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CLA Budget 1001--Part 8: Donated Funds

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By Brent Gustafson, finance director

As we've noted a number of times in previous columns, most of the budget for the College of Liberal Arts comes from tuition and state appropriations. This column will focus on an important and more restricted source of money--donated funds. For CLA, like many higher education and non-profit organizations, donated money from fundraising is an important source of money to meet key priorities and can supplement and enhance the activities from larger sources of funding. In FY 2013, CLA has budgeted $9.3 million of spending from gifts and endowment earnings. At the close of the 2012 fiscal year, the total value of CLA donated funds was $215.9 million. The amount of spending from donated funds is small compared to the total amount of money that has been donated, and the reasons for this are explained below.

Donors and Donations
As the name implies, donated funds are resources that result from the philanthropic gifts of varying sizes from all types of donors (individuals, foundations, etc.). Some donors give sizable sums to CLA and other donors give smaller amounts. The manner in which they give can also vary--some gifts are unrestricted (or discretionary) as to their use, while other gifts have very specific criteria for how the money can be spent by the college.

Types of Donated Funds
Within the University's structure for donated funds, most of the money is held and managed by the University of Minnesota Foundation (UMF). Donated money that came to the University prior to establishment of the Foundation is held by the Treasury Accounting Department, a support unit within the Controller's Office.

Many organizations that raise private money have endowments. These endowments typically have constraints both in terms of what the money can be spent on as well as how much can be spent. The endowment funds within the college or within the University should not be thought of as one large balance, but rather they are a collection of many smaller endowment funds, each with its own intended purpose, as articulated by the donor. The types of funds can also differ:

"Permanent Endowments" are those funds for which the principal balance cannot be spent, but the spendable payout (4.5% of endowment balance, averaged over the prior 20 quarters) on that endowment creates a revenue stream that can be spent on the fund's intended purpose. At the University of Minnesota Foundation, a gift needs to be at least $25,000 to establish an endowment.

"Quasi Endowments" are quite similar to permanent endowments, but for these funds, a portion of the principal balance can be spent, in addition to the investment earnings.

Both permanent endowments and quasi endowments are held in longer-term investments and therefore subject to greater market risk. This can significantly affect the earnings and valuation of these funds over time.

"Demand Funds" are essentially cash accounts that can be drawn upon in full to meet the intended use and do not have provisions to limit the spending. Demand funds are held in short-term instruments with virtually no market risk.

The following table indicates CLA's donated fund balances at the close of FY 2012 by type of fund (click chart to see larger):

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Designated Purpose
The designated purpose of a CLA donated fund is recorded in a Memorandum of Agreement (MOA), which guides how funds are to be spent. These documents blend individual donor preferences with institutional goals and guidelines, and they must be adhered to when funds are allocated. Often, MOAs reflect the college's fundraising priorities. For example, in recent years, CLA has prioritized fund raising activities around undergraduate scholarships and graduate fellowships, and many of our MOAs restrict the use of donated funds to these purposes.

Below is a table indicating the breakdown of CLA's donated funds by types of activities the money supports:

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Stewardship
After funds are raised, the college has an important role in ensuring that donors' intentions are met through effective use of these funds. This stewardship function helps keep donors aware of activities associated with their gifts and can also help the college in its efforts to obtain future donations.

CLA Budget 1001--Part 7: Grants & External Funding

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By Brent Gustafson, finance director

Many of the columns in this series to date have focused on the large and flexible sources of funding in the budget for the College of Liberal Arts, such as tuition and state appropriations. This column will examine some of the fiscal aspects of grant funding, a smaller but still important part of the CLA financial picture.

Sponsored vs. Non-Sponsored
An important distinction that's present throughout the University of Minnesota's financial structure is that of sponsored versus non-sponsored expenditures. Much of the focus of financial matters within CLA is on non-sponsored resources, because these comprise the lion's share of the CLA budget, and these are flexible funds that the college can allocate to meet its priorities. Tuition and state appropriations are non-sponsored funds.

