The$Real$Crisis$at$UNI:$ Misplaced$Priori7es$ presentation... · the eight components (average weekly manufacturing hours, the national yield spread, the new orders index, and diesel

The Real Crisis at UNI: Misplaced Priori7es

Howard Bunsis; Ph.D.; J.D.; CPA Professor of Accoun7ng, Eastern Michigan University

Chair, AAUP Collec7ve Bargaining Congress April, 2012

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Roadmap •  UNI Financial Strength –  Ra2o Analysis –  Bond Ra2ngs –  State of Iowa Strength

•  Misplaced Priori2es of the administra2on –  Instruc2on vs. Ins2tu2onal support expenses –  ShiCing employees from the classroom to administra2on

–  Faculty salaries in context •  Athle2cs •  Conclusions •  Appendix on expense category defini2ons

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Financial Strength of UNI •  We will show that UNI is in strong condi2on based on their financial statements as of June 30, 2011

•  In addi2on, we will demonstrate that the poten2al tui2on freeze and addi2onal reduc2on in the State appropria2on will not severely hurt UNI

•  In the ra2o analysis, we will include the results of the Founda2on –  It is true that many of these assets cannot be spent – but they are nice to have

– Moody’s and S&P combine the Founda2on and University results

–  It is analogous to why Moody’s and S&P count restricted net assets in their ra2os – though the funds are commiRed to certain purposes, it frees up other resources

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Assets, Liabili7es, and Net Assets Source: Annual CAFRs (Comprehensive Annual Financial Report)

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•  UNI has over $600 million of assets, yet less than $200 million of liabili7es.

•  Assets are growing solidly over the 5-‐year period, as are net assets

Reserves Source: Annual CAFRs (Comprehensive Annual Financial Report)

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•  The primary reserve ra7o is defined as total reserves over total opera7ng expenses •  UNI has $144 million of reserves at the end of 2011. It sheds light on that $6 million

budget “hole” that is causing so much concern •  The primary reserve ra7o of 54% is very strong, and is a major reason for the high

bond ra7ng that UNI possesses. The Moody’s report had this at 0.5 •  The decline in 2009 is mostly due to paper losses in the stock market

Unrestricted Net Assets Source: Annual CAFRs (Comprehensive Annual Financial Report)

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•  Using $6 million of reserves would put a small dent in these reserves

•  The primary reserve ra7o would s7ll be above 50%

Manageable Debt Source: Annual CAFRs (Debt note in Comprehensive Annual Financial Report)

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•  The viability ra7o is defined as total reserves over interest-‐bearing debt •  The ra7o of 105% is very strong, and is part of the ra7onale for the strong

bond ra7ng of UNI

Revenues vs. Expenses Source: Annual CAFRs (Comprehensive Annual Financial Report)

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•  The net income ra7o equals the change in net assets divided by total revenues. •  The change in net assets is defined as total revenues less total expenses •  The decline in 2009 is due to paper losses on investments; we will next look at

cash flows

Cash Flows Source: Annual CAFRs (Comprehensive Annual Financial Report)

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•  The cash flow ra7o is defined as opera7onal cash flows over total cash receipts •  This is very strong evidence that UNI is in strong financial condi7on; •  UNI generated posi7ve cash flows even in 2011, with a $15 million decline from

the State

Cash Flows and the Change in Net Assets Source: Annual CAFRs (Comprehensive Annual Financial Report)

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•  Cash flows are always ;posi7ve, even in 2011 amid a $15 M drop from the State

•  The change in net assets is affected by paper gains and losses

Confirma7on of Strength: Arbitrator •  In the spring of 2011, United Faculty and the UNI administra2on made their case before an independent arbitrator concerning the wages and working condi2ons that would form the Master Agreement

•  The arbitrator awarded modest but significant raises for the faculty. The arbitrator made this award aCer hearing both sides argue about the “ability to pay” of the administra2on; it is clear that this independent arbitrator believed that the UNI administra2on had the resources to compensate the faculty with modest raises.

•  This is independent confirma2on of the ra2o analysis, and the arbitrator was certainly aware of the large decline in the State appropria2on for 2010-‐11.

