Finances & Fundraising, Lecture notes of Financial Management

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Chapter 10 Finances & Fundraising

Goals The University budget is built to reflect the institution’s commitments to academic excellence and affordability. Cost containment along with strategic investments in financial aid, faculty, and research are critical to these goals. Fundraising activity supports critical operational needs as well as strategic investments to manage growth and minimize exposure to risks. Overview This chapter focuses on revenues, and examines the trends by sources, such as state appropriations, tuition, research grants and fundraising. Since 2001, state appropriations as a revenue source has declined and the U-M budget has become increasingly reliant on tuition, research grants, and other sources of revenue. The state appropriation for FY 2022 was $ 32 6.3 million. When this is compared to inflation-adjusted state appropriations since FY2002, there is a widening funding gap between a state appropriation at the rate of inflation and the appropriation provided by the State of Michigan. The COVID-19 pandemic caused the campus to move to remote teaching and work as much as possible, leading to lost revenues in several areas of activity. Starting in fall 2021, in-person teaching with appropriate cautions returned and other work functions were performed through a mix of in-person and remote activities. While the pandemic put a strain on the U-M’s finances, it has managed to weather the financial storm. Starting in January 2018, the U-M offered the "Go Blue Guarantee," which pledges to fund four years of tuition for in-state undergraduate students with a family income less than $65,000 who are admitted to the University. (Such students are also eligible for additional aid, as are many other students, whether in-state or out-of-state.) In November 2013, the University launched its most recent major fundraising campaign - Victors for Michigan - with a goal of $4 billion. The campaign surpassed its goal and closed December 31, 2018 after raising $5.28 billion with more than 3 98 ,000 donors having made 2.4 million gifts. The University manages its endowment to meet donors’ expectations that their gifts will provide support to the University in perpetuity. The objective is to maintain and enhance the value of endowment gifts and to secure their future purchasing power. For More Information Go Blue Guarantee (goblueguarantee.umich.edu) Cost Cutting & Budget Update (publicaffairs.vpcomm.umich.edu/key-issues/cost-cutting- budget-update/) U-M Endowment Q&A (publicaffairs.vpcomm.umich.edu/key-issues/university-of- michigan-endowment/) Leaders & Best/Giving at Michigan (leadersandbest.umich.edu/) Charts in Chapter 10 10.1.1 Breakout by Spending Categories of General Fund Budget for the Ann Arbor Campus, FY20 22. 10.1.2 General Fund Revenue and Expenditure Budget Summary for Ann Arbor Campus, FY20 12 - FY 2022. 10.1. 3 Summary of Budgeted Revenues and Expenditures by Funds for Ann Arbor Campus, FY20 12 - FY 2022. 10.2 Contributions to the University’s General Fund by State Appropriations, Tuition and Fees, and Other Revenues, FY1970-FY 2022. 10.3 FY200 2 State Appropriation Adjusted for Inflation and Projected Forward to Maintain Constant Value, Compared to Enacted Annual State Appropriations, FY2002-FY 2022. 10.4.1 State of Michigan Appropriations to the U-M Ann Arbor Campus per Full-Time-Equivalent Student, Adjusted for Inflation, FY20 12 - FY 2022. 10.4.2 State Appropriations per Full Time Equivalent Student to the U-M and AAU Institutions, FY20 20. 10.5 Private Gifts to the University, Adjusted for Inflation, FY20 11 - FY 2021. 10.6.1 Total Value of U-M Endowment, Ann Arbor Campus, Adjusted for Inflation, 20 11 - 202 1. 10.6.2 Market Value of Endowment, U-M and Peers, 20 21.

In addition to the General Fund, the U-M Ann Arbor operating budget projects revenues

and expenditures for three additional funds: Designated, Expendable Restricted, and

Auxiliary Activities.