Sponsored funds or sponsored expenditures refer to funds where an external funder has given money to the University to carry out a project or function, most typically a research project. Most sponsored projects are awarded through competitive processes, in which a University researcher makes an application for funding for a specific project. The terms "sponsored" and "grants" are often used interchangeably to describe this type of funding. When a sponsor awards a grant to a researcher, the sponsoring organization has specific criteria and interests for the money, and is therefore not discretionary the way non-sponsored funds would be.

Across the University, there is considerable variation among colleges in the portion of the budget that is composed of sponsored funding. For CLA, sponsored funding covered $14.9 million of expenditures in FY 2012, out of a total all funds budget of $249.5 million (6%). By comparison, the College of Science and Engineering had $124.3 million of sponsored activity in FY 2012 out of a total all funds budget of $346.7 million (36%).

Sources of CLA Grant Funding
The federal government plays a large role in funding projects at research universities, and that is the case both for the University as a whole and for CLA. Of the $14.9 million of sponsored expenditures in CLA in FY 2012, grants from federal agencies covered $12.2 million (82%).

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Grant Activity Among CLA Departments

Across departments in CLA there is considerable variability in the opportunities available to pursue externally-sponsored research funding. Within CLA, the Department of Psychology has been the largest recipient of grant funding, regularly accounting for over half of the sponsored activity within CLA in any given year. The following table shows FY 2012 sponsored expenditures by department.

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Indirect Cost Recovery
Many external funders recognize that the University must maintain infrastructure that is essential to carrying out its research mission, and as a result, grant funds allow the charging of various types of overhead expenses to the grant. This charging is often referred to as indirect cost recovery (ICR), which as its name implies, is a partial recovery for the costs that are not directly related to the sponsored project, but are indirectly associated with it. These types of costs are also commonly referred to as facilities and administration (F&A), which comprise the main types of expenditures that are offset by these charges. The allowable rate charged for ICR varies across types of funding, and this rate is often subject to University agreements with its many funders.

In FY 2012, the college brought in $3.7 million of ICR revenue on its $14.9 million of sponsored expenditures. A portion of these funds are utilized at the collegiate level to cover costs associated with maintaining necessary research infrastructure and a portion of these funds are directed toward the relevant academic units to support the infrastructure needed at the department level.

CLA Budget 1001--Part 6: Instructional Funding

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By Brent Gustafson, finance director

Within the College of Liberal Arts, the delivery of the college's curriculum takes many forms. Tenured and tenure-track faculty members are a key resource that provide teaching, along with their expected research and service responsibilities. Beyond the faculty, however, the college employs contract faculty, instructors, and graduate assistants to deliver the curriculum. This column will look at this important aspect of CLA's finances and operations.

Single Allocation

The current fiscal year (2013) is the third year that CLA has delegated instructional resource management to the academic departments of the college. Prior to this time, CLA Administration played a larger role in determining teaching assistant staffing levels, course minima, and the numbers of sections of a course. Now, academic departments make these decisions based on their own identified needs and priorities and within the unit's instructional resources. The college still plays a role in consulting with departments about enrollment trends and best practices.

In order to fund these priorities, departments receive from the college a "single allocation" of instructional resources with which to deliver their curriculum. Known as "TA/UI" (teaching assistants/unassigned instruction), the single allocation is a bucket of resources with which departments hire the appropriate staff to either teach or assist in the classroom. The college also sets enrollment targets for units to accompany the allocation of TA/UI to help ensure efficient use of the money.

Instructional staff can also vary in the types of appointments fulfilling this function. Many of these roles are filled by professional and administrative instructors (P&A, approximately 400 this year). Beyond these P&A instructors, the college employs a large number of graduate assistants (approximately 1,000 this year). The role of these graduate assistants varies widely throughout the college, with some TAs serving as graders or assisting TAs, while other graduate assistants teach courses on their own. In any given year, approximately three-fifths of what CLA spends for instruction is for graduate assistants.

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Trends

Over time, CLA has gradually decreased its spending on instruction provided by non-tenure/tenure-track faculty. The primary reasons for this decline are related to decreasing numbers of undergraduate and graduate students enrolled in the college. As noted in a prior column (see "What we control, what we don't"), enrollment in CLA has fallen by just over 1,000 students from fall semester 2009 to fall semester 2012. In addition to the decline in the number of students, CLA has also experienced a decrease in the share of credits taken by CLA undergraduate students within the college (see "A closer look at tuition"). In the 2008-09 academic year, CLA students took 73% of their credits within CLA, but that share fell to 66% last year (AY 2011-12).