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Confirma7on of Strength: Bond Ra7ngs •  12/1/2011: MOODY'S ASSIGNS A1 RATING TO THE UNIVERSITY OF

NORTHERN IOWA'S DORMITORY REVENUE BONDS, SERIES U.N.I. 2011; OUTLOOK IS STABLE

•  SUMMARY RATINGS RATIONALE: The University of Northern Iowa's A1 ra7ng reflects its importance as one of the three public universi7es in the State of Iowa offering primarily undergraduate educa7on, its adequate financial resources and favorable opera7ng performance and good debt service coverage levels. These strengths are offset by a challenging compe77ve market and demographic landscape as well as recent declines in state support.

•  No7ce how the ra7ng acknowledges the decline in State support. •  A1 is the 5th highest poten7al ra7ng out of 23 ra7ng categories.

The S&P ra7ng of A+ is also the 5th highest ra7ng out of 23.

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Strengths from the Moody’s Report •  Established market niche as one of three Iowa four-‐year public higher

educa2on ins2tu2ons, as well as the only one with an emphasis on undergraduate educa2on.

•  Adequate balance sheet reserves with preliminary Fiscal Year (FY) 2011 expendable financial resources covering proforma debt 0.9 2mes and opera2ons 0.5 2mes.

•  History of posi2ve opera2ng performance, with three-‐year average opera7ng margin of 2.6% for FY 2009-‐2011 and a 8.9% opera7ng cash flow margin providing acceptable average debt service coverage of 1.9 2mes for FY 2009-‐2011, based on preliminary FY 2011 financials. Moody's notes that opera2ng performance was weaker, though s2ll balanced in FY 2011 due to deep cuts to state appropria2ons.

•  Pledged Revenues provide healthy debt service coverage in FY 2011 on outstanding bonds: Academic Building Revenue Bonds -‐ 11.1 2mes coverage; Dormitory Residence Bonds -‐-‐ 2.6 2mes; Student Union Revenue Bonds -‐-‐ 4.4 2mes; Student Health Center Revenue Bonds -‐-‐ 9.0 2mes; Field House Revenue Bonds -‐-‐ 5.9 2mes.

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Challenges from the Moody’s Report •  Expected enrollment challenges from weak state demographic

environment and projected decline in high school graduates coupled with strong compe22on from higher educa2on ins2tu2ons within and outside Iowa. In fall 2011, the University had a 2.5% decline in full-‐2me equivalent (FTE) enrollment aCer experiencing modest year-‐over-‐year growth since fall 2007.

•  Con2nued cuts in state support, a primary source of revenue for the University, increasing the need for ongoing opera2ng efficiencies and financial flexibility. In FY 2011, state appropria2ons represented 31.3% of UNI's total opera2ng revenue.

•  Compe22ve student market puts pressure on the University's ability to con2nue to provide healthy debt service coverage of auxiliary systems, par2cularly residence halls.

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The Administra7on’s Own Words on the Bond Ra7ng Source: 2011 CAFR, page 23

•  “Moody’s Investors Service has assigned its “A1” credit ra2ng to the University for all outstanding bond issues with a “stable outlook.” Standard and Poor’s assigned its “A+” credit ra2ng to the University revenue bonds supported by unlimited student fees and its BBB+ ra2ng for Dormitory Revenue Bonds. Standard and Poor’s assigned a “stable outlook” to all University bonds with the excep2on of Dormitory Revenue Bonds. It assigned a “posi2ve outlook” to those bonds. The highest achievable ra2ngs are “Aaa” and “AAA”, respec2vely. The University’s capacity to meet its financial obliga7ons is considered strong based upon these ra7ngs. “

•  If there is any ques7on about the bond ra7ng, the administra7on should release all the bond reports to the public. “Sunlight is the best disinfectant.”

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The $6 Million Budget Hole for 2012-‐13 •  The State may limit tui2on increase, and decrease the appropria2on, leading to $6 million less in revenue.

•  Total revenues were $292 million in 2011; 6 million is a 2% decline in total revenue.