10 .1.3 Summary of Budgeted Revenues and Expenditures by Funds for Ann Arbor Campus, FY20 12 - FY 2022. Budgeted Revenues by Fund 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 General 1,587,037 1,649,140 1,724,140 1,794,910 1,833,749 1,939,943 2,053,775 2,181,076 2,307,881 2,300,038 2,409, Designated 137,490 137,540 143,190 172,489 195,081 196,170 201,890 217,515 232,028 195,653 237, Expendable Restricted 1,110,109^ 1,094,334^ 1,097,197^ 1.054.926^ 1,157,947^ 1,204,451^ 1,269,565^ 1,315,880^ 1,398,915^ 1,268,003^ 1,581, Auxiliary Activities 2,932,963^ 3,198,411^ 3,406,856^ 3,593,864^ 3,867,754^ 4,132,188^ 4,891,134^ 5,232,564^ 5,669,783^ 5,259,348^ 6,142, Total Revenues 5,767,599 6,079,425 6,371,383 6,616,189 7,054,531 7,472,752 8,416,364 8,947,035 9,608,607 9 , 023 , 042 10,371, Budgeted Expenditures by Fund General 1,587,037 1,649,140 1,724,140 1,794,910 1,833,749 1,939,943 2,053,775 2,181,076 2,307,881 2,300,038 2,409, Designated 137,490 137,540 143,190 172,489 195,081 196,170 201,890 217,515 232,028 195,653 237, Expendable Restricted 1,110,109^ 1,094,334^ 1,097,197^ 1.054.926^ 1,147,647^ 1,189,451^ 1,254,565^ 1,300,880^ 1,383,915^ 1,254,503^ 1,566, Auxiliary Activities 3,015,247^ 3,239,005^ 3,495,268^ 3,638,271^ 3,937,359^ 4,062,275^ 4,845,345^ 5,292,120^ 5,730,165^ 5,275,252^ 6,136, Total Expenditures 5,849,883^ 6,120,019^ 6,459,795^ 6,660,596^ 7,113,836^ 7,387,839^ 8,355,576^ 8,991,590^ 9,653,988^ 9,025,447^ 10,349, Table entries are dollars in thousands. SOURCE: U-M Office of Budget and Planning, U-M Office of Financial Analysis The total budget of the University of Michigan Ann Arbor is allocated to a wide range of activities, including instruction, research, administration, health care, student financial aid, student housing and athletics, among others. The revenue and expenditure budgets are divided into four main funds, which track broad campus activity groups. The General Fund is used for operating purposes to support instruction, research, and public service; academic and other student services; operation and maintenance of the university’s physical plant; and university-funded financial aid. Revenues for the General Fund come from State of Michigan appropriations, student tuition and fees, indirect cost recovery tied to sponsored grants and contracts, and other income. (See Table 10.1.2 for a breakdown of General Fund revenues and expenditures.) The Designated Fund is similar to the General Fund in that both support the academic mission of the university, although the Designated Fund revenue sources differ substantially from those for General Fund. The major sources of income in the Designated Fund are departmental revenue for continuing education (non-degree granting), conferences and seminars, royalty income, endowment distribution from unrestricted endowments, publishing of teaching and research data, unrestricted gifts (President only), and investment income from the University Investment Pool for cash held in this fund. The Expendable Restricted Fund includes spending for research and other sponsored activities, such as research, financial aid, instruction, etc., with the funds originating from the federal government, other governmental units, non- federal agencies, foundations and charitable organizations, gifts, and endowment distributions. These funds are restricted and may only be used for expenditures relating to the specific purposes as stated by the sponsor or donor. The Auxiliary Activities Fund supports activities that charge customers for goods and services provided. Auxiliary units include the U-M Hospital and Health Centers, student housing, intercollegiate and varsity athletics, and parking.

The state appropriation’s budgeted share of the General Fund has declined dramatically

since 1970.

