Sunday, October 18, 2015

The Management of the University Part II

The Management of the University Part II

1. Internal Audit

 Table for technology vendor audit

In September 2015 the U of M Office of Internal Audit presented its quarterly report to the Board of Regents. The expected implementation rate of outstanding essential recommendations 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 16% did not even come close. See p. 135 of the Sep 2015 AUD Docket. The actual implementation rate for the previous quarter was 13%. See p. 46 of the June 2015 AUD Docket.

What is the effect of the failure to meet even the low expected implementation rate for essential recommendations? Consider the conclusion of the Internal Audit Office in its recent report on technology vendors:
     The University is using an increasing number of vendors to provide technology services where the vendors are responsible for managing systems and/or have access to University data. Despite increased use of these services, controls and processes for performing due diligence of these vendors is inadequate. The University has insufficient directives and oversight for technology vendor management. Units are responsible for determining due diligence processes independently, leading to varied and often inadequate processes.

How many resources of the University are squandered as a result of the failure to implement even essential recommendations? Who is responsible at the highest level of the U of M administration for ensuring implementation? Who should be held accountable?

2. Facilities Management

Map of campus 

In September 2014 the associate vice president for facilities management informed the Regents that the current approach to facilities management is unsustainable. See p. 23 of the Oct 2014 BOR FRI Docket. Today approximately one-third of the buildings on the Twin Cities campus (7.7 million square feet) are rated in critical or poor condition. See p. 107 of the Sep 2015 FAC Docket.
The administration is planning to submit to the state legislature a 2016 Capital Request in excess of $300 million. Consider the descriptions of some of the current facilities in the Capital Request:

     $100 million health sciences facility on Minneapolis campus. The poor condition of the University's educational facilities are undercutting the competitiveness of University programs. Almost all of the educational and training facilities for the Medical School and other health professional schools are over 40 years old and are in need of major renovation and renewal or, simply, replacement. Accreditation bodies are citing deficient facilities in their reviews, student applicants are citing the poor educational facilities for their decisions to enroll at other institutions, and student dissatisfaction with the educational facilities is high.

     $42 million chemistry and engineering building on Duluth campus. The existing Chemistry building was the first building constructed at UMD in 1948 and was not designed to be dedicated to chemistry. Utility infrastructure is outdated, frequently in need of repair, and cannot support 21st century science. The building has numerous deficiencies, including a lack of adequate eye washers and showers, lack of chemical storage space, rusty and poorly ventilated under the hood storage, very old and poorly designed labs, lack of adequate wall space for chemical storage cabinets and gas cylinders, lack of adequate supply of wall or bench mounted electrical outlets, and water leaks. In addition, students have noted corroded gas lines and gas valves, poor air handling systems, and an elevator which is often out of service. Many of these have the potential to compromise the health and safety of building occupants. 
     $6.6 million plant research facility on St. Paul campus. The existing greenhouse is a fragile structure, costly to operate and rife with problems that are expensive to fix. Environmental, structural and functional deficiencies have resulted in escalating maintenance and repair costs, and serious safety issues. Failure of seals around large glass panes allows glass to shift and fall. High humidity levels, resulting in extensive cracking and spalling of the exterior concrete masonry unit knee walls, and freeze and thaw cycles have heightened the rate of deterioration of the greenhouse. This facility has the smallest footprint of any like buildings on the St. Paul campus but has the highest energy use and the second highest CO2 emissions. Gaps in the structure's foundation further compromise the plant collections and student projects as a result of insect migration.
pp. 132, 134 and 137 of the Sep 2015 FAC Docket
(emphasis added)

The administration declares that "at a world class university it is unacceptable to have people study, live, work or receive care in buildings classified as poor or critical." See p. 60 of the Sep 2015 FAC Docket. Indeed. See Crumbling Academic Infrastructure.
How did this happen? Too many resources have been allocated to the construction, operation, and maintenance of buildings that are (at best) secondary to the purposes of an institution of higher education, such as a recreation center, alumni center, football stadium and, coming soon, a massive "athletes village." Too many resources have also been allocated to the black hole of costs of administration. See section 4 below.
Who is responsible at the highest level of the U of M administration for the allocation of resources? Who should be held accountable?

