Goal 8 Committee Report

Committee Members:
Chair: Larry Davis - Associate Professor: Business and Economics
Co-Chair: William McGarry - Treasurer and Chief Financial Officer: Finance
Joseph Galetto - Executive Director: Enrollment Management
Howard Greenley - Director: Auxiliary Retail Operations
Janet Hayden - Executive assistant: Government Relations/Secretary to the Board of Control
Renee La Fleur - Student Representative
Ann McLean - Associate Professor: Forestry
John Sellars- Senior Vice President: Advancement
Martha Sloan - Professor: Electrical Engineering

The committee focused on financial management for the University as a whole. We gathered information and evaluated the manner in which the University translates the goals in its strategic plans into financial plans, insures that sufficient funds necessary to meet the University’s strategic goals are generated, and manages its financial resources in an effective and efficient manner.

The committee evaluated how well the University is meeting the projected targets outlined in the University’s Strategic Plan. This report will specifically address the five North Central Association (NCA) criteria. See Attachment 1 for a more detailed explanation of this committee’s charge and responsibilities.

Clear Statement of Goals

The University has clear qualitative statements of its financial goals in the strategic plan 1998 and Beyond. These financial goals are driven by the financial requirements of the other strategic goals, and are consistent with the other strategic goals and with the University’s mission. These goals make it clear that the University is committed to financial stability, an inclusive, effective budgeting process, increasing the financial resources available to the University, and keeping tuition at an affordable level.

Clear, quantitative statements of the University’s short term financial goals are in its annual budgets. These budgets clearly set out planned levels of revenues and expenses, and are made public via formal presentations by the provost to the faculty, staff, and board of control.

The establishment and communication of the financial goals in the Strategic Plan and in the annual budget is an important improvement when compared to historical practice. Historically, the University did not have established financial goals, or routinely communicate financial information to the University community.

A weakness with respect to clear statement of the University’s financial goals is that the goals have, for the most part, not been quantified (i.e., translated into dollar amounts) in either the strategic plan or in the form of long range budgets (i.e., beyond two or three years into the future). For example, one goal is that student tuition and fees should increase at a ‘modest’ rate. However, there is no statement as to what a ‘modest’ rate is, nor is there any statement as to what the goal is with respect to total tuition revenue. Similar situations exist with respect to state appropriations, fundraising, and savings from operating efficiency. This represents an opportunity for the University to assess and clearly state as goals the levels of future revenue and expenditure that will be necessary for accomplishing the University’s strategic objectives.

Organization

The University has organized its resources for the efficient and effective management of the University’s financial operations. The University has clearly assigned responsibility for its primary financial functions to specific individuals who are qualified to perform those functions.

Primary responsibility for the management, operation and oversight of the University’s financial activities resides with the

1. President,
2. Executive Vice-President and Provost,
3. Director of Budget, Planning, and Faculty Personnel,
4. Chief Financial Officer, and
5. Internal Auditor.

The distribution of responsibilities among these individuals results in clear assignment of responsibilities to the individuals responsible for the various financial management functions, and insure that the University’s finances are given the attention that they deserve.

Primary responsibility for the preparation of the University budget resides with Executive Vice-President and Provost, and with the Director of Budget, Planning, and Faculty Development. These individuals’ active and continuing role in the planning and management of the University make them well-suited for this role. The assignment of University budget responsibilities to the Executive Vice-President and Provost occurred in 1991 in response to financial difficulties (see discussion under Criterion 3) and also the reorganization that took place after the hiring of the current President.

The Chief Financial Officer oversees the University’s financial operations and financial reporting. The Chief Financial Officer is a new position that was created in 1992 as a result of the President’s reorganization plan and the financial difficulties of 1991. The creation of the position served to insure that the management of the University’s financial operations and reporting would be handled by a qualified individual and assures that management of the University’s day-to-day financial operations receive the undivided attention of a qualified individual. Previous to the creation of this position, management of the University’s financial affairs were the responsibility of the Vice-President for Operations and Finance, who also had responsibility for Facilities Management, Human Resources, Auxiliary Enterprises, Institute of Materials Processing, Bureau of Industrial Development, and Accounting.

