
the enterprise tax would increase. They
do not, Mr. Volna said; they have modeled how long the enterprise tax will have
to be continued to pay off the cost, but there has been no whisper of
increasing the tax. What is the tax
based on, Professor Speaks asked? If on
salaries, the revenues from the tax will go up even if the rate does not
because salaries will increase. For
example, the 10% increase in graduate student pay will mean a 10% increase in
the tax revenues from those salaries.
Ms. Blixt affirmed that the tax is on active salaries paid the previous
month. So the decision on increasing
graduate student salaries will hit departments twice, Professor Speaks
observed—they must pay students 10% more plus pay a higher enterprise tax.
Professor Campbell asked if funds for
the new system are included in the biennial request. Mr. Volna said they are but he did not know
if the University would receive the money.
Presumably there will be no need for internal taxes for this purpose if
the system were to be paid for by state funds, Professor Campbell
commented. Mr. Volna said the state has
been interested in the project.
Professor
Konstan said he thought the project was going along well. He asked if the fundamental concepts in the
new system are different. Some are, Mr.
Volna said. What is the schedule for
training time in 2007-08, Professor Konstan asked? Mr. Volna said he could not say at this point
but that training has been part of the project from the very beginning. He said they expect that departments will do
more training for this system than they did for CUFS. How flexible is the system if there is a
change in federal policies, Professor Konstan asked? For example, there are NIH funding modules
that do not have restrictions. Mr. Volna
said he could not speak to that particular example but the chart of accounts
system capability will be much more robust than it has been with CUFS.
Professor
Campbell thanked Mr. Volna for the presentation.
4. Update on Strategic Planning
Professor
Campbell next welcomed Provost Sullivan to the meeting to provide an update on
strategic planning.
Provost
Sullivan reported that the strategic plan has been presented to the Board of
Regents and was received enthusiastically.
There will be a final resolution at the March Board meeting to accept or
approve the plan. The second stage is
that the President has appointed two task forces, one on the academic side (of
which he serves as chair) and one on the administrative side (which is chaired
by Vice President O'Brien and Executive Associate Vice President
Sullivan). The latter will be looking at
efficiencies and economies that the University can achieve, and it is expected
that any savings will be reinvested in the academic side. The President will have the reports from the
two task forces by March 21; the month after that will be used for
consultation. The final recommendations
will go to the Board of Regents in May and June—while the University and the
legislature are still in session. The
process will be entirely transparent, he said.
The
academic task force is focusing on three areas, Provost Sullivan said.
-- the design of the University: if it has the right academic clusters to be
in the top three public research universities
-- admissions: how the University recruits, admits, enrolls,
advises students, and including its use of financial aid, in order to achieve
better retention and graduation rates; they are looking at University-wide
experiences that would enhance the student experience and performance on
outcomes
-- faculty culture: does it have the right culture to identify,
recruit, hire, reward, and retain the very best faculty to achieve the
University-wide goal? This includes
compensation, benefits, prizes, endowed chairs, and so on.
All three of these items involve looking at the whole
University. This will be an ongoing work
in progress, Provost Sullivan said, a multi-year process that they hope their
successors continue to look at. They
cannot accept the status quo if the University is to achieve its goal.
Professor
Konstan said this is a challenging task, and more challenging because there is
no answer to the question of how the University does things. There could be 87 faculty cultures at the
University. If one includes the
recruitment, retention, and funding of graduate students, there may be over 100
cultures. The question is how to dip
below the level of the dean to identify what happens in departments. One will not see that in college-level
reports. How will that be done? What they will try to do, Provost Sullivan
responded, is instill a sense of urgency about implementing the strategic
values and make the point day to day. He
will do this through the compact process—the strategic plan is being applied to
the compact process and colleges need to respond to it. He said he hoped it will be applied at the
department level. The rhetoric and
theory must be applied in day-to-day practice.
He said he knows that observation will not be 100% but the
organizational culture must change.
It
boils down to five action strategies, the Provost said: recruiting and retaining strong students,
recruiting and retaining strong faculty, looking at the organizational culture
and changes that must be made to accompany the goals, a communications strategy
(if there is not communication both internally and externally, a lot will be
lost), and how to manage the infrastructure as a platform for human
capital. The University must work on all
five simultaneously or it will not be successful.
Professor
VandenBosch said that the academic clusters will generate the most anxiety;
once announced, what mechanism will there be for feedback? They are still working on that, Provost
Sullivan said, and the feedback will take place after March 21, once the
President has decided which of the recommendations from the task forces he will
accept. The exchange of information will
be two-way in the consultation process before the final recommendations go to
the Board of Regents.
Professor
Erdman noted that a number of things are going on simultaneously, including the
compact process and the strategic planning effort. How independent are they and are the task
forces receiving information about them.
Provost Sullivan said that decisions will be aligned—the biennial
request, the capital request, the budget, and so on. The strategic planning process will include
all decisions that must be made. The
academic task force is making decisions at a different level from the colleges,
Professor Erdman observed, and it could be that colleges are moving ahead on
plans and decisions that may turn out to be contrary to the recommendations of
the two task forces. At present
everything is at the conceptual level in that academic task force, Provost
Sullivan said. He goes across meetings
and serves as the conduit between groups.
As a
research university, the University aspires to be among the top three public
institutions in the world, so one would expect to see more overtly stated about
research in the plan, Professor Campbell said.
The whole theme of the document is research, Provost Sullivan said. He believes that research bubbles up from the
faculty and the University must be careful about identifying research from the
top down.
What
will it take to get state-level buy in, Professor Konstan asked? Seeing the articles in the paper, it appears
the view is that the University should not be a top-ranked institution if it
means "my kid can't go there."
Legislators seem to say that the state can't afford a top-ranked
university and one that is good enough will do.
Good enough is not good enough, Provost Sullivan said. The legislator has thwarted efforts to save
money by closing or changing in the past, Professor Konstan said; can the
institution make changes without state buy-in?
The Committee discussed this issue with the Provost, who concluded that
the University will fall behind if it does not move forward, and it must have
the resolve to do so. Modesty and
humbleness are desirable personal attributes but they are not good for a
university.
Professor
Campbell thanked the Provost for joining the meeting.
Professor
VandenBosch reported that she and Professor Roe have been appointed to the
administrative strategic planning task force as a result of inquiries by the
Faculty Consultative Committee.
Professor
Campbell adjourned the meeting at 4:15.
--
Gary Engstrand