These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on Finance and Planning
Tuesday, October 4, 2005
2:30 – 4:15
238A Morrill Hall
Present:
Fred Morrison (chair), Charles Campbell, Arthur
Erdman, Steve Fitzgerald, Lincoln Kallsen, Thomas Klein, Michael Korth, Judith
Martin, Ian McMillan, Kathleen O'Brien, Kathryn Olson, Richard Pfutzenreuter,
Justin Revenaugh, Karen Seashore, Charles Speaks, Alfred Sullivan, Kate
VandenBosch, Susan Van Voorhis, Warren Warwick
Absent:
Calvin Alexander, Rose Blixt, Daniel Feeney, Joseph
Konstan, Thomas Stinson, Michael Volna
Guests:
none
[In these minutes: (1) new budget model update; (2) 2006 capital
budget and six-year capital plan]
1. New Budget Model Update
Professor
Morrison convened the meeting at 2:30 and turned to Vice President Pfutzenreuter
to lead a discussion of the new budget model.
Mr.
Pfutzenreuter distributed copies of a set of briefing materials that had been
used with President Bruininks a day earlier and began by outlining the proposed
model, "earned income/full cost."
Briefly, all tuition, the UM fee, and ICR will be allocated to the units
that earn them (the model retains the 75/25 tuition split for students enrolled
in one college taking courses in another).
Unit-earned revenue would continue to accrue to the units, as at
present. State special appropriations
will be spent as required by law. The
President will retain control of the state appropriation, including compact
investments and other select institution-wide fees (e.g., undergraduate
application fees, bursar fees). Units
(academic and non-academic) will be charged for central services using a
variety of rate-setting mechanisms, depending on the service. Academic compact investments will be funded
by an "off the top" allocation from the state appropriation.
In
terms of costs to be assessed to units (and the basis for the charges), these
have been discussed with the Committee previously:
Facilities Management operations (proportion of
assignable square feet)
Utilities (actual consumption)
Debt & leases (actual costs)
Office of Information Technology (headcount, employees
and students)
Administrative service units, such as the President's
office, the Provost's office, etc. (proportion of total expenditures).
Revenue allocations were noted above, with the President
making an annual decision about allocation of the state funds and other select
institutional fees.
There
are three different types of cost allocation that will be used:
-- consumption-based
(e.g., utilities), which creates an direct incentive toward desirable behavior
-- cost-driver based (based on relative
share of identified cost-driver variable, such as head count for information
technology); the variable acts as a proxy for use and there is no measurement
of actual use (e.g., how much time people are actually using email or the web)
-- common-good-based allocation (cost
allocated based on a variable accepted as a reasonable measure of
participation); there is no direct or primary connection to incentives, it is
just a reasonable way to fairly allocate a shared cost.
Since
the last discussion, the budget model committee has reached conclusions about
recommending cost allocations in several additional areas.
-- research ($14 million in
2005-06): this includes the Office of
the Vice President for Research, Sponsored Projects Administration, Patents and
Technology Marketing, Sponsored Financial Reporting, and the Academic Health
Center Office of Research. The variable
used to allocate costs to units will be their proportion of sponsored research
expenditures, based on a three-year rolling average (to minimize the impact of
annual fluctuations). The charge will be
a fixed percentage of sponsored research expenditures applied to all units
(e.g., if research services cost 3% of sponsored expenditures, each unit will
be charged 3% of its sponsored research expenditures). In response to a question, Mr. Pfutzenreuter
said that the AHC Office of Research is included because, the case was, if it
were not in the AHC, its services would have to be provided by the Vice
President for Research.
-- libraries ($31.4 million in
2005-06): this is Twin Cities campus
only. Costs will be allocated based on a
study done in the early 1970s by faculty and is used by Institutional Research
and Reporting. Library costs will be
allocated to units based on weighting of faculty and staff:
2 lower
division undergraduate
3 upper
division undergraduate
4 professional
student headcount
4 graduate
student headcount
4 faculty
headcount (broad definition?)
Headcount will be lagged one
year. This measure will be revisited in
the future to determine its validity.
Committee members discussed who
should be included in the headcount of faculty; Mr. Pfutzenreuter agreed that
the subject needed further investigation before a final decision is made. Mr. Klein said the question should be whether
the individual (in whatever category of "faculty") triggers the use
of the libraries, journal subscriptions, etc.
-- student services will rely on three
different approaches, depending on the service/cost. Student finance administration and the
registrar will be allocated on total enrollment. Admissions, orientation, pre-health advising,
and student affairs will be allocated on undergraduate enrollment on the Twin
Cities campus. Graduate school
operations will be allocated based on graduate student enrollment on the
-- general purpose classroom costs will
be allocated on the unit's proportional share of total student credit hours
(this is Twin Cities only). The model
may be refined in the future to encourage improved management of classroom
space.
