The University Record, October 25, 1999

Report of the Chief Financial Officer

Editor’s Note: The Report of the Chief Financial Officer reprinted from the Financial Report for the year ended June 30, 1999. For copies of the complete report, contact Financial Reports Office, 764-4284.

Once again, I am pleased to report that the University of Michigan is in excellent financial health. Its balance sheet has grown stronger, its operating budget remains balanced. As a result, the University continues to seize opportunities for excellence as we move into the next century.

Any discussion of the University’s finances must begin with an expression of deep appreciation to the men and women of Michigan. Their support for more than a century through State appropriations has been crucial to our success. State support for the University is 13 percent of the University’s overall operating revenue, or 37 percent of the University’s General Fund operating revenue. To put this in perspective, the University would need a $7 billion endowment to generate a revenue stream of that size.

The thousands of individuals who work as staff for the University are another source of strength that merits special note. These individuals, through their long hours and high degree of professionalism, provide a margin of excellence. Their dedication has been vividly displayed in the Universitywide implementation of the new software system this year, in the sustained high level of patient satisfaction at the hospitals, and in our ability to oversee increasingly complex research initiatives while at the same time making participation in those initiatives an essential part of undergraduate education. These are, however, but a handful of examples of the selflessness exhibited across the University on a regular basis. Clearly the old adage is true. We are rich in people who bleed maize and blue. The University benefits enormously, and we are grateful.

This report will identify highlights of the University’s finances. It is designed to add context and meaning to the audited financial statements that follow.

Shifting Responsibilities

Three significant changes that occurred during the past year merit attention. Perhaps most important is the continuing evolution of the way in which the University is organized to invest its endowment and other financial assets. As of June 30, the University’s endowment funds totaled approximately $2.5 billion.

Late in the winter, I announced that the size of this portfolio and the complexity of the markets necessitated the creation of a new position of Chief Investment Officer. We are fortunate to have attracted L. Erik Lundberg to serve as the University’s Chief Investment Officer. He will begin work this fall, focusing upon maximizing investment performance and reporting directly to the Chief Financial Officer. Under this new structure, the Board of Regents retains the ultimate authority for overseeing the investment of the University’s assets. The University will continue to rely upon external professional investment managers for the selection of particular investment opportunities.

This evolution occurs against a backdrop of recent success. In fiscal year 1999, the University attained a total return of 13.5 percent, placing its performance in the top quartile of college and university endowments in the country.

I am also pleased, and relieved, to announce that the University has successfully completed the implementation of new Universitywide software for its financial transactions. This new software replaces the general ledger and procurement system that was built 30 years ago and over time has led to the creation of redundant databases and “shadow systems” across the University. After several painful months last autumn, the system is working more effectively, with the monthly closing process now providing information in a more useful form and on a more timely basis. The goal is to put management information into the hands of the managers without needing to rely upon technology experts.

Finally, this year’s annual financial statements are the first to be audited by Pricewaterhouse Coopers LLP. The change of auditors reflects the prudent practice of rotating auditors in order to ensure we receive the benefits of fresh perspectives. Despite the difficulty of implementing a new financial system and concurrently rotating auditors, the year-end closing process went very smoothly and resulted in an unqualified opinion from the independent auditors.

Over the next several years, a special committee will lead us through a review of business processes and attendant internal controls across the University to ensure the University is operating efficiently and with a prudent level of risk management. This initiative will be a partnership between the central administration and the academic and nonacademic units across campus. With new independent auditors and new technology, the University has a fine opportunity to review carefully the way in which we do business.

The Operating Budget

At its meeting on July 15, 1999, the Board of Regents reviewed the fiscal year that had just closed and examined the proposed operating budgets for the year ahead. The Regents were told that the University had completed the fiscal year ending June 30th with a balanced budget. While attaining this balanced budget, the University benefited from diverse streams of revenue and careful cost controls. The charts on page 5 (in the complete report) illustrate the sources of revenue, both for the University as a whole and for the University without the medical center, M-CARE, and certain other clinical activities. The exclusion of certain clinical aspects of the health system allows a clearer view of the operations of the schools and colleges as well as the central administration. The medical center and clinical activities, which continue to be critical to medical education and health care in the region, are discussed on page 9 (in the complete report).

