$tate of the U - A Parent's Perspective

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My friend and fellow alum, Michael McNabb writes another important guest post that is well worth reading by parents of prospective University of Minnesota students.  His prior essays on our university have been major contributions to framing the debate on the crucial question: What do we want for our University?

President Bruininks gives the perspective of the administration on the state of the University in his correspondence of June 14 to Regent Steve Sviggum.  Here is the perspective of a parent of four children who have received their undergraduate or professional degrees (or both) from the University since 2004.

(1) The President acknowledges that during the past 10 years the budget of the University has increased by $1 billion.  Yet the administration is cutting courses and faculty positions.  See Three Minutes at http://ptable.blogspot.com/2010/06/three-minutes-of-input-at-university-of.html#links.  And the administration plans to continue the elimination of academic programs and the replacement of professors with part-time instructors without tenure.  See Recommendation No. 4 (Narrow the Scope) at pp. 8, 33-34 of the June 2011 report of the President on Financing The Future at http://blog.lib.umn.edu/pres/news/June2011_TtU_CostProductivity_FINAL.pdf. 

During the same period the administration has displayed no mercy toward the students and their parents as it raised tuition at dizzying rates.  See Stop Using Students as ATMs at http://ptable.blogspot.com/2010/10/stop-using-students-as-atms-university.html#links.   The administration increased tuition so substantially that it more than offset the reduction in state appropriations.  Hundreds of millions of dollars of tuition flowing into the coffers each year together with hundreds of millions of dollars in state appropriations enabled the administration to increase its budget by $1 billion.  (In the current fiscal year the administration will rake in $808.3 million in tuition.  See the President's Operating Budget at p. 26 of the June 20, 2011 report of the Board of Regents at http://www1.umn.edu/regents/docket/2011/june/board620.pdf. )

The administration plans to continue using students and their parents as ATMs with endless reservoirs of money.  A recent report declares that "tuition is the revenue stream with the highest potential for significant, long term growth" and asks "what should tuition pay for when tuition revenue exceeds the cost of instruction."  See the link to the 2009 Report of the Future Financial Resources Task Force in On The Hidden Cost of Research at http://ptable.blogspot.com/2010/12/on-hidden-cost-of-research-michael.html#links; see also Recommendation No. 2 (Grow Tuition Revenue) at pp. 7, 51-52 of  Financing The Future.

This double whammy inflicted by the administration means that students and their parents now pay much more while the scope of the education available is reduced and the actual teaching of students is increasingly assigned to part-time instructors (or, cheaper yet for the University, to on-line instruction).

"The real issue is increasing the value that we the university bring to the state of Minnesota, to its stakeholders and to our students.  Increasing that value, communicating it and demonstrating it will be the major goal of my presidency."

President Eric Kaler in the July 7, 2011 issue of the Pioneer Press at http://www.twincities.com/ci_18423950 (emphasis added).

(2) The President claims:

Net Price for Twin Cities undergraduates has increased an average of 3.4% per year over 10 years.

See p. 59 of his report on Financing the Future (emphasis added). Let us examine the calculation of Net Price: 

The cumulative percentage increase per student, 2001-2010, in Cost of Attendance, grant/gift aid, and Net Price were quite different from the increase in tuition sticker price, Dr. Radcliffe explained.   The cost of attendance increased by 50% during these ten years; the Net Price increased only 34%.  The primary reason that the Net Price is increasing more slowly than the Cost of Attendance is because of significant increases in the size of the mean grant/gift award.  The Net Price, he said, is tuition minus financial aid.   His focus is on the net price; while the sticker price is relevant for some students, it is not for most.

See p. 5 of the June 7, 2011 report of the Senate Committee on Finance & Planning (emphasis added).

The administration includes student loans in its definition of "total financial aid."  See the definition under the heading "Improvements in Financial Support" on p. 12 of the report of the Provost entitled Achieving Excellence at http://www.academic.umn.edu/provost/reports/documents/Achieving_Excellence_2005-10.pdf 

So the calculation of Net Price by the administration does not reflect the economic reality facing the students (and their parents). It subtracts (disregards) the amount of the student loans that the students and parents will be paying off for years to come.

See the response of the Minnesota Daily at Cynical & Deceptive at http://ptable.blogspot.com/2011/03/minnesota-daily-nails-university-of.html#links. 

See also Student Debt at http://ptable.blogspot.com/2009/10/college-of-liberal-arts-dean-vision-of.html#links

(3) The President claims that there will be 74 senior administrators at the end of the 2010-2011 academic year. He defines senior administrators as the president, vice presidents, provosts,chancellors, deans and a few others. See p. 5 of his letter and note 6 in Financing The Future.