The Committee discussed whether
there should be adjustments in the formula depending on where the class is held
(e.g., lab, classroom). Mr. Klein
pointed out the principle of simplicity:
it is possible to gain accuracy with more complexity, but the result
could be so complex it cannot be understood.
Nor, Mr. Pfutzenreuter said, should the system encourage teaching
classes in labs in order to avoid using classrooms (or the reverse, Professor
Morrison added, so labs are being taught in classrooms and there are no beakers
available).
Discretionary
investment pools exist in the budgets of the senior vice presidents, the Vice
President for Research, the President's Office, and in a system-wide account
for compacts. The proposal suggests that
in the future determining the size of the compact pool will be part of the
annual budget process; investment decisions will be built into allocations to
academic units; there will be no separate pool funded in a central account but
investments will be tracked and communicated and built into compact narratives. Determining the size of the vice presidential
pools will be made each year and funded from state dollars; these pools will
not be counted in the costs of the vice presidential office that are assessed
to the units. Mr. Pfutzenreuter said, in
response to a question, that this will be a more transparent process than is
currently the case (when these investment pools are buried in the recurring
allocation to the various offices). The
Internal Revenue Sharing (IRS) tax will be abolished.
There
were a number of special issues that the budget model committee offered
comments on.
-- distribution of fringe benefit costs
(medical, dental, tuition): distributed
on per-head basis rather than as a percentage of salary (at present, those
units with higher salaries pay more, those with lower salaries pay less, but to
change the system would mean a significant redistribution of costs. This item is being held for further study.
-- enterprise assessment: the new budget model eliminates the IRS tax
but the committee recommends that the current enterprise assessment continue as
is to pay off the cost of current projects; in the future, these costs would
likely be built into the Office of Information Technology costs. The current assessment will need to go
through about 2011 or a little later.
The best estimates now are that the University will not need new
technologies until perhaps 2013 or 2014, at which time whoever is in these
offices can deal with the question.
-- expenditure base for administrative
service units pool: what funds should be
included in the pool for allocating costs?
The budget model committee recommends including all funds, which does
not determine which funds will pay the bill.
This includes restricted funds (gifts, endowments, etc.) as well as
sponsored funds. The Committee asked to
see the data on the size of the administrative service units pool. There was a question about inclusion of
scholarship funds.
-- fully loaded costs: in allocating costs, should each cost pool
(e.g., libraries) only reflect direct costs?
The budget model committee recommends that allocated costs for a unit/service
should include both direct costs and that unit's share of other costs (e.g.,
the charge for the libraries will include the facility and technology costs
that are assessed to the libraries).
-- auxiliaries and Internal Service
Organizations (ISOs): the budget model
subcommittee recommends that certain auxiliaries (which includes units such as
parking, housing, food services, the bookstores, and athletics in part) be
allowed to opt out of facilities operations and maintenance charges because
they currently have other arrangements that allows them to deliver services at
lower costs. In the case of ISOs (e.g.,
fleet services), the budget model committee recommends excluding ISOs from
internal charges because the complications that arise with respect to charging
for research grants make it so difficult to allocate costs that it would not be
worth the effort.
-- pushing the model to departments: should colleges be allowed or encouraged to
push the model to the department level?
The budget model committee recommends leaving that up to each unit,
subject to explicit approval from the Budget Office and the central
administration. What if the college
wants to extend the model but the departments do not? The central administration will have to
settle the issue, Mr. Pfutzenreuter said.
It might work in some places but not others due to different
cultures. Would a college be required to
implement the model uniformly, if it chose to do so? Mr. Pfutzenreuter said he had not thought
about that question but his sense is that a college would have to be uniform.
Professor Seashore asked if, with this
revised budget model, there would be double taxation because of dual
administrative structures in the
Mr.
Klein asked if there would be a basic level of service for research that will
be automatically provided to units, and the units then offered the option of
buying additional services at a cost to the unit. And if so, is the AHC receiving the basic
service or more? Mr. Pfutzenreuter said
that Senior Vice President Cerra maintains the AHC will only receive the basic
level as part of its costs. Who will
engage that discussion, Mr. Klein asked?
It was agreed that the Committee would invite Senior Vice President
Cerra and Vice President Mulcahy to discuss assessment of research costs.
Vice
President Pfutzenreuter reviewed the timeline for budget development, from the
central perspective:
administrative/support units will have to have budgets completed by
early January in order that rates can be established for academic units. Academic units would receive budget
instructions in late January, with final budgets prepared in April for
presentation by the President to the Board of Regents in May and June. He also reviewed the next steps in the
process, which includes implementation within the next two weeks or so. The new model will be presented to the Board
of Regents in concept as a discussion item.
Several
questions were asked.
-- What about public spaces in
buildings? All space will be assigned to
a unit, but some will be held (swing space) until it is assigned. Public spaces in buildings will be assigned
in proportion to the assignable square feet a unit occupies in that building. (So central classrooms will be assigned a
portion of the cost of the stairways in the buildings where the classrooms are
located.)
