BOARD OF GOVERNORS BUDGET AND FINANCE COMMITTEE March 19, 2003 Minutes The meeting was called to order at 1:05 p.m. by Governor Driker in the Alumni Lounge. Secretary Miller called the roll. A quorum was present. Committee Members Present: Governors Bernstein, Driker, Massaron, and Washington; Michael McIntyre, Faculty Representative; Charles Elder, Faculty Alternate Representative, Barbara Flis, Student Alternate Representative Committee Members Absent: Governor Hardy; Taras Kurtas, Student Representative Also Present: Governors Dunaskiss, Hillegonds and Miller and President Reid; Provost Bantz and Executive Vice President Gibbs; Vice Presidents Brown, Dambach, Davis, Johnson, Lessem, Rounding; and Secretary Miller APPROVAL OF MINUTES, JANUARY 29, 2003 ACTION: Upon motion made by Governor Washington and supported by Governor Bernstein, the Minutes of the meeting of January 29, 2003 were approved as presented. FY 2002 AUDITIED FINANCIAL STATEMENTS Governor Driker moved the agenda to allow the auditors to present the FY 2002 Audited Financial Statements earlier in the committee meeting, and asked Vice President John Davis for his comments. Vice President Davis indicated that the financial statements were presented in detail to the Audit Subcommittee earlier in March. Members of the subcommittee had a number of questions for the audit 2551
2552 Budget and Finance Committee manager, Mr. Darrell Burks of PriceWaterhouseCoopers, and were satisfied with his presentation. The audit opinion was unqualified. Mr. Burks was then asked to give the Board an overview of the university s financial standing. Mr. Burks summarized some of the issues raised at the Audit Subcommittee meeting, and indicated that the reporting changes mandated by the General Accounting Standards Board (GASB) are now reflected in the university s financial statements. The most dramatic change is that the university must show state appropriations and investment earnings below the line, which creates a significant operating loss. This is very consistent across most public entities, but is new for the university, and will pose a challenge in reviewing the statements and identifying the bottom line. Mr. Burks indicated that the university s financial position is very strong, and that included in the report is an expanded section on management discussion summarizing activities for the year, including major projects and future challenges. Governor Driker asked for clarification on a reference to a management letter in the report. Mr. Burks indicated that reference was for the A-133 report, which will come forward at a future meeting. Professor McIntyre asked about the potential cause for the jump in operating expenses for research. Mr. Burks indicated that research is cost-reimbursed, thus when looking at federal and state grants and contracts, revenue amounts are comparable to the increases in expenses. Governor Driker asked whether there were opportunities to refinance any outstanding bonds at lower interest rates. Vice President Davis indicated that they have been reviewing this issue. Refinancing last year did not offer enough of a savings to justify the costs, but the investments advisor is currently reviewing this issue again. Governor Driker asked whether the university s internal controls were adequate; Mr. Burks indicated that there were no deficiencies in internal accounting controls. supported by Governor Washington, the Budget and Finance accepted the FY2002 Audited Financial Statements report as presented. CONTINGENCY RESERVE Executive Vice President Gibbs presented a request for a transfer from the contingency reserve to fund the search for a new Provost and Senior Vice President for Academic Affairs. The costs will include travel expenses, advertisements, a search consultant, and all other expenses related to the Provost Search.
