Morrill Hall – The University of Minnesota

University Inc. 

Part II

Guest Post by Michael McNabb 

[Mr. McNabb has posted on this topic earlier.  Part I. in the series is one of the most widely read posts on the Periodic Table, both at the University of Minnesota and at universities throughout the world. ]  

As the University transforms itself from an institution of higher education to a modern business corporation, it inevitably acquires the attributes of a for-profit corporation.  Here we will examine whether some of those attributes serve the advancement of learning and the instruction of youth.  (See the inscription above the entrance to Northrop Auditorium.)  

1.  The Costs & Risks of Non-Academic Business Ventures

The administration spent $9.3 million on planning the development of UMore Park by the end of fiscal year 2010 (on June 30, 2010).  In December 2009 the administration told the Regents that:

"Revenues are anticipated to be approximately $3.7 million in FY 2010 and $4.6 million in FY 2011, primarily related to gravel mining activities.  Revenues from mining activity beyond FY 2011 are estimated at $3.0 to $4.0 million per year, rising to as much as $7.0--$10.0 million per year after FY 2020.  Revenues from mining activities are subject to market conditions."

See the link to the December 10, 2009 report of the Finance & Operations Committee of the Board of Regents at item (5) of Financial Stringency .

The only part of that projection that was realistic was the final sentence.  In November 2010 the Regents approved a 40 year lease for mining at UMore Park.  The lease provides for a minimum royalty of $5 million (for the entire 40 year lease) plus annual royalties between $425,000 and $800,000.  See p. 2 of the November 11, 2010 report of the Facilities Committee of the Board of Regents at http://www.umn.edu/regents/minutes/2010/november/facilities.pdf and pp. 13-14 of the November 11, 2010 report of the Finance & Operations Committee at http://www1.umn.edu/regents/docket/2010/november/finance.pdf.

The projected balance for the central reserves fund for the University is $10.3 million by the end of fiscal year 2011(on June 30, 2011).  The balance should be $24.7 million to comply with the policy of the Board of Regents.  See p. 32 of the U of M budget for FY 2011 at

http://www1.umn.edu/regents/docket/2010/june/boardjune22.pdf.

The central reserves fund exists to provide funds for contingent, non-recurring expenses.  The senior administrators and the Regents have depleted the fund to a level almost 2.5 times less than the level required by official policy at a time when the University is facing a financial crisis.  The main reason for the depletion is the expenditure of more than $9 million to plan the development of UMore Park, the new business model for the corporate university that features the unique combination of a commercial gravel pit and a utopian residential community.  

This is what can happen in the new corporate university when senior administrators and Regents go moonlighting and use public funds to start business ventures on the side.  See University Inc.  It is easy for the senior administrators and Regents to take enormous financial risks on such business ventures when they are not spending their own money.

2.  Million$ for Advertising

Spending millions of dollars on advertising is another corporate attribute.  The University paid the Olson & Co. advertising firm $4.4 million for the Driven to Discover campaign for the period April 9, 2007 through June 30, 2009.  See the link in item (2) of Financial Stringency.  In October 2009 the Regents approved an additional $1 million payment to the firm.  Now the Regents have approved another $1 million payment to the firm for an "integrated marketing plan" [a/k/a "Because"] for the period November 30, 2010 through December 1, 2011.  This latest payment is just the first of two renewals for the contract. 

We are told that since the inception of the advertising campaign "public perceptions are shifting upwards" and that "continuation of these efforts is crucial as we work to leverage the brand's success and engage audiences around supporting the University during these challenging economic times."  See p. 12 of the November 11, 2010 report of the Finance & Operations Committee of the Board of Regents at:

http://www1.umn.edu/regents/docket/2010/november/finance.pdf. 

What has been "the brand's success" in generating support for the University?  From fiscal year 2007 to fiscal year 2011 the level of state appropriations has  declined from $709 million to $591 million.  See p. 3 of the March 2010 report "Financing the Future" at:

http://www1.umn.edu/regents/docket/2010/march/boardhandout1.pdf.

What about the effect of advertising on donors?  Here again the administration claims success.  See p. 3 of the February 3, 2011 report of the Faculty Consultative Committee:

Mr. Goldstein [president of the University of Minnesota Foundation] said it is black and white for him.  Driven to Discover has had a huge impact on their work.

See p. 3 of the February 3, 2011 report of the FCC at http://conservancy.umn.edu/bitstream/101142/1/11_02_03FCC.pdf.

