UM FY10 = Tuition Hike + Financial Aid

University of Michigan Board of Regents meeting (June 18, 2009): Despite dissent from two regents over a 5.6% tuition hike, the University of Michigan Board of Regents approved several FY2010 budgets at their Thursday afternoon meeting – including budgets for the general fund, health system, and athletic department.

Though budget presentations – and speaking turns by each regent on the budget, most of them reading from prepared statements – took up much of the meeting, the board approved several other items, among them: 1) changes to UM’s technology transfer policy, 2) authorization to demolish seven vacant buildings that make up the Kresge complex at the corner of Ann Street and Zina Pitcher Place, 3) approval to hire an architect for a major expansion to the G.G.Brown building on north campus, and 4) design approval for a new intercollegiate soccer stadium.

We’ll begin our report with a look at non-budget agenda items.

Board Changes Leadership

Regent Katherine White completed her one-year term as board chair. At Thursday’s meeting, the board unanimously elected Andrew Richner as the new board chair. He previously was vice chair, a position to which regent Julia Darlow was elected on Thursday.

Richner is a Republican from Grosse Pointe Park. Both White and Darlow are Democrats from Ann Arbor. Richner told White he would try to follow in her footsteps, noting that she “brought order to a disordered environment – maybe that’s her military background.” White, a law professor at Wayne State University, is a Lt. Colonel in the U.S. Army reserves.

Building Projects

With little discussion, regents approved several building projects at Thursday’s meeting. One project that won’t be moving forward at this time is a previously proposed parking and office building on Wall Street – a decision we reported in a separate article.

Here’s a summary of the projects that did receive regental approval on Thursday:

• A $4.8 million, 10,000-square-foot addition to the Engineering Programs Building on north campus. Regents had approved a schematic design in April – their vote on Thursday allows the university to issue bids for the project and award construction contracts after bids come in.
• A $56 million, 66,000-square-foot addition to the G.G. Brown Memorial Laboratories, which was built in 1958 and houses the Department of Mechanical Engineering. The architectural firm of Perkins+Will, along with Integrated Design Solutions, will be working on the design phase.
• A $9.7 million demolition of seven vacant buildings that are part of the Kresge complex at Ann Street and Zina Pitcher Place. The buildings were previously used by various units of the medical school – those units have been located elsewhere over the past several years. The project would require asbestos removal and the decommissioning of medical labs, as well as landscaping after the buildings are taken down. The architectural firm SmithGroup will work on the project.
• A $6 million intercollegiate soccer stadium for men’s and women’s teams. Regents approved the project in May, and at Thursday’s meeting OK’d the schematic design by architects Jickling Lyman Powell Associates. The stadium – which will include locker rooms, concessions, a press box and grandstand seating for about 1,800 people – will be built on a soccer field located just west of UM’s tennis complex on South State Street. The project is expected to be finished in the fall of 2010. The structure’s exterior will be limestone and brick, prompting Coleman to joke that the university provides “lots of opportunities for brick masons to keep their skills intact.”

Separately, Tim Slottow, the university’s chief financial officer, filed an updated Plant Extension Report, which lists construction projects on campus. The report includes the cost for each project, its source of funding, the companies hired to work on the project, and its expected completion date. This report is updated and filed at each month’s regents meeting, and it’s worth a look – the list is long.

Technology Transfer Policy

Regents voted to change the university’s technology transfer policy, with modifications intended to promote student entrepreneurship. Below is the relevant section of the policy – the redlined clause has been eliminated under the changes approved on Thursday (“OTT” is the Office of Technology Transfer):

D. The University will not generally claim ownership of Intellectual Property created by Students. (A”student” is a person enrolled in University courses for credit except when that person is an Employee.) However, the University does claim ownership of Intellectual Property created by students in their capacity as Employees  or with direct or indirect support of funds administered by the University. Such students shall be considered to be Employees for the purposes of this Policy. Students and others may, if agreeable to the student and OTT, assign their Intellectual Property rights to the University in consideration for being treated as an Employee Inventor under this Policy.

Fiscal Year 2010 Budgets

Remarks from the President

UM President Mary Sue Coleman began the meeting with comments directly related to the budget presentations and vote, which came toward the end of the proceedings. She said the university is in a different league compared to most other institutions, and it’s important – for the state’s economy and for thousands of young people whose future relies on a quality education – to keep UM strong during this tough economic time. The budget has been crafted to do that, she said. Coleman also wanted to assuage any anxiety within the university or state about UM’s fiscal health. “We are stable – very stable,” she said.