With this decline in demand, CLA has experienced a lower need for instructional resources. Pulling back on funding this capacity has helped CLA make budget reductions in the face of continued budget pressures related to tuition revenue.

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Effective and efficient use of TA/UI resources is one important way that departments help meet multiple goals for the college. Ideally, the curriculum within each department is attractive to students and enrolls well, in order to make good use of faculty instructional time as well as the time of teaching assistants and P&A instructors. Appealing to student interests and enrollment trends in turn helps the college's tuition revenue by drawing students into CLA classes, both from within CLA and also from other colleges.

CLA Budget 1001--Part 5: Cost Pools

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by Brent Gustafson, Finance Director

The budget for the College of Liberal Arts comes primarily from two sources--tuition (75%) and state appropriations (19%), and the vast majority of expenditures are for two functions--salaries and benefits for employees (54%) and "cost pools" (35%). This column will examine cost pools in more detail, highlighting what these costs are for and the various categories of cost pools we pay. For the current fiscal year, CLA will pay $90.2 million in cost pool charges. (See the first column in this series for more background on sources and uses of the college budget.)

What are cost pools?

Cost pools are a way for the University to pay for functions that are essential for operating the institution, but are not specifically associated with individual colleges. The types of expenses covered by cost pools are likely found at any major research university or other large organizations. Cost pools are a necessary part of the University's overall budget model, because all of the revenue in the University is allocated out to collegiate units, and it is not retained for University-wide expenses. These cost pools are a mechanism to finance University expenses by distributing costs to colleges.

Over time, the University has modified its cost pool model, and currently, there are nine separate cost pools paid by CLA. Each is distinct in what costs it is designed to cover, as well as how those costs are distributed out to colleges. The reason for these different methodologies of distribution is to seek a relatively fair manner of assessing charges.

The Nine Cost Pools

Below is a listing and description of each of the cost pools charged to CLA and our cost for FY 2013. Also included is information about the manner in which the costs are distributed to colleges.

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Student Services ($34.9 million): this cost pool covers central offices and functions that support all students in the University, including admissions, student finance, and the Graduate School. The costs are distributed to colleges based on the numbers of students, so this is a large cost pool for CLA, and we pay the largest share of this cost pool given our size. There are actually four sub-categories of this cost pool in order to try to have different distribution methodologies for the component costs.

Technology ($16.0 million): many of the University's technology systems are managed centrally, so the costs of email, voice services, file storage, the Office of Information Technology, the help desk, and others are distributed out to colleges through this Technology cost pool. This cost distribution is on the basis of total number of students and employees.

Library ($13.1 million): the Library cost pool allocates the budget of the University Libraries out to colleges based on the number of faculty and students in the college.

Facilities Operations and Maintenance ($7.9 million): this charge covers the costs of building maintenance, waste management, custodial services, and grounds keeping. Costs are charged to colleges based on the amount of square feet that it occupies.

Support Service Units ($6.5 million): in order to fund the units of the University that have general support responsibilities, this cost pool charges out costs on the basis of total expenditures. Included in this category are things like the President's Office, University Relations, the Office of Human Resources, General Counsel, and the Office of Budget and Finance, among others.

General Purpose Classrooms ($3.9 million): as it sounds, this cost pool includes the functions associated with monitoring and maintaining classroom space on the Twin Cities campus, and it is allocated on the basis of total course registrations in a college.

Debt and Leases ($3.6 million): this pool includes the costs of centrally supported debt service and leases. Colleges are charged this cost if they occupy spaces for which the University is paying debt service. For CLA, Folwell Hall is an example of a debt-financed renovation for which we are charged costs in this pool.

Utilities ($3.6 million): while some utilities are charged through the Facilities Operations cost pool, most are included in this Utilities cost pool, including steam heat, electricity, and central air conditioning. Most utility charges are measurable by building, so over time, this charge has been more of a direct cost to units, rather than a proxy methodology that is present with most of the other cost pools.

