Friday, January 19, 2018

The Billion Dollar (+) Administration

The (Over) Billion Dollar Administration

In December the University of Minnesota administration released its Administrative Cost Benchmarking Report for fiscal year 2017. The Expense Summary in the Report is a list of expenses for three broad categories: (1) direct mission activities (instruction, research, and public service); (2) leadership & oversight; and (3) mission support & facilities. Here are the administrative expenses for the second and third categories:

See p. 9 of the December 2017 FIN Docket.

Note that this $1 billion tally of the costs of administration does not include the expenses for the direct mission activities of instruction, research, and public service. Nor does it include any spending on the costs of facilities or for debt service.
The total operating expenses of the university for fiscal year 2017 were $3.7 billion. See p. 324 of the December 2017 BOR Docket. So the $1 billion costs of administration account for 27% of those total expenses.
Is 27% 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 past administrative overhead of 20% American private health insurance companies had the highest administrative costs of any health insurance system in the world. See, T.R. Reid, The Healing of America (Penguin Press 2009) at pp. 36--38.
The Affordable Care Act now requires health insurance companies to send rebates to customers 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 costs of administration if the legislature required 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.
In 2014 the president of the university promised the state legislature to reduce administrative costs by $90 million over a six year period. This reduction is simply slowing (slightly) the rate of increase in the costs of administration which have skyrocketed over the past 20 years. For example, the spending just on personnel in the leadership & oversight category soared from $197 million in fiscal year 2015 to $245 million in fiscal year 2017.
The administration asserts that the costs of administration are less than 9% of the university budget. This calculation of spending on administration is limited to expenses in the leadership & oversight category. But in calculating any reduction in costs of administration to meet its six year $90 million promise to the legislature the administration counts any reductions in expenses in the mission support category. See pp. 41-42 of the Dec 2016 FIN Doc And on the U of M web site the administration defines administrative costs as the combined costs for leadership & oversight and mission support. See Cutting Administrative Costs.
In the mission support category the administration spent almost $50 million on administrative consulting and professional services. The administration also spent almost $85 million more on consulting and professional services in the direct mission category. University administrators and consulting firms across the country have created a variation of the military-industrial complex.
We need to start to imagine a different way to operate and to finance higher education.
The state legislature should establish a task force with members of the higher education committees, university administrators and faculty and staff members, Minnesota Office of Higher Education staff members, and informed students and parents.
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 the operations of the university and the use of state appropriations on a continuing basis. This legislative liaison (or watchdog) should have the responsibility to review information produced by senior administrators, to collect additional information through 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

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