Tuesday, March 12, 2013

A Necessary Challenge...


Historically, America’s economic strength has largely been dependent on the quality and accessibility of the education system particularly at the college and graduate levels.  Excellence here has been the fuel for America’s global growth.

But, increasingly, over the past decade plus there has been a most troubling cost growth with tuition growing faster than inflation and student loan debts exploding.  Today, the total loan debts exceed $1 trillion with some 15 percent of that expected to go into default leaving another huge debt burden on the taxpayer.  Further, these sharp rises in tuition have all but eliminated the possibility of a student working his way through college and, thereby, jeopardizing another vital part of the American Dream.

Today a student working at minimum pay rates would have to work some 61 hours per week in order to cover University of Minnesota costs.  In 1970, that figure was 24 hours.  Further, the average student now graduates with a debt load of nearly $30,000.  Assume a couple marries, the combined debt load is $60,000 and this does not include any graduate school costs.  But what it does do is severely hamper the ability of that couple to purchase a home and it also influences the type of employment they seek. Economics compels them to make choices related more to earning power than toward service-oriented opportunities including teaching

For instance, in medicine the debt load is approximately $150,000 and this clearly is impacting career choices with specialties gaining and the area of general practice in decline.

As a result of these changes, our economy will be hurt from fewer housing starts to attracting teachers and doctors.  These rising costs will also prevent many talented individuals from seeking advanced degrees particularly in areas vital to our economic growth.  For instance, a recent Price-Waterhouse report noted that the United States is losing its “innovative edge” in medical technology to countries like China and Brazil

That is a trend we cannot allow to continue.

Over the past several months, there have been troubling stories published in the Star Tribune, Washington Post, and Wall Street Journal relative to the University of Minnesota’s administrative bloat and excessive compensation costs.  And contrary to the efforts by administrators to brush aside the importance of these rising costs, it is of vital importance that we deal with them and prevent further harm.

Personally, I had always thought of the role of academic administration to be one of fostering an environment of excellence and success for the teaching and research pursuits that constitute the mission of a university.  In so many ways they defined the public service value in higher education.

Sadly, higher education leaders have created a financial model that focuses on their importance and it is spiraling out of control   And it is this spiraling that is increasingly creating media criticism and is being identified as a cause for the sharp increases in tuition.

For instance, when I came into the Governor’s office in 1991, the President of the University made approximately $152,000 while I made $112,000 – a gap of some $40,000.  Today, the Governor makes $120,000 and the University President, $610,000 – a gap of $490,000.

This mirrors the overall explosion of administrative salaries.  As an example, the lead attorney for the University makes $295,000 or $95,000 more than the Attorney General of the United States, and over $180,000 more than the Minnesota Attorney General and some $78,000 more than the Chief Justice of the United States Supreme Court.

The University President’s Chief of Staff earns a salary commensurate with the United States Secretary of State while the University lobbyist who pleads the University’s case at the State Capitol earns some $60,000 more than the Governor.

Joel Maturi, a fundraiser and part-time teacher makes $468,000 while the President of the United States earns $400,000.

This comparison with federal and state government officials with comparable responsibilities could go on ad infinitum.

Overall, the Wall Street Journal and Washington Post found some 17 administrators making over $300,000 per year  - well more than the Vice President of the United States and some 81 earning over $200,000 per year or more than any cabinet-level secretary.

As if this is not sufficient cause for alarm, the retirement packages have been attracting attention.

First of all, the University has a rich pension formula for its higher-level employees including administrators. Prior to January 2012, the required employee contribution rate was 2.5 percent of salary with the University contributing 13 percent.  Most public employee systems require a more even split between employer and employee.  In January 2012, a new formula went into effect with employees contributing 5.5 percent while the University puts in 10 percent – still a most generous plan.

Interestingly, the University is far less generous to its civil service employees.  They are part of the Minnesota State Retirement System and contribute 5 percent of their salaries with the University putting in another 5 percent.  Simply put, the top echelons of administrators have a substantially richer pension reward system than the average employee.

On top of this, the Star Tribune has published the enormous costs of some retirement packages.