Research Support Services ($0.6 million): the budgets for central units that administer, support, and monitor sponsored research activity are covered by this cost pool, such as the Office of the Vice President for Research (OVPR) and Sponsored Financial Reporting, among others. The costs are charged out to colleges based on a three-year rolling average of sponsored research expenditures.

Finally, it should be noted that the University's budget process has two distinct components that separate the units that are supported by cost pools and the collegiate units that pay the cost pools. The administrative (cost pool) units have an earlier (early winter) budget process to allow budget decisions to be made in time to reflect the impact on cost pools for the colleges. The colleges then know the impact of any cost pool changes when engaging with the University's budget process in the spring.

CLA Budget 1001--Part 4: What We Control, What We Don't

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The budget for the College of Liberal Arts is financed primarily by tuition (75%) and state appropriations (19%). These resources are then spent on CLA operations, primarily on salaries and fringe for faculty, staff, and graduate assistants (54%), as well as overhead and shared costs to the University (35%, known as "cost pools"). (See earlier columns of this CLA Budget 1001 series for more background.)

The revenues and expenses of the college are influenced by a variety of factors, and this piece is intended to briefly highlight that some of the factors are within CLA's control, while others are largely outside of our control.

What are the drivers?

At a very basic level, the two most significant drivers of tuition revenue to the college are the number of students paying tuition and the rate of tuition charged. As for the rate of tuition charged, this is a decision made by the Board of Regents, not CLA. The number of students in CLA also is subject to a lot of influences, among them:

• the number of new high school students admitted,
• the number of transfer students admitted,
• the number of students who transfer into or out of CLA from other parts of the University, and
• the rate at which students complete their degree programs and graduate.

The overall number of students in CLA has declined in recent years, with one result being a decline in the amount of tuition revenue.

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The number of undergraduate students admitted to CLA is a decision made in the Provost's Office, and this decision is influenced by goals the University has for the size of the student body as well as the academic characteristics of the students admitted.

One other factor that can significantly influence the tuition revenue from undergraduate students is the individual course-taking behavior of each of roughly 14,000 undergraduate students enrolled here. The University's financial structure shares the tuition revenue between the college that enrolls the student and the college that provides the course instruction to that student. (See part 2 in this series for more on the University's 75/25 split.) In recent years, the share of credits that CLA students take within the college has declined (see graph below). This is the result of thousands of individual decisions by students.

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Finally, the allocation of state appropriations among colleges within the University is the result of the annual budget and planning process of the University. (See part 3 in this series for more on state appropriations.) CLA participates in this annual budget process, but decisions about allocating state resources are made by the University's administration. The University's budget process considers the combined amounts of tuition and state appropriations when making resource allocations to individual colleges.

Within CLA's Control

While much of the revenue side of CLA's budget is subjected to external influences and not internally controlled, the college has more discretion on the spending side of our budget.

Over half of CLA's budget goes toward paying for salaries and fringe benefits for employees. This is not surprising, given the nature of any educational institution. Because this is our largest expense, it is also the area of most spending discretion. CLA makes its own choices about the number of faculty, the number of teaching assistants, and the level of staffing for administrative functions. The compensation levels for any given position is only partly within our control, as there are external influences as well, primarily market considerations, collective bargaining agreements, and University policies.

In contrast to undergraduate admissions, the number of graduate and professional students admitted is a decision made within CLA. The reduction in the number of graduate and professional students over the past few years (see table above) reflects both a drop in the number of new students matriculating each year and efforts to ensure students compete their degrees in a timely manner.

Effective management of the college's curriculum is a primary way in which CLA can both help control its costs and influence its revenue. CLA departments seek to offer courses that meet our mission as a liberal arts college and are part of a coherent academic program. Additionally, departments try to ensure that the number of courses offered--as well as the timing--help students meet degree requirements in a timely manner. Ideally, the curriculum within each department is attractive to students and enrolls well, in order to make good use of faculty instructional time as well as teaching assistants. Appealing to student interests and enrollment trends in turn helps the college's tuition revenue by drawing students into CLA classes, both from within CLA and also from other colleges.