•  This is very short term in nature, and is the type of issue that reserves are intended to cover.

•  This needs to be seen in context of: –  Size of the university –  Reserves –  Strength of the State of Iowa

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State Appropria7on Over Time Source: 2011 CAFR page 86

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State Appropria7on Per Student Source: 2011 CAFR page 86

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Tui7on and Fee Revenue Over Time Source: Annual CAFRs

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Enrollment Projec7ons Next 10 Years Source: 2011 CAFR, page 98

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2011 UNI Revenue Distribu7on Source: 2011 CAFR

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Discussion of Revenue Distribu7on •  The UNI administra2on claims that the State is 47% of the budget; however, they are using the General Fund as the denominator

•  Moody’s recognizes that the University of Northern Iowa is not called University of Northern Iowa General Fund Only. Moody’s reports that the State is 31.9% of total revenues, which is what the prior slide confirms.

•  BoRom line: The State is important to UNI, but it is not everything. A majority of total revenue (68.1%) comes from sources other than the State.

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More Problems with the $6M Hole Argument •  The UNI administra2on is assuming that:

–  All other revenues will remain constant –  All faculty will return in fall 2012 (before they start layoffs)

•  Every year, a certain percentage of faculty leave UNI, for all sorts of reasons (re2rement, death, taking other jobs, denied tenure, move to administra2on). By assuming that all faculty will return, the budget for faculty salaries and benefits is overstated. The faculty who leave are either: –  Replaced with new faculty who typically make $20-‐$25k less than the

ones they replace –  Replaced with part-‐2me faculty who are paid very liRle, and generally

are not given benefits –  Not replaced at all, leading to fewer sec2on offerings

•  BoRom line: The $6 million hole will be much smaller than adver2sed.

•  Remember the furloughs? Those were totally unnecessary, and only led to more profit and more cash flows for the administra2on.

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State of Iowa: Is it Broke? •  The State of Iowa has a AAA bond ra2ng from all three ra2ng agencies (, one of 8 states to have such a ra2ng in 2011. That ra2ng has not changed since 2009.

•  Source: hRp://www.resultsiowa.org/manage.html

•  As we will see, Iowa has a lower unemployment rate than most states.

•  As of June 30, 2011, the State of Iowa had $1.6 billion in total unrestricted net assets, all of it related to business-‐type ac2vi2es, which covers the State’s public universi2es and unemployment insurance.

•  Iowa is far from broke. •  What is broke is the legislature’s and governor’s commitment to educa2on.

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State Unemployment Rates Source: Bureau of Labor Sta7s7cs, March 2012

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Iowa and Na7onal Unemployment Rates Source: Bureau of Labor Sta7s7cs; Iowa Workforce Development 3/30/2012)

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Iowa Leading Indicator Index •  The Iowa Leading Indicator Index is reported to the Iowa

Department of Revenue each month. It collects data on various employment and other measures of economic ac2vity.

•  The January 2012 report was released on March 15, 2012, and the index rose to 104.6 (1999=100), up from 104.5 in December.

•  The posi2ve components of the index were the Iowa stock market index, residen2al building permits, ini2al unemployment insurance claims and average weekly manufacturing hours.

•  The nega2ve components were the new order index, the na2onal yield spread, the agricultural futures profits index, and diesel fuel consump2on.

•  The graph on the next page reports this index over 2me

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Iowa Leading Indicators Index Over Time

28 Iowa Leading Indicators Index January 2012 1

Iowa Leading Indicators Index January 2012 Report Tax Research and Program Analysis Section

Released March 15, 2012

The Iowa Leading Indicators Index (ILII) rose to 104.6 (100=1999) in January 2012 from 104.5 in

December. The Iowa non-farm employment coincident index recorded a 0.05 percent rise in

January, extending the streak of employment gains to sixteen consecutive months. In March, the

Bureau of Labor Statistics released revised employment numbers, lowering 2011 monthly values by

an average of 0.33 percent.

