These minutes reflect discussion and debate at a meeting of a committee of the University of Minnesota Senate; none of the comments, conclusions, or actions reported in these minutes represents the views of, nor are they binding on, the Senate, the Administration, or the Board of Regents.

 

Minutes

 

Senate Committee on Finance and Planning

Tuesday, February 20, 2007

2:30 – 4:15

238A Morrill Hall

 

Present:

 

Judith Martin (chair), Jesse Andrist, Rose Blixt, Rachel Curtiss, Steve Fitzgerald, Darwin Hendel, Lincoln Kallsen, Thomas Klein, Joseph Konstan, Michael Korth, Mikael Moseley, Richard Pfutzenreuter, Michael Rollefson, Nicholas Treat, Michael Volna, Aks Zaheer, John Ziegenhagen

 

Absent:

 

Daniel Feeney, Kathleen O'Brien, Kathryn Olson, Justin Revenaugh, Terry Roe, Karen Seashore, Thomas Stinson, Warren Warwick, George Wilcox

 

Guests:

 

Vice President Timothy Mulcahy; Provost E. Thomas Sullivan; Vice President Stephen Cawley

 

Other:

 

Julie Tonneson (Office of Budget and Finance); Sharon Reich Paulsen (Office of the Provost)

 

[In these minutes:  (1) trends and comparative data on sponsored research at the University; (2) financing strategic positioning; (3) athletic finance and planning committee; (4) Enterprise Financial System update; (5) six-year capital plan debt capacity]

 

 

1.         Trends in Sponsored Research

 

            Professor Martin convened the meeting at 2:30 and welcomed Vice President Mulcahy to discuss trends in sponsored research funding.

 

            Dr. Mulcahy distributed copies of the PowerPoint slides of his annual report to the Board of Regents and highlighted a few of the major points.

 

--  No single research metric reflects overall quality or prominence of an institution; they reflect only a part of what the University does and to use them exclusively would be a misapplication of the data.

 

--  The NSF R&D ranking data are the best available; they are not a report on NSF FUNDING, they report science and engineering research funding by institution, and while the report includes some social science funding, they are not a perfect measure.  (The data also lag two years; the data used in this report are for 2004.)  But inclusion of "research" in the University's strategic objectives will require use of a credible research metric.

 

--  The University's research funding has increased steadily in nominal dollars; in real dollars it has been nearly flat since about 2001. 

 

--  One of the most important points he emphasizes with the Board of Regents and the public is that there are a number of ways to rank universities.  One can look at other rankings besides NSF ranking of public universities, such as the Florida study and the Shanghai (world rankings) study.  In the NSF study, Minnesota ranked 8th, tied with Berkeley.  In the Florida study, the University was in group 2 (that is, it ranked in the top 25 on eight of nine variables, but ranked 26th on one of them, so was in the second tier).  In the Shanghai ranking of world universities, Minnesota ranked 32nd in 2006.  The three systems are somewhat consistent, although in some cases institutions may go up on one ranking and down on another from year to year.  Minnesota has generally been consistent in where it has ranked, and it clearly has a prominent position as a public university in the US and the world. 

 

--  Compared to 16 other top research institutions, the University's growth rate in research funding 1997-2004 is second to the bottom (only Texas grew less than Minnesota).  The average growth in research funding for the group was 88%; Minnesota increased by 53%.  The University's peers are increasing their volume of research at a greater rate than Minnesota.  As Vice President for Research, he is looking at what can be done to make the University more competitive.

