Continuous Improvement

Current revenue streams and future funding from new sources should provide sufficient funding to support University operations. While it is unlikely that the University will experience any significant financial difficulties in the near future, it has set a number of ambitious goals which will depend on significant increases in revenue from multiple sources. The University is moving aggressively to increase the funding it receives from its three main sources—State appropriations, tuition, and sponsored research—and is embarking on a $100 million capital campaign. Since the 1991 financial difficulties, the University has taken several steps to insure financial mismanagement will not lead to future difficulties.

Current Sources of Revenue: State Appropriations, Tuition, Sponsored Research, and Private Gifts

Although increases in State appropriations have been moderate, they have been reliable, and we anticipate this will continue.

In 1996/7, the State of Michigan began to establish per student "floor funding" levels (minimum per-student funding levels) for universities, based on Carnegie classifications (see Table 1, Chapter 1). Michigan Tech is currently classified Doctoral II, although we have achieved the threshold for Doctoral I status. Attainment of Research II classification within the next five years is highly likely, and would make us eligible for additional funding. In addition to regular line-item appropriations, the State also funds capital projects; however, the State now requires matching funds for them (see Chapter 11).

The University has been working to educate State officials about the high cost of science and engineering education. President Tompkins' election to the presidency of the Michigan Presidents' Council, an organization composed of the presidents of Michigan's 15 State-supported universities, supports this. Two unpredictable factors which may impact State support in the future are

1. the extent to which the State requires public universities to help fund the unfunded portion of the MPSERS (Michigan Public School Employees Retirement Systems) fund, and
2. settlement of the Durant case which could require the State to fund all Federal and state unfunded mandates for K–12 education—this could place significant pressures on the State budget (initial estimates indicate that the cost could be in excess of $300 million per year).

Because affordable tuition is a University objective and because Public Act 7 provides a tax credit to parents of students who attend universities that limit tuition increases to the level of inflation, it is unlikely that the Board will recommend significant increases in tuition rates to generate revenue. Instead of looking to increase the tuition rates, the University is acting to attract and retain students (see Chapter 4) to increase total tuition revenue. Enrollment is projected to increase in 1998/99. When we achieve our stated goal of 7,100–7,300 students, we would realize annual additional revenue from tuition of $3–4 million.

We now distribute a large portion of our financial aid based solely on academic qualification and financial need. Financial aid could be used preferentially as a tool to improve enrollment in under-enrolled programs.

Although Federal funding for research has been significantly constrained in recent years, we have been able to obtain an increasing number of dollars from sponsored research, a trend we anticipate will continue. The role of research in the tenure and promotion process, and support supplied for research (see Chapter 8), are significant and continuing institutional incentives. Nonetheless, declines in federal funding coupled with a reluctance to fund indirect costs pose threats to our ability to support research at a level consistent with our strategic plan.

The past success of the Michigan Tech Fund, as well as the connections provided by the many industrial advisory boards and alumni academies, position Michigan Tech for future advancement efforts. To aid in the upcoming capital campaign, we hired an outside consulting firm, which determined that the University was not yet in a position to begin a major capital campaign. The consultants' recommendations have been incorporated into Advancement's long-range planning to guide future fundraising activities. While the capital campaign should provide the funding required for planned capital improvements, it is unlikely that operating funds will be enhanced by external fundraising, with the possible exception of tuition scholarships.

Factors That May Enhance Future Revenue

Better marketing, improved residence facilities, and an improved intellectual properties office position the University to generate new revenue in the future. Michigan Tech is developing a comprehensive marketing plan to enhance our image (see Chapter 4), which should result in higher enrollments and increased levels of giving. Income from auxiliaries is expected to increase as residence halls and student apartments return to full occupancy in Fall 1997/98. With no debt service on these facilities, improved occupancy from a larger incoming freshmen class and a higher re-application rate, attributable to improved residence-life programming and lifestyle options, contribute directly to the University budget. Finally, as our research grows, opportunities for patents and licenses increase and the resulting revenue could be substantial. Trademarks and licensing are also potential growth areas and the University image and icons will be marketed more aggressively than in the past.