CLA, like other colleges at the University, also has discretion over its use of "indirect cost recovery" (ICR) revenue that accompanies the receipt of many external grants. (A future column will examine grants and ICR revenue.) Additionally, CLA, in consultation with academic departments, sets its own priorities for fundraising from private donors and can partner with donors to direct these resources to collegiate priorities like scholarships and fellowships. Both ICR and donated funds, however, are much smaller sources of revenue than either tuition or state appropriations.

CLA Budget 1001--Part 3: The State Appropriation

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By Brent Gustafson, Finance Director

As a public institution, the University of Minnesota relies on biennial appropriations from the Minnesota Legislature to fund a significant portion of its operations. For the College of Liberal Arts, state appropriations fund nearly $45 million of our current year's budget (19%). This week's column is intended to explain the process of how the University allocates these resources among colleges, as well as trends in the level of state resources available to the University and to CLA.

Biennial Process

Each time the State of Minnesota develops its budget, it does so for a two-year period. This "biennial budget" sets in law appropriation amounts for state agencies and the University of Minnesota, among other recipients. Typically, the state legislature makes appropriations for each two-year biennium in the spring of each odd-number year for the fiscal year that begins on July 1 of that year. The Legislature is currently in session and developing the FY 2014-15 biennial budget. Overall, the State's budget encompasses a total of $67 billion for the two-year period across all funding sources (FY 2014-15 ). However, much of the focus for the state budget each legislative session is on the $37 billion General Fund, because this is the largest and most flexible resource for state lawmakers. The General Fund is the source of the University's appropriation from the state.

While the Legislature creates an appropriation law (i.e., the budget) in the odd-numbered years, it also makes adjustments to the budget in the even-numbered years, often referred to as the supplemental budget.

University Process

Within the University, each administrative and collegiate unit undergoes an annual budget and planning process with central administrative offices. These central offices are responsible for the overall allocation of resources across the University and for presenting those plans to the Board of Regents. Academic units like CLA go through this process--known as the compact process--each spring for budget allocations for each fiscal year that begins on July 1.

As part of this annual budget process, the University will allocate what it has received from the State of Minnesota. The state appropriation is often referred to as "O&M," which stands for Operations and Maintenance. For the current fiscal year (FY 2013), the University received $545.8 million as an appropriation from the State's General Fund (the biennial amount for the U for the current biennium is $1.09 billion, or about 3% of the State's total General Fund). For the current fiscal year, CLA's allocation of state appropriations is $45 million, or about 8% of the University's allocation.

In making allocations to colleges such as CLA, central offices take into account many factors, including the availability of other resources. The budget process involves examining levels of funding and trends across all sources, so CLA's revenue from tuition and other sources is taken into account when setting allocations of state O&M funds. Other colleges receive different percentages of their budget from the state appropriation.

Trends

The amount of funding for the University--and consequently CLA--has fluctuated over time, particularly in light of state budget shortfalls. For example, the State of Minnesota faced a $5.5 billion budget shortfall for the current biennium. In setting appropriations for this two-year period, the Governor and Legislature set the amounts for the University at a level that was $126 million lower than the prior two-year period.

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Not surprisingly, as the state funding for the University has decreased, so has the amount of O&M that has been allocated to CLA. In 2008, state resources funded $75.6 million of CLA's operation (32% of CLA's budget). As noted above, the CLA's budget for the current year relies on $45 million of state funding (19% of CLA's budget).

Currently, the University has a budget request under consideration by the State Legislature. Anyone seeking more information about the University's biennial request can get information from the University's Office of Government and Community Relations: http://govrelations.umn.edu/biennial-budget.html.


CLA Budget 1001--Part 2: A Closer Look at Tuition

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By Brent Gustafson, Finance Director

The budget for the College of Liberal Arts is financed primarily by tuition (75%) and state appropriations (19%). These resources are then spent on CLA operations, primarily on salaries and fringe for faculty, staff, and graduate assistants (54%), as well as overhead and shared costs to the University (35%, known as "cost pools"). [See the first article of CLA Budget 1001 for more on sources and uses of the CLA budget.] This piece is going to examine the college's largest revenue source--tuition--in more detail. For the current fiscal year (2013), CLA is budgeting tuition revenue of $177.3 million.

