U-M prepares for financial challenges
U-M is weathering the U.S. recession better than many of its peers because of some significant steps the University has undertaken in recent years.
"The University is not immune from the outside world. Fiscal year 2010 is likely to be very challenging," cautioned Philip Hanlon, vice provost for academic and budgetary affairs, speaking at a Dec. 1 College of Engineering (CoE) faculty meeting. "We are carefully monitoring U-M's financial situation and doing advance budget planning with the regents, executive officers and deans."
A conservative endowment-spending rule and prudent investment strategies have helped position the University for the challenges ahead, Hanlon said. Peer institutions that base their annual endowment payout on a three-year average market value or less or that rely on endowment income for a large part of their operating budget have been among the hardest hit by the market downturn and recession, he explained. Endowment income accounts for only about 7.5 percent of the operating budget of U-M's academic enterprise.
The University is helped by its prudent financial practices and multi-year commitment to cost containment. "When you work hard at cost containment over a period of years, you find ways to do it more effectively, and that has helped put us in a better position than many of our peers," Hanlon said.
Still, U-M continues to carefully monitor the economy. The University's Research Seminar in Quantitative Economics forecasts the multi-year recession will hit bottom sometime in 2009. Michigan will be particularly hard hit in 2010, with unemployment projected to be more than 10 percent and state general fund tax revenues projected to decline.
Gov. Jennifer Granholm and legislative leaders are working on details of an executive order to deal with Michigan's anticipated revenue shortfall.
What does the economic downturn mean for U-M?
In late November, the U-M Health System announced 80 employees will be notified of a reduction in force affecting their positions. Hanlon said the Health System is seeing an increase in the number of uninsured patients due to economic conditions in the state.
The University likely will see mid-year cuts in the state appropriation, which will require it to delay or abandon some new initiatives. Anticipating increased need for financial aid, Provost Teresa Sullivan has set aside funds for students whose financial situation suddenly has worsened.
During the CoE faculty meeting Khalil Najafi, professor of electrical engineering and computer science and of biomedical engineering, asked if students still are able to get loans. In addition to funds U-M has set aside, Hanlon said, JPMorgan Chase, Citibank and Sallie Mae have ample funds available for student loans although the costs of borrowing have increased since last year. Students with a good credit rating also can borrow the entire cost of their education through Federal Plus Loans, which have a fixed 7.9 percent interest rate and charge a 2.5 percent fee.
These days, Hanlon, the Donald J. Lewis Collegiate Professor of Mathematics, is busy modeling reduction scenarios for the fiscal year 2010 budget, with a sharp focus on affordability for students and their families.
He anticipates a possible drop in the state appropriation and in revenue from external funding sources, a growing need for financial aid, and relatively low inflation (due to a slight decline in energy costs and a Consumer Price Index increase below 2 percent).
"We will need to work together to craft creative solutions. The next year or two will be leaner than in the recent past," Hanlon said. One good sign: As of Dec. 1, enrollment applications were up 2.7 percent compared to the same time a year ago.
Responding to a question from Nancy Love, chair of the Department of Civil and Environmental Engineering and professor of civil and environmental engineering, about how the state's financial situation will affect faculty recruitment, Hanlon said: "It certainly impacts spousal placements and contributes to a belief that the University must be in financial difficulty." However, he asked that faculty members help by letting colleagues nationally know that the University is financially sound, and the University continues to place a high priority on recruiting and retaining excellent faculty.
"We will meet this challenge in a strategic way and don't anticipate a hiring freeze," Hanlon said. U-M is on course to hire 100 junior faculty to work on interdisciplinary projects. "The funding for the new hires is in place, another example of our Midwest conservatism."
Keeping financially afloat
Careful planning has prepared U-M for the challenges ahead. Here are a few examples:
• Cost-containment efforts pared $135 million from the operating budget during the past six years and continue to yield savings each year. U-M now self-insures health and pharmacy benefits for employees instead of contracting with an insurance company, negotiates savings with vendors for large purchases, and saves on heating and cooling by using energy-efficient regional chillers.
• A more conservative endowment-spending rule limits University spending to 5 percent of the endowment's average market value over six to seven years. This longer-than-normal market averaging period helps smooth the yearly distribution from endowment and protects the endowment and payout from market volatility.
• U-M's prudent investment strategy features a highly diversified portfolio, arrangements with financial institutions that guarantee sufficient liquidity, and the highest bond rating from both Moody's (Aaa) and Standard & Poor's (AAA). High bond ratings improve the marketability of U-M's debt and allow the University to borrow money at favorable interest rates.
• Investments in Development, the Office of the Vice President for Research and the Business Engagement Center are helping to generate more external funding.