Coleman outlined four critical facets to that stability, saying these areas were important in making decisions about how to allocate resources:

• Market presence. The university is aggressively focused on its market presence – having a reputation as an economic development force, as an institution that’s hiring faculty at a time when others can’t, as a university with strong student admissions and research growth, among other strengths.

• Revenue growth. UM is increasing revenues from research funding and donor support, as well as by offering more spring and summer courses, and treating more patients in its health care system, Coleman said. They’re doing this at a time when most institutions are struggling.

• Cost controls. They’ve been insistent on making cuts to keep costs down, she said. That includes asking employees to pay more for health care; closing WFUM, the university’s public television station; shifting the University of Michigan Press to become a digital publishing enterprise; reducing energy costs; and asking units within the university to cut their budgets by 1-3%.

• Strong cash and balance sheet management. The university’s strong bond rating reflects confidence in the institution’s financial position and ability to manage resources, Coleman said. “Our investment strategy has been prudent,” she said, “and is buoying us at a time when other universities are being forced to make drastic cuts.”

The university’s goal is not merely to hold its own, but to advance, Coleman concluded: “We are not out of the woods – we anticipate more budget challenges in the near future, but are confident in the institution’s ability to move forward.”  [Link to full text of Coleman's remarks.]

CFO: Financial Overview

Tim Slottow, the university’s chief financial officer, gave a presentation on UM finances designed to provide context for the budget reports later in the meeting.

The university has a strong balance sheet, he said. Total assets are $12.8 billion, with liabilities at $4.5 billion, including $1.4 billion in debt and $1.5 billon in staff and faculty retirement costs. That brings net assets to $8.3 billion. Slottow described possible threats to the balance sheet’s health, including ongoing market volatility, the state’s economy, rising health care and energy costs, and competitive pressures in recruiting and retaining faculty, providing financial aid to students and maintaining external research funding.

Regarding the general fund, Slottow said they had started supplementing it with money from the endowment, to offset a decrease in state appropriations. In 2009, the general fund received $190 million from the endowment, which was primarily used for scholarships, endowed professorships and academic programs. An example of this strategy includes the President’s Donor Challenge, an effort to raise $105 million for need-based financial aid and professorships.

Slottow outlined other strategies to bring in revenues for the general fund, which included redirecting part of UM’s revenue from its Big 10 TV contract to use for financial aid ($2 million), and moving some non-general fund revenues – such as vending machine, parking and late fee revenues – to support general fund activities ($4 million).

On the expenditure side, Slottow said the university has a “sustained, relentless commitment to the boring stuff” – the kind of upkeep, like upgrades to heating and cooling systems, that requires spending millions of dollars, “and when you’re done, it looks no different.” He reminded regents of the scope of UM’s physical plant, which includes:

• 22 miles of roads and 4.2 million square feet of sidewalks, steps, and plazas;
• 7 miles of utility tunnels and 156 miles of fiber optic cable;
• 280 acres of parking lots/decks;
• 547 buildings, 1,840 classrooms and instructional labs, 1,093 study rooms, and 5,183 research labs/rooms;
• 29 million gross square feet of buildings and core infrastructure;
• 509 elevators and escalators;
• 14,005 trees and over 12 million square feet of turf;
• 97,703 network desktop computers.

In terms of “human capital,” at its three campuses combined, the university employs 28,535 regular faculty and staff, and another 6,729 instructional, clinical and research faculty. He also made note of a pending transition –  within 5 years, 54% of UM’s managers will be eligible for retirement.

Slottow concluded by reporting that UM had the highest possible credit rating from Standard & Poor’s – a triple-A. He quoted from a press release issued in May 2009 from that rating agency, which cited the university’s national reputation, stable enrollment, strong financial resources, exceptional fundraising record and limited dependence on state support.

Provost: General Fund Budget

Provost Teresa Sullivan presented the $1.46 billion general fund budget for the Ann Arbor campus. She praised her staff for working long hours to put together the budget, and commended the university deans – many of whom attended Thursday’s meeting – for their leadership during a difficult budget cycle. They had a twin challenge, she said: Maintaining student access and academic excellence, while facing uncertain financial support from the state.

