The real cost of institutional support

Thomas Jefferson said, “The liberty of speaking and writing guards our other liberties.” He also wisely said that “the most valuable of all talents is that of never using two words when one will do.”

The current global economic crisis and its ultimate impact on the level of state support for the University of Minnesota have appropriately raised questions and concerns within the University community about how the University spends its money. Speaking and writing about those concerns are a critical component to an engaged University community. Consultation and discussion with faculty governance, academic leadership and our many employee groups has always enriched my thinking about the issues at hand. The dialogue and the choices that must be made about the University’s overall budget have never been more important if we are to emerge from the current economic crisis positioned to regain our momentum.

Of late, much has been said about the growth of administrative costs at the University. Both The Minnesota Daily and members of the University community have used figures on growth in institutional support as indicative of runaway administrative costs. The issue is complex and, while I would like to adhere to the wise advice of Thomas Jefferson and use as few words as possible, it just isn’t that simple.

The University is governed by a set of accounting rules that requires us to track spending at both an object level (salaries, supplies, consultants, utilities, etc.) and by function (instruction, research, public service, institutional support, etc.). There is a standard set for these categories across higher education institutions in order to allow comparisons. Academic and support units assign their expenditures to particular function codes based upon the primary purpose of an activity.

For example, even though a faculty member may spend 80 percent of his or her time on instruction and 20 percent on research, their whole salary and fringe would likely be coded under instruction. Obviously, everyone tries to adhere to the same code definitions, and they do as good a job as they can to get it right. But it is not simple, nor is the application perfect.

The category of institutional support has become more complex in recent years due to new accounting rules on the treatment of certain expenses. For example, we were just recently required to record future liabilities for certain fringe benefit costs within this category.

It has been stated that expenditures for institutional support have nearly doubled over the last five years. The document used to make that assertion is one prepared by the University. Unfortunately, individuals making this assertion have erroneously compared actual spending in 2005 to a 2009 budget plan. A budget plan is not the same as actual spending.

For example, it has been inaccurately asserted that expenditures on scholarships and fellowships have gone down by almost $9 million since 2005. Actual spending in 2008 was $152 million (a 32 percent increase over 2005) and not $103 million as entered in the budget plan. It is not unusual for units to underestimate or overestimate expenditures in their entered budgets, and the uncertainty of the appropriation from the State of Minnesota every other year often results in timing issues related to Board of Regents approval and entry into the budget system. I trust this was an honest mistake by the user of the document. We should do a better job of getting the budget levels set correctly at the start of each year, but I strongly encourage people to check numbers with the source, particularly if they see a large discrepancy from one year to the next.

Expenditures categorized within institutional support can fluctuate significantly. The real growth in this category between 2005 and 2008 was $99 million, or 55 percent, rather than the 80 percent suggested by some folks. It is not the case that it has been caused by runaway administrative costs. Of that real growth, $85 million can be explained by three major items. Roughly $25 million relates to changes in the way utility costs were recorded. In 2005, those costs were recorded in another function code related to facilities. Beginning in 2007, when the University moved to a new budget model, those costs were moved to academic units, and they used the function code “institutional support” to pay those costs. This has been corrected for the current fiscal year. In addition, $40 million of the increase relates to a change in the methodology for recording fringe benefit costs due to a federal mandate. This one-time change distorted the numbers between years. Finally, approximately $20 million relates to one-time expenses for the new financial system that must be recorded in institutional support. With these corrections, the average annual increase in institutional support was 2.4 percent per year, second lowest growth rate compared to all other functional areas of the University’s budget.

Function codes are not a perfect way of displaying expenditures, but it is required for higher education institutions. I much prefer the object classification (salaries, supplies, fringe benefits, etc.) as a better way to look at spending. For more information on expenditure trends, please see www.budget.umn.edu/document.htm.

Richard Pfutzenreuter is Chief Financial Officer for the University of Minnesota. Please send comments to letters@mndaily.com.