The University Record, May 6, 1997

Faculty Perspectives

The Budget Study Committee - A Three-Year Review

By Elizabeth A. Duell,
Chair of the Budget Study Committee

The Budget Study Committee was established as a standing committee of Senate Assembly in March, 1994. Prior to that, it had functioned as a joint effort of the AAUP and several members of Committee on the Economic Status of the Faculty (CESF). It has presented three reports: one each spring since 1994. The present article points out highlights of these reports.

The Committee's goals. The main goal has been to gain an understanding of the University's budget and to inform the faculty of the budgetary features affecting them most. The Committee has also sought to find problem areas in the budgets and to alert the faculty and administration to the need for attention to these areas. It has given high priority to the well-being of students and studied their financial needs.

The Operating Budget. This has three principal components: the General Fund, the Medical Fund and the Restricted Fund (used mainly for research activities). From 1985-86 to 1995-1996 the total operating budget has gone from about $1.1 billion to about $2.5 billion, with less growth in the General Fund than in the other two funds. Over this period tuition revenue grew at more than twice the cost of living, from $169 million to $455 million. Faculty salaries barely kept up with inflation. A major reason for the increasing expense budgets (rising about 10 percent a year at a time when inflation averaged about 4 percent) was the expansion of the administrative staff, which apparently occurred at every level from departmental to that of the highest executive office. The Committee has pointed out undesirable implications of the rapid increases in tuition and the need to avoid them in years to come.

The Committee made comparisons of the University's budgets with those of 11 similar institutions and found that the University had one of the highest rates of tuition increases and one of the highest values of net tuition (tuition minus student aid). Other information about these 11 institutions led to the conclusion that operating costs and the rate of increase of these costs at Michigan are relatively high. Another problem area surfaced in 1994-95, when revenues in the Medical Fund began to decrease.

The Committee has pursued the matter of rapid growth of personnel and salaries of administrative versus instructional staff. It found that a "life-cycle factor" partly explains the excess in salaries. If one controls for inflation, then most faculty members follow the same salary cycle, starting as assistant professors at low salary and retiring as full professors at a salary about double the starting salary. However, newly appointed administrators typically start with the salary of those whom they replace, which is much higher than the starting salary of those persons. The matter of numbers of administrators also was pursued and the Committee made proposals for decreasing these numbers and for decentralizing some decision-making.

The Capital Budget. The Committee has concentrated on the vast construction program of recent years and has asked: 1. How was this funded?

2. How does it affect the operating budgets?

In a total of 100 construction projects beginning after 1979 that were studied, roughly equal financial support was obtained from the State of Michigan Building Authority, gifts, program revenues and loans. The loans were comprised of bonds issued by the University, to be repaid from program revenues, gifts, student fees and investment income. It appeared that the impetus for carrying out so many projects was the availability of gifts and state grants of exceptional extent. The Committee has not yet obtained a clear explanation of how program revenues produced the amounts mentioned.

Current operating budgets are impacted by the cost of repaying construction loans. As with the federal government, interest the University pays on the accumulated debt is not available to pay current operating expenses. An additional burden is the cost of operating the new facilities to provide heat,

air-conditioning, electric power, water and maintenance. By examining data presented to the State of Michigan in a request for such operating funds, the Committee determined that roughly 4 percent of construction cost is needed to operate a new building in its first year of use, and that this sum typically rises with inflation. In 1995 the Committee was able to test this estimate of operating cost on several buildings, with the aid of remarkable new software, FMIS (Facilities Management Information System), which the Plant Department made available.

A faculty member who assisted in a major way in developing this software (Prof. Mojtaba Navvab) then joined the Committee and has greatly enhanced the Committee's ability to study questions about operating cost. The tests have generally confirmed the 4 percent figure, with some variations; some buildings, because of their design or because of the way in which energy use is managed, have operating costs deviating significantly from the 4 percent value.

Since new construction in the last decade has cost over a billion dollars, well over $40 million has been added to operating expenses. This cost, as well as that of debt retirement, reduces the funds available for faculty salaries, purchase of books and journals for the library and assistance to students, and hence should be of concern to all members of the University community. The Committee concluded that caution should be exercised in deciding to proceed with construction of a new building; the availability of construction funds should be weighed against the cost factors cited, as well as against criteria of need.

Prof. Navvab's skill in using the FMIS software has permitted him to propose a variety of steps to increase the efficiency of building use and to continuously monitor that efficiency. His very practical program is being implemented, and his work deserves the recognition and gratitude of the community. (Details are provided in the 1996 report of the Committee and will be amplified in subsequent reports.)

Along with its study of the operating cost of new buildings, the Committee studied the effect of renovations on old buildings. In many cases renovations are intended to improve efficiency. It was found that the results are mixed: in some cases, renovations increase operating costs.

Since student enrollment has been rising over recent years, the Committee asked how total floor space assigned to laboratories, offices and classrooms has changed from 1989 to 1996, a period in which much construction was carried out. It was found that, for the Ann Arbor campus, the space for offices and laboratories increased by about 10 percent, but the floor area for classrooms decreased by about 1 percent. This finding is paradoxical and the Committee seeks an explanation for it.

Budget Effects on Students. The Committee investigated the effect on students of the rapid tuition increases noted above. Eight questions were posed about these effects:

1. The extent of student borrowing;

2. The extent to which students take on outside jobs;

3. To what extent they live at some distance, to save on rent;

4. The amount of financial aid received;

5. The typical accumulated debt of graduating students;

6. The extent to which No. 5 influences choice of career;

7. The experience of graduates in obtaining employment;

8. To what extent students drop out for financial reasons.

Partial answers to these questions have been obtained from some survey results provided by the Office of Student Affairs. In general, the implications of high tuition were found to be major, raising serious questions about how students' education and career choices were being affected. The topic was pursued by inviting seven students representing various organizations to meet with the Committee and discuss the eight questions posed above. They mentioned many difficulties: inadequacy of financial aid, high living expenses, accumulation of debt, conflicts between employment and pursuing their majors, especially great burdens on graduate students, difficulty in getting loans, and difficulty in getting research grants. Many referred to the "black hole" in which some students found themselves: having parents whose incomes were too large to make government grants and loans available but not large enough to be able to afford the high tuition.

Value Centered Management. The Committee has followed the plans for introducing this budget system, locally referred to as VCM, and contacted one professor at each of three universities employing a version of the system. At Indiana University it was reported that their version, called RCM (Responsibility Centered Management), does lead to some improvement of efficiency but also causes problems. A unit is discouraged from introducing a program of general benefit to the university, since all will gain from it but the originating unit has to pay for it. There is pressure to lower admission standards of units as each seeks more tuition revenue. There is a proliferation of new courses and some redundancy. The contact at the University of Pennsylvania said that the system has generally been satisfactory and has saved some money, and also has given units more flexibility in determining their programs.

The major shortcoming is that units have become more isolated and independent, and students are discouraged from taking courses outside their own units. At the University of Southern California it was found that units set up undesirable barriers, such as charging rent for room use. Some academically sound ideas are not being followed up since they require broad efforts by many units and each unit fears involvement, because it may lose funds and need additional staff.

Closing Observation. Major policy decisions are often cloaked in budgetary structure. The Budget Study Committee's examination of revenue allocations and costs helps to spotlight such decisions and stimulate discussion of them.

Copies of the three Committee reports can be obtained from the SACUA office 764-0303, fax 936 6420, e-mail mandevil@umich.edu).

This article was prepared with the assistance of Committee member Wilfred Kaplan.