The general fund accounts for only 28% of the university’s total budget, but is the primary source of support for academic programs, she said. It relies primarily on tuition, fees, state funding and payments from sponsored research activity. Tuition and fees represent 65% of the budget, with state aid at about 22%.

Under the budget and 5.6% tuition hike approved later in the meeting, undergraduate tuition and fees for 2009-10 will be $11,659 for Michigan residents (an increase of $622 from last year) and $34,937 for non-residents (up $1,868 from 2008-09). Graduate student tuition, both in-state and out-of-state, is also increasing 5.6%.

While raising tuition, budget also includes an 11.7% increase in undergraduate financial aid, which would make $118 million available to students. About 80% of in-state students and 55% of out-of-state students currently receive some form of financial aid. Sources of financial aid that are increasing include donations contributed during a recent capital campaign, the amount available from federal Pell Grants, and an additional $1.6 million in federal stimulus funding of student work-study programs.

In addition to tuition, efforts are under way to increase revenues in other ways, while trimming costs, Sullivan said. On the cost-cutting side, the university is targeting $36.5 million in budget cuts over the next three years, including $15 million in the 2010 fiscal year. Current measures include:

• eliminating 63 positions through attrition or that were already vacant;
• cutting the university’s contributions to employee health benefits, and implementing a one-year wait before contributing to a new employee’s retirement savings;
• pulling the plug on WFUM, the university’s public TV station;
• restructuring the University of Michigan Press into a digital-only enterprise.

[A document detailing broader cost-containment efforts is posted on the provost's website.]

Any new academic initiatives will be funded by reallocating existing resources, Sullivan said. The budget also provides funding for a program to hire 100 new faculty members over a five-year period, which began in 2008. At the media briefing prior to the regents meeting, Sullivan said the budget also includes a 2.5% “pooled” increase for faculty, which can be used for merit increases, promotions or retention. A 2% increase will be available for staff, she said.

Regarding tuition, Sullivan put UM’s increase in the context of other public universities, citing higher increases at the University of Washington (13%), UCLA (10.3%), and the University of Minnesota (7%). She said some had lower increases, including the University of Iowa (4.3%) and University of Virginia (4%). Ohio State University isn’t raising its tuition, she said, but they are getting a 6% increase in state funding.

When asked at the media briefing about why UM isn’t proposing a tuition freeze – something than many students have called for – Sullivan said that with cuts in state funding, it wasn’t possible to maintain the university’s academic quality without a tuition hike.

During her presentation to regents, Sullivan also had a warning: They might not have seen the worst. The university is preparing for dramatic fiscal challenges in 2011 and 2012, she said, based on the state’s economic outlook.

UM Health System Budget

Doug Strong, CEO of UM Hospitals and Health Centers, reported that the system’s operating surplus was lower than anticipated in the current fiscal year, coming in at $14 million on revenues of $1.8 billion. The system had projected a $56 million surplus for the year. For the fiscal 2010 budget, which begins July 1, they are forecasting a $33 million surplus on revenues of $1.9 billion.

Reviewing capital projects, Strong said the Kellogg Eye Center on Wall Street is set to open in January 2010, and the $108 million acquisition of the former Pfizer property, which the health system will pay for in part, closed earlier in the week. The massive Mott Children’s Hospital and Women’s Hospital currently under construction will be completed in 2012.

UM’s health system faces several challenges which will continue into the coming year, Strong said. A worsening economy increases the amount of uncompensated care provided by UM – both charity care and unpaid patient debt. A higher percentage of patients are being covered by federal programs like Medicare and Medicaid, which reimburse the health system at lower levels than do private insurers. A shift toward more outpatient care is generally good for patients, he said, but means lower revenues than the system would get from inpatient care.

To contain costs, the system has instituted a hiring freeze in its non-clinical areas and has reduced staff levels through attrition. Sixty employees were affected by job cuts, though the majority have found positions in other parts of the organization, he said.

Finally, Strong said federal healthcare reform could be on the table for the coming year – no one knows how that will play out, but it will surely be a factor in the future.

Athletic Department Budget

Athletic Director Bill Martin gave the final budget presentation of the meeting, and started by saying that this was the ninth time he has presented a budget to the regents. He joked that while the athletic department’s budget was much smaller than the health system’s, his presentation was always longer – that was true again this year.