Characteristics of a sound financial reporting system include separation of the operating and the financial reporting functions, and independent review of financial reports provided to users. The Chief Financial Officer is an Officer of the Board of Control and reports directly to the Board. However, the Chief Financial Officer has dual reporting responsibilities and also reports to the President of the University. The Internal Auditor reports to the Board of Control, through the Secretary to the Board, insuring his/her independence of operational managers. The Internal Auditor is responsible for providing assurance that the University’s accounts are accurate, expenditures are properly authorized and that the University’s business procedures are adequate. Under their current charter, the Internal Auditor has not been assigned responsibility for reviewing financial reports provided to the board of control and/or external parties

The dual reporting responsibilities of the Chief Financial officer combined with the limited authority of the Internal Auditor to review financial reports presented to the Board of control and external parties represents an organizational weakness in that there is neither a clear separation of the financial reporting and operating functions, or an independent, internal review of financial reports. (The external auditors audit the annual financial statements, but do not review the other information provided to the Board of Control or the quarterly financial statements.) This weakness might be alleviated by either having the chief Financial officer report only to the Board of control, or by assigning to the internal auditor responsibility for reviewing the financial reports provided to the Board of Control and to external parties.

Currently, both the Internal Audit Department’s reports and the Chief Financial Officer’s presentations are given to the full Board of Control. The effectiveness of the board’s financial oversight could be enhanced by the establishment of finance subcommittee whose members are charged with developing in-depth understanding of the University’s financial management and operations.

Management of financial aid is the responsibility of the Director of Financial Aid who reports to the Executive Director of Enrollment Management, who reports to the Provost. The existence of these two positions results in clearly assigned responsibility for these functions and acts to insure that they will be managed by qualified individuals.

The University has created the Michigan Tech Fund, which oversees the fund raising activities and receives gifts on behalf of the University. The Michigan Tech Fund is governed by a Board of Trustees, and is audited annually by an outside accounting firm.

External fundraising is primarily the responsibility of the Senior Vice-President for Advancement and University Relations. The University has expended significant effort and resources reorganizing the advancement area and preparing for a major capital campaign. The advancement area has been totally reorganized, including the hiring of college/school development officers in preparation for a $100 million capital campaign. In particular, a new Senior Vice-president for Advancement and University Relations has been hired, as has an executive director of development and the Michigan Tech Fund. The President also plays a major role in fund raising activities. At the department/college/school level, advisory boards and alumni academies have been instituted.

Auxiliary Services includes student housing, food service, and retail operations. Since 1988 Auxiliary Services has been reorganized with a significant reduction in upper level management positions, including the Director of Auxiliary Enterprises, Director of Housing, and Manager of the S.D.C. The result of the reorganization was an annual budget savings of $250,000. Auxiliary Services is currently divided into two areas managed by a Director of Residential Services and a Director of Retail Services.

Qualifications of Financial Management Team

The University’s hiring practices[1.5B2] insure that the University employs only qualified financial professionals for its top financial management positions. Under those guidelines, when filling top administrative positions—which would include the Chief Financial Officer, the Provost, the Director of Financial Aid, the Internal Auditor and the Vice-President for Advancement and Development—the University conducts regional or national searches to identify qualified candidates, and those candidates are screened by a committee composed of appropriate faculty members and administrators.

A review of the University’s top financial administrators’ personnel records (in the Human Resource Department) indicates that all have a record of work experience, professional certification, and/or education that makes them well-qualified for the responsibilities that they hold. For example:

1. Prior to coming to Michigan Tech the President and Provost held positions where they had full responsibility for developing and monitoring the budgets of various units at other universities
2. The Chief Financial Officer held financial management positions at Lehigh and Rensselear Polytechnic Universities
3. The Internal Audit Head worked for several years as an auditor for the State of Michigan and holds, among other professional certifications, a CPA certificate.

In addition to the individuals described above, the personnel records of the Director of Financial Aid and the Senior Vice-president for Advancement and University Relations were also examined and show that these individuals are well-qualified for their positions. For example, the Senior Vice-President for Advancement and University Relations held a similar position and had a record of significant success in fundraising before coming to MTU.

Financial Decision Making Process

The budget process aligns well with the strategic plan (see Attach-ment 2). This process assures that there is consistency between the University’s stated long-range goals and its short run resource generation and allocation, and that inconsistency between the short run and long run objectives do not lead to confusion as to what the University’s financial goals are. Prior to 1991 there was very little discussion and involvement by the campus community in the budget process, and thus there was an atmosphere of mistrust of the upper administration. The current process insures that the relevant constituencies have input into the budget process and thus enhances the effectiveness and credibility of the financial decision making process.

The budget process typically begins in the fall of each year with a re-evaluation of current internal strengths and weaknesses and progress toward our goals. One result of the evaluation is the identification of possible budget priorities. The Provost then meets and reports on the progress that was made the prior year and discusses the possible budget priorities for the following year with all budget units on campus. As a follow-up to the individual meetings, all units are requested, typically in November, to update their progress in achieving the initiatives relevant to their area and set new, annual goals for their operations (including a prioritized list of initiatives that require new central resources) [7.7]. In January, a first draft of possible budget scenarios for the following year are developed by the Director of Budget and Planning, in consultation with the President and Vice Presidents, and shared with the campus community. During the spring, all of the unit initiatives are reviewed and final decisions regarding proposed funding are made. The final budget is normally approved by the Board of Control in June.