Tuition revenue includes tuition paid by graduate, professional, and undergraduate students. In CLA, 89% of our tuition revenue comes from undergraduates.

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75/25 Split
The University of Minnesota uses a budget model that allocates all "earned income" to colleges across the system. What this means for tuition is that all the tuition is earned at the collegiate level, and only through overhead charges (known as "cost pools") does that money get back to centralized University functions.

Within this structure, tuition is "earned" in two different ways: through enrollment and instruction. The University budget model gives 25% of a student's tuition to the college in which that student is enrolled (registration tuition). The remaining 75% of the tuition paid goes to the college that provides the instruction for the course (instructional tuition). Given the individualized nature of student course taking, that 75% portion of tuition will vary from student to student. Additionally, for any given student it is possible that the 75% portion of tuition will vary from semester to semester, and even from course to course.

Examples:

1. A forestry major (CFANS) enrolls in a Spanish class. Of the tuition paid, 25% goes to CFANS, 75% to CLA.
2. A sociology major (CLA) enrolls in a Family Social Science class (CEHD). Of the tuition paid, 25% goes to CLA, 75% to CEHD.
3. A psychology major (CLA) enrolls in an art class. 100% of tuition is paid to CLA.

Trends
CLA has financial challenges related to tuition based on both aspects of the 75/25 tuition split. Overall enrollment in the college (undergraduate and graduate students) has declined from just over 17,000 students in fall 2009 to just under 16,000 students in fall 2012. This reduces the tuition available from the 25% paid to the college of enrollment.

Additionally, CLA has experienced a decline in the number of student credit hours of instruction taught in our courses. In academic year 2008-09, CLA delivered approximately 434,000 student credit hours (SCH) of instruction, while last year (AY 2011-12) that figure was approximately 393,000 student credit hours. While some decrease in SCH should accompany the decrease in the size of the student body, another trend has created pressure on CLA instructional tuition. CLA students are taking an increasing share of their credits in colleges outside of CLA:

• In 2008-09, CLA students took 73% of their credits in CLA, with the remaining 27% at other colleges;
• Last year (AY 2011-12), only 66% of CLA credits were taken here, while 34% were taken at other colleges.

There are likely a number of factors that are influencing these trends, reflecting trends in demand for particular fields of study as well as the menu of what's offered in CLA and other colleges.


Implications
Regardless of the source, the implication is that the combined effect of fewer students overall and a declining share of the instructional pie results in budgetary challenges for the college, as this creates downward pressure on our single largest revenue source.

Often the most visible aspect of tuition is the overall rate set by the Board of Regents, as well as any rate of increase. However, for any college within the University, the total amount of tuition earned is driven not just by price, but by volume. As a result of a decline in volume, CLA's tuition revenue does not change by the same percentage as the price increases of recent years. For example, for the current fiscal year, while the rate of in-state undergraduate tuition increased 3.5% (and 4% for non-resident and graduate student tuition), CLA has only budgeted a 2.4% increase in revenue from tuition due to the declines in enrollment and student credit hours described above.

CLA Budget 1001--Part 1: Basic Revenue & Expense

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(A new series on how our money works)

By Brent Gustafson, Finance Director

The annual operating budget for the College of Liberal Arts is approximately $250 million for the current fiscal year. While this is a really big number, the CLA budget can be broken down into two main sources of income and two main types of expenses: tuition and state appropriations, and personnel and cost pools (the charges from the University for a variety of indirect costs).

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The largest single source of revenue to finance CLA operations comes from tuition--primarily undergraduate tuition ($177 million of budgeted tuition in FY 2013, 75% of collegiate revenue). Appropriations from the State of Minnesota to the University make up the second largest component of CLA's revenues ($45 million in FY 2013, 19% of budgeted revenue). State appropriations are allocated to colleges through the University's annual budget process, and this amount has varied over time, and has decreased in recent years due to reductions in state funding for the University.

Beyond these two sources of revenue, the college receives smaller--but still significant--amounts from external grants, donated funds, and student fees.

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Not surprisingly, over half of the college's spending in any given year goes for salaries and benefits for employees, and this includes faculty, staff, and graduate assistants. And, obviously most of this spending is in academic units for faculty and teaching positions.