Office of the Vice President for Global Communications

Tuesday, December 15, 2009

U-M finances sound, but leaders seek help with further belt tightening

Watch a video of the town hall meeting >>

Although U-M is relatively well positioned to withstand the effects of recession, university leaders are encouraging everyone on campus to look for additional ways to operate more efficiently, and to participate in programs and initiatives designed to reduce overall costs.

That was a key message from Provost Teresa Sullivan and Phil Hanlon, vice provost for academic and budgetary affairs, in their presentation, “U-M’s Financial Position: Town Hall for U-M Staff,” Monday at Rackham Auditorium.

Economic woes have forced some elite universities to hike tuition as much as 30 percent and resort to significant layoffs, but U-M is well positioned to withstand the worst of the budget storm — even as the state of Michigan continues to be rocked by economic pressures that could further erode general fund support.

“We are not in crisis,” Sullivan said. A workable plan has been formed to meet the challenge of finding $100 million in recurring cost reductions and revenue enhancements over the next three years to maintain quality, breadth and access, she added.

“Fundamentally, what makes the university sing is the great people here: The great faculty, the great staff and the great students,” Sullivan said. “We need to be more efficient with what we do to keep the same great people and great ideas.”

“Looking ahead to next year, state revenues are projected to fall over $1 billion short of the current year’s expenditures,” Hanlon said, adding that higher education appropriations could be identified as a place for the state to cut. “U-M is planning around these realities.”

Hanlon said strategic initiatives to reduce costs and seek efficiencies will minimize job loss or erosion of salary and benefits during this period. He said information technology is one area the university has identified for pursuing cost savings, along with better space utilization and reducing health care and energy costs.

Hanlon said the university annually spends $300 million on IT related services — almost as much as the $317 million general fund appropriation U-M currently receives from the state. “Across the university, IT has grown in a highly dispersed fashion, and there is duplication. We can do it more efficiently,” he said, adding that a consultant will begin visiting individual departments in early 2010 to examine IT services throughout the university, seeking ways to eliminate duplication.

Responding to questions from the audience, Hanlon said U-M already began streamlining IT services this past year, reducing expenditures by roughly $7 million through a reorganization of central IT service operations.

“When we talk about reducing IT costs, it’s not just people costs but how we buy equipment,” Sullivan said.

Hanlon said that if reductions in IT staff levels are identified, “We try to do it through attrition first.” He added that some of the savings would go toward upgraded IT support of the university’s research mission.

Their 90-minute presentation focused on the university’s $1.45 billion general fund budget, which supports the core academic enterprise, and economic trends that impact it. Hanlon said that while state appropriations made up 78 percent of that budget in 1960, that contribution has shrunk to 22 percent. To help compensate for the loss, tuition and fees, which contributed 20 percent of general fund revenue in 1960, now are counted on to contribute 65 percent to the general fund.

This comes at a time when the recession has resulted in economic contraction worldwide, massive loss in asset values and freezing of the credit markets. Hanlon said this has hit Michigan particularly hard. Two of the Big Three auto makers have declared bankruptcy, the state’s unemployment rate rose above 15 percent and tax revenues plunged.

“The past 12- to 15-month period has been just a financial nightmare,” he said. Nationwide, Stanford University announced 500 layoffs; the University of California-Berkeley reported 8 percent salary cuts; both announced deep unit cuts; and many other elite universities have similar stories, Hanlon said. “We find ourselves in a stronger position than they are.”

He said U-M maintained momentum this past year as hiring continued in most units, the university purchased the former Pfizer facility to house university-sponsored research projected to generate thousands of new jobs, progress continued on major facilities projects, and investment continued in new initiatives in global health, international public policy and Asian arts.

“The University of Michigan is in a sound and stable financial position,” Hanlon said, as several forward-looking steps were implemented in recent years. Key among these efforts has been prudent management of assets through conservative endowment spending policies, self-insurance to better maintain health care and liability costs, and the space utilization initiative.

He said the university also has successfully embraced fiscal discipline. “We have required a 1.5 to 2 percent expenditure reduction every year. We have been able to take advantage of these strategic ways to cut costs.” He said one example of how the university has identified cost savings has been in more energy-efficient building systems such as the move to regional chiller plants to deliver chilled water to multiple buildings. Through many such efforts, the university has been able to reduce spending by $135 million in recurring costs over the past six years.

In budgeting through 2012, Hanlon said, the university will prioritize robust growth in financial aid, continued investment in salary and benefits, and maintain a focus on efficiency of operations, increased productivity and new revenue streams.

He said the university will implement strategic approaches to cost containment through greater sharing of resources, by reducing local control and by rationalizing highly dispersed activities.

Such strategic initiatives already under way include the IT review; travel and hosting reform; benchmarking U-M administrative and other staffing against peer institutions, MHealthy program to promote a culture of health that will result in happier, healthier, more productive employees who require fewer health care costs; and Planet Blue, which seeks to encourage behavioral changes to conserve energy use.

“They’re all part of our plan to work through challenges over the next three years and emerge a stronger university,” Hanlon said.