Technology

The University relies primarily on the BANNER® system for the processing of financial information. This system has generally met the University’s needs in an acceptable, although not outstanding, manner. Since installation of the BANNER® system there have been no significant stoppages in processing or reporting financial information. Neither the internal auditor nor the external auditors have noted any significant problems with the system that would prohibit the University from normal operations.

While the system has functioned well for most routine transaction processing, an inability to easily modify the software has led to some problems. For example, the University has been unable to easily modify the software for optimal contract billing by research services. Qualified personnel with good software programming skills are needed to write, implement and maintain a complete package for financial services which would be compatible with BANNER® [2.6H1].

Computing hardware is adequate for financial purposes. Physical space and functional propinquity are also adequate.

MTU has provided adequate resources over the last ten years to support it operations. The University experienced financial difficulties in 1991 (see below). However with the exception of the recession of the 1991/92 salary increases, the University has never defaulted on a financial obligation or been forced to curtail its educational or research activities.

1991 Financial Difficulties

In October of 1991 the state did not make a scheduled payment to the University for its 1991/92 state appropriation. This payment was effectively never made. As a consequence of this action, the University was compelled to lay off fifty staff members, reduce salaries by 4%, and to borrow money. Virtually all of the individuals who were laid off and wished to return to work at the University where eventually rehired. The debt that was incurred as the result of the missed payment has been repaid. Further as of June 20, 1996, the University had cash and cash equivalencies that totaled $23 million. This is a significant increase from both the $12 million on hand on June 30, 1988, and the $4 million on hand on June 30, 1991.

At the same time the state did not make its monthly appropriation payment to the University, the Vice President for Operations and Finance was making financial commitments on the basis of fund reserves which were not reflective of cash balances. When coupled with the missed payment from the state and the decision to prefund the early retirement programs of the 80s (which resulted in a transfer of $7 million from the General Fund to the Retirement and Insurance Fund) the result was a General Fund deficit. In 1991, this deficit totaled $7,866,000. Since 1991 the University has been committed to the reversal of this deficit and the deficit, as of June 30, 1996, was $2,496,000.

Since 1991 the University reorganized its financial operations and has implemented several processes to enhance effective financial management. The duties formerly held by the Vice-President for Operations and Finance have, as discussed previously, been divided between the Executive Vice-president and Chief Financial Officer. The University has developed a cash flow projection model to aid in the prediction and management of cash flows, has begun issuing quarterly financial statements, and has implemented a more participative budgeting process to aid in the timely identification of actual or potential problems.

ESI/Ventures

A detailed discussion of the Educational Support Institute (ESI) and Michigan Tech Ventures, Inc. (Ventures) is contained in the Lewiston Report. Only a brief overview of the relevant issues is provided here.

In the early to mid 1980s, the Michigan Tech Board of control authorized the establishment of the ESI and Ventures, with Ventures eventually becoming a wholly-owned subsidiary of ESI. The purpose of these two organizations was to benefit Michigan tech through the facilitation of ‘the transfer of technology from the laboratory in the business world’ [5.6A, p.3], support of the University’s research and development activities, etc., and to facilitate regional economic development. ESI was established, and ownership of Ventures transferred from the University to ESI, in order to separate the management and operations of Ventures from the University itself.

ESI/Venture’s objectives were laudable and there were several successful, job-creating initiatives. In particular, ESI/Ventures facilitated regional economic growth and job creation through aiding startup or financially troubled companies such as Peninsula Copper, Gundlach Construction, and Main Street Inn (now Best Western - Franklin Square).

In 1990 and 1991 ESI and Ventures were named as defendants in several civil lawsuits alleging nonpayment of debts. Shortly thereafter, two of Ventures’ top officers pleaded no contest to tax evasion and the dissolution of ESI and Ventures began. As of June 1997, the dissolution is substantially complete, although ESI and Ventures both remain in existence pending final completion of their legal and business affairs.

The net effect of ESI/Ventures on the University was threefold:

1. the loss of an indeterminate amount of assets that were transferred to Ventures,
2. a tarnishing of MTU’s reputation, and
3. the impairment of the University’s ability to engage in profitable technology transfer.

In particular, the ESI/Ventures events have impaired the University’s fundraising efforts due to a perceived lack of integrity on the University’s part. Fortunately, because ESI is a separate legal entity, the University should not be liable for any unpaid debts or obligations of ESI/Ventures.

