The University’s budget is massive, to say the least. With totals of more than $5.2 billion in operating revenues and expenses at the University’s three campuses, including the University of Michigan Health System and the Athletic Department, it’s easy to see why developing the University’s budget is almost a year-long process.
Despite the budget’s enormity and vast importance for life at the University, very little about its formulation is known to many members of the University community. Over the past two months, through several interviews, University President Mary Sue Coleman, Provost Teresa Sullivan and Phil Hanlon, vice provost for academic and budgetary affairs, have offered insight onto this rarely discussed process.
The University’s budget planning begins in the fall of the previous academic year. Upon direction from the Office of the Provost, the dean of each of the University’s schools and vice presidents of each executive office begin formulating budget recommendations for their respective units.
In an interview last month, Coleman said deans and vice presidents are directed each year to look for ways to cut costs.
“We understand that we’re going to have to take between 1 and 2 percent out,” she said. “We’re just going to have to cut.”
Coleman said the cuts proposed must impact the quality of education at the University as little as possible, so as not to harm the experience students receive on campus.
In an interview last month, Sullivan said in addition to the cuts, deans and vice presidents are asked to reallocate an additional 1 to 2 percent from low priorities to higher priorities — to put emphasis on each unit’s bigger goals. Once this has been done and the proposals are completed, the budget recommendations are then reviewed in budget conferences with the provost.
In that March interview, Sullivan said this year’s budget conferences began in January and were expected to finish near the end of March. She explained that the budget conferences provide an opportunity for deans and vice presidents to present their budgets and justify the amount of money they’re requesting.
Last week at Coleman’s monthly fireside chat — an event to which a group of students are invited to meet with the president and to ask questions and share concerns about the University — Royster Harper, vice president for student affairs, told students about her experience with the budget conference this year.
“We went into our budget meeting, and we had squirreled away a little money, and so the issue on the table when we got there was ‘What are you going to do with all this money?’” she said. “We had squirreled it away for specific things that we knew we were going to have to replace or some equipment, so we had our little list.”
Harper said because the budget she had presented looked too large, she was forced to go back and outline more specifically what the money would be used for, so the provost could review the budget more carefully.
“When she saw the budget, it was big at the bottom,” she said. “So we had to go back, make our list and show her exactly why we didn’t have what looked like a lot of money.”
Sullivan said after budget conferences are finished, she joins her budget team in reviewing the list of priorities from each school or office to determine what may be feasible for the following year. At the same time, Sullivan said her budget team will review ways to control expenses through cost containment.
“If we can contain costs, that makes a big difference in the budget,” she said, adding that the University has eliminated $135 million in expenses over the past six years because of cost containment.
The approximately $135 million in savings has been due to measures like changing how the University orders and distributes supplies, increasing energy efficiency at several campus buildings and alternative strategies for managing employee health care benefits.
Sullivan stressed that in order to protect the University financially from year to year, cost containment measures have to be permanent solutions. For example, the University has renegotiated several contracts with suppliers to gain more favorable prices and switched to a direct-delivery system — eliminating the need for a central office on campus to deliver office supplies to various schools and offices.
Sullivan said one-time cuts can create a structural deficit — meaning the expenses may return the following year requiring the University to make deeper cuts or raise revenue streams, like tuition, more dramatically to cover the costs.
The University has had an equally long-term approach to other aspects of its financial planning. Approximately two years ago the University switched from a five year rolling average on payouts from its endowment to a seven-year average to better insulate the University’s endowment from changing winds in the nation’s economy. This means the 5 percent annual payout from the endowment is based on the past seven years’ performance, which mitigates temporary spikes or dips in stock markets and other investments.
Coleman and Sullivan both said the same conservative approach would be taken with any money the University might receive from the federal stimulus package. Instead of using the money to cover existing operating costs, both said the money would be used for one-time expenses, since the money would not be available in the future.
Sullivan said throughout the process she also receives advice from multiple advisory groups that are convened to offer advice about the budget. Two such advisory boards include the Student Budget Advisory Committee, which consists of students from campus that meet with Sullivan on a monthly basis, and the Prudence Panel, which has members from the faculty, staff and students on campus.
In a meeting with Sullivan and some members of the Student Budget Advisory Committee last week, committee members explained the committee has met approximately six times since it was founded last fall. The committee, Sullivan said, was created to bring a student voice into the budget process and help students learn about the University’s budget process.
The Prudence Panel, which was also formed earlier this year, is a committee of faculty, staff and students that meets with the provost to discuss ways to cut expenses from the general fund.
Sullivan said although the committees may not make recommendations on cost-cutting strategies that can be immediately implemented, their recommendations may be able to help cut costs in future years.
After all the recommendations and budget proposals have been received and discussed by the provost’s budget committee, the provost and her staff will work to create a budget that will balance expenses with expected revenues.
Revenue streams to the University include appropriations from the state, tuition paid by students, endowment revenue, research grants, and other fees charged for services.
Some sources of revenue can be restricted for certain activities. For instance, most endowment funds are given by donors for a specific purpose and can only be used for that purpose, whether it be student scholarships, endowed professorships or special programs at the University.
Other funding from the Health System and the Athletic Department is used by those entities and does not enter the general fund — excluding funds from the Athletic Department that pay for student-athlete scholarships and money contributed for general financial aid.
On the other hand, state appropriations can be used for any purpose at the University. Coleman said the fact that state appropriation money isn’t earmarked for anything makes it especially valuable to the University because it can be used for any purpose.
Since 2002, the University has lost $36 million of state appropriations in nominal dollars and more than $100 million in total of state appropriations in real dollars — which are adjusted for inflation at the Consumer Price Index for Detroit.
Sullivan said it can be very difficult to predict revenue levels because the University finalizes its budget in June, but the state doesn’t finalize its budget until the end of September — making it hard to predict state appropriation levels.
“We go to our board in June, but the state budget doesn’t get wrapped up until Sept. 30 so we have to make a guess every year about how much we’re going to get,” she said.
Last year was the first time the budget was presented to the University Board of Regents in June. Previously the budget was not presented until July. Sullivan said she instituted the change so incoming freshmen know their tuition rates earlier in the summer.
Sullivan said in the past, estimates have not always been accurate, but that she tries to estimate conservatively to ensure drastic measures like a mid-year tuition increase aren’t necessary.
For example, Sullivan said last year the University’s estimates were wrong last year, but that the decision was made to absorb the difference internally as opposed to further raising tuition.
“I have to be the most conservative person about the budget on campus,” Sullivan said, “because if I get it wrong, we all pay the price for 12 months, maybe more.”
The regents have unanimously approved the University’s budgets — including those for each of the University’s three campuses and the health system — for the past two years. However, in 2006, Regent Andrea Fisher Newman (R–Ann Arbor) opposed each of the budget proposals.