These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on Finance and Planning
Tuesday, October 4, 2006
2:30 – 4:15
238A Morrill Hall
Present:
Judith Martin (chair), Rose Blixt, Marcie
Jefferys, Lincoln Kallsen, Thomas Klein, Joseph Konstan, Michael Korth, Ian Macmillan,
Mikael Moseley, Kathryn Olson, Richard Pfutzenreuter, Terry Roe, Michael Volna,
Warren Warwick
Absent:
Daniel Feeney, Steve Fitzgerald, Kathleen
O'Brien, Justin Revenaugh, Karen Seashore, Charles Speaks, Thomas Stinson,
George Wilcox, Aks Zaheer, John Ziegenhagen
Guests:
none
[In these minutes: (1) the balance of academic investments; (2) 2007
capital request; (3) 2007-09 biennial request; (4) increased bid thresholds]
1. The Balance of
Academic Investments Questions
Professor
Martin convened the meeting at 2:30 and turned to Professor Konstan to open a
discussion of questions he had sent to the President about the balance of the
University's investments in its academic programs; the questions were these:
Is the University applying the same level of care to investments
in the University as it does to its endowment investments? The University
is proposing a substantial investment in the health sciences. Adding
substantial capacity for research and training in that area may have tremendous
returns. It may even be the best way to move us towards our goal of
becoming a top-ranked public research university. But is it being
analyzed in terms of the risk it creates for the university as a whole?
And are we preparing other investments to balance the portfolio. For
example:
-- How big a
dependence on NIH funding, or on clinical revenue, can we afford if we want to
limit our chances of having to bail out the AHC in the next 25 years to 5%, or
to 1%? We've had to deal with changes before (including Medicare changes),
and it seems likely that future changes could both reduce our patient care
revenue and perhaps limit the percentage of faculty time that can be billed to
NIH.
-- What is the
effect of heavy investment into non-tenure-track faculty in the AHC for the
rest of the University?
-- Are there
countercyclical investments we should make as a hedge? When medical
school applications are down, do applications go up in law or business?
(And if so, should we grow those schools to balance out the risk?) Or in
the humanities, social sciences, sciences, or engineering?
At the request of
President Bruininks, Senior Vice President Cerra responded to Professor
Konstan's questions, as follows:
As is usual with Prof Konstan, this is a
very thoughtful group of questions pertaining, in general, to risk management
of investments, and in specific, to investments in research in the AHC/Medical
School. While I believe the question is generic to all areas of soft
funding, since it was framed in the context of the AHC, I do have the following
suggestions of important items
for the response. First, let's recognize the benefits of working within
an academic environment where education is a core value, and thereby learning
takes place. What we've learned from past experience is the critical
importance of planning with professionals who monitor, and set, future
trends in research. The impact of this learned lesson has been reflected
in the outcomes of recent years. I also believe the starting point is the
success the AHC and the institution have had in the last years in substantively
improving its competitive position in a very difficult market place.
I have been asked to address the Finance and Planning Committee on this matter,
and look forward to providing further details at that meeting the end of
November 2006.
AHC Risk Management Practices for Research Investments
1. Faculty have defined corridors of research. These corridors are
based on where the leading edge research is going, what the perception of the
research future is, and what the areas of interest of the faculty are. These corridors are where the largest portion
of resources go for space and
the recruitment of faculty, usually tenured/tenure track in research. The
goal here is to leap frog out in front in key areas of discovery and
application.
2. Recruitment and retention of top scientific leadership is the stated goal in
a framework of interdisciplinary leverage both within the AHC and across the
University, e.g. Prof Gunda Georg as Chair of the Department of Medicinal
Chemistry and the leader of the drug discovery corridor linking Medicinal
Chemistry, chemistry, Center for Drug Design, Cancer Center, therapeutics, and
the faculty of multiple schools.
3. Each new faculty is hired within a financial model, based on years of
experience, that funds space, start-up costs, compensation; and is very
predictive of subsequent earned revenue. Generally, multiple funding
sources are used in the revenue base.
4. Each AHC school/program either has, or is developing, a research reserve
fund equal to 10% of its gross sponsored project revenue. This reserve
fund is for bridging purposes.
5. Space of research is not permanently assigned to departments. It is
assigned to programs and shepherded operationally by the dean or program
leader.