While it is not within the University’s power to institute policies that would prevent a similar series of event from occurring in the future, it is unlikely that similar incidences will occur in the future. The rights and responsibilities of the MTU Board of Control are defined by the laws of the state of Michigan. The Board was acting within its power when ESI/Ventures were formed and University assets were transferred to them, and there is little that the University can do in the way of formal policies or procedures to prevent similar action in the future. However, subsequent to the events described above, the Board of Control has had a heightened awareness of the need for effective financial management and control. Further, the University’s counsel now attends all board meetings to provide independent advice on Board actions, something that was not true prior to 1991.

Current Sources of Revenue

Presented in the pie charts below (Figures 1 and 2) is information regarding the diversity and changing nature of the University’s funding. Michigan Technological University is, like most higher education institutions, experiencing a shift in funding from dependency on state appropriations to being more tuition, research and private gifts driven. This shift has influenced the University to expand its fundraising and research capabilities.

FIGURE 1. Current Fund Revenues: 1987/88.

Source: IPEDS Finance Surveys

FIGURE 2. Current Fund Revenues: 1995/96

Source: IPEDS Finance Survey

Since 1988 the level of support from state appropriations has gone from $34,923,000 to $41,939,000 in 1996, although as a percentage of the University’s general operation budget it has declined from 69% to 53%. For 1996/97, Michigan Tech received a 4% increase in its state appropriation, as well as an additional $1 million for technology related expenditures in recognition of our high cost science and engineering curriculum.

External funding for research has increased from $11,317,000 in 1988 to $20,900,000 in 1996. This increase has paralleled the growth in graduate programs during that same period and reflects a shift in emphasis on the part of the University from its previous role as primarily an undergraduate institution. The University expends over $5 million per year for support of graduate students, who are an integral part of research activities. Further the University has made significant improvement in the physical facilities in support of the growth in research [6.2B9].

Auxiliary Services generates approximately $18 million a year in revenue however, the cost of Auxiliary Services equals about 90% of that amount. Thus Auxiliary Services does not represent a significant source of funds for the University with respect to its core educational functions.

The University has committed itself to maintaining tuition at affordable levels. The tuition and fees rate at Michigan Technological University ($3,948) is low compared with the University of Michigan ($6,438) and Michigan State University ($5,306) and continues to be listed by Money Magazine as one of the ten best buys among scientific and technological universities. Nevertheless, there is potential for increased revenue by increasing the tuition and fees rate.

Since the last NCA report, undergraduate enrollment has declined from 6,037 in 1988 to 5,541 in 1996, with a high of 6,360 in 1992. This fluctuation in enrollments has had a negative impact on tuition revenue and the University’s ability to meet the financial requirements to meet all of our goals. There are a number of factors that have contributed to the decline. There has been a major downturn nationally in the demand for engineers and scientists. There has also been an increase in the number of engineering programs offered in Michigan: 11 in 1986 to 15 in 1997. The recent decline in enrollments has been a major concern across campus and a number of initiatives have been implemented to try to reverse this trend [6.2B2].

In 1988 the Michigan Tech Fund assets totaled $10,737,278. At the close of fiscal year 1996, Michigan Tech Fund assets totaled $45,473,038. The increase in assets was a result of more alumni involvement and an increase in solicitation activities. In fiscal year 1988 the Tech Fund provided more than $462,175 in scholarships and $685,428 in faculty development funds. In fiscal year 1996, the Fund provided $1,150,864 in scholarships and $1,161,257 in faculty development funds. Among the major gifts during the last two years was a $5,000,000 gift from the Dow Foundation, a $1,000,000 gift from the Ford Motor Company Fund in support of the Environmental Sciences and Engineering Building, and a $2,500,000 gift from Richard and Bonnie Robbins in support of a number of University initiatives. Corporate support during the same period has increased from $1,952,178 in 1987/88 in gifts and grants to $3,319,868 in 1995/96. Likewise, corporate research funding increased from $1,932,736 in 1997/98 to $3,608,089 in 1995/96.

Operating Efficiencies

The University has put forth several efforts at reducing/and or controlling future operating costs, most notably in the area of employee benefits (after salaries, fringe benefits are the University’s second largest expense.) In 1995, a Benefits Long-Range Plan was developed. The premise on which the plan was built was the philosophy that Michigan Tech "deliver an employee benefits program that provides flexibility over the design and cost of benefits in order to deliver the highest quality and value at a reasonable cost for both the individual and the University." A number of the initiatives included in the plan have been implemented. They include the adoption of a PPO network, implementation of a flexible benefits program (Tech Select), and initiation of a wellness program. In addition, the University is phasing out its defined benefit retiree health care plan (estimated liability of $107,000,000) and replacing it with a defined contribution plan (estimated liability of $6,000,000). Michigan Tech’s Physical Plant is also recognized around the State as the most efficient operation, with the lowest or near lowest cost in all categories. The current president, who arrived in 1991, adopted total quality management principles and launched a total quality initiative which included the hiring of a Director of Total Quality Management. This has resulted in improvements and efficiencies in a number of administrative processes across campus.