The ILII’s value increased 0.1 percent in January, after a 0.2 percent increase in December and a

0.1 percent decline in November. During the six-month span through January, the ILII decreased

0.2 percent (an annualized rate of -0.4 percent). The six-month diffusion index was 50.0 with four of

the eight components (average weekly manufacturing hours, the national yield spread, the new

orders index, and diesel fuel consumption) experiencing a decline of more than 0.05 percent over

the last half a year.

In January, four of eight Iowa Leading Indicators Index components contributed positively. The

positive contributors were the Iowa stock market index, residential building permits, initial

unemployment insurance claims (inverted), and average weekly manufacturing hours. The new

orders index, the national yield spread, the agricultural futures profits index, and diesel fuel

consumption contributed negatively.

Figure 1. Iowa Leading Indicators Index and Iowa Non-Farm Employment Coincident Index: January 1999-January 2012

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Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Month and Year

Index (1999=100)

ILII

Non-Farm Employment Index

Opera7ng Expenses per the CAFR

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Discussion of Opera7ng Expenses per the CAFR •  The defini2on of the categories is at the back of the presenta2on

•  It appears as if instruc2onal costs were increased significantly in 2011, aCer a drop due to the furloughs in 2010.

•  Ins2tu2onal support (pure upper-‐level administra2on) increased significantly from 2007 to 2009, then was cut in 2010 and 2011

• We will examine if these conclusions are true – through 2010 – by an examina2on of IPEDS data, which includes details on the categories.

•  No2ce how deprecia2on expense is included; this is a non-‐cash expense, and is a main reason why opera2onal cash flows are posi2ve each year – this non-‐cash expense does not reduce cash.

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2011 Expense Distribu7on: It is NOT all Instruc7on

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Misplaced Priori7es: Changes in Main Expenses, 2007 to 2011

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Misplaced Priori7es: IPEDS over 7me

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•  Even though ins7tu7onal support (upper-‐level administra7on) declined from 2009 to 2010, the salaries component increased; this is in contrast to what occurred with instruc7on.

•  The “other” category increased for instruc7on over 7me and decreased for ins7tu7onal support.

•  Therefore, the decline in ins7tu7onal support is not what it appears to be – recall that ins7tu7onal support declined in 2011; when that data becomes available, we will see if the decline is in salaries or “other”

Comparing Instruc7on to Ins7tu7onal Support: More Evidence of Misplaced Priori7es

34 In every 7me period, administra7ve salaries increase more than instruc7onal salaries. This is not appropriate

IPEDS Data on the “Other” Components of Instruc7on and Ins7tu7onal Support

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•  What do we see? More money is being allocated to the other component of ins7tu7onal support, and less to instruc7on?

•  We need to find out what other contains: IT costs? Consultants?

Faculty Costs in Context Sources: AAUP Salary Survey and IPEDS

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•  That is correct: Consider everybody who teaches at UNI: •  The total cost of their salaries and benefits are only 25% of total expenses •  If cuts are to be made, there are other places – ADMINISTRATION – to look

Number of Employees Over Time

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•  The administra7on has claimed that they have cut administrators in the last two years

•  However, the cuts in faculty have been more severe from 2009 to 2010 and from 2010 to 2011.

Headcount Enrollment Over Time Source: 2011 CAFR

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Percentage Changes in Faculty vs. Administra7on and Enrollment Over Time

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This proves that the UNI administra7on is not true to the core academic mission; over the long run, enrollment is down, faculty down, but administrators up. This is not appropriate.

UNI Faculty Salaries Source: AAUP Salary Survey 2010-‐11

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UNI Faculty Have Lost Considerable Ground vs. Peers Since 2005-‐06

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•  This data is very revealing; since 2005-‐06, UNI faculty have lost considerable ground versus peer ins7tu7ons

•  In 2005-‐06, UNI full professors were right in line with peers; in the 5 years since, they have lost thousands of dollars versus peers

UNI Faculty vs. Peers Graphically

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UNI Administra7ve Salaries: 2009 vs. 2011 Source: Iowa Legislature Salary Book

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•  These are the salaries that could be ascertained from the UNI Organiza7onal Chart and other top salaries

•  The salaries for certain administrators were not available in 2009

What is Causing Increases in Tui7on?