10. 2 Contributions to the University’s General Fund Budget by State Appropriations, Tuition and Fees, and Other Revenues^1 , FY1970-FY 2022. SOURCE: U-M Office of Budget and Planning The U-M's recently passed General Fund budget projected a State of Michigan appropriation for FY20 22 of $32 3. 0 million, drop of $2.6 million from last year's budget. In FY1970, the State appropriation represented 64 percent of the Ann Arbor campus General Fund budget. By contrast, tuition and required fees for FY20 21 will be 74 percent of the General Fund; in FY1970, tuition was 26 percent of the General Fund. The crossover year was FY1991, when the State appropriation and tuition provided 45 percent of the General Fund budgeted revenues. (^1) Prior to FY1969, indirect cost recovery was not included in the General Fund.

State support per student, when adjusted for inflation, is 19 % lower than a decade ago.

10. 4 .1 State of Michigan Appropriations to the U-M Ann Arbor Campus per Full-Time-Equivalent Student, Adjusted for Inflation^3 , FY20 12 - FY 2022. SOURCE: U-M Office of the Registrar, U-M Office of Budget and Planning This chart is based on a simple calculation: The State of Michigan appropriation to the Ann Arbor campus as enacted each year is adjusted for inflation and the amounts are divided by the official fall semester full-time-equivalent (FTE) enrollment. FTE enrollment is calculated adding the count of part-time students divided by 3 to the count of full- time students. (^3) Based on the estimated Employer Cost Index for 2022 as projected by the U-M Research Seminar for Quantitative Economics.

Most AAU public universities receive more state support per student than the University of

Michigan-Ann Arbor.

10.4.2 State Appropriation per Full-Time Equivalent Student to the U-M and AAU Public Institutions, based on FY20 20 Appropriation and Fall 201 9 Enrollment. SOURCE: Integrated Postsecondary Education Data System (IPEDS) The calculation of full-time equivalent (FTE) students for each school is based on IPEDS methodology. State appropriations for three AAU institutions – Pennsylvania State University, University of Colorado-Boulder and University of Pittsburgh – are not available in IPEDS. Note: These values are not adjusted for inflation, so the U-M value above does not match the FY20 20 inflation-adjusted value in 10.4.1. U MICHIGAN

The total value of the University of Michigan-Ann Arbor endowment has grown steady over

the past decade.

10. 6 .1 Total Value of U-M Endowment, Ann Arbor Campus, Adjusted for Inflation^6 , 2011 - 21. SOURCE: U-M Accounting Operations The University of Michigan’s endowment is essential to sustaining academic quality. Endowment funds are invested for the long-term, and earnings from those investments provide a guaranteed source of income to support in perpetuity professorships, student scholarships, innovative programs and learning opportunities. Donors who contribute to the endowment do so because they want to support the University and positively impact U-M students and academic programs now and in the future. The growth in endowment value from FY2020 to FY2021 is primarily due to the signifcant increase is the value of the stock market as opposed to growth in endowment contributions. The value of the endowment funds shown in the chart is the value on June 30 of each year. (^6) Based on 2021 U.S. Consumer Price Index.

The U-M has the largest endowment among its public university peers.

10. 6 .2 Market Value^7 of Endowment, U-M and Peers, 20 21. SOURCE: 2020 NACUBO-Commonfund Study of Endowments The U-M endowment market value increased by 38 percent, to $ 1 6. 80 B, at the end of FY20 21 , from $ 12. 145 B at the end of FY20 20. The COVID-19 pandemic hurt returns for the previous fiscal year, just like it did the U.S. and world economies, although endowments generally did much better during FY2021. The value of North American college and university endowment funds increased an average of 30. percent during the 20120 - 21 budget year^8 , according to an annual survey of 720 institutions and higher education foundations by Commonfund and the National Association of College and University Business Officers (NACUBO). Data for public universities are shaded in yellow; private university data are shaded in blue. (^7) The change in market value does NOT represent the rate of return for the institution’s investments. Rather, the change in the market value of an endowment from one fiscal year to the next reflects the net impact of withdrawals to fund institutional operations and capital expenses; the payment of endowment management and investment fees; additions from donor gifts and other contributions; and investment gains or losses, NACUBO-Commonfund Study of Endowments. (^8) “College Endowments Saw Stellar Returns as the Market Soared,” Chronicle of Higher Education., February 18 , 20 22.