Ability to Meet Financial Obligations

In 1993 Michigan Technological University received a Moody’s bond rating of "Aaa" and Standard and Poor’s rating of "AAA." These ratings are an indication of the University’s success in meeting financial obligations.

The University has a debt of $3,070,000, the lowest debt level of any public university in the state of Michigan. This represents $497 of debt per full-time equivalent (FTE) student. The next closest is Grand Valley University with a total debt of $15,157,000 or $1,475 per FTE. The highest in the state is the University of Michigan with $621,288,000 or $13,748 per FTE.

In 1995, our liquidity improved by $1.1 million, compared to 1994. The University has exhibited stable finances over the last five years, with net operating gains as illustrated below:

	1991	1992	1993	1994	1995
Net Operating Gain (in thousands of dollars)	$4,656	$10,771	$9,949	$8,748	$5,212

Arthur Anderson LLP, our external auditors, has given Michigan Technological University an unqualified opinion for each of the past eight consecutive years, indicating that in their judgment the University is not likely to experience financial distress. At the same time, the University has periodically obtained short term financing from Michigan Financial Corporation, and has a $10 million line of credit from that institution. These facts indicate that the University is viewed by knowledgeable, objective third parties as being financially stable.

Record of Providing Adequate Financial Resources

Given the fact that MTU is a public institution with a primarily engineering and science focus, the identification of benchmark institutions against which to compare ourselves is difficult. The institution to which we are most comparable is the University of Missouri - Rolla. Compared to UM-Rolla, we spend approximately the same percentage of revenues on instruction (38.6% at MTU as compared to 41.5% at UM-Rolla), but spend somewhat less per student in absolute dollars ($8,433 vs. $9,899).

The three primary resources for providing a quality education are a qualified faculty, support staff, and physical plant. The University has been very successful at attracting and retaining qualified faculty and staff. Further, the University has no deferred maintenance problems and has added and renovated facilities commensurate with its changing role as a research university [6.2B9]. The University staff and faculty salaries are the largest component of instructional costs (indeed, the largest single type of expenditure at the University). As discussed in Goal Committee 2 Report [6.2B4], the University has yet to achieve salary parity with our benchmark institutions. However, as also reported in the Goal 2 Committee report, salaries have not resulted in an inability to hire and retain qualified faculty and staff. As reported in the Goal Committee 2 report, the University has a well-maintained physical plant. Another important physical resource for a technological university is adequate computing for instructional purposes. Since 1988, student computing has been supported through a system of access and course lab fees, resulting in a significant increase in revenues. These revenues must be used in support of student computing; as a result, Michigan Tech has exceptional student computing facilities and support.

Perhaps the most convincing evidence of the adequacy of the University’s support for its educational mission is the good placement rate of students.

The University’s current revenue streams and future funding from new sources should provide sufficient funding to support its current level of operation. While it is unlikely that the University will experience any significant financial difficulties in the near future, the University has set forth a number of ambitious goals for which funding will be dependent on significant increases in revenue form a variety of sources. Since the 1991 financial difficulties, the University has taken several steps to insure financial mismanagement will not lead to future difficulties.

As stated previously, the University’s main sources of funding are: state appropriations, tuition, and sponsored research. The University is moving aggressively to increase funding in each of these areas. In addition, the University is poised to begin a capital campaign to raise $100 million.

State Appropriations

Appropriations from the State of Michigan have—with the exception of the deferred payment in October of 1991—been a reliable source of funding, albeit with moderate levels of increase. However, the state of Michigan has begun using a formulaic method of determining funding for state universities. If this process continues, one benefit of our obtaining classification as a research institution will be that our base level per student will increase. Assuming the state continues to use a similar formulaic funding approach, the University could see an approximately 15% increase in state appropriations. (While the University is currently classified as a Doctoral II Institution and our attainment of Research II classification by the 1998 date set in the University’s strategic plan is subject to debate, attainment of Research II classification sometime in the near future is highly likely [6.2B6].)

In addition to the possible benefits of additional appropriations from attainment of Research II status, the University has been placing increased emphasis on the development of positive relations with the state government and sensitizing the government to the high cost of science and engineering-oriented education. For instance, the President of the University has assumed the presidency of the Michigan Presidents’ Council, an organization composed of the presidents of Michigan’s state supported universities.