 

            The California schools have been helped a great deal by state investment, Professor Martin commented.  That is part of the reason for their growth, Dr. Mulcahy agreed, but state funding does not explain all of it, and he is trying to get a handle on the other factors.  Professor Hendel said it is also clear that some institutions with high growth rates in research funding have also seen an enormous increase in facilities.  Dr. Mulcahy agreed and said he has explained to the legislature the increased funding for facilities among the top five public research universities.  Professor Konstan asked if there were data on the number of tenured and tenure-track faculty at the institutions for the same period.  Are those institutions increasing the number of faculty?  Dr. Mulcahy said that is a complicated question; it is not only the number of faculty but also their disciplinary distribution; UCSF, for example, is almost entirely medical faculty, who have access to a great deal of federal research funding, while Minnesota has many faculty who do not have similar access to federal or any other funds.  Professor Konstan said the University could be number one in research funding if it took over the bottom 40 institutions and lumped them into one accounting system; there is much emphasis in these data on having the most money and patents, not on productivity or quality.  Dr. Mulcahy agreed and emphasized again that the NSF data are only one measure, not a measure of the University. 

 

--  In 1996 there was a $65-million gap in research funding between Minnesota and Wisconsin.  In 2004 the gap was $237 million (Wisconsin is ranked number 3 in the NSF data).  The differential growth rate in funding explains the growing difference. 

 

--  One can break down the research funding into categories:  federally-sponsored, state/local funding, institutional research support, industry support, and all other sources.  Dr. Mulcahy looked at Minnesota's rank (and amount received) by category as well as the amount received by the number one institution in that category.  (For example, Minnesota ranked tenth on federally-sponsored research funding, at $308 million; Washington was first with $625 million.  And so on.)  If the University simply had to find $237 million in sponsored research to catch up to Wisconsin, it could never do it, but one can look at the different categories of research funding to see where Minnesota might make some headway.  Each category has a unique strategy. 

 

            Professor Zaheer said it was troubling to see that Wisconsin, similar to Minnesota in most benchmarks, is $237 million ahead of the University in research funding.  Has Dr. Mulcahy done a study to account for the gap?  In general, the more he drills down in the data, the more questions he has, Dr. Mulcahy said.  In the specific case of Wisconsin, with $210 million in institutional research support (compared to $70 million at Minnesota), the funds include $50-75 million per year from the Wisconsin Alumni Research Foundation (WARF) given to the University of Wisconsin for research infrastructure.  According to the Florida report, the only single measure that has a positive correlation with the ability to stay among the elite research universities is unrestricted funds for new research.  On that score, Minnesota is not doing well.  (WARF goes back 85 years and has an endowment of about $1.5 billion.  By contract, it must invest some percent of its revenues in the University each year.)

 

--  If one looks at the NSF research funding rankings and controls for the presence of a medical school and an engineering school, some institutions' rank changes dramatically while others do not.  Illinois (with no medical school) increases its ranking by 12 places if medical schools are subtracted from the data; it drops 40 places if engineering is subtracted.  Minnesota, Washington, and Michigan change position very little regardless of whether medical schools or engineering are in or out of the data.  So, Dr. Mulcahy deadpanned, Minnesota is already in the top three.  The authors of the Florida study write that consistent ranking when medical and engineering units are factored out "reflects an academic commitment to the notion of the well-rounded university—the campus that cultivates the liberal arts and sciences as the core activity of a mainstream University." 

 

--  The federal funding picture is fairly dismal, the success rate for NIH grant applications has dropped significantly.  That means every faculty member must do two or three times as much work to obtain funding; the University must do all it can to help them.

 

            If unrestricted research funding is a big factor in how well the University does, is he talking with the Foundation and the Alumni Association about this, Professor Martin asked?  He is, Dr. Mulcahy said, and following other paths as well.  He's also talking with his colleagues at peer institutions; UCLA went from down in the ranks to number one in ten years.  Professor Zaheer pointed that the gap in research funding between Minnesota and Wisconsin has grown from $65 million to $237 million; what created it?  It was both WARF as well as an increased in sponsored research, Dr. Mulcahy said. 