The bottom chart on page 5 (in the complete report) highlights the central role played by the State of Michigan in support of our efforts, as well as the importance of our alumni and friends. As noted above, the annual State appropriation of $375 million continues to be a cornerstone of our strength.

Student tuition has also remained an important source of revenue. In fiscal year 1999, tuition and related fees at the three Michigan campuses amounted to $513 million. While tuition is therefore an important source of revenue, the University remains committed to offering an outstanding, affordable education to residents of Michigan.

Students who are not residents of the State pay a premium of up to 320 percent more in tuition than what is paid by resident students, reflecting the University’s commitment to Michigan. Furthermore, the University continues to offer generous financial aid, ensuring that every undergraduate student who is a resident of this State receives financial aid that is sufficient to allow the student to meet demonstrated need. In fiscal year 1999, over $64 million was awarded in scholarships and grants to undergraduates on the Ann Arbor campus. Another $55 million was made available to these students through student loans.

Gifts from the University’s alumni and friends contributed a critically important $177 million of revenue. These gifts provide a growing source of support for the University.

The University has a long history of constructive relationships with the private sector and this year, once again, we have profited from private sector generosity. In May, the Ford Motor Company announced a $9.3 million pledge to the University of Michigan that will support major initiatives in education, the environment, and the arts. Ford’s partnership with the University has spanned nearly 50 years, and this latest gift expands Ford’s involvement so it now includes faculty and student support, industry research, building renovation, and programmatic support across a wide range of schools, colleges and programs.

An important trend in the University’s development is the growing role of individuals as donors. This year a record was set, with almost 62 percent of our gifts from individuals. As President Bollinger notes in his written comments, the $30 million gift by Mr. A. Alfred Taubman to the College of Architecture and Urban Planning is a transforming gift and a milestone for the College and the University as a whole. Mr. Taubman’s gift was all the more important because it is a gift of endowment funds that will support faculty and students for many years to come.

Two other important acts of generosity also merit special attention. This past year, philanthropist and long-time friend to the University, Charles Walgreen, Jr. (PHC ’28, HMS ’51, HLHD ’92), and his family created the President’s Fund with a $5 million gift. This gift provides the President of the University with a generous endowment to address future circumstances and opportunities for the University at large. It builds upon a history of support by Mr. Walgreen to individual schools, colleges, and programs at Michigan.

Samuel Zell (AB ’63, JD ’66) and Ann Lurie, wife of the late Robert H. Lurie (BSEIE ’64, MSE ’66), each gave the Business School $5 million to create the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies. In the past decade, Michigan has emerged as a leader in innovative approaches to teaching entrepreneurship and the new Institute will allow the Business School to make even greater contributions in this area. Previously, Sam Zell endowed professorships in the College of Engineering and LS&A, as well as making a generous gift to the Law School. Ann Lurie endowed a professorship in the School of Social Work and made a significant contribution to the College of Engineering to fund the Robert H. Lurie Engineering Center and the Ann and Robert H. Lurie Tower.

Clearly, few individuals’ gifts can be of this scale. Nevertheless, the growing participation from alumni and friends of the University will provide critical support as we build upon our success as an internationally recognized center of teaching, research and scholarship.

The University of Michigan, like most universities, uses its endowment to support operations in a way that strikes a balance between meeting current needs and preserving the purchasing power of endowment funds for the benefit of future generations. At the University of Michigan, the Endowment Spending Rule states that 5 percent of the asset value of the endowment funds is available for current operating needs. Any capital gains or income generated above that 5 percent are reinvested so that in leaner times funds will be available. The discipline provided by the Endowment Spending Rule is a cornerstone of the University’s prudent financial management.