Budget and Finance Committee 2553 supported by Governor Washington, the Board of Governors authorized the transfer of $120,000 to fund the search for a new Provost and Senior Vice President for Academic Affairs. Governor Bernstein asked whether the Board would receive more specific details on the search, and how these funds have been utilized. Executive Vice President Gibbs indicated that she would provide the Board with the details in a summary report at the conclusion of the search. FY2002 GENERAL FUND BUDGET PERFORMANCE REPORT Executive Vice President Gibbs introduced Budget Director Vanessa Rose for the presentation of the annual budget performance report. Ms. Rose began her presentation with a discussion of the university s fund balance, which showed a modest increase this year. The fund balance changes as a result of revenues and expenditures throughout the year. The 4.7% increase in the fund balance this year is attributable to increases in tuition and fees received, increases in indirect cost recovery, and was offset by a smaller reduction in investment income. Some of this increase is also attributable to the GASB 35 changes that stipulate when the university must account for revenue it receives for tuition. Credit hour enrollment increased by 3.4% over the previous year. Ms. Rose reviewed a chart outlining trends in credit hour enrollment for the past five years, and explained how tuition and fees are projected when the budget is developed. Tuition revenue was also affected by spring/summer enrollment. Indirect cost recovery has grown by 42% since 1999, and in 2002, it grew by 24%. Ms. Rose provided a chart showing trends in indirect cost recovery revenue, and indicated that revenue from this source was $30 million in 2002, and similar gains are expected in 2003. Ms. Rose then discussed how the surplus funds were disbursed. About 44% of the amounts generated from indirect cost recovery are put right back into research activities, through individual schools, colleges, departments, and the faculty member who generated the research activity. Surplus revenues are also used to fund deferred maintenance and capital projects. About 60% of the net revenue generated from spring/summer tuition goes back to the individual schools and colleges that generated the revenue. Other areas receiving funding from the surplus include research operations to support research stimulation and university enhancement. Ms. Rose then discussed expenditure levels for the previous year. Actual expenditures can differ from budgeted expenditures for a number of reasons. One of these is the carry forward that occurs at the end of a fiscal year, when the
2554 Budget and Finance Committee fund balance is moved forward. Some of the items that were added to the approved budget include a cash pool loan for the Integrated Systems Project, and the recognition of the implementation of the new GASB standard which mandates the manner and time for accounting for revenues received. Approximately $236 million was spent on academic and research programs in individual schools and colleges in FY 2002, which includes faculty and staff costs, operating expenses, instructional supplies, and other academic and research support, including the libraries. Student support, including financial aid, accounts for about 12% of the total; institutional support, including items such as plant maintenance and repairs, represents about 13% of the total. All of these items, as well as some other small categories, account for the approximately $408 million that was expended. Because the budget uses estimates and assumptions, variances will occur. At the end of the fiscal year, unspent balances in schools, colleges and divisions may be carried forward in part and retained in that division, and traditionally about 75% of unspent balances in any school, college or division are carried forward into a subsequent year. Some items, for example, compensation increases, are budgeted centrally and transferred into the appropriate school, college or division at the time they are paid. Any unspent balances in these types of accounts are managed centrally, and then get reallocated. There are times during the year when emerging needs arise that need to get funded, and those are handled on an individual basis. Some of the central accounts include debt service, fringe benefits, utility costs, deferred maintenance, and insurance reserves. At the end of the year, all of the year-end balances in schools, colleges, divisions, and some of the central accounts are aggregated. The year-end balance for FY 2002 was $59.1 million. This figure does not represent cash on hand, however, 94.4% of those funds were earmarked for specific purposes, including ongoing research programs and specific university projects. The Rainy Day fund is a separate reserve, and about $1 million was transferred from the Rainy Day Fund in 2002, and about $7.8 million remains. Once all of the earmarked funds have been identified, the remaining balance available for allocation is computed; that amount for this year is $3.3 million. However, given the recent executive order cuts, these available funds will be used to offset the most recent 1.5% cut. These are one-time funds, however, and the university is developing a comprehensive strategy on how to manage these budget reductions in the future. Professor McIntyre asked for a breakdown in the amounts that comprise areas of under-expenditure (e.g., areas which were budgeted at a higher amount, and expended at a lower amount), and indicated that areas where this occurred previously, such as utilities and fringe benefits, have now been budgeted more