6. The assignment and reassignment of space is tied to performance using
a policy and process developed by the AHC faculty and approved by the faculty
governance, deans and myself. The metrics are the number of people
employed by, and the grant dollars generated by, a given PI assigned to the
space. The policy permits reassignment
of space. We are now performing the
"clipboard" inventory of who is in what space, what the use of the
space is, and what the revenue support of the space is, so that the policy can
be fully implemented. (This data is not available in the University's current
information systems)
7. AHC centers have an approval process, as well as an annual internal
and periodic external evaluation and assessment process within which continued
funding is a question that must be answered. The approval process ends
with the AHC Deans and the SVPHS.
8. Research investments are monitored, evaluated and assessed for
performance and return on investment. This process has been very
successful and is the subject of a recent peer-reviewed publication.
Programs have also been unfunded.
9. The responsibility/accountability for the research investments in the
AHC is at the senior University management level, the Senior Vice President for
Health Sciences, who reports to the President of the University. Central oversight and accountability is
present.
10. We are exploring insurance options for major hires. We have
many hires over the $5M mark.
11. New space (buildings) is very carefully planned around a scientific
and financial plan. New space is not build until what has been done is
evaluated for productivity and effectiveness. Generally, the programs are
interdisciplinary, another approach to success and to reducing risk.
Context
1. The plan for investments is part of the University budgeting and
compact process.
2. The annual performance review of programs and administration,
including the SVPHS, provides effective accountability.
3. The budget model provides great transparency for where dollars go and the
balances of accounts.
4. Interdisciplinarity, a major theme in the AHC, is rapidly becoming a
University-wide theme, and is essential to the success of investments in any of
the sciences.
5. NIH is one of many federal funding sources. By there nature,
federal funding sources generally use a competitive, peer-reviewed process.
Managing the risk of all these funding streams needs to be on the radar screen.
The major inroad to risk is understanding it and its potential impact, which we
do through experience. Then one can do whatever is possible to reduce the
risk, recognizing that managing the risk is critical, as it is usually not
possible to eliminate it.
I also point out the following: The Medical School is the largest, single
research engine in the institution. The University will not get to be
number three unless the
top three public research university, NOT making the investments is the single
greatest risk to this University and its future. Mediocrity is not an
acceptable outcome!!! Becoming number three, by its very nature, has
risk. I believe we are managing that risk. We can certainly do it better,
no question. The other corollary of this is that one must make the
investment what the return is likely to happen.
Professor Konstan explained that
these are high-level questions. He has
considerable concern about the decentralized control of growth at the
University, which may mean it is not dealing with what is best for the future
of the institution as a whole. He asked
the President, with these questions, what is being done about looking at the
risks in University academic investments.
There are very sophisticated models for investing money to reduce risk
(e.g., in retirement plans), but he has heard nothing about such analysis with
respect to the University's academic investments. The Academic Health Center (AHC), to use an
investment metaphor, might be considered the University's aggressive growth
stocks. Should there be a tax on the
entire institution in order to ensure against the risks that come with
aggressive investing? Might it be that
investments in the liberal arts are a source of stability? He noted that the President had asked Senior
Vice President Cerra to respond to his questions, but it isn't clear that the
questions are answered by asking the aggressive growth manager to explain how
he is doing a good job (which he most likely is). Dr. Cerra's position, however, does not
represent the overall University view.
The same questions could
also be addressed to Provost Sullivan, Professor Martin commented, because he
may have responsibility for the less-high-risk investments. Dean Rosenstone has argued that the
University's strategic investments do not sufficiently recognize CLA’s existing
highly-ranked programs and that they are not receiving the investment they need
to help the University achieve its top-three goal.
The
question is not just about risk, Professor Konstan added. Another question is what the marginal return
on each dollar invested is for improving the University's reputation. Perhaps the University could get more return
on each dollar invested in History than in an AHC program. There are plenty of highly-ranked
universities that do not have a medical school.
He said he was not advocating such a pattern of investments, but one
would hate to see the University damaged if the AHC were to run into financial
difficulties.
Mr.
Klein said he thought Dr. Cerra's responses to the questions did a good job of
explaining the AHC investments and how they fit within the University's
framework. The AHC is not operating on a
different concept outside the University.
For the conversation to go forward, however, the Committee needs to know
what investments are being made in the rest of the University.
Some of Professor Konstan's
questions ask about basic principles, Professor Roe said, about what an economist
would put in the framework of opportunity costs. An assessment of investment alternatives that
add the largest increment to the University’s contribution to society depends,
in obviously complex ways, on where it is at this moment, i.e., initial conditions
that entail current differences in contributions among collegiate units, and
where future discoveries are possible and contribute to societal needs. The assessment is an ongoing process in which
tradeoffs depend upon many factors that are difficult to measure, such as the
value of maintaining core competencies in social and basic sciences as well as
responding to markets that promise high rewards, as in the case of the
incubator initiative. This is something the
University may never get exactly right, but it will know when it gets it
wrong. Part of the Metrics and
Measurement task force's effort contributes to this process; the collegiate
scorecard is a small step in this direction.