At the height of the deep recession from 2007-2012 when the middle class was losing some 40 percent of its total net worth and students were buckling under the weight of sharp tuition increases, some top University administrators were helping themselves to unprecedented retirement riches.  For instance, the Chancellor of the University of Minnesota, Duluth was granted by retiring President Robert Bruinincks a $535,700 bonus package.  Other top administrators were also benefactors in sharing the $2.8 million made available by the University.

The one that caught everyone’s attention was the enrichment package President Bruininck’s negotiated.  In addition to compensation in excess of $700,000, he received $455,000 for the purpose of preparing himself to return to the academic world.  He also funneled some $355,000 to his newly created Center for Integrative Leadership where he teaches at a salary of $355,000 per year.

This excess directly translates into higher administrative costs which are then placed on the various colleges under the umbrella of the University.  For instance, the medical school pays over $66 million for overall administration services ranging from utilities to a variety of student services as well as technology, library, etc.  There is no one specific item that identifies administrative overhead.  Rather these costs are blended in with the overall figures.

However, the bottom-line result is that our medical students pay the highest or near the highest tuition for public universities and this impacts our ability to attract the highest quality students.  Further, as mentioned previously, this high cost burden is a factor in the type of medicine students pursue.

At the Business School, the overhead is nearly $21 million.  The prior Dean of the Carlson School pursued financial independence for the school in order to reign in the costs. This effort was not successful.  She resigned and accepted the position of Dean of the University of Michigan School of Business which enjoys more financial independence.

Clearly, high administrative costs have serious consequences.  But salaries, pensions, and retirement packages are only a part of the overall problem of administrative costs.  Perhaps even more serious is the effect of management layering.

For instance, at the University of Minnesota, most management employees are under contract rather than serving at-will.  This means they can only be fired with cause.  This has created some highly expensive and inefficient practices.  It is not uncommon for an outgoing President to extend the contracts of his favorite managers thereby limiting the flexibility of the incoming President.

Further, it has created an environment resistant to dismissal and supportive of transferring the less productive employees.

The overall effect has been one of creating a confusing array of management layers.  For instance, when the University of North Carolina at Chapel Hill hired Bain & Company, they concluded: multiple layers of management can exacerbate complexity.  Complexity and related operating issues lead to inefficiency.  Likewise, when Bain and company reviewed management at the University of California, Berkeley, they noted the redundancies, complexities and inefficiencies.

 Is the challenge worth it?  Well, the Bain report for the University of North Carolina outlined cost savings of $66 million per year.  At Berkeley it was $75 million per year and at Cornell the anticipated savings were $85 million.

Frankly, I have not enjoyed writing this blog. Like so many of you, I love the University and have nothing but fond memories or professors going the extra mile to help faltering students and lead us into a world of ideas and exploration.  They were truly brilliant teachers in the best sense of the word.

As I get older, my acquaintanceship with the medical facilities has become more frequent.  Again, the nurses and doctors are not only talented but also caring. They are exceptional.

They all define the best in serving the public.  But, sadly, the leadership of Morrill Hall has left us with serious problems that must be dealt with if the University is to succeed. It is clearly a necessary challenge…

In my next blog, I will deal with issues of leadership, etc.

See you then.

8 comments:

  1. Thanks for your insight and wisdom Governor.

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  2. And know we know, and it is our duty to let our legislators know. How does this play out on the national education scene? Can we rein in MN costs without losing talent to other institutes? I do mean "public" education institutes. I don't care what Harvard wants to pay their administrators.

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  3. I don't buy the "we might lose talent due to low pay rational". This high priced talent is self serving and usually immoral. They are the ones that got us in trouble in the banking and insurance collapse - and are the same high priced failures running Washington. We'll still get talented dedicated people for the paltry low 6 figure salaries, just not greedy crooks.

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  4. An extraordinary blog. I learned a great deal I did not know. Thanks, Governor.

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  5. Thank you Governor Carlson.
    Appears the U of M Administration has followed the model of our US Senate and Congress. This is outrageous and must end.

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  6. UMN HR appears to be the place where workplace bullies cozy up and pervert the process. I have observed through my wife's struggles with a number of craft union personnel beset with bully bosses that the only thing the policy manuals and their protections are good for is hanging in the rest room stalls where the Sears catalogs used to go.

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    ReplyDelete