 

            Professor Martin said the University needed to talk more about idea advanced in the quote from the Florida study.  A university is not just patents; what it is doing with students is extremely important.  Professor Konstan said he agreed with the sentiment expressed by the quotation about the importance of excellence in the liberal arts and sciences, but maintained that the measure doesn't actually show that.  The ranking data are only about funding; they have nothing at all to do with strength in the humanities and arts.  Rather, the "balance" they show is that the University's non-engineering sciences, public health, nursing, and similar areas are as strong as its medical school and engineering programs.  Whether the University has top-3 or bottom-3 arts programs, this statistic wouldn't change.  That's all the more reason that research quality measures that aren't simply measures of research funding are needed.  Dr. Mulcahy agreed with Professor Martin but disagreed slightly with Professor Konstan's conclusion about the data.  The stability in rankings indicates the University of Minnesota does not sink or swim on one factor or source and says the core is solid.  He emphasized again that analyzing research-funding rankings is only one way to measure a university.

 

            A big part of the University's biennial request was to protect that core, Professor Martin pointed out—for which the Governor chose not to recommend funding.  Dr. Mulcahy agreed that the Governor's recommendation, if adopted, would harm the University and said that once a department or institution goes into decline, it is almost impossible to recover; if a program erodes, it usually cannot recover. 

 

Professor Chapman said that the flat rate of research funding plus the difficulty in obtaining the new external funding suggests a different workload allocation.  It may be necessary for those researchers capable of bringing in substantial new funds to be given some release from other responsibilities in order to encourage them in that pursuit.  Dr. Mulcahy agreed and said that as a result of strategic positioning the University is taking a global view of the academic enterprise, responding to the environment, and improving its ability to compete.

 

            Professor Martin thanked Vice President Mulcahy for joining the meeting.

 

2.         Financing Strategic Positioning

 

            Professor Martin turned now to Provost Sullivan to lead a discussion of financing strategic positioning.

 

            Provost Sullivan began by noting that the University has been working for about two years on the strategic positioning process and is now making investments and planning for further investments based on recommendations from the 35 task forces.  As of July 1 of last year, the recommended reconfiguration of colleges was in place; the primary reason for the reconfiguration was to increase academic synergies and enhance excellence.  Cost savings were also expected.

 

            As one thinks about strategic positioning investments, there are a number of revenue sources the University can draw upon:

 

--  the biennial request (a number of the strategic positioning priorities are in the biennial request)

--  the capital bonding request (ditto)

--  internal budget principles

--  tuition

--  grants

--  endowment income (the endowments total about $2.5 billion and the University is beginning to plan for a major capital campaign, which will provide a number of significant naming opportunities)

 

            Early in the strategic positioning process, they anticipated about $3-4 million in savings from the redesign of the colleges; the savings in hand total about $4 million.  Professor Martin inquired if the savings came from elimination of staff positions or reallocation.  It was administrative downsizing, Provost Sullivan said, not cuts to departments.  The funds that were saved have been segregated so that they can be reinvested in the colleges from which they came, consistent with strategic positioning goals, and they hope to reinvest in the departments. 

 

            The Provost said the University has also made significant investments in 2005-06 and 2006-07, including assisting the "wave 1" colleges in redesign.  Many people believe that will be a "wave 2" when he refers to wave 1, Professor Martin commented.  There is no plan for any "wave 2," Provost Sullivan said; he is not working on any second wave.  New investments have been made in the last two budget years in the redesigned colleges as well as other colleges (e.g., an additional $3 million to the College of Design). 

 

            This Committee has had ongoing questions about the ambition to achieve the top three goal, Professor Martin related.  The $4 million in savings is commendable, but the Committee has the sense that the gap between Minnesota and others is enormous (for example, in unrestricted research funds, which Vice President Mulcahy explained during the first part of the meeting).  How does he think about that gap?  Provost Sullivan said they have done a careful analysis of the recent NSF data that Vice President Mulcahy presented to the Committee; Dr. Mulcahy is leading an effort to look at sources of funding and how they compare with institutions ranked above Minnesota.  One measure is institutional investment in research, and the University must be sure it is coding its expenditures correctly; it may be that its rank could be improved by ensuring accurate reporting.  Vice President Mulcahy has identified perhaps $40 million that is not being coded.  Once the University is sure of its accounting, it will have more confidence in what it is investing in compared to its peers.  Better reporting will help decision-making, which must be consistent with strategic positioning (investing in strong departments and near-great departments, and investing in interdisciplinary priorities).