Professor
Martin said she recalled from the 1980s a discussion about unbalanced
investments in the AHC and how the risks for the University are very large.
Professor Roe said that in
the AHC revenue streams seem more easily influenced by the market than, for
example, the revenue streams in the social sciences. Problems in health care starting in the 1980s
were unforeseen; the University had to replace some of the declining clinical
revenue to cover the salaries of tenured professors. One can probably assume that there will be
the same kind of shocks in the future.
Professor
Konstan said he was not sure the Committee could get answers to the questions
from Senior Vice Presidents Cerra and Sullivan as long as their portfolios are
managed separately. They may need to
talk with the person who balances the two portfolios, the President.
Professor
Hendel said that an added dimension is that one must recognize other highly
research-active universities are also making enormous investments in these same
areas. Part of him believes that there
are not enough opportunities that all the institutions can emerge as
winners. One question is who is
investing in other areas, such as the arts and sciences, which are core to
National Research Council rankings. Professor
Martin noted that there has been a huge payoff for the University's reputation
due to the investment in the Arts Quarter on the
The
questions are very broad, Professor Konstan observed. When investing, one needs to rebalance
portfolios from time to time. Does that
concept apply in higher education? If
there is success in the AHC, should revenues from that success then be used for
investment in agriculture or the humanities because in those fields "the
market is low"? There have been no
discussions about when a field is down far enough that it should be built up—or
dropped. Right now the University is
aiming for tremendous growth in fields that rely heavily on soft funding; the
activities are highly leveraged. If
there were financial problems, some of them could be shed, but not all, and not
necessarily rapidly. He said he would
like to hear about an insurance pool and about investments in other colleges so
the University's "portfolio" is balanced. A related question is whether the University
is becoming too reliant on tuition.
Some
would like the application of portfolio theory to the University's academic
investments, Mr. Klein said, and some would not.
Part
of the answer to Professor Konstan's questions, for units outside the AHC, lies
in the compact process, Professor Martin said.
All units want more money; the question here and at FCC and elsewhere is
"how much money will it take?"
Dr.
Kallsen asked what the cost of the Institute on the Environment will be. The University must decide on a broad
portfolio, he agreed, but it is more interesting to think about what the mix
will be in the future rather than how much money is going to CLA, IT, etc. The structure of the University is not able
to easily handle cross-department and cross-college investments, he added. Professor Roe responded that the costs of the
Institute on the Environment will not be high and will be focused more on
organizational efficiency than increase funding; the AHC activities involve a
great deal more money and have implications for future contingencies. Dr. Kallsen said he believed the funding for
the Institute on the Environment could be more than just modest.
Professor Macmillan said he was sympathetic to these issues being
raised. He noted two things. First, that the
Professor
Warwick said this conversation sounds like a discussion of big business. The University is a place of education, which
is easy to forget when one looks at the "mountains of dollars"
involved. The University's role is to
educate the students who come to it.
Professor Konstan said he did not want to diminish the role of
knowledge-creation, the distinctively American decision to co-locate college
education with the creation of knowledge.
He would like to figure out where to do things and how best to do
them. It is not entirely a
"pull" process, he said—it is not clear that allowing those who want
most to grow is in the best interests of the University. Perhaps those who have not been allowed to
grow, and may not even be thinking about growing because they have been told so
often that they cannot, should be told to think about growing. Professor Konstan related that he'd spoken with
a high official at NIH about the reasons that NIH chose to pay for academic
year salary for faculty when NSF didn't. There was an NIH decision to grow health and
medical fields, he was told, and paying academic salaries as well as direct
funding for postdocs and graduate students, was designed to get universities to
increase capacity—an incentive that Professor Konstan observed as well-received
and quite successful. NIH understands
that there is a 30-year tail on these investments if a decision were made not
to grow them any more. If the goal of
portfolio management is to grow fast, one concentrates the bets (and increases
the risk of losing as well); if the goal is to grow into the top 10 for the
next 100 years, one spreads out the bets and the investments even out over the
long term, just as with financial investing.
Professor Konstan wondered if the goal of reaching the top three soon
might reduce the chance of being in the top ten for the next 100 years.
Changes
in funding directions can provide an advantage to some institutions and not to
others, Professor Macmillan observed, and they can drive institutions to spend
money in certain ways in order to be competitive. But funding can shift quickly, which is why
one should be nervous about becoming too dependent on external funding sources,
all of which are political in one way or another.
