These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on Finance and Planning
Tuesday, November 1, 2005
2:30 – 4:15
238A Morrill Hall
Present:
Kate VandenBosch (chair pro tem), Rose Blixt, Charles
Campbell, Arthur Erdman, Steve Fitzgerald, Dan Hennen, Thomas Klein, Joseph
Konstan,[1]
Michael Korth, Judith Martin, Ian McMillan, Kathleen O'Brien, Jacob Olson, Kathryn
Olson, Richard Pfutzenreuter, Justin Revenaugh, Karen Seashore, Michael
Sertich, Susan Van Voorhis
Absent:
Fred Morrison, Calvin Alexander, Daniel Feeney, Lincoln
Kallsen, Charles Speaks, Jeffrey Spevak, Thomas Stinson, Alfred Sullivan, Michael
Volna, Warren Warwick
Guests:
Julie Tonneson (Office of Budget and Finance)
[In these minutes: (1) budget instructions; (2) capital
request and six-year capital plan financing assumptions; (3) faculty
promotional salary increments]
1. Budget Instructions
Professor
VandenBosch convened the meeting at 2:30 and began with a round of
introductions for the benefit of the three new student members in
attendance. She then turned to Vice
President Pfutzenreuter and Ms. Tonneson to lead a discussion of the budget
instructions.
Ms.
Tonneson reviewed the proposed budget development timeline (from the central
administrative perspective). The support
units are to complete their budgets by early January, with initial instructions
going out in early October. In middle
and late November there will be meetings with the support units and final
budgets will be submitted to the senor vice presidents and President for
approval in January. The cost
allocations, part of the new budget model, will then be incorporated in the
budget instructions to academic units.
Ms. Tonneson identified the support units that have received budget
instructions
Academic
units will receive instructions in late January, meeting will occur from
February to early April, and the President will make budget recommendations to
the Regents in May (for review) and in June (for action). In response to a query from Professor Korth,
Ms. Tonneson affirmed that the coordinate campuses are considered academic
units; their budgets will be due in the spring.
Ms.
Tonneson itemized the contents of the budget instructions to the support
units. They include an overview of the
new budget model, identification of 2006-07 as a transition year, and planning
parameters approved by the Regents last spring (3% salary increases, 6.5%
tuition increases, a $15-million reallocation).
They request information similar to what is required for compacts, such
as mission, performance measures, goals, space and facilities issues. They are also required to provide a detailed
description of all funds and asked to raise significant financial concerns.
The
biggest part of the exercise, Mr. Pfutzenreuter said, is what the units will do
if they do not receive the funds to deliver the salary increases. They have been asked what they will do in
that case.
Is
the assumption the new budget model will be accepted, Professor Martin
inquired? It is, Ms. Tonneson said; the
President has approved it.
What
kinds of things come up when units are asked about significant financial
concerns, Professor VandenBosch asked?
Software licenses for Information Technology, delivery of financial aid
to students for Financial Aid, sufficient funding to take care of buildings for
Facilities Management, and for smaller offices, the need to cut equipment or
impose layoffs if they do not receive funding for salary increases.
Professor
Campbell asked if the new budget model changes the way that fringe benefits are
handled; it does not, Mr. Pfutzenreuter said.
Ms.
VanVoorhis asked about funding for activities that are system-wide versus Twin
Cities campus. If something is
system-wide, Mr. Pfutzenreuter said, she (and others in similar positions) are
responsible for bringing forward identification of a need; if it is something
specific to a coordinate campus, it is their responsibility to bring it forward
to obtain resources. That process may
not be effective when coordinate campuses project costs that are part of a unit
on the Twin Cities campus; Mr. Pfutzenreuter agreed that the compact
discussions have not been well-connected with the support unit budgeting
process.
This
will be a difficult budget year, Mr. Pfutzenreuter told the Committee. There will be fuel cost problems, among other
things, and the University will likely make a supplemental request to the state
to deal with fuel costs. The budget also
calls for a reallocation of $15 million, with many other things going on, the
resources will be stretched. There is a
$15-million investment pool in the capital budget for strategic positioning
because they know things will happen that will require funds. They will also need a pool of funds to deal
with things they don't know will happen.