So let us look at the "black and white"  to see if the historical facts support the claim of a "huge impact."  See the historical chart at p. 10 of the 2010 Report on Giving at http://giving.umn.edu/2010annualreport/assets/pdf/GivingReport2010.pdf.   In 2010 the University received $186 million from donors.  The University received the same level of donations in 2005 and 2006 before the advent of Driven to Discover.  The donations were much greater in 2007, 2008, and 2009 (between $250 million and $280 million).  What is the explanation for the larger amounts received in those years?  Mr. Goldstein himself gives us the answer:

Professor VandenBosch asked how giving compares to 2008 before the downtown.  They raised $280 million that year, Ms. Pickard reported.  Mr. Goldstein pointed out that 2008--2009 were great years [plural] in that the University received three of the largest gifts in its history:  $65 million from the Masons, $40 million from the Schultz family, and $50 million for the Amplatz Children's Hospital.  They have to look over longer horizons because it takes time to develop those kinds of gifts and they do not happen every year.

See p. 3 of the February 3, 2011 report of the FCC (emphasis added).

Yes, and when we look over longer horizons we see that the donations to the University in 2000, 2001, and 2003 (many years before the advent of Driven to Discover) were much greater than in 2010.  (In those years the University received between $210 million and $230 million compared to the $186 million in 2010.  See the historical chart at p. 10 of the Report on Giving.)   

History does not support the Driven to Discover claim.  The state of the economy and the private decisions of very wealthy families to leave a legacy are significant factors.

Yet the senior administrators and the Regents continue to spend millions of dollars on Driven to Discover/Because.

So we further enrich an advertising agency at the expense of teaching our children?  Every single student, parent, and faculty member would have spent the $6,400,000 and counting on the academic mission of the University.  Use the tuition paid by students and their parents and the state appropriations provided by the citizens of this state on the substance of education, research, and public service.  Then the public perception of the University will be outstanding.  Squander the public resources of the University and the public will be outraged at the misplaced priorities of the senior administrators and Regents.

The expenditure of millions of dollars on advertising is related to the goal of creating a perception of the University as "one of the top three public research universities in the world."  Yet the senior administrators and Regents all know that this is an illusory goal.  On September 11, 2009 the president and the provost presented the annual University Plan, Performance, and Accountability Report to the regents:

"While university rankings are often a topic of interest to the general public and influential in changing or, in most cases, reinforcing perception; these rankings have several limitations which make them inappropriate for strategic planning and monitoring progress.  Two of the most significant limitations are, first, that the rankings are not guided by any empirical and theoretical framework to justify the selection of measures and methodology employed, and second, that the rankings adjust methodologies annually making year-to-year analysis meaningless."

See p. 90 of the Report at:

http://www1.umn.edu/regents/docket/2009/september/board.pdf (emphasis added)(punctuation and grammar as in original). 

As one ancient statesman and orator asked:

Ubi est autem dignitas nisi ubi veritas?

(Where is there dignity unless there is honesty?)

Cicero, Epistalae ad Atticum (Letters to Atticus)

3.  The explosion of costs of administration

The new corporate University has numerous executives (administrators) with extravagant compensation.  The amount devoted to "institutional support" (also known as costs of administration) exploded at the University from $108.9 million for fiscal year 2005 to $234.3 million for fiscal year 2010.

The category of "institutional support" includes (1) compensation and benefits and (2) supplies and services.  The Table below shows the explosion of these costs.

University of Minnesota Institutional Support (Costs of Administration)
	2005	2007	2010
Compensation and Benefits	$96.5 M	$118.3 M	$172.9 M
Supplies and Services	$12.4 M	$31.0 M	$61.4 M
Total	$108.9 M	$149.3 M	$234.3 M

Source:  see p. 26 and p. 61 of the 2005 annual financial statement at http://www.finsys.umn.edu/controller/um_annualrpt2005.pdf; see p. 19 and p. 62 of the 2007 annual financial statement at http://www.finsys.umn.edu/controller/um_annualrpt2007.pdf ; see p. 12 and p. 73 of the 2010 annual financial statement at http://www.finsys.umn.edu/controller/um_annualrpt2010.pdf.