The Pioneer Press has a web site for Minnesota Public Salaries.  There is a link to the site in On The Cost of Administration at http://ptable.blogspot.com/2011/03/on-cost-of-administration-at-university.html#links.  The web site lists 9 provosts, 18 chancellors, 40 vice presidents, and 112 deans.  The site identifies the persons who hold those senior positions.  The number claimed by the administration is not even close to being accurate.  There are scores of administrators who receive hundreds of thousands in dollars in compensation each year.

In his letter the President does not discuss the compensation of the senior administrators. At the legislature he defends the compensation as within market range for such positions. This is the same justification used to pay tens of millions of dollars in annual bonuses to Wall Street executives. The President and the Regents may have an unwavering confidence that the market always makes the correct determination in economic matters. Alan Greenspan did when he was 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.

The law restricts the pursuit of personal wealth by the leaders of a tax-exempt organization (such as a non-profit institution of higher education). Among other measures, the Internal Revenue Code imposes an excise tax on excessive compensation paid to senior executives. See the Postscript below. Is the annual compensation of hundreds of thousands of dollars to scores of senior administrators at the U of M reasonable when students must incur tens of thousands of dollars in debt that will take years to repay in order to support that level of compensation?

Conclusion

Our system of higher education has contracted a malady that plagues our health care system.  The cost of health care in the United States is much higher than it is in any other country (whether measured as per capita spending or as a percent of GDP).  A major reason for this high cost is that our for-profit health insurance companies have by far the highest administrative costs in the world.  See T.R. Reid, The Healing of America pp. 34-43, 229  (New York:  Penguin Press 2009).

Each year hundreds of billions of dollars flow through each system.  The issue is not a lack of funds.  The issue is the allocation of those vast sums of money.  See University Inc. Part II at http://ptable.blogspot.com/2011/02/draft-as-university-transforms-itself.html#links .

Postscript

The law restricts the pursuit of personal wealth by the leaders of a tax-exempt organization (such as a non-profit institution of higher education):

No part of [a tax-exempt] organization's net earnings may inure to the benefit of an insider.  An insider is a person who has a personal or private interest in the activities of the organization such as an officer, director or key employee.  This means that an organization is prohibited from allowing its income or assets to accrue to insiders.  An example of prohibited inurement would include payment of unreasonable compensation to an insider.  Any amount of inurement may be grounds for loss of tax-exempt status .

See pp. 2-3 of the IRS Compliance Guide for 501(c)(3) Public Charities (Publication 4221-PC) at http://www.irs.gov/pub/irs-pdf/p4221pc.pdf (emphasis added).

Section 4958 of the Internal Revenue Code also provides for an intermediate sanction that may be imposed on executives of tax-exempt organizations who receive excessive compensation:

Congressional hearings in 1993 produced several outrageous instances of excessive compensation.  Though the existing federal law could penalize an organization by removing recognition of its tax exempt status, the IRS rarely, if ever, imposed such a penalty, for the removal of exemption was like hanging someone for stealing a loaf of bread.  It was too draconian for the wrong, and it hurt the organization rather than the individual who engaged in the private inurement.  In response to this problem, Congress adopted the approach of the private foundation rules, imposing a graduated excise tax on "excess benefit transactions" involving 501(c)(3) and 501(c)(4) organizations other than private foundations, a so-called intermediate sanction that replaced the ultimate penalty of revocation of tax exemption.

Fishman, Wrong Way Corrigan and Recent Developments in the Non-Profit Landscape, 76 Fordham L. Rev. 567, 585 (2007) at http://ir.lawnet.fordham.edu/flr/vol76/iss2/3. (Click on download in the right hand column.)

In 2005-2006 the IRS conducted a compliance check on executive compensation in tax exempt organizations.  Although high compensation was usually determined to be appropriate, the IRS did assess $21 million in excise taxes against 40 executives in 25 organizations on the basis of excessive compensation.  See p. 1 of the March 2007 IRS Report on Exempt Organizations Executive Compensation Compliance Project at http://www.irs.gov/pub/irs-tege/exec._comp._final.pdf.

In October 2008 the IRS commenced a compliance check on tax-exempt colleges and universities.  Executive compensation was a major area  of inquiry.  The IRS requested information on the compensation of the six highest paid officers, directors, trustees, and key employees (ODTKEs).  The IRS survey included 91 large universities.  The average compensation of the highest paid ODTKE at large universities was $428,000 while the median compensation was $361,000.  See Figure 65 on p. 55 of the May 2010 IRS Interim Report on Tax-Exempt Colleges and Universities Compliance Project at http://www.irs.gov/pub/irs-tege/cucp_interimrpt_052010.pdf. 

Over the past several years the compensation of President Bruininks was an annual salary of $455,000 plus an annual contribution of $150,000 to his retirement account.  The compensation of President Kaler will be an annual salary of $610,000 plus an annual contribution of $50,000 to his retirement account starting in his second year. 

Michael W. McNabb
University of Minnesota B.A. 1971; J.D. 1974
University of Minnesota Alumni Association life member

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