Budget and Finance Committee 2555 closely to the amount of actual expenditures. Ms. Rose indicated that she would share that information with the Academic Senate. Governor Massaron asked that the information also be distributed to Board members. President Reid added that there are high priority items that are simply unable to be funded each year through the regular budget process, and that the end-of-theyear reallocation process addresses only a small portion of those items. Sometimes funds have to be reallocated from base funding to address high priority items, as was the case when the university needed to identify funding to dispose of hazardous waste. In other areas, the university faced double-digit increases for utilities and health care over the past few years. While the university can hope that those increases will moderate, it must anticipate these costs when building future budgets. Governor Bernstein raised the issue of the 100% increase in steam costs that the university has faced from Detroit Edison, and the status on the steam issue. Governor Bernstein also asked for confirmation that the steam utility is the only unregulated utility. Vice President Davis responded that the 100% increase is a fluctuating number. Detroit Edison has now sold their steam business to another enterprise, which wants the university to sign a contract for service. The university has not signed the contract, but is paying its bills, and reviewing other options. Right now, there is only one steam provider, making it a monopoly enterprise. A number of other public institutions in the area are facing the same issues. There are conversations underway with the City of Detroit, Wayne County, and with the Michigan Public Service Commission (MPSC) to see what can be done. He confirmed that steam is the only unregulated utility, and that issue is part of the question to the MPSC. Vice President Lessem added that the university is talking with the city and the county to see if it is viable to form a unified block, as between these three entities, they use almost a quarter of all of the steam available. Governor Driker asked about the feasibility of moving off steam. Vice President Davis indicated that the university has quite a number of buildings on steam, and currently the university does not have the capacity to move to an alternate energy source. Self-generation is an expensive alternative. Professor McIntyre raised an issue related to level of net income received from summer school revenue that is rebated back to the units. He believes this number should be higher, as in its current form, it serves as a disincentive to the units to offer summer courses. President Reid indicated that as a research institution, the university must identify ways to support the research enterprise. Given the nature of the distribution of indirect dollars that are distributed across the institution, it is appropriate to utilize some portion of summer school revenue to support one of the university s primary missions. There were no further comments, and Governor Driker thanked Ms. Rose for her presentation.
2556 Budget and Finance Committee MERRILL-PALMER INSTITUTE CHILD DEVELOPMENT LABORATORY There were no questions about this item. supported by Governor Washington, the Budget and Finance Committee recommended that the Board of Governors authorize the President or his designee to design, solicit bids, and award contracts to renovate the Merrill-Palmer Institute Child Development Laboratory (MPI-CDL) at the Pauline Knapp Building for a cost not to exceed $300,000. Funding for this project will be provided from a Housing and Urban Development (HUD) Special Project Grant. The motion carried. MACCABEES BUILDING FAÇADE REPAIR Vice President Davis updated the Board on the status of the repairs to the Maccabees Building. The repairs were identified during a comprehensive due diligence investigation. Initial repairs were begun by the Detroit Public School System, as part of the purchase agreement for the building, but total costs for the repairs have increased. Although the amount for the repairs is sizeable, the university is paying a fair price for an important property for the university. Governor Miller asked about city building requirements, and whether they play a factor with this purchase agreement. Vice President Davis indicated that the city does not necessarily inspect buildings, even though they have a requirement that they be inspected on a regular basis. Vice President Lessem indicated that most of the inspection laws deal with the purchase of residential property, which does not apply to the DPS building. Governor Massaron indicated that a summary of the plans for the building would be helpful. Vice President Davis indicated that an administrative committee is in place, and a consultant has been hired to review potential options for the building, including privatization of the top floors, which would require outside developers. The Records and Registration Office, currently located in Helen Newberry Joy, will be one of the first offices to be relocated. One of the goals is to identify buildings that need to be taken off-line or closed, and move people and/or programs from those buildings to the Maccabees Building. Retail and office space are being identified for the first floor. Professor McIntyre asked whether there was any opportunity to defer all or some portion of this project, given the budget issues faced by the university. Vice President Davis indicated that the consultant had identified two priorities, and the 2 nd priority was being deferred. Governor Bernstein asked for additional
