Sunday, October 26, 2014

The Management of the University of Minnesota

The Management of the University 

 1. Internal Audit.

 In September 2014 the Audit Committee of the Board of Regents received an internal audit update. The expected implementation rate of outstanding essential recommendations since June 2014 was 40%. You might think that the U of M administration would easily clear such a low bar. You would be wrong. The actual implementation rate of 23% did not even come close. See p. 8 of the October 2014 BOR FRI Docket.

The report on this dismal performance did not rouse the somnolent Regents who asked nary a question. But there are serious questions to ask. What is the effect of the failure to meet even the low expected implementation rate for essential recommendations? What are the essential recommendations that have not been implemented? Are the multiple levels of administration at the University an obstacle to achieving even essential goals? How many resources of the University are being squandered as a result of the failure to implement the recommendations?

2. External Audit.

The Deloitte Consulting firm, the external auditor for the University, is about to expand its role (and profits) by providing advisory services for the Enterprise Asset Management project. For this service the University will pay to Deloitte the sum of $1,744,000 in fees and expenses.

When this matter was presented to the Audit Committee of the Board of Regents in September 2014 Regent Brod asked about the effect of this contract on the role of Deloitte as an external auditor. An associate vice president responded that the appearance of independence is at the heart of the issue in retaining an external auditor. He acknowledged that there is general guidance for the examination of non-audit services but no clear dollar amount or ratio to determine when the independence of the external auditor may be affected. He promised to provide the general guidance at a later meeting.

So did the Regents decide to wait until they had at least some general guidance on whether $1.7 million (and the prospect of millions more in income for non-auditing services now that the wall has been breached) might cause an external auditor to go easy on the administration on future audits? No, instead the docile Regents voted unanimously to approve the contract. See p. 9 of the October 2014 BOR FRI Docket.

As the external auditor Deloitte knew that the U of M spent more than $37,000,000 on administrative consulting and professional services in fiscal year 2014. See line 18(d) of the Expense Summary in the Administrative Cost Benchmarking Report at p. 77 of the October 2014 BOR FIN Docket. Having seen the explosive growth of the university administration--consulting firm complex Deloitte hopped on the gravy train. Who now is left to be vigilant about the escalating costs of administration?

 3. Facilities Management. 

The condition of 50% of the facilities at the University is below average or worse. It would require an investment of $1 billion to bring all facilities to at least fair condition. In September 2014 the associate vice president in charge of facilities management informed the Finance & Operations Committee of the Board of Regents that the current approach to facilities management is unsustainable. Expenses have increased by 75% over the last decade. The increase is due to rising service costs and the addition of space even though there has been a reduction in operations cost per square foot. See p. 23 of the October 2014 BOR FRI Docket.

Although the addition of space is a major factor in the soaring expenses, the Regents are planning a 10 acre Education District in downtown Rochester that would accommodate 587,000 square feet of development. See p. 60 of the October 2014 BOR FAC Docket.

Constructing the Education District before the administration comes to grips with the current unsustainable approach to facilities management will accelerate the deterioration of existing facilities. See Crumbling Academic Infrastructure.

4. Budget Management.

For the last three fiscal years the administration has presented an Administrative Cost Benchmarking Report to the Regents. The Report divides expenses into three broad categories: direct mission activities (instruction, research, and public service); mission support and facilities, and leadership and oversight.

 Once again in fiscal year 2014 there were net increases in all three categories. See the Report at pp. 72, 74, and 76 of the October 2014 BOR FIN Docket. Vice president Pfutzenreuter noted that savings within each category "are masked by program growth and service increases." See p. 79 of the Docket (emphasis added).

Yes, the University budget operates like a giant balloon. When one side is pinched to reduce expenses, another side expands with even greater costs. See The Phantom Reduction Part II.

Just as the Wall Street bankers created a housing bubble using other people's money, the senior administrators and the Regents have created a higher education bubble. The U of M budget exploded from $2 billion in fiscal year 2002 to $3 billion in fiscal year 2012. See p. 18 of the 2002 annual financial report and p. 15 of the 2012 annual financial report. Skyrocketing tuition far exceeded the reduction in state appropriations. See Ten Year Review of University Inc.