Financial Planning

All organizations periodically realign resources to remain viable in a changing environment. Since 1993/94, realignment at Michigan Tech has been accomplished by reducing the total base budget for each unit by 1% each year (see Chapter 1, Response to Concern 3). The administration allocated these captured funds to fund new initiatives such as pursuing accreditation for the School of Business and Economics. However, an unintended consequence of realignment has been the depletion of available funds for SS&E (Supplies, Services, and Equipment). In response to the Board's concern that we reallocate resources, we will be implementing a pilot position control program. After July 1, 1997, any vacant positions will revert to the Provost, and be dealt with on a case-by-case basis. To resolve the problem with depleted SS&E budgets, in 1997/98 these budgets will increase by 4% across the board.

A weakness in our financial planning is that not all strategic financial goals have been quantified. For example, one goal is for student tuition and fees to increase at a "modest" rate, yet there is no definition of "modest" nor any goal for total tuition revenue. This is also true for State appropriations, fundraising, and savings from enhanced operating efficiency. Another weakness is that we have not yet translated our strategic financial goals into long-range budgets which look more than three years into the future. Assessing and clearly stating our goals in terms of future revenue streams and expenditures will help us accomplish the University's ambitious strategic objectives.

Although the University is prepared for short-term financial shortfalls, with its $10 million line of credit, it has not anticipated or planned for events, such as permanent cutbacks in the State funding or large unplanned costs, that would create long-term financial problems. The University Senate has yet to propose a retrenchment plan. The danger is that, given the 1991 financial difficulties, any efforts in this direction may be misinterpreted as symptoms 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.

Integrity

The University demonstrates integrity in its financial relationships through a system of internal controls, full and truthful disclosure of its financial position in publicly available audited financial reports, and policies and procedures which ensure ethical conduct. Specific policies and procedures are in place for acceptance of gifts and distribution of financial aid.

Michigan Tech's internal and external auditors' reports indicate that the University's internal control system is well-designed and functioning properly to safeguard University assets and to fully and accurately record, summarize, and report financial transactions (including transfers between funds). Monthly forecasts and monthly and quarterly reports are prepared in addition to annual, audited financial statements. Established University policies guide the transfer of funds between fund accounts, purchase of large capital items, investment of capital, and budget accountability. Investments are restricted to specific investment criteria and vehicles; an external, independent money manager manages these investments and reports to the Board of Control at least annually.

The Chief Financial Officer, the Board of Control, and the University Senate are all charged with general financial oversight. The Chief Financial Officer monitors compliance with the University's budget and has the authority to take preventive and corrective action, which includes prohibiting a unit's expenditure of funds in excess of its budget. He reports bimonthly to the Board on the University's financial status; minutes of these meetings are publicly available in the library [3.2B]. The Board of Control must approve the annual University budget as well as significant capital acquisitions and financial obligations such as the issuance of bonds. The Finance Committee of the University Senate is charged with reviewing the financial status of the University, and in particular whether University investments adhere to investment guidelines. The Senate President reports on Senate activities at every Board meeting.

The University fully and truthfully discloses the results of its operations and its financial position in its externally audited annual report, which includes the published audit opinion. The annual report is publicly available. In addition, the University prepares Combined Annual Financial Report Financial Statements in the State's consolidated format. Because Michigan Tech has an independent Board of Control, it enjoys relative autonomy from detailed State financial control, compared to more centralized systems of public higher education in neighboring states.

Additional audits to insure financial integrity include:

• audits by the Internal Auditor, who reports regularly to the Board;
• periodic audits by the State of Michigan;
• NCAA financial audit of intercollegiate sports every three years; and
• periodic U. S. Department of Health and Human Services audits of sponsored research.

The Internal Auditor submits an annual audit plan 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, departmental responses, and recommendations for improvements. However, in the past the University had no mechanism in place to follow up to ensure that incorrect financial procedures were corrected. During the past year, Internal Audit began follow-up audits on prior recommendations. This has provided an incentive for departments to correct any practices that are not fiscally sound.

The University's Conflict of Interest Policy [1.2A] requires individuals to disclose conflicts that arise 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 at risk.

In response to growth in private gifts, and anticipating the upcoming capital campaign, the Michigan Tech Fund has developed procedures over the past few years with regard to donor solicitation, the acceptance of gifts, the valuation of gifts, control and appraisal of assets, and the environmental assessment of properties. The Michigan Tech Fund is audited separately by independent auditors at the direction of the Michigan Tech Fund Board of Trustees (the Tech Fund Board includes two Board of Control members as liaisons), but its financial reports are not reviewed by the University's Internal Auditor.

Financial aid programs are governed by policies and procedures established by the University, the State of Michigan, and the Federal government.

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