There a number of factors that may impact the net level of state support in the future. Most important of these are:

1. the state now requires matching funding on capital projects,
2. the state may require the University to help fund the unfunded portion of the Michigan Public Service Employees Retirement fund, and
3. settlement of the Durant case (which would require the state to fund all federal and state unfunded mandates for K-12 education) could place significant pressures on the state budget (initial estimates indicate that the cost could be in excess of $300 million per year).

Tuition

The University has affordable tuition levels as one of its strategic objectives. As a consequence, it is unlikely that significant increases in revenue will be obtained from increasing tuition rates (i.e., the amount paid per student). Further, significant increases in tuition may be constrained by the Board of Control or state actions (e.g., Public Act 7 provides a tax credit to parents of students who attend universities which constrain tuition increases at the level of inflation).

However, the University has taken action to attract and retain students [6.2B2]. These actions hold significant promise for increasing total tuition revenue. While the University enrollment has been below the levels set forth in the strategic plan, recent indications are that our enrollment is increasing. If the University should achieve its stated goal of 7,100 to 7,300 students, additional revenue from tuition would amount to approximately $3,000,000 to $4,000,000 annually. While the University is actively engaged in broadening the curriculum, our ability to increase tuition revenue through increased enrollments is impaired by the current narrowness of our curriculum.

Currently, the University distributes a large portion of its financial based solely on academic qualification and financial need. One way the University might enhance future enrollments is by also allocating financial aid, in part, based on academic major, with students majoring in underenrolled or new programs being given preference.

Advancement and Development

Concurrent with these developments has been increased effort by various units within the University to enhance relationships with alumni. For example, several colleges have instituted academies to honor distinguished alumni, industrial advisory boards have been established, and the President of the University has ongoing contact and input from a National Advisory Board. Lastly, the University has hired an outside consulting firm to aid in the upcoming capital campaign. The consultants have determined that at this time the University is not in a position to begin a capital campaign, and have identified several areas that the University needs to address before proceeding with a major campaign. The Advancement area is using the consultants' recommendations as a foundation for their long range planning and to guide future fund raising activities. These efforts should pay off in the form of increased giving to the University. While these efforts should prove to be a source for much of the funding required for planned capital improvements, there is likely to be little in the way of general fund budget money provided from external fundraising, the possible exception being the funding of tuition scholarships from the Michigan Tech Fund rather than by the University.

The consultants have determined that at this time the University is not in a position to begin a capital campaign, and have identified several areas that the University needs to address before proceeding with a major campaign. The Advancement area is using the consultants' recommendations as a foundation for their long range planning and to guide future fund raising activities.

Sponsored Research

Current trends indicate that the University will continue to generate increasing amounts of funds from sponsored research. Although federal funding for research has been significantly constrained in recent years nationally, the University has been able to obtain an increasing number of dollars from sponsored research. The role that research plays in the University’s tenure and promotion process, and the incentives and support that the University supplies for research [6.2B6], indicate that there will continue to be significant institutional incentives for the attainment of sponsored research funds and that, as a consequence, the University will continue to generate significant amounts of sponsored research.

While there is the expectation that externally funded research will continue to increase, the continued decline in federal funding coupled with reluctance to fund the indirect costs pose threats to our ability to support research at a level consistent with our strategic plan.

Factors That May Enhance Future Revenue

Michigan Tech currently lacks a significant market presence among high school seniors contemplating college, as well as among potential donors. The University is currently in the process of developing a comprehensive marketing plan. The enhancement of our image through implementation of this plan should result in higher levels of enrollment and increased levels of giving.

Projected enrollment for 1997/98 indicates that residence halls and student apartments will return to full occupancy; this condition allows auxiliaries to provide additional revenues to the University budget. This is being accomplished while maintaining a competitive rate structure which places Michigan Tech in the middle of all Michigan public universities. Revenue generation from this source is enhanced by the absence of debt service on the facilities. Income from this source is expected to continue at a higher level than in the past due to increased occupancy resulting from larger incoming freshmen classes combined with a higher re-application rate attributable to improved residence life programming and life style options.

Another source of potential revenue generation is in the area of intellectual property. As the University’s research grows, opportunities for patents and licenses increase and resulting revenue could be substantial. In addition, trademarks and licensing are a potential growth area and the University image and icons will be marketed more aggressively than in the past.

Realignment of Financial Resources

As must any organization to be viable in the long run, the University must realign its financial resources to meet a changing environment. Since 1993/94, each budget unit has had its total base budget reduced by 1% per year. These funds have been used to fund new initiatives, such as accreditation for the School of Business. However, the result of this process has been a significant reduction in the level of funding available for supplies, services, and equipment. The University will continue to realign its resources, but the mechanism for realignment is being reconsidered (e.g., position control, zero-based budgeting, etc.) with the intent that there will be adequate support for supplies and services in the future.