In addition to strengthening our revenues, the University is paying close attention to expenses. In fiscal year 1999, expenses incurred were consistent with the amounts budgeted, thereby illustrating the rigor with which the Provost and the Executive Vice President for Medical Affairs prepare their budgets.

The objective, however, is not financial strength for its own sake. The University of Michigan continues its commitment to being an internationally recognized center of teaching, research and scholarship. As Provost Cantor noted in her remarks to the Board of Regents, “A University must at once be conservative—it is the repository of what is known—and innovative—it builds on its foundations as a repository to create new knowledge and new ways of knowing.”

Combining the requirements to conserve the known and support the new puts a good deal of financial pressure on the University’s academic units. They must find the resources to mount new programs while maintaining strength in existing areas. There are two general ways in which these goals can be accomplished. One involves the continuing commitment of the central administration to control costs so that resources can be reallocated towards the academic missions of the University. Indeed, this year, as last, the share of the budget going to the academic units rose relative to the share going to the central administration.

A second way involves a continuing search by the Provost, by the deans, and by other academic leaders, for places where spending can be reduced. Some of these changes are administrative. For example, in the past year a faculty and staff review committee appointed by the Provost to examine distance learning came to the conclusion that by eliminating redundancies about $1 million could be saved annually. These savings were realized in the

FY 2000 budget. Perhaps more important, although harder to see directly, is the continual revision on the part of the academic units in what is taught and what is studied. Over a seven-year period, the College of LS&A reallocated 58 of its tenure and tenure-track positions away from declining areas and toward growing ones. The much smaller School of Music moved six faculty positions. Similar kinds of changes occur throughout the University on a continuing basis. This is how we come to have a University that looks quite different than it did ten years ago, and very different than it did 30 years ago, although it has remained about the same size. For a description of several important academic initiatives, I refer you to the Provost’s budget presentation to the Regents at

The University Health System

Several years ago the University Board of Regents created the position of Executive Vice President for Medical Affairs. The goal was to integrate the Medical School, hospitals, joint venture and networkings of the Michigan Health Corporation and M-CARE (the University’s HMO) more fully into a health system, aligning their incentive structures and goals, and reinforcing their anchoring in the University community. Dr. Gilbert S. Omenn serves as the first EVPMA. Under his leadership, and through the work of the Health System’s physicians and staff, Michigan has had a year of major accomplishments in the effective delivery of health care and furthering our understanding of the underlying science.

During this past year, the excellent health care provided by the University’s hospitals continued to receive national recognition. For example, the hospitals were ranked by U.S. News & World Report as being among the top ten in the country, with the excellence appearing in nearly every clinical specialty. By coincidence, the methodology used in compiling the rankings is based on the work of Avedis Donabedian, Professor Emeritus at the University’s School of Public Health.

In addition to its offering of nationally recognized programs, the Health System remains committed to serving Michigan. The Health System is engaged in KidsCare, a joint venture with the Henry Ford Health System. In this example of the commitment to patient care, capitated comprehensive care on a voluntary enrollment basis is offered to the 24,000 children in this state eligible for the Title V program for children with special health care needs. I also want to highlight the Washtenaw County Integrated Health Project, a pioneering effort to unite mental health and substance abuse services with regular medical/surgical services, beginning with the eligible Medicaid population.

I am particularly pleased to note that this excellent and innovative patient care is being delivered by one of the nation’s financially strongest academic medical centers. While academic hospitals around the country are experiencing meaningful operating losses as a result of pressure on several fronts, our hospitals have once again delivered an operating surplus for the fiscal year ending June 30. We are not immune to the nationwide trends and we will need to redouble our efforts to stay strong. Yet the current financial stability is a credit to the physicians and staff who work in the hospitals.

For additional information on the University Health System, please refer to its Web site:

The Balance Sheet

The University’s balance sheet remains strong. The University’s endowment funds have grown, the needs of the physical plant are being met, and the use of debt is modest. This strength will provide resilience over time.