Compare the extraordinary increases in institutional support to the modest increases (or decreases) for instruction, academic support, and public service.  See p. 12 of the 2010 annual financial statement.
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The fuel for this explosion has been the skyrocketing tuition and fees.  The protests of students and their parents about the crushing debt of higher education do not register with the tone deaf senior administrators and Regents.  In November 2010, in the midst of the "financial stringency" declared by the president, the Regents approved $150,000 for compensation and benefits for the new position of deputy director of the Board of Regents and $215,000 for maintenance and "refurbishment" of Eastcliff.  See p. 11 of the November 11, 2010 report of the Finance & Operations Committee of the Board of Regents at http://www1.umn.edu/regents/docket/2010/november/finance.pdf. 

It may be claimed that the lavish compensation of the senior administrators is within the market range for those positions.  The Regents may have an unwavering confidence that the market always makes the correct determination in economic matters.  Alan Greenspan did when he was the chair of the Federal Reserve, as did the "Masters of the Universe" who were the chief executive officers of the Wall Street firms.  Their misplaced confidence combined with greed to bring our national economy to the brink of chaos.

Considerations of equity must balance economic considerations, and that is true in spades when the issue is compensation for the leaders of a non-profit corporation, such as an institution of higher education.  It is the public service of a non-profit corporation that qualifies it for tax exempt status.  See section 501 of the Internal Revenue Code.  Great leaders exemplify that public service.

4.  The Hidden Costs of Research

Research at the University is part of the reason for its existence, and research is essential for the continuing existence of many corporations.  This common attribute is not a problem.  However, there is a problem with the escalating costs of research.  The increases in the costs of research and the costs of administration are by far the fastest growing categories of expenses for the University.  See page 21 of the report of the Board of Regents on December 10, 2010 at:

http://www1.umn.edu/regents/docket/2010/december/board.pdf.

Those increases are the primary reasons for the huge increases in tuition.  See: Stop Using Students as ATMs. 

The administration uses the media to broadcast across the state the news of the funds that it receives for research.  (In 2010 the University received $823 million for research from the federal government and other sources.)  But those glowing press releases issued by the administration fail to report that those funds cover only part of the costs of research.   

The University classifies those costs as Facilities and Administrative Costs.  Those costs include the capital costs for the construction and maintenance of research facilities and the operating expenses for compensation and benefits of the researchers and staff.  In 2009 the University incurred $289 million in such costs and received $104 million for such costs.  So the University had net F & A costs of $185 million.  In 2009 the University received $95.2 million in gross revenues from research in the form of royalties.  See On The Hidden Cost of Research  

   

The information about these costs is available in University documents, but one has to search diligently to find the information.  The public pronouncements about research should also discuss the costs incurred by the University.  Then the University puts itself in a credible position to request state appropriations to support research.  See The Cost of Education

5.  Sports

The modern corporation leases stadium suites to entertain its customers. The senior administrators and the Regents construct a stadium that will be used for six games each year at a principal cost of $288.5 million.  In the 2006 "stadium session" the legislature approved $137 million in bonds for the construction of the stadium while it slashed the request of the administration for HEAPR bonds for the maintenance and renovaton of existing academic facilities from $80 million to $30 million.  Now the administration and the Regents are strong-arming the students (and their parents) to pay for part of the cost of construction by imposing a stadium fee on all 50,000+ students, most of whom will never attend a single game.

The athletic department also continues to receive annual multi-million dollar subsidies from the general fund of the University (the Operations & Maintenance fund).  In fiscal year 2010 the subsidy was $8 million; in fiscal year 2011 the subsidy is $7.8 million.  pp. 77 & 81 of the U of M budget for fiscal year 2011 (ending June 30, 2011) see:

http://www1.umn.edu/regents/docket/2010/june/boardjune22.pdf .

These multi-million dollar subsidies for sports continue as the administration cuts faculty positions and compensation and plans to cut academic programs. See: Three Minutes of Input

Conclusion

The creation of the new corporate University raises legitimate concerns.  It is up to each student, parent, and faculty member to address those concerns.  Talk to your state legislator. Talk to your student and faculty representatives in the University Senate.  Send letters and guest columns to the Minnesota Daily and to the local newspapers.  Discuss these concerns in your blogs and in committee meetings.  As the administration has unwittingly advised us:  Because the fate of tomorrow's U is in our hands today (one of the slogans of the "Because" campaign).

Michael W. McNabb

University of Minnesota B.A. 1971; J.D. 1974

University of Minnesota Alumni Association life member