The University has Not Quantified the Cost of its Strategic Plan

As stated previously the University does not have long term budgets with projections beyond two or three years. As a consequence, it is not possible to assess the extent to which the University’s future funding will be adequate for the ambitious plans for improvement on which the University has embarked. This is not to say that the University has ignored the need for enhanced levels of financial resources to support its planned activities. The preceding discussion in this section argues strongly to the contrary. But the University has not developed the long term financial projections that are important in normal times and critical for sound financial management in periods of transition such as the one currently evolving at MTU.

Contingency Plans in the Event of Revenue Shortfalls

The University does have an established line of credit with Michigan Financial Corporation in the amount of $10 million that can be used to offset short-term financial shortfalls. However, the University has no plans for dealing with such things as permanent cutbacks in the size of state funding, or large, unplanned costs. There have been sporadic attempts at developing a retrenchment plan, in conjunction with the University Senate, but the efforts have yet to bear fruit. Given the (relatively) recent budget cuts and downsizing that took place in 1991, efforts in this direction may be misinterpreted as symptomatic of another financial crisis. However, the University’s current solid financial position provides an opportunity to develop a strategy and operating plan for dealing with financial problems in a non-crisis atmosphere where all affected constituencies may be heard.

Financial Monitoring

With respect to timely identification of difficulties: From a short-run perspective the University has the usual control mechanisms of monthly forecasts, reporting, etc. These reports are reviewed by the Chief Financial Officer and appropriate action taken when necessary. In the longer term these control mechanisms are supplemented by the external auditors reports and the involvement by the Board of Control’s involvement in the budgeting process and the Board’s periodic review of the University’s financial status at their meetings. The lack of a long range budget does hinder assessment of the University’s likely financial health more than two to three years into the future.

With respect to the timely identification of potential additional funding: The University relies primarily on the

1. President,
2. Executive Vice President and Provost,
3. Office of the Vice-Provost for Research,
4. Advancement Office,
5. Vice-president for governmental Relations and the President of the University, and
6. Director of Enrollment Management.

Their activities are described in detail in previous sections of this committee report. Evidence of their success includes the increase in the University’s appropriations for the 1996/97 academic year in recognition of its higher cost programs, the planned capital campaign, the increase in the number of students in our entering freshman class, and the steady increase in research funds over the past 9 years.

Financial Controls

At the operational level, the University’s internal control system insures that the University’s assets are properly safeguarded and that its transactions are fully and accurately recorded, summarized, and reported. The reports of both the internal and external auditors indicate that the University’s internal control system is well-designed and functioning properly.

At the management level, financial oversight is provided by the Chief Financial Officer, the University Senate, and the Board of Control. The Chief Financial Officer monitors compliance with the University’s budget and has the authority to take preventive and/or corrective action where necessary. For example: the Chief Financial Officer may prohibit the expenditure of funds by any unit which has spent in excess of its budget. The University Senate, through the Finance Committee, participates in oversight of the University’s investment adviser’s choice of investments. The Board of Control must approve the University budget each year, and approve both significant acquisitions (e.g., new buildings, equipment) and financial obligations (e.g., the issuance of bonds).

In addition, the University has developed policies and procedures to help safeguard its financial resources. In addition to the policies and procedures which range from controls established to ensure that departments are spending within their budgets, transfers between funds meet certain requirements, investment guidelines are adhered to, and conflicts of interest are disclosed, the University has engaged in long range planning. Long range plans have been developed for recruitment and retention of students, strategic planning, a comprehensive tuition plan, and for auxiliary enterprises operations.

Full and Truthful Disclosure

The University fully and truthfully discloses the results of its operations and its financial position in its annual report. The University’s annual financial statements are audited by an outside auditor with the audit opinion being published in the annual report. The annual report is distributed, or made available, to all its constituents, both on and off campus [4.1A]. In addition, the University prepares annual CAFR financial statements in the State’s consolidated format and prepares quarterly financial statements.

Supplemental to the yearly financial statements, the Treasurer and Chief Financial Officer reports publicly to the Board of Control (every two months) on the current financial status of the University, with a copy of the minutes of these meetings distributed to the library for public display [4.3C, 4.3D and 4.3F–J].

Mechanisms in Place to Ensure Ethical Conduct

The Internal Auditor conducts audits of the University’s operations and provides regular reports to the Board of Control and the Administration. The State of Michigan also audits the University’s financial statements on a periodic basis. An NCAA financial audit of intercollegiate sports is conducted every three years, as well as periodic D.H.H.S. audits of sponsored research.

The University has policies in place that guide the transfer of monies between funds, purchasing of large capital items, investment of capital, and budget accountability.