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More Evidence on Administra7ve Costs: Source: IPEDS Feedback Report, 2010

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Instruc7on and Research as a Percent of Total Expenses (Source: 2011 Audited Financial Statements)

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Conclusions on Faculty and Administra7on Salaries and Headcounts

•  The evidence is clear: –  Faculty salaries and benefits are only 25% of total expenses

–  Faculty salaries at UNI have increased much less than peers

–  Faculty salaries at UNI have increased much less than administra2ve salaries at UNI

–  The number of administrators at UNI has increased, while the number of faculty has declined

–  Tui2on increases are not being driven by faculty salaries, but by administra2ve costs

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Athle7c Overview Source: Equity in Athle7cs Data Analysis (EADA), US Department of Educa7on

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Athle7c Spending in Context

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•  The UNI administra7on claims that athle7c costs are only 3% of total expenses. They either are not coun7ng certain costs (scholarships, possibly, or have a much larger denominator, though that is hard to see.

•  This expense data comes from EADA; the USA Today expenses are actually higher by several million; Internal documents have the expense at $11 to $12 million

•  A proposed cut of $500,000 in a $11 to $14 million pie is miniscule

Athle7c vs. Academic Salaries Sources: AAUP Salary Survey; EADA

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Breakdown of 2011 Athle7c Expenses Source: EADA

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Another Breakdown of Athle7c Expenses Source: EADA

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Athle7cs Expenses Per USA Today Database

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Percent Changes in Athle7c and Academic Metrics: 2006 to 2011 Sources: IPEDS and USA Today

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Athle7c Revenues per USA Today

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•  The two highlighted “revenues” are direct support from the core academic mission to athle7cs

•  This is very common for non-‐BCS schools, all of which rely on students and the core university to support athle7cs

Support from the Core Mission to Athle7cs: UNI, Iowa, Iowa St.

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•  This reveals that 42% of UNI athle7c expenses have to be covered by the core academic mission; there are not enough 7cket sales and other revenues to cover athle7cs

•  This percentage is much lower at Iowa and Iowa State, who are both BCS (Bowl Championship Series) universi7es

Recommended Ac7on •  Given the financial strength of UNI, and given that the UNI administra2on has not been true to the core academic mission, no academic cuts should be made un2l a full and thorough examina2on have been undertaken of administra2ve costs.

•  A Zero-‐based budget concerning administra2ve costs should be performed. This will examine the jus2fica2on, from a base of zero, of: –  Every administrator –  Every administrator’s salary –  Every administrator’s budget

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Further Recommenda7ons •  Stop all academic core mission cuts now •  Just like furloughs, these were not necessary •  The review of administra2ve costs should produce whatever cuts are necessary in the short term. If this review is not undertaken, then . . .

•  The administra2on should use reserves in the short term. This is the only acceptable ac2on. It is not appropriate for people to lose their jobs, health care, and food for their families, while the administra2on is siwng on 70 million of unrestricted reserves.

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Conclusions •  The UNI administra7on claims they are being prudent and

resolute in cusng academic programs •  In fact, the administra7on is laying people off and compromising

the core academic mission. •  If cuts are to be made, there must be a zero-‐based budget analysis

of all administra7ve costs performed first. •  Reserves exist for a rainy day to cover short-‐term unexpected

declines. That is what UNI faces. To lay people off, take away their health care, and deny students the right to a complete educa7onal experience while the university is genera7ng posi7ve cash flows and sisng on millions of reserves is not appropriate.

•  Lets act collec7vely to convince the administra7on to support the core academic mission.

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IPEDS Categories

•  The next several slides reports the defini2ons of the different expense categories.

•  Instruc2on contains more than faculty salaries, as we will see

•  The main administra2ve category is ins2tu2onal support

•  Academic support contains most of the academic administra2on, as well as other student-‐oriented costs.