Professor
Warwick suggested that perhaps the University should look at what has been done
in
Better linking of new
knowledge production to the business community is part of the responsibility of
the Vice President for Research, Professor Roe said—to increase the number of
patents to shorten the transition from discovery to practice. Areas where patents and technology transfer
are not available (e.g., political science, economics) may require special
status.
Mr.
Volna said he liked the balanced portfolio model and suggested that each
academic unit could identify its contribution to the University's risks and its
stability. Perhaps there needs to be a
compact tax, said Professor Konstan, so there is more money at the presidential
level. Such a tax would allow the
president to say to a unit that just because it can make money does not mean it
can spend it all; the money is earned by using the University's reputation and
some of it can be used to help subsidize units that do more to education
students, etc. Dr. Kallsen said that at
least conceptually that is what the President does with the state funds. As long as all units operate at a loss, that
works, Professor Konstan said, but if some operate at a "profit," and
also detract from the University's reputation, the President has no
leverage. Dr. Kallsen said that under
the current budget model, no unit generates a profit; some thought they were
close, but once they received their bills for indirect costs, they learned that
they did not.
Two
individuals most significant in building the
It
is not necessarily the case that those who generate the most tuition become the
great leaders, Professor Konstan said. Did
those medical leaders generate a lot of tuition revenue or simply invest a lot
of time in a handful of students each year who became stars? It would be useful to do outcome
measures: how well are graduates doing
in their careers 5 and 20 years later?
Some Ph.D. programs track this; does the University do it at the
undergraduate level? And compare the
results with what MNSCU and the private colleges accomplish?
Professor
Roe asked what the process is by which the University makes strategic
investments. It is not the compact
process, which does have much influence on the decisions. The University tries to fund new research
areas and build new buildings. What is
the decision-making process to make those investments and do they address
criteria the Committee has talked about.
There
is a political tension in teaching and graduating students, Professor Martin
said. There have been discussions in the
Committee on Educational Policy about the implications of attracting students
from elsewhere in the country (who pay more).
The University has long been focused on educating students from
Professor
Roe said there is often confusion between the institutional aspirational goal
and goals for individual faculty. The
University can expect individual faculty members to be the best in their field,
but it cannot expect as an institution to be the best in every field.
Professor
Martin inquired where the conversation should go next. Professor Konstan suggested that the
Committee should have a discussion with Senior Vice President Cerra and with
Senior Vice President Sullivan, together or separately. These are hard questions and it is not clear
what the answers are. The point may be
simply to be sure that the people in Morrill Hall are thinking about them as
they deal with strategic positioning issues.
2. 2007 Capital
Request
Professor
Martin welcomed Senior Vice President Jones and Vice President Pfutzenreuter to
discuss several items with the Committee, the first of which was the 2007
capital request.
Vice
President Pfutzenreuter said this capital request will go the Board of Regents
in October, along with the proposed biennial request. This request consists of two parts. One is the Biomedical Sciences Research
Facilities Authority (for $279 million, less than the first request, last year,
because the legislature approved one of the five buildings that comprise the
BSRFA). There was strong support from
the Governor and legislature last year for this request and that support
remains strong.
The second part of the
capital request is Asset Preservation, which is a request for $22 million in
HEAPR money (Higher Education Asset Preservation and Replacement). Because this is not a capital appropriations
year for the legislature, it will only be sympathetic to requests for emergency
funding, which this is. Last year the
University requested $80 million in HEAPR funding but received only $30
million. The uses of the HEAPR money, if
received, would fall into three categories:
health and safety, water infiltration, and building systems (repair or
replacement of things that have failed); $19.4 million would be for the Twin
Cities campus, $1.39 million for UMD, $710,000 for UMM and $250,000 each for
UMC and regional centers.
3. 2007-09 Biennial
Request
Vice
President Pfutzenreuter distributed copies of the docket material that will be
provided to the Regents concerning the biennial request. He said he cannot say what the request will
be in terms of tuition, reallocation, and the request from the state, but he
said the state request would be aggressive and the tuition increase would be
moderate. The plan being used to develop
the specifics of the request involves two themes: (1) Assuring Quality and Competitiveness and
(2) Creating Minnesota's Future.
(1)
is the core of the institution and will include general wage and salary
increases, expanding research opportunities, funding for technology,
classrooms, and the libraries, etc. (2)
will include a competitive pool for faculty salaries, initiatives in science
and engineering, agriculture, renewable energy and the environment, as well as
investments in academic programs—expanding existing programs and creating new
ones. About 70-75% of the request will
go into (1).