Budget and Finance Committee 2557 background on the purchase of this building, and whether this building will, given the cost of repairs, be an asset to the university, and a good value. Vice President Davis confirmed that the location makes this building extremely important to the university, in that the university owns all of the rest of the property on this city block, and will enhance the university s presence on Woodward Avenue. President Reid added that the building was part of a package of six properties offered to the university by the Detroit Public School System. Some of these pieces may ultimately be sold; the Maccabee Building comprises about 50% of the total square footage of these properties. Both President Reid and Vice President Davis confirmed that this property was a very good value for the university. supported by Governor Washington, the Budget and Finance Committee recommended that the Board of Governor authorize the President or his designee to proceed with the design, solicitation of bids and the award of contracts for repairs to the stone façade of the Detroit Public Schools Maccabees building for an amount not to exceed $1,950,000. Repair work would begin following the purchase closing and title transfer of the building. Funding for this project will be provided from reserves for capital projects in the plant fund. The motion carried. PHARMACY DISTANCE LEARNING LAB FOR NURSE ANESTHESIA There were no questions on this recommendation. supported by Professor McIntyre, the Budget and Finance Committee recommended that the Board of Governors authorize the President or his designee to design, solicit bids, and award contracts to renovate space in the Eugene Applebaum College of Pharmacy and Health Sciences building to support the Nurse Anesthesia Distance Learning Center for a cost not to exceed $155,000. Funding for this project will be provided from a $433,000 Federal Health Resources and Services Grant. The motion carried. PARKING LOT RENOVATIONS SCOPE AMENDMENT Vice President Davis indicated that this recommendation is an amendment to a project that had been approved by the Budget and Finance Committee and the Board in July 2002, and corrects an omission in the resolution presented at that time.
2558 Budget and Finance Committee supported by Professor McIntyre, the Budget and Finance Committee recommended that the Board of Governors authorize the President or his designee to proceed with the design, solicitation of bids and the award of contracts for parking structure security improvements, Parking Structure 1 structural repairs, and Parking Structure 2 and 4 lighting upgrades. As approved at the Board of Governors July 31, 2002 meeting, funding for this additional construction will be provided from two sources including $8,500,000 from bond proceeds generated through the sale of general revenue bonds during the summer of 2002, and $1,000,000 from the University Parking Authority reserves. The additional work will be completed within the approved $9,500,000 budget. The motion carried. LAW SCHOOL EXPANSION SCOPE AMENDMENT Vice President Davis reported that this recommendation is to amend the scope of the final phase of the Law School expansion project. The initial plan called for enclosing the area between the Spencer Partrich Auditorium and the Law School classrooms. It has been decided that the enclosure is not necessary. Alternatively, the school wishes to utilize the money allocated for this phase, in addition to other money that has been saved from the project, to complete the construction as outlined in the recommendation. supported by Governor Washington, the Budget and Finance Committee recommended that the Board of Governors authorize the President or his designee to amend the approved phase three scope of the Law School Expansion Project and to proceed with design, solicitation of bids and awarding of contracts for the new components. As previously approved, phase three would have provided an enclosure for the area between the Spencer M. Partrich Auditorium and the Law School Classroom Building. Instead, it is now recommended that $575,000 in funding previously intended for this purpose, plus $425,000 in other remaining funds from the approved project budget be reallocated to provide an enclosure and build-out of the third floor roof areas of the Law Library Building for additional faculty offices, modifications to adjacent clinical space, and the provision of additional electrical service and technology infrastructure in the Law Classroom Building to support students who use laptop computers. The motion carried.
Budget and Finance Committee 2559 PURCHASING EXCEPTIONS Vice President Davis presented the quarterly informational report on purchasing exceptions. ADJOURNMENT There being no further business, the meeting was adjourned at 2:10 p.m. Respectfully submitted, Julie H. Miller Secretary to the Board of Governors JHM:dlh