The investments of the University are reviewed by a committee and are restricted to specific investment criteria and vehicles. These investments are managed by an outside independent money manager who in turns reports to the Board of Control on an annual or semi-annual basis.

The University has instituted a conflict of interest policy which requires individuals to disclose conflicts arising from outside professional activities, commitment of effort, external professional relationships, outside business activities, and other outside professional activities to a Conflict of Interest Coordinator who determines the degree of disclosure required for these activities. Due to the complexity of this issue, the University is working on establishing procedures to help individuals know how and when to disclose potential conflicts and how to ensure that these potential conflicts do not put the University in a vulnerable position.

The University has groups and/or committees that are devoted to reviewing the University’s performance and making recommendations for improvement. These include the University Senate which is composed of faculty and professional staff. The Senate also has a Finance Committee which reviews the financial status of the University. To assist in open communication between the Senate and the Board of Control, and to ensure that the Senate’s voice is heard, the Senate President reports on their activities at every Board of Control meeting.

The Internal Audit Department submits an audit plan each year that guides its audit activities. Internal Audit reviews actual practices against policy to ensure that University policy is being carried out correctly, and that each area is using fiscally sound procedures. The audit reports highlight findings, the department’s responses, and recommendations for improvements. However, in the past there was no follow up to ensure that incorrect financial procedures were corrected. During the past year the Internal Audit Department began follow-up audits on outstanding recommendations which have now provided an incentive for departments to correct any practices that are not fiscally sound.

In addition, as stated before, the University is audited annually by an outside audit firm and periodically by the State of Michigan.

Integrity in Fundraising and Financial Aid

The University has established policies and procedures for the acceptance of gifts and the distribution of financial aid.

During the past several years procedures have been developed regarding the solicitation of donors, the acceptance of gifts, the valuation of gifts, control and appraisal of assets, and the environmental assessment of properties.

The University administers a comprehensive financial aid program that includes scholarships, grants, loans, and part-time employment. The University not only strives to keep costs as low as possible, but to provide adequate financial assistance to make its education affordable to all students. Approximately 70 percent of Michigan Tech’s students receive financial assistance totaling $32 million annually. The financial aid programs are governed by established policies and procedures established by either the University, the government, or by other outside organizations.

Strengths

1. Strong national reputation for high quality, employable and productive graduates.
2. "Best Buy" quality as reported in U.S. News and World Report.
3. Low debt burden of only $474 per student and an established line of credit.
4. Competent financial managers.
5. Commitment to continuous quality improvement.
6. Strategy of increasing the focus on the generation of external research funding.
7. Modern campus with no deferred maintenance problems.
8. Per capita state funded student support in 1996/97 of $7,416 placing the University in the top tier of the state support.
9. Reorganized Advancement organization and increased emphasis on fund raising.
10. Relative autonomy from detailed State financial control.
11. Least expensive facility maintenance costs per square foot among Michigan institutions.

Weaknesses

1. Expensive curriculum that is focused on science and technology and is subject to enrollment fluctuations based on perceived market place opportunities for graduates.
2. Declining enrollment for the past five years.
3. Absence of a Board of Control finance committee and the resultant lack of in-depth financial oversight.
4. Lack of a comprehensive image and marketing strategy.
5. Lack of a long-term, comprehensive financial plan that reflects the cost of implementing the strategic plan.
6. A lower quality index from rating agencies as a result of a high rate of acceptance.

Opportunities

1. Formula funding at the state level.
2. Significant base of affluent alumni.
3. Strong technological bent of economy requiring more science and engineering graduates.
4. Healthy state economy.
5. Increased market for scientific and technological knowledge.

Threats

1. The state legislature viewing us as regional university and not a special cost high technology research and graduate university and adjusting our appropriations accordingly.
2. Cyclical demand for engineers and scientists.
3. Continued decline in federal support for basic technological research.
4. Growth of market share of new engineering programs at other Michigan schools.
5. Possible reduction in state funding (e.g., MSPERS, Durant Case)
6. A resurgent job market resulting in fewer undergraduates continuing onto graduate school.
7. Reluctance on the part of the government to pay the full cost of research indirect costs and fringe benefits.
8. Growing pressure from the state to constrain tuition increases.

Action Plan

1. Develop 10-year operating and capital outlay budgets.
2. Rescind the Chief Financial Officer’s reporting responsibilities to the president, or assign responsibility for the review of financial information provided to the Board of Control and External parties to the Internal Auditor.
3. Develop a retrenchment plan.
4. Include student major as a factor in the allocation of financial aid.
5. Either hire new staff who have the skills necessary to modify and maintain the BANNER® system, or train current staff to do so.
6. Form a Board of Control Finance Subcommittee