In
response to a question about saving money by "burning Cheerios," Vice
President O'Brien explained that the University's steam plant is equipped to
burn biomass in addition to coal and natural gas. One form of biomass the University has
requested permission to burn is oat hulls, which are the byproduct of making
Cheerios (made in northeast
Could
wind energy be tapped on the Twin Cities campus, Professor Martin asked? What they are finding, Vice President O'Brien
said, is that there needs to be a particular kind of wind and that positioning
is very important. This is a trickier
business than one might think. They hope
to increase the capacity at the Morris campus and save the energy for use
elsewhere in the system.
Professor
VandenBosch thanked Ms. Tonneson for her presentation.
2. Capital Request and Six-Year Capital
Plan Financing Assumptions
Mr.
Pfutzenreuter distributed copies of a handout and reviewed the financial
assumptions underlying the upcoming capital request and six-year capital
plan.
The
2006 capital request will total $269 million, of which the state is being asked
to provide $206 million. Of the state
funds, $80 million will be in HEAPR funds (building maintenance and renewal and
which do not require a one-third University match) and $126 million will be for
new building projects. The University's
required one-third match for new projects will be $63 million (which, under the
new budget model, will be paid by the units that get the new buildings). The projects in the request, in addition to
the $80 million in HEAPR funds, are:
-- $39
million for
-- $23
million for Labovitz School of Business at
-- $62 million for a science teaching and
student services facility (to be located where the never-finished Science
Classroom Building sits, on the east end of the Washington Avenue bridge across
from the Weisman Museum)
-- $60 million for a medical biosciences
building and infrastructure
-- $4.2 million for research centers and
field stations.
Of the $63 million the University must contribute,
fund-raising and debt will be used, but private funds and unit resources will
reduce overall borrowing costs.
Mr.
Pfutzenreuter reviewed the projected debt service and operating costs for the
facilities requested in the 2006 capital request. Debt will peak at about $6.2 million in 2009
(it will be sold for 20 years at a project 5.5%); new building full operating
costs will also occur in 2009, about $4.3 million per year (and increasing
marginally each year thereafter). These
buildings are adding square footage to the campus, he noted.
Professor
Seashore inquired if there were any buildings coming off line. Vice President O'Brien asked her which ones
she would like closed. She said that
they continually try to determine which buildings should be invested in (e.g.,
Folwell, which is a campus icon) and which should not. They are considering taking some off line.
Mr.
Pfutzenreuter next reviewed the factors that bond-rating agencies use to
determine the University's rating, which affects how much it can borrow. There are four major factors: state support (40%), student demand (20%),
management analysis (10%), and financial statement (30%; ratios that related to
liquidity, debt burden, and operating performance). The University is a strong Aa institution. Mr. Pfutzenreuter explained the various debt
ratios and debt capacity projections that the rating agencies use.
Debt
service assumptions include retaining the University's Aa rating, following
existing amortization schedules for existing debt, the University has
outstanding debt of $667 million as of 6/30/05 at an average rate of 4.48% and
average life of 11.2 years ("cheap and short"), that it will take on
$59.9 million in new debt (previously- and newly-authorized projects, which is
separate from the 2006 capital request), and so on.
The
projected debt balances through 2012 show a peak in 2006 (because of the new
debt being added) and then a decline (which assumes that no new debt will be
incurred). A lot of the principal is
paid down, Mr. Pfutzenreuter said, which is the intent, so that the University
can recycle debt. The University's debt
includes the Gateway center because it is an "affiliated
organization" under accounting rules.
The Gateway debt does not decline at all during this period because only
interest payments are being made; there is a bullet payment due in the late
2020s (which presumably the Gateway Corporation is saving money for).
Of
the current and projected debt service, roughly one-half is for auxiliary units
and one-half is for academic facilities.
The
upshot of the analysis of the debt ratios the bonding agencies use is that the
University is well-positioned to take on increased debt, Mr. Pfutzenreuter
said, because its credit is good and it does well on the measures used. He said he is reluctant to identify the
University's debt capacity, because while one can quantify the financial
ratios, "strength of management" and "state support" are
less certain measures. But a robust debt
capacity does mean the University can afford more debt—does it have the money
for payments? Is it a priority to spend
more on debt service? The major question
is source of payment.