-- Most discussions of common goods have
focused on the libraries, so it is surprising to see it funded on a cost-driver
allocation basis rather than as a centrally-funded common good. Mr. Pfutzenreuter said that all should
support the libraries but they recommended that all units should provide
proportionally reasonable support rather than funding the libraries "off
the top." Professor Martin, who
raised the point, then suggested that the terminology in the presentations be
changed because the funding is not a "common good based cost
allocation."
-- Have they thought about behavior
changes that might occur as a result of the new model? If the charges are high enough, might
colleges duck out of space to avoid the costs?
The units cannot just abandon space; it must be taken by another
unit. They will help units
"sell" space, Mr. Pfutzenreuter said; Vice President O'Brien said the
question is whether space can be aggregated to the point where it is usable by
another unit, but she assured the Committee that individual departments and
colleges would not have to become realtors.
-- The initial point of the model will be
to allocate costs so that units can pay for them, Professor Campbell
observed. If a unit is charged for
something on the basis of headcount, it will be allocated enough money to pay
that cost. But there could be perverse
incentives, so a unit would reduce its headcount once it had the money.
-- What happens to units that, for
example, teach in
Professor
Morrison thanked Mr. Pfutzenreuter and Mr. Kallsen for the discussion, and
asked them to move on to the next item.
2. 2006 Capital Request and Six-Year
Capital Plan
Mr.
Pfutzenreuter again distributed a handout and reviewed it with the Committee.
The
draft capital request for 2006 totals $269 million, with the University
contributing $63 million as its one-third share of new construction, the state
contributing $126 million as its two-thirds, and an additional $80 million in HEAPR
(Higher Education Asset Preservation and Renewal—building maintenance), which
does not require a one-third match from the University. The total request for state funds is $206
million.
In
addition to the $80 million in HEAPR funding, there is $189 million in project
funds (
Mr.
Pfutzenreuter then explained the rather complicated elements that go into the
calculation of the University's debt capacity and the factors that affect its
bond rating. By Regents' policy, the
University is to maintain its Aa bond rating.
The rating agencies look at several factors: student demand, state support, the financial
statement (liquidity, debt burden, and operating performance), and management
performance.
Mr.
Pfutzenreuter reviewed the University's current level of debt ($667 million,
with an average interest rate of 4.48% and average life of 11.2 years) and the
new debt to be issued ($63.8 million, because of decisions already made about
capital projects). The 2006 capital
request, if approved in any part, would also carry implications for additional
debt. He said that the University's goal
is to recycle its debt—sell its debt as cheaply as possible, pay it off as
quickly as it can, and thus recycle debt capacity. Of the University's annual debt service
(about $62.2 million in the current year), about one-half is paid by auxiliary
units and one-half by the administration/units that contribute to a share of
the required one-third.
There
is a set of ratios used by rating agencies that Mr. Pfutzenreuter explained to
the Committee. The upshot of the
analysis is that the University is in good shape and that it could,
theoretically, increase its debt, based on the data used in the ratios, without
compromising its Aa rating. But the key
question, Mr. Pfutzenreuter pointed out, is not the strength of the
University's credit, it is the source of payment if additional debt were to be
incurred. It would have to come from
institutional revenues, earned income, fund-raising, unit reserves, project
revenues, or federal funds. If the
University is to spend more on debt because it has the capacity to increase its
debt, there must be a decision that the debt payment is more important than
something else. The President, other
academic officers, and others must decide that question. And the University can create more or less
debt capacity depending on what bond rating it wants. But the important question is how any
increased debt will be paid.
Professor
Morrison looked at the data and suggested that the University has the capacity
to absorb about $5 million in increased debt service in the next six years ($10
million, but half would be for auxiliaries), which would mean about $50 million
in debt. So rather than incurring an
additional $63 million in obligations in the 2006 capital request, the data suggest
the University can take on only about $17 million in debt for each of the next
three biennia. And if there is an
increased debt service, which will be charged to the units that get the new
buildings, will the President increase the allocation of state funds to them in
order that they can pay for the increased debt service?
Does
the new budget model apply to the 2006 capital request, Professor Morrison
asked? It applies to the 2005 capital
budget, Mr. Pfutzenreuter said, but will honor previous agreements about units
coming up with one-half of the University's required one-third contribution to
costs. After that, however, the new
rules will apply in full.
Professor
Martin inquired what measure would be used for new facility operating costs,
given what is know about spiraling utility costs. Vice President O'Brien said the projections
are based on what they know today.
Mr.
Pfutzenreuter promised to obtain for the Committee data on time contributed by
each unit to the development of the new financial system.
Professor
Morrison thanked Mr. Pfutzenreuter and adjourned the meeting at 4:05.
--
Gary Engstrand