When this budget balloon bursts, the senior administrators and the Regents will walk away unscathed just as the investment bankers did. The students (and their parents) will suffer the harm from the student loan debt that inflated the balloon. They will be shackled by that debt for many years (or even decades for many students in the graduate and professional schools).

5. Cost of Administration.

Many hours are wasted on unneeded and unexplained paperwork and permissions, making University authorities seem both oppressive and out of touch. 
U of M Strategic Plan at p. 84 of the October 2014 BOR FRI Docket.

The Expense Summary in the Administrative Cost Benchmarking Report for fiscal year 2014 is a list of personnel and non-personnel expenses for the three broad categories of expenses: direct mission activities (instruction, research, and public service); mission support and facilities; and leadership and oversight. Here are the administrative expenses for mission support and facilities and leadership and oversight:

The Report shows total operating expenses of $3,171,787,000 for fiscal year 2014. So the cost of administration ($918,956,000) accounts for 29% of those total expenses. See the Expense Summary in the Report at p. 77 of the October 2014 FIN Docket.

 Is 29% in administrative overhead excessive? There is no national system for comparing administrative costs at universities so we have to look to the world outside the campus. With an administrative overhead of 20% American private health insurance companies have the highest administrative costs of any health insurance system in the world. See T.R. Reid, The Healing of America (New York: Penguin Press 2009) at pp. 36--38.

 The Affordable Health Care Act now requires health insurance companies to send rebates to consumers if administrative costs and profits consume more than a set percentage of premiums (20% for individual and small group markets and 15% for large group markets). See the August 17, 2014 Star Tribune report on Health Insurers Must Pay Up or Pay Back.

 It is likely that there would be an immediate and sharp reduction in the cost of administration if the legislature were to require the University to send rebates of state general appropriations to the state treasury if the U of M administrative costs exceeded 15% of its total expenses.

 The U of M administrators might resist by asserting that the University enjoys the privilege of a separate constitutional status. Then it is also likely that the citizens of Minnesota, outraged by the spectacle of highly paid senior administrators claiming special privilege, would vote to abolish that status. See The Cost of "Top Talent" Part III.

6. Finding Solutions. 

 Our system of higher education is broken. Over the past decade we have seen escalating costs, skyrocketing tuition, and staggering student loan debt.

Freezing tuition in return for an increase in state appropriations is a shell game and not a solution.

The U of M administration should revise its new Strategic Plan to include the steps necessary to reduce the escalating costs of higher education--not just ways to reduce the rate of increase but to actually reduce the costs. The very expensive report produced last year by Huron Consulting fails too often to describe the specific actions necessary to get from point A to point B just as it fails too often to provide even ball park estimates of the costs of implementing its recommendations and the savings to be realized. See The $495,000 Report.

The state legislature should obtain a commitment from the University to review the increase in administration over the past 40 years. If there has been an increase in the number of administrators that is disproportionate to any increase in the number of students or in the level of research, we should ask why.  If there has been a substantial increase (in constant dollars) in the compensation of any administrator, we should ask why.

We should also compare the compensation paid to senior administrators in state government who have similar qualifications and duties to University administrators. For example, the annual salary of the state commissioner of human rights is $108,000. The annual salary of the vice president at the U of M Office of Equity & Diversity is more than twice that amount at $225,000. See Nice Work If You Can Get It.

Each biennium the citizens of our state now invest more than $1 billion in the U of M in general appropriations. With that much at stake the legislature should appoint a qualified person to monitor on a continuing basis the operations of the University and the use of state appropriations. This legislative liaison (or watchdog) should have the responsibility to review the information produced by senior administrators, to collect additional information through his or her own independent research, and to meet with all groups at the University so that the perspectives of other well-informed and thoughtful members of the University community are presented to the legislature.

 Michael W. McNabb

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

 University of Minnesota Alumni Association life member