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Defini7on of Instruc7on Expense Per IPEDS htp://nces.ed.gov/ipeds/glossary/

•  A func7onal expense category that includes expenses of the colleges, schools, departments, and other instruc7onal divisions of the ins7tu7on and expenses for departmental research and public service that are not separately budgeted. Includes general academic instruc7on, occupa7onal and voca7onal instruc7on, community educa7on, preparatory and adult basic educa7on, and regular, special, and extension sessions. Also includes expenses for both credit and non-‐credit ac7vi7es.

•  Excludes expenses for academic administra7on where the primary func7on is administra7on (e.g., academic deans).

•  Informa7on technology expenses related to instruc7onal ac7vi7es if the ins7tu7on separately budgets and expenses informa7on technology resources are included (otherwise these expenses are included in academic support).

•  Ins7tu7ons include actual or allocated costs for opera7on and maintenance of plant, interest, and deprecia7on.

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Defini7on of Research Expense Per IPEDS •  A func2onal expense category that includes expenses for ac2vi2es specifically organized to produce research outcomes and commissioned by an agency either external to the ins2tu2on or separately budgeted by an organiza2onal unit within the ins2tu2on.

•  The category includes ins2tutes and research centers, and individual and project research. This func2on does not include non-‐research sponsored programs (e.g., training programs).

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Defini7on of Public Service Expense Per IPEDS

•  A func2onal expense category that includes expenses for ac2vi2es established primarily to provide non-‐instruc2onal services beneficial to individuals and groups external to the ins2tu2on.

•  Examples are conferences, ins2tutes, general advisory service, reference bureaus, and similar services provided to par2cular sectors of the community.

•  This func2on includes expenses for community services, coopera2ve extension services, and public broadcas2ng services.

•  Also includes informa2on technology expenses related to the public service ac2vi2es if the ins2tu2on separately budgets and expenses informa2on technology resources (otherwise these expenses are included in academic support).

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Defini7on of Academic Support Expense Per IPEDS

•  A func2onal expense category that includes expenses of ac2vi2es and services that support the ins2tu2on's primary missions of instruc2on, research, and public service.

•  It includes the reten2on, preserva2on, and display of educa2onal materials (for example, libraries, museums, and galleries); organized ac2vi2es that provide support services to the academic func2ons of the ins2tu2on (such as a demonstra2on school associated with a college of educa2on or veterinary and dental clinics if their primary purpose is to support the instruc2onal program); media such as audiovisual services; academic administra2on (including academic deans but not department chairpersons); and formally organized and separately budgeted academic personnel development and course and curriculum development expenses.

•  Also included are informa2on technology expenses related to academic support ac2vi2es; if an ins2tu2on does not separately budget and expense informa2on technology resources, the costs associated with the three primary programs will be applied to this func2on and the remainder to ins2tu2onal support.


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Defini7on of Student Services Expense Per IPEDS

•  A func2onal expense category that includes expenses for admissions, registrar ac2vi2es, and ac2vi2es whose primary purpose is to contribute to students emo2onal and physical well -‐ being and to their intellectual, cultural, and social development outside the context of the formal instruc2onal program.

•  Examples include student ac2vi2es, cultural events, student newspapers, intramural athle2cs, student organiza2ons, supplemental instruc2on outside the normal administra2on, and student records.

•  Intercollegiate athle2cs and student health services may also be included except when operated as self -‐ suppor2ng auxiliary enterprises.


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Defini7on of Ins7tu7onal Support Expense Per IPEDS

•  A func2onal expense category that includes expenses for the day-‐to-‐day opera2onal support of the ins2tu2on.

•  Includes expenses for general administra2ve services, central execu2ve-‐level ac2vi2es concerned with management and long range planning, legal and fiscal opera2ons, space management, employee personnel and records, logis2cal services such as purchasing and prin2ng, and public rela2ons and development.

•  Also includes informa2on technology expenses related to ins2tu2onal support ac2vi2es. If an ins2tu2on does not separately budget and expense informa2on technology resources, the IT costs associated with student services and opera2on and maintenance of plant will also be applied to this func2on.

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Documents

The$Real$Crisis$at$UNI:$ Misplaced$Priori7es$ presentation... · the eight components (average weekly manufacturing hours, the national yield spread, the new orders index, and diesel