Saturday, June 16, 2012

 Morrill Hall - The University of Minnesota

On The Cost of Administration Part II

The U of M administration has (finally) made an attempt to determine the percentage of total compensation spent on administrative staff.  On May 1, 2012 the director of financial research and the chief financial officer described their analysis to the Senate Committee on Finance & Planning.  See the report of the Committee.

Here are the three employee categories that were classified as "administrative or operational overhead" and the percentage of total compensation paid to each category:  University leadership 6%; organizational support 24%; facilities staff 4%. 

A fourth category, higher education mission support, was not classified as part of administration.  This category includes student services, health services, and general mission support, and receives 14% of total compensation.  The rationale for excluding this category from an administrative classification is tenuous:
Mr. Kallsen [director of financial research] said they struggled with this category and agreed that one could make an argument that these employees are "institutional overhead."
See p. 7 of the May 1, 2012 report of the Committee.

In fiscal year 2011 the total compensation paid to all employees at the University was $1.97 billion.  To make a very conservative calculation of the percentage of total compensation paid to administrative staff, exclude the categories of higher education mission support and facilities staff.  This leaves the University leadership and organizational support categories classified as administrative.  Together those two categories received 30% 
($590 million) of the total compensation paid to all employees. 

In fiscal year 2011 the total operating expenses of the University were $2.9 billion.  See p. 11 of the 2011 annual report.   So administrative overhead ($590 million in compensation) consumes at least 20% of the operating expenses.  (This calculation omits from administrative costs the tens of millions of dollars spent each year on supplies and on compensation for outside law firms, advertising agencies, and countless consulting firms.)

Is administrative overhead of 20% too high for a non-profit institution of higher education?   It is difficult to find an answer within those institutions:

More specific metrics about the efficiency of certain administrative or spending practices are not widely available. . . . For example, there is no common understanding on how much each institution spends for each dollar it raises, no statistics about staffing ratios, and no available information on what other universities spend in financial transactions.
See the section on the Need for Better Metrics in the September 16, 2011 Inside Higher Ed report on Where Universities Can Be Cut.

So how does the cost of administration at the U of M compare to the world outside the campus?  Let us look at an industry that is notorious for high administrative costs--health insurance:

The monthly premium goes toward paying the worker's medical bills, but the insurance firms also soak up a significant share of the premium dollar to cover the costs of marketing, underwriting, and administration, as well as their profit. . . .
Most for-profit insurance companies maintain a medical loss ratio of about 80 percent, which is to say that 20 cents of every dollar people pay in premiums for health insurance doesn't buy any health care. . . .
Every organization, public or private, business or charity, has administrative costs.  But the U.S. private insurance industry has the highest administrative costs of any health care payer in the world.  Americans tend to believe that the private sector can manage any type of business better than government can.  That is not the case, though, when it comes to health insurance.  Medicare, the government-run-single-payer systems created by Congress in 1965 to pay for basic health care for the elderly, has administrative costs of about 3 percent; the single payer government system run by different provinces in Canada have about the same.  Britain's National Health Service, a system where government provides and pays for health care, has administrative costs of 5 percent.
T.R.  Reid, The Healing of America (New York:  Penguin Press 2009) at pp. 36-38.

If the U of M administration cannot be as efficient as Medicare, at least it should be able to have administrative overhead far less than the health insurance industry, an international leader in excessive costs of administration.  To achieve that modest objective there must be a change in the culture of the University administration.

Earlier this month I had lunch with a Regent.  He repeated the refrain of the administration that current levels of compensation for senior administrators are necessary in the market to attract "top talent."  This is the same justification used to pay extravagant compensation to Wall Street executives.  The "Masters of the Universe" who are the chief executive officers of the Wall Street firms have an unwavering confidence in the market.  Their misplaced confidence combined with greed to bring our national economy to the brink of chaos.

Have we not learned from the Great Recession just how wrong "the market" can be?  The disastrous failure of the market to determine the absence of value in securities based on subprime mortgage loans is described in horrific detail by Michael Lewis in The Big Short (New York:  W.W. Norton & Co. 2010).

The lavish compensation paid to senior administrators has placed the University at risk of losing the financial support of state legislators and the general public.  This year the legislature, outraged by the payments of millions of dollars to departing senior administrators, slashed the Capital Request submitted by the administration.  See The Incredible Shrinking Capital Request Part II.

There may be more bad news at the legislature next year when state appropriations are allocated.  The Pioneer Press issued a warning in its lead editorial on Sunday, March 11, 2012:

But here's the problem:  This is the tip of the iceberg.  Don't believe that institutions that spend tax dollars in this way in this instance ["transitional" compensation] don't spend like this in general. . . .
There's linkage between this situation, spending practices in general and the seeming inexorable cranking up of tuition costs year after year.  Remember that next budget cycle when the University cries poor.
Read more of the editorial in Vacation Pay $455,000.

At our lunch the Regent dismissed the state legislature with a comment that state appropriations now cover less than 20% of the operating costs of the University.   But that statistic is misleading in isolation.  In fiscal year 2002 the University received $684.7 million in state appropriations and had operating costs of $2 billion.  In fiscal year 2011 the University received $623.3 million in state appropriations and had operating costs of $2.9 billion.  The reason for the significant decline in the percentage of operating costs covered by state appropriations is the billion dollar explosion in spending over the past decade by the administration.  The fuel for that explosion is skyrocketing tuition that increased from a total of $293 million in fiscal year 2002 to $634 million in fiscal year 2011.  See Ten Year Review of University Inc.

It now takes scores of students (and their parents) paying full tuition to support a single senior administrator.  There should be substantial reductions in the annual compensation of senior administrators and in the sheer number of administrators.  If the administration does not voluntarily take such actions, then the legislture may compel such actions by slashing state appropriations just as it slashed the 2012 Capital Request. 

End Quotes

It is extremely important for academic leaders to remind universities, and to remind themselves, that [intellectual development] is why we are here.  We're a nonprofit.  We're not here to make money.  We're here to improve the lives of students.  We're here to create new knowledge and we're here to serve the people of Minnesota.  That's  what we're about.

To the best of my knowledge, no great scientific discoveries, no insightful social science tracts, and no novels have been produced in Morrill Hall.  No classes are taught in Morrill Hall.  No patients are made well in Morrill Hall. . . . Without authority invested where the real work of the University is done, the light of excellence will only grow dimmer.
President Mark Yudof  

See Tenth Anniversary of Inauguration.

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

1 comment:

William Messing said...

With regard to "If the administration does not voluntarily take such actions, then the legislture may compel such actions by slashing state appropriations just as it slashed the 2012 Capital Request.", it should be the function of the University's faculty to take the necessary actions. Unfortunately, the University of controlled by the administration and not by the faculty. At great universities the opposite is true. The faculty at Cambridge, Oxford, Harvard, Princeton, ... govern these universities in a manner than is unthinkable in Minnesota. This is certainly one of the reasons that the University of Minnesota will remain, for the foreseeable future, second rate.

William Messing
Professor, School of Mathematics
University of Minnesota