 

            Professor Zaheer commented that he teaches strategic planning and said that another primary principle is linking evaluation and compensation to strategic planning.  To what extent is the administration making sure that deans and decision-makers are compensated in line with achieving strategic positioning goals?  They are developing metrics and a scorecard to follow progress, Provost Sullivan said, and deans are evaluated on the basis of strategic positioning.  Questions are raised in the compact meetings, three hours with each college, and he has a set of 15 questions, which the deans have in advance, to track strategic positioning.  The compact is for allocating extra funding to the colleges, Professor Zaheer said; is their success in strategic positioning factored into their compensation?  Provost Sullivan said the answer is "yes," because there is a connection between the individual evaluation of the dean, the compact process, and progress in strategic planning.

 

            Professor Konstan asked how much of the strategic positioning investment will come from mandated reallocation.  How much, that is, is falling on units because they have been told to cut X%?  Provost Sullivan said there have been no final decisions about the 2007-08 budget; if the decision is that there will be internal reallocation, the question is whether it will be across-the-board or strategic and focused.  When there has been internal reallocation, they have been very careful about tracking the every dollar and where it went.  How the money has been used can be traced and shown, he noted.

 

            Professor Konstan said the University can invest in growth or productivity (or both).  It can invest in new centers, etc., while the faculty are left overwhelmed.  Faculty salaries are a high priority in the President's budget, but he has heard nothing about more staff, fellowships, etc.  How will he decide whether to achieve the goals by getting bigger versus achieving them by providing more support to the people who are already here?  The one thing people talk about most is time, Professor Martin added.  Provost Sullivan agreed that a recurring theme in faculty discussions is that they do not have enough time for teaching, research, mentoring, etc.  There is overload.  The answer to Professor Konstan's question is complicated and the answer multi-faceted, he said.  One, the University is investing in productivity (for example, there has been $5 million in new additional funds the last two years for graduate student fellowships and block grants and that investment will continue; the University must have great graduate students).  There have also been investments in new interdisciplinary institutes (e.g., the Institute on the Environment) that have already begun to generate external grant income the University could not have obtained previously.  The number one priority of the University is salaries, investment in human capital, the Provost said.  The biennial request had two requests, 3.25% on the total salary base ($134,600,000 requested for the biennial budget) and an additional 5% ($18,700,000 for the biennial budget) for enhancement of faculty compensation.  The Governor did not recommend the base compensation increase; he likes strategic positioning but believes the University should support the core while he supports strategic positioning.  The President has been very forceful with the legislature that the University cannot be successful in strategic positioning without being sure the core is strong.

 

            Ms. Blixt asked if it is true that the principles of staffing, from the administrative strategic positioning task force (which have been implemented in the redesigned colleges) will be applied to all colleges?  It is, Provost Sullivan said; they will look at all colleges.

 

            The task force reports all asked for more money, Professor Martin commented.  Has he put a price tag on what the University needs to achieve the strategic positioning goals?  They are working on it, Provost Sullivan replied, and the President is considering it in the context of working with the legislature.  It is not a number he is prepared to share now, but it is large, which should not surprise anyone.  They are looking at the sources of revenue—state funds, capital campaign, capital bonding, reallocation, grants, managing assets better (e.g., UMore Park).  He said he is optimistic that when a number is identified, there will also be alignment with relevant sources of income.  It will be a large number but it will be reasonable in light of the University's aspirations and sources of revenue.

 

            The University will be ambitious in going after increased funding and achieving its strategic positioning goals, Professor Martin observed, but so will most of its peers.  Is it realistic to believe the University can improve its position when its peers are striving to do the same?  It is, Provost Sullivan said, because the University will become more focused, will do a better job of measuring what it is doing, has significant competitive advantage, and will make adjustments along the way.  He said he was very optimistic about the University's accomplishing its goals.