One
of the growth assumptions that Mr. Pfutzenreuter touched on was a projected 7%
growth in Foundation assets and a 5% increase in Medical Foundation
assets. Professor Seashore asked what
happens if those growth levels are not achieved. That is about what happened last year, Mr.
Pfutzenreuter said, and if the asset were to grow more slowly, it would simply
mean that the University's hypothetical debt limit would be a little
lower. He said he is not uncomfortable
with the 7% projection; it is about normal.
Is
there any concern, given these assets, that some in St. Paul might believe the
University should pay more than one-third of the cost of new buildings,
Professor Martin asked. That is why he
emphasizes source of payments, Mr. Pfutzenreuter said; the University needs to
have the money. It could spend up to its
debt capacity over the next 6-8 years, but will have to pay the debt, and a new
president at some point down the road would want some money to spend. The Board of Regents will not want to spend
up to the limit.
Professor
Erdman asked about the 2006 capital request and the cost of buildings. That is part of the dilemma, Mr.
Pfutzenreuter said: when one looks at
what it will take to be among the top three public research universities, the
price of research facilities is challenging.
There are no more $20-million buildings; they all cost $60-70-80
million. One problem is state
policy: the bonding bill can be no more
than about $800 million, for the whole state.
When the University brings 4-5 projects with high prices, it is
difficult for them to compete with (for example, $3-million) projects spread
around the state in legislators' home districts. The University struggles to pay for these
buildings, and it will not get to where it wants to be if they have to compete
with home-district projects. The
University needs to think about finding ways to fund biomedical research
buildings through the state so they are not competing with projects around the
state in home districts.
The
state wants to push the University as an economic engine, Professor Martin
observed, and measure performance by patents and royalties and so on; is there
a way to take these considerations into a separate category? The administration is thinking about this
issue, Mr. Pfutzenreuter said, especially with respect to medical and
bioscience research. How do private universities
do this? What are other states
doing? The privates use donors, but in
general there were no answers to the questions.
It seems like the state must buy in if there is to be any change in the
model for funding medical research facilities, Professor Erdman surmised; Mr.
Pfutzenreuter said he didn't see the funding coming through the normal
budgeting process. The state will have
to make a first-dollar decision to invest.
Is
there any thought that the federal government might come up with some funds for
these kinds of facilities, Professor Seashore asked? Mr. Pfutzenreuter suggested that the
Committee speak with Mr. Engelen, the University's federal relations director,
about the earmarking process.
With
the new budget model, will there be a change in debt service, Professor
VandenBosch asked? Mr. Pfutzenreuter
noted that units that get the buildings pay the debt service. The President will have to decide if he is
willing to provide the unit with additional funds to help pay the increased
debt.
Mr.
Klein asked if any of the strategic positioning task forces have an alternative
funding model for medical research facilities in their charge. Mr. Pfutzenreuter said they have just begun
to think about this, so not. Mr. Klein
suggested that this could be part of a charge.
Professor
VandenBosch thanked Mr. Pfutzenreuter for his presentation.
3. Faculty Promotional Salary Increases
Professor
VandenBosch recalled that at a recent meeting, the Provost asked the Committee
to develop a recommendation for changing the increments to be award to faculty
when they are promoted from assistant to associate professor and from associate
to full professor. The increments were
set in 1993-94 and have not changed since:
$1500 for promotion from assistant and $2000 for promotion from
associate. Committee members were
provided copies of the current policy, which can be found at http://www.fpd.finop.umn.edu/groups/senate/documents/policy/faccomp.html
The pertinent language of the policy is this:
PROMOTION
INCREASES
Beginning
with the 1993-94 salary year, promotion from assistant professor to associate
professor will be accompanied by an extraordinary $1,500 increase in base
salary and promotion from associate professor to professor will be accompanied
by an extraordinary $2,000 increase in base salary. It is intended that these
promotional increments will be in addition to the annual salary increase award
related to meritorious performance. The dean will set aside, from those funds
provided to his/her unit for salary increase distribution, sufficient funds to
cover these promotional increments. It is understood that the dean may also set
aside funds from this overall pool to address special merit or retention
purposes. It is intended that this promotion increment will receive
inflation-related increases in future years.