Martin said the department has shown a surplus every year since he became athletic director in 2000 – under previous leadership, the department had been running a budget deficit. He noted that UM is one of only a handful of universities with a self-sustaining athletic department. For the coming year, he projects a nearly $9 million surplus on the $94 million budget. The department will end the current fiscal year with a projected $10.2 million surplus. Revenues come from ticket sales – including a projected $33.7 million for the coming football season – as well as corporate sponsorships and donations, among other sources.

Though growth has leveled off in 2009, mainly because of market losses in its endowment investments, the department has seen 16.5% annual growth in net assets from 2002 through 2008.  The department has operating reserves of about $27 million, and an endowment balance of about $46 million.

Looking ahead at capital improvement projects, Martin said the $226 million Michigan Stadium project is on track for completion in the fall of 2010, and several other capital projects – including the new soccer facility approved by regents earlier in the meeting – are in the works. A couple of major projects remain, Martin added, the largest of which is Crisler Arena, which hasn’t been touched since it was built in 1967. That will be the department’s next focus, he said.

At the end of Martin’s presentation, regent Andrea Fischer Newman said, “You’re in great shape – you don’t need anything from us.” “Just your support,” Martin replied.

Statements from Regents, and Their Vote

Prior to voting on several budget-related items, each of the eight regents took a speaking turn, with all but two – Andrea Fischer Newman and Martin Taylor – reading from prepared statements. Most expressed the same sentiments: Times are tough; the university is an important asset to the state and its future; it’s crucial to maintain the resources UM needs to be a national and international leader, while keeping a high-quality education accessible to students.

While regents were in agreement on these themes, two of them – Denise Ilitch and Julia Darlow – concluded that the university should not raise tuition, and that administrators could do more to cut costs and generate revenues in other ways.

Ilitch said the university needs to fix its budget from within, not on the backs of students and families. She was voting against the proposed budgets because “I think we can do better.” The university can not operate as though it’s immune from the state’s economic crisis, she said.

Darlow said the top priority is to support students and their families, and that holding down tuition won’t undermine the university’s financial position. As an example, she said, a 5.6% increase for resident undergraduate tuition will contribute only an additional $12.9 million, or less than 1% of the general fund total. They should be concerned about student debt, she said – financial aid and tuition restraint are needed.

Regent Katherine White noted that the university has a history of investing during difficult economic times – the law quad and Rackham graduate building were constructed during the Great Depression. Olivia Maynard said that the availability of financial aid had been important in her decision to support the budgets and tuition increase. No matter how each regent voted, they all cared deeply about the university, she said.

Andrew Richner said his son was now a high school senior, so he is more acutely aware of tuition costs. Speaking in support of the budget, he said he has served on the board 7 years, and during that time he’s watched state funding for the university drop from $365 million to $316 million. Larry Deitch noted that this was his 17th budget cycle as a regent, and that one of the reasons he decided to run again in 2008 was to help shepherd the university through this difficult economy, and to take the heat for raising tuition if necessary. Even if decisions are unpopular now, he said, their decision must be made for the long haul.

Andrea Fischer Newman described herself as a tuition hawk, but said that this year she was supporting the budget and tuition hike. State funding might be cut even more dramatically in the near future, she said, and the university needs to prepare for that. Yes, they can do more, she said, but they also needed to remember that so far, they’d been able to cut general fund costs without layoffs, and that was commendable in this economy.

Martin Taylor said that people who attended these board meetings might get the impression that the regents are just rubber-stamping decisions made by the administration – they’re not, he said. Regents had spent hours and hours discussing the budget over the past several months, he said. [Editorial aside: Coleman and several regents alluded to discussions at multiple budget meetings. We'll be following up to inquire about where these meetings were held and whether they complied with the state's Open Meetings Act requirements.] Any tuition increase is too much, Taylor said, but he was pleased that they could hold it at 5.6%. He said the quality education provided by UM is still the best deal in the world.

Outcome: All budgets and tuition increases were passed, with Ilitch and Darlow dissenting.

Present: Mary Sue Coleman (ex officio), Julia Darlow, Larry Deitch, Denise Ilitch, Olivia Maynard, Andrea Fischer Newman, Andrew Richner, Martin Taylor, Katherine White

Next board meeting: Thursday, July 16, 3 p.m. at  in the Fleming Administration Building, 503 Thompson St., Ann Arbor. [confirm date]