 

            Professor Martin thanked Provost Sullivan for joining the meeting.

 

3.         Athletic Finance and Planning Committee

 

            Professor Martin reported that there is an athletic finance and planning committee and that this Committee has a representative on it.  Professor Speaks served in that role in recent years; with his retirement, a new representative is needed.  She asked for volunteers.

 

4.         Enterprise Financial System Update

 

            Professor Martin asked Messrs. Cawley and Volna to come to the table to provide the Committee an update on the new financial system.

 

            Mr. Volna provided a brief history of the Enterprise Financial System (EFS).  The University has five systems:  student, human resources, grants, libraries, and financial management; the first four have been installed and the financial system is the last one.  They have worked hard to be sure that the new system is aligned with strategic positioning.  Mr. Volna made a number of points.

 

--  The redesigned administrative service model calls for delivery of some financial processes using a different model that generally exists today..

 

--  EFS will promote single enterprise use of the system and eliminate or reduce the need for shadow systems.

 

--  They will implement best practice solutions (rather than having multiple ways of doing the same thing)

 

--  There will be investments in people to enhance their financial competencies; everything will not be great just because there is a new system and there must be training and support for staff.

 

--  The CUFS system was installed in 1991, has not been supported by the vendor since 1995, and the University has nursed it along.  But it puts the University at risk because it could break down—and it is the source for information reported to the federal government, used to buy things, and so on.

 

--  They are using consultants judiciously, and emphasizing University staff on the project teams, so the knowledge stays at the University.  They intend to minimize modifications (there will be some) so that the system can be upgraded without significant reprogramming.  They have attempted to change policies and procedures before modifying the system.

 

--  They have sought a great deal of participation from the internal financial community and system users. 

 

--  They expect to have the system "go live" in July, 2008 (everything but budgeting—travel, pay, investments, gifts, grants, etc., and they will be consistent across the institution)  There will not be as much variability as there is now, except that there are some subsidiary systems for facilities, clinical billing, and so on, that make sense and will be left intact..  Right now they are at the point of completing the functional design ("how will functionality be delivered?"), which followed analysis ("what functionality is needed to meet the University's business needs?").

 

--  They will limit what they deliver with the system to what they said they would deliver; the project will attempt to deliver a "vanilla" system where possible; future enhancements will be incorporated in the ongoing institutional decisions about the overall enterprise system (all five systems).  Decisions will be based on advice from users and technology needs.

 

--  There will be a new framework for some financial services:  many will continue to be decentralized to departments, some will be managed centrally, and some will be shared in a cluster model.  Departments would handle requisitions, travel and expenses, asset and line item budgeting; cluster centers would handle bill entry, purchasing oversight, journal entry, budget approval, and so on; the central offices would handle purchasing services, disbursement services, accounting services, SPA, SFR, etc.  College budget offices can handle these responsibilities, Mr. Volna said, and will be provided models on how they might wish to do so.  Ms. Blixt reported that the new colleges are already using teams working with 2-3 departments; it has been a struggle, she said, but it is working out.  Mr. Volna said they have been paying attention to the wave 1 colleges to learn from what they have done.

 

            When the system is implemented on July 1, 2008, will there be any financial savings, Professor Martin asked?  There will be operational efficiencies and increased effectiveness, Mr. Volna said, but he has never told anyone that the goal is to save money in a way that will create a pot of money than can be used elsewhere.  What EFS will provide is better data and analysis for financial management and decision-making, such as the new budget model, something difficult to do with the current system.  Units will receive a lot more data, which will require a higher skill set among the staff.

 

            How different will life be for the average University employee, Professor Konstan asked?  Better?  Will training be required?  Reports will be delivered to departments, Mr. Volna said, and whether they will look the same as they do now he cannot say.  There will be approximately 63 training courses on different aspects of the system; not everyone needs to attend them all and many of them will be on-line.  There will be three months of training, beginning in March or April, 2008. 