The University’s endowment grew by $161 million during fiscal year 1999. This growth is net of funds utilized to support operations. Most of the endowment provides direct support for the University’s 19 schools and colleges, and our branch campuses, Dearborn and Flint. The endowment funds, and the long-term portfolio as a whole, continue to be invested by professional managers in a diversified pool of investments around the globe.

Our facilities continue to be an important part of the University’s assets. Just as we must preserve our financial strength as it is reflected in our balance sheet, we must continue to be good stewards of our buildings and lands.

During this fiscal year, meaningful progress was made in the master planning initiative that President Bollinger and the Board of Regents launched approximately two years ago. The goal is to shape future development so it best serves the academic and teaching needs of the University community. During the first phase of the planning effort, the University, with the help of the architecture and planning firm of Venturi, Scott Brown & Associates (VSBA), used extensive conversations with the University community as well as various data to describe and understand the current physical environment at the University.

As President Bollinger notes in his comments, a dramatic and crucially important academic initiative of 1999 was the regental approval of the Life Science Institute. This spring the University brought forward a proposal for the space in the northeast corner of the Central Campus that is bordered by Washtenaw Avenue, the Power Plant, the Dental School and North Hall. For many years, that space has been an informal parking area. Under the plan presented, that space will be the location for a new building that will house the new Life Science Institute. Additionally, a parking deck with over 800 spaces will be built, which can support a large building on its roof. Finally, a smaller building will be built on the curve in Washtenaw to house public space for eating and meeting.

This space was selected for development because it can serve as a bridge among the health science schools to the north and east and the sciences conducted in LS&A, Pharmacy and Dentistry. Historic maps show that this area has been targeted for much of the century as a pivotal point in pulling together the campus.

The decision has catalyzed the desired integrative reaction. Simultaneous with the planning and programming of the buildings at the Palmer Drive location, the Medical School has begun to plan and program new laboratory buildings on the block just north of the Power Plant bordered by Zina Pitcher, Huron, Glen and Catherine Streets. These new Medical School laboratories will house research that is complementary to that which will occur in the Life Science Institute.

The master planning initiative has also focused renewed attention on five LS&A buildings for which the State is providing money for much needed renovations: the LS&A Building, Mason/ Haven Halls, West Hall, and the Perry and Frieze Buildings. Working closely with the leadership of LS&A, we have identified ways to renovate the buildings’ infrastructures and better serve the faculty and students. The goal in executing major infrastructure and restoration projects on historic buildings is to accomplish the construction so that it seems seamless with the original architecture. That will be true of the work in West Hall, and the Perry, LS&A and Frieze Buildings. The renovation of Mason/Haven Halls offers an opportunity to improve the space by expanding Haven Hall and easing passage through the “Fishbowl” by building several connectors above it. Needless to say, the Fishbowl that currently connects those buildings will remain an important public space for the community.

The master planning effort will now turn northward from Central Campus. In the course of the coming year we expect to engage the University community in the planning of the Medical School/Hospitals area complex north of Huron Street. Then in the spring we expect to focus attention on the future development patterns for the North Campus. In all cases, the needs of our faculty and students, as well as sensitivity to environmental and infrastructure concerns, will shape the plans that emerge.

Finally, the University continues to maintain its conservative approach to debt. As of June 30, 1999, it had just under $679 million of debt and that debt has received the second highest ratings available from both Moody’s Investor Services and Standard & Poors. Approximately two-thirds of the outstanding debt has been issued in connection with the University Health System and is being repaid from operating revenue. The debt relating to activities on the campus is being issued primarily in connection with financing cash flow.


The University of Michigan continues to benefit from the State of Michigan’s economic prosperity, as well as the continued appreciation of its financial assets. We are using this moment of grace to seize compelling opportunities to build our strength and, at the same time, ensure that our existing areas of academic excellence have solid financial underpinnings. The University is laying the foundation of prudent management that will help maintain the University’s health and excellence into the foreseeable future.

For further financial information and supplemental information, please refer to the financial statements for fiscal year 1999. As noted above, the statements have received unqualified opinions of the University’s independent accountants.

Robert Kasdin,
Executive Vice President and Chief Financial Officer