When this was adopted, Professor Seashore said, it was a
way to address inequities across colleges, a way to equalize treatment. There was some thought at the meeting that
the amounts were floors, but a closer reading of the policy convinced Committee
members that the policy stipulated an amount that had to be delivered.
Professor
Seashore said she thought this was a poor precedent for faculty; it provided
very little incentive for faculty not to move at the point they receive tenure
(when they could then take a tenured position at another university). There is no easy way for a department to say
that it likes a faculty member and wants to keep him or her. Why is there a bind, Professor Campbell
asked; a department can deliver more money.
The ability to do so varies by college, Professor Martin said. That was the concern the last time this came
up, Professor Campbell said: how to deal
with these promotional increments vis-à-vis regular merit raises. If there is less money available for merit
raises, and the promotional increments are to come from the merit pool, there
is even less then available for merit raises.
This was supposed to come from a separate pool, it was thought, but the
policy provides that the dean is set aside from the salary increase pool the
money for promotional increments. This
is a terrible policy, Professor Seashore concluded.
Ms.
Blixt recalled that these raises were part of the budget instructions in the
past but were left open to interpretation.
Some units gave only the $1500 or $2000 while others saw these amounts
as a floor. She said she had not seen
the policy before, but that is the way most units do it.
Professor
VandenBosch said there are two issues.
One is the amount of the increase; the other is whether any of the
policy language needs changing. (It was
noted that any changes, if to be effective for the 2006-07 budget instructions,
should be brought to the December 1 Faculty Senate meeting.) Professor Martin said it would be helpful to
know what the practices have been in the colleges.
There
is no separate pot of money, Professor Seashore pointed out again. The money comes out of the total faculty
raise pool. This is a serious equity
problem, especially in smaller colleges; there could be years when faculty only
receive the minimum raise because of the impact of the need to deliver the
promotional increments. The Committee
could suggest that the President use some of his "chunk of money" for
promotional increments, Professor Martin said, but Professor Campbell said he
did not believe the President would have any chunk of money. Right now the President controls the O&M
budget and he will continue to do so in the future, and the only difference is
that there will be different algorithms.
Then the question is whether there should be a separate pool of funds
for salary increments, Professor Martin replied, although where the funding
would come from is not clear. The
Committee could suggest a source, Mr. Klein said. Professor Seashore said it should not be that
everyone should lower the thermostat to reward their colleagues. Mr. Klein agreed but said this is just an
idea unless the Committee can identify a source of revenue.
Professor
Campbell said there is not a lot the Committee can do. The administration directs that salary
increases will be, for example, 3% but the colleges must produce the money. They can also obtain approval to give
additional increases. The Committee
could set the scale of the promotional increments, which is insufficient, or it
could articulate a policy which provides that the promotional increases must be
IN ADDITION to the raises the University
announces for everyone and that the dean must find the additional money. For small units, Professor VandenBosch said,
the lumpiness of the raises is an important point—in some cases there might be
several individuals who qualify while in other years there may be no one. That affects what the colleges are able to
do. It is only lumpy if the promotional
increases are figured on an annual basis, Professor Revenaugh said, but if the
college sets aside money for a cohort, it could deal with the cost. That, however, is not permissible under the
current language of the policy, Professor Seashore suggested; the language
needs to be changed to give the deans more flexibility, and the amounts should
also be changed.
In
1993, most salary money came from the President and legislature, Ms. Blixt
noted. Now the colleges provide almost
100% of the salary money. If new amounts
are adopted, it must be clear that they are a floor. And that they must be detached from the
annual salary pool, Professor Seashore added.
Professor
Erdman suggested that a small group of people bring recommendations to the next
meeting. It was agreed that Professors
Revenaugh and Seashore and Ms. Blixt would constitute an ad hoc subcommittee to
draft revised language for the next meeting, with Professor Revenaugh as chair.
Professor
VandenBosch adjourned the meeting at 3:50.
--
Gary Engstrand