 

            Mr. Rollefson asked Mr. Cawley if, given the volume of users, Mr. Cawley is comfortable the system will be able to perform.  The registration system was initially overwhelmed by the number of users.  Mr. Cawley said he was confident that the registration system problems would not be repeated.  They have engaged in a great deal of testing.  Mr. Volna also assured Mr. Rollefson that the new system would be able to track and report departmental balances.  Mr. Pfutzenreuter noted that this requirement is one of the system modifications being made by the project.

 

            Professor Martin thanked Messrs. Cawley and Volna for joining the meeting.

 

5.         Six-Year Capital Plan Debt Capacity

 

            Professor Martin turned finally to Vice President Pfutzenreuter to explain the six-year capital plan debt capacity issues.

 

            Mr. Pfutzenreuter recounted that he presented this report to the Regents last month; there will be a new six-year capital plan in March, and it will need discussion at this Committee.  The information he is providing today is the baseline.

 

--  The University's bond rating determinants are four:  state support, student demand, management analysis, and financial statement (which includes liquidity, debt burden, and operating performance).  Analysis of these factors by the agencies puts Minnesota in the strong Aa category. 

 

--  Certain assumptions are made about the debt service:  the University will maintain its current Aa2 rating; current debt will follow existing amortization schedules; there is $633 million in outstanding debt ($700 million including the Gateway Corporation), at an average rate of 4.37% and average life of 9.5 years (the University pays off its debt quickly); there is $265 million additional debt coming on line through 2010 (2005 and 2006 capital request approved projects, the football stadium, the Gateway district); future capital requests are not included; and other matters.

 

--  Despite adding $265 million in new debt in the next three years, the outstanding debt will increase only from $700 million to $712.8 million.  The University also has level principal payments, unlike the usual home mortgage.  Annual debt service will go from $66.9 million this year to $78.3 million in 2011-2012.  Not all of that debt service will come from academic programs; some will come from parking and some from student fees for the stadium. 

 

--  Mr. Pfutzenreuter reviewed the three ratios used by rating agencies.  In all three cases, the University's numbers are moving in the desired direction.  In theory, the University could issue another $561 million in debt by 2012, above the $265 already added, and retain its current bond rating.  Agencies say the institution has a lot of capacity, but it is in their interest to say so because they only make money if the University issues debt and they receive the fees related to it.  The University may have the capacity but what appetite does it have to cut budgets in order to make payments on the debt service?  The State never provides the money; any increased debt service creates pressure on tuition or on budgets, and funds are not available from the Foundation (which funds are mostly restricted).  The University does not intend to issue another $561 million in debt over the next five years.  

 

--  The next six-year capital plan will include debt above the $265 million to be added, but the University will be cautious and look at its fund-raising capacity.

 

            Professor Konstan asked if the University hoped to get to Aa1 rating in order to get a lower interest rate.  Mr. Pfutzenreuter said the difference in rates between the two ratings is almost nil, and once the University were to obtain that rating, it would have to maintain the appropriate financial ratios.  If the University obtained Aa1 rating, it would be on the back page of the business section of the paper; if it later lost the rating, it would be on the front page.  He does not want to see any downgrade in the University's rating (although, again, the interest rate is not much different), but falling from the top to the second rating would get the University a black eye with no offsetting gain.

 

            Professor Martin said she hoped that as the University considers its debt service, it does not put academic programs at risk.  There is always that trade-off, Mr. Pfutzenreuter said; the one-third share of debt service required by the state must come from somewhere.  It has put a burden on institutions and pressure on tuition.  The University is working on reducing the institutional commitment to 10% for research buildings because they are so expensive.  If all research costs the University money, the cost of the buildings adds even more pressure on budgets.

 

            Professor Martin thanked Mr. Pfutzenreuter for the explanation and adjourned the meeting at 4:30.

 

                                                                        -- Gary Engstrand

 

University of Minnesota