3. Budget Management

In August 2015 Standard & Poor's revised its outlook on U of M debt from stable to negative:
"The negative outlook reflects our opinion that increased debt issuance over time, coupled with weakness in financial operations, could pressure the debt ratings on UM," said Standard & Poor's credit analyst Jessica Wood.
The university's total debt has increased during the past few years, and UM's plan to issue approximately $260 million in new debt will increase its total debt to $1.67 billion by fiscal year 2017, inclusive of state-supported debt.
See the Pioneer Press report: UMN Debt Prompts Negative Outlook From S &P.
Unfazed by this negative assessment, in October the Regents approved the plan of the U of M president to incur even greater debt for capital projects in fiscal year 2018 ($194,888,000) than the University will incur in fiscal year 2016 ($123,829,000) or in fiscal year 2017 ($99,556,000).
The debt to be incurred in fiscal year 2018 (commencing on July 1, 2017) includes: athletic village long term debt $89,470,000; athletic village short term debt $36,560,000; and a new track $20,000,000.
See p. 32 of the Oct 2015 FIN Docket,  See also the Pioneer Press report on Ski-U Mah Turning Into IOU With $290 Million Debt Load.
So the president and the Regents have placed at risk the credit rating of the University--in part so that they can engage in the sports entertainment business. This is what happens when there is no accountability for persons making decisions to spend other people's money.
This void of accountability has generated increasing financial risks at institutions of higher education across the country. In 2008 and 2009 the consulting firm Bain & Co. examined the finances at the University of California (Berkeley), Cornell University, and the University of North Carolina. In a report in 2012 Bain observed that the operating principle for universities has been the "Law of More":
     Many institutions [of higher education] have operated on the assumption that the more they build, spend, diversify and expand, the more they will persist and prosper. But instead the opposite has happened: institutions have become over leveraged. Their long term debt is increasing at an average rate of approximately 12% per year, and their average annual interest expense is growing at almost twice the rate of their instruction-related expenses (see Figure 5). In addition to growing debt, administrative and student service costs are growing faster than instructional costs. And fixed costs and overhead consume a growing share of the pie (see Figure 6).

 (emphasis added).

Just as the Wall Street bankers created a housing bubble using other people's money, the senior administrators and the Regents at the U of M have created a higher education bubble using both student loan debt and institutional debt. 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 harm from the student loan debt that inflated the balloon. They will be shackled with that debt for many years (or even decades for many students in the professional schools). And the citizens of Minnesota will pick up the tab for the huge institutional debt.

4. Costs of Administration

The Expense Summary in the Administrative Cost Benchmarking Report for fiscal year 2015 is a list of personnel and non-personnel expenses for three broad categories of expenses: (1) direct mission activities (instruction, research, and public service); (2) mission support & facilities; and (3) leadership & oversight. Here are the administrative expenses for the second and third categories:

The Report shows total operating expenses of $3,243,350,000 for fiscal year 2015. So the costs of administration ($969,628,750) account for 30% of those total expenses. See the Expense Summary in the Report at p.46 of the Oct 2015 FIN Docket.
Is 30% 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 administrative overhead of 20% American private health insurance companies had the highest administrative costs of any health insurance system in the world prior to the enactment of the Affordable Care Act. 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.
President Kaler promised the state legislature to reduce administrative costs by $90 million over a six year period. Such a reduction will simply slow the rate of increase in the costs of administration. Those costs continue to rise despite the reduction in certain administrative expenses.
Moreover, the reduction of certain administrative expenses will not reduce the U of M budget by a single penny. The president intends to simply spend the $90 million on "mission" and "mission support." See The Phantom Reduction.

5. Finding Solutions

A dismal rate of implementation of essential recommendations of the internal auditor. Crumbling academic infrastructure. A black hole of costs of administration. And no accountability for the highly paid senior administrators in charge of the management of the U of M.
The current Troubles at the U of M have been years in the making. These Troubles are not random problems. There has been a systemic failure of management.
The U of M president has the greatest responsibility and should have the greatest accountability. Many of the Troubles had their origin in decisions of Robert Bruininks and then increased in intensity as Eric Kaler failed to make course corrections. A prime example is the Markingson case. See A Restoration of Trust Part II.
The Regents do not provide effective oversight. They rely on the senior administrators to sift through the volumes of information about the operations of the University. So they see only the information selected by the administrators. They develop a bond with the senior administrators with whom they spend most of their time on campus. So as a group they tend to dismiss the perspectives of other persons (on the rare occasions when they hear other perspectives).
Consider the annual Plan, Performance, & Accountability Report that senior administrators present to the Regents (and to the public). The annual report is full of laudatory assessments of the work of the administration. It is rare to find even a mention of a problem, much less an analysis of the problem and a discussion of possible solutions. For example, the annual reports do not mention the irreparable harm to agricultural research inflicted by the ill-conceived plans for UMore Park. See More on MoreU Park and MoreU Park Fiasco. How is it possible to hold the senior administrators accountable if critical assessments are omitted from their reports?
Our system of higher education is broken. Over the past decade we have seen escalating costs, skyrocketing tuition, and staggering student loan debt.
The high tuition high financial aid experiment has failed the vast majority of students and their parents. It has vaulted many of U of M students into the top tier for student loan debt notwithstanding the ballyhoo by the administration about the Promise Scholarship program. (This was a predictable result of the experiment as college administrators classify student loans as "financial aid.") See Student Debt: Fiction v. Fact Part II.
We need to find a better 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, staff from the Minnesota Office on Higher Education, and informed students and parents.
The work of the task force should include an analysis of the rise in the costs of 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 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 University administrators to the compensation of senior administrators in state government who have similar qualifications and duties. For example, the annual salary of the state commissioner of human rights is $145,000 (after a large raise in July 2015). The annual salary of the vice president of the U of M Office for Equity & Diversity is more than 50% greater at $230,700. 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

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