What
will be the process of reallocation under the new budget model, Professor
Konstan asked? Withdrawing state dollars
from colleges or within-college reallocation?
The financial framework is built on a certain amount of state funds,
tuition, and reallocation, Mr. Pfutzenreuter said, and what the University does
will be a result of all three elements.
Support units have been asked to identify what they will do with 1% less
funding next year, and it is assumed that reallocation would be about 1% (or
about $11 million) each year. It is not
clear how this would affect academic units until the University has a better
idea of what the Governor's recommendation for the biennial request is.
There
was discussion at this Committee about whether it would be possible to track
reallocation at a finer granularity, Professor Konstan recalled (such as within
departments). At the time, Mr.
Pfutzenreuter said that no one would consider such changes to be reallocation,
but is there a mechanism by which to track changes in priorities in spending in
fields so that the University can legitimately say it is reallocating more than
$11 million? There is no way to do that,
Mr. Pfutzenreuter said, it would be expensive, it is not clear it would be
worth it, and that is the kind of reallocation that can better be explained by
examples.
Someone
must decide what will be reallocated, Mr. Volna observed. Will the reallocation be assigned, Ms.
Jefferies asked? The colleges and vice
presidents will be given an amount; they need to decide how to impose it.
Last
year there was a lot of effort put in by the strategic positioning task forces,
Professor Hendel pointed out, and there were a lot of recommendations, some of
which included discussion of the resources necessary to reach the goal. To what extent is the biennial request
connected to those recommendations?
There will be a strong connection, Mr. Pfutzenreuter said; for example,
the four institutes for which funding is being sought all came out of the task
force reports. Senior Vice President
Jones said the biennial request must be prepared in such a way that it
considers strategic positioning—it isn't possible to finance ALL the strategic positioning
recommendations through this biennial request, but the request must be
consistent with strategic positioning.
One of the objectives of this biennial request is to move away from
financing the University in two-year increments and to see each request as a down
payment on strategic positioning.
Is
there any danger that as the biennial request goes to the legislature,
legislators will be more interested in spending money on new activities rather
than on the core, Professor Martin asked?
That is always a risk, Mr. Pfutzenreuter said. Part (1) of the request will be paid for in
part by tuition and reallocation, with some state funds. Part (2) will be funded entirely by the
state. If the legislature were to chose
to fund only (2), there would be a dramatic effect on tuition rates.
4. Bid Thresholds
Mr.
Pfutzenreuter next distributed copies of a Regental docket item related to the
thresholds for purchases requiring Board approval. As part of their routine review of policies,
the purchasing policy came to the Board.
One result of the review is a proposed change in thresholds. The specific thresholds used to be in the
Board policy; now they will be in administrative policy with periodic review by
the Board.
Mr.
Volna reviewed the changes. For goods
and services (standard stuff), the threshold will increase from $10,000 to
$50,000. The dollar value of the bids
that will now fall below the (new) threshold is about $116 million, but the
average bid is only about $11,000, so in any one instance there is little risk. There will be just over 10,000 additional
bids that will fall below the new threshold.
For professional services (consultants, etc.), the threshold remains at
$50,000. For construction, the threshold
increases from $10,000 to $100,000, and for professional services (architects
and engineers only), it will increase from $50,000 to $100,000.
What is the cost of the bid process
for each of the standard goods and services purchase, Professor Konstan
asked? About $75 for each vendor
transaction, Mr. Volna said. The change,
however, eliminates weeks of preparation, writing an RFP, and so on, so probably avoids thousands of dollars per
transaction.
There will be a significant savings in effort in the central purchasing
office, Mr. Pfutzenreuter said, so the change will free up time to focus on
more strategic activities. There are
also a number of areas they have not focused on for a long time, Mr. Volna said
(e.g., copiers). They have been able to
help with vetting contracts but they have not been able to help in assessing
what a unit really needs; they are starting a pilot project to see how they can
help more. And while it is a big
increase in the threshold, Mr. Pfutzenreuter said, it is the amount used by the
State of
Below
the threshold it is important that departments do some informal bidding or
price comparisons—due diligence—Mr. Volna said.
Most do so now because they are prudent and want to economize. In many cases the federal government requires
it. The threshold only determines what
is formal and what can be informal.
Following
brief discussion of the changes in the professional services threshold,
Professor Martin said this made good sense and that the current numbers were
too low. She thanked Messrs.
Pfutzenreuter and Volna and adjourned the meeting at 3:50.
--
Gary Engstrand