RESPONSE TO MICHIGAN HOUSE OF REPRESENTATIVES HIGHER EDUCATION APPROPRIATIONS SUBCOMMITTEE

March 23, 2005

1. What contributions to economic development, research, and jobs has the University made to the local economy and state? Please present findings of a recent economic impact study.
2. Briefly describe the impact of the 15-16% cut in State Appropriations in the last two years to your university. What cost-effective savings have been implemented at your university?
3. What is your university doing to sustain affordability for the citizens of Michigan?
4. What do you hope to accomplish in the near future with the investments that you are making at your university?

1) What contributions to economic development, research, and jobs has the University made to the local economy and state? Please present findings of a recent economic impact study.

To better understand the impact of the University of Michigan- Ann Arbor, the committee may find it helpful to review some data about the University and the size and scope of its operations. Accompanying this document is a fact sheet that provides some comprehensive measures of the University’s activities. Some of the highlights from that fact sheet include the following:

• In the Fall of 2004, the University of Michigan enrolled 39,533 students, including 24,828 undergraduates.
• The University employs a total of 34,314 faculty and staff, including those at the U-M hospitals. It is the largest employer in Washtenaw County, and the sixth-largest employer in the state.
• The University encompasses approximately 3,177 acres in the Ann Arbor area and occupies 538 buildings and over 30 million square feet. It is the largest physical plant of any university campus in the country.
• The U-M Health System, comprised of three hospitals, 30 health centers, 120 outpatient clinics, and M-CARE , accommodated over 1.5 million patient visits, nearly 58,000 surgeries, and the deliveries of 3,900 babies in FY 2004.
• The University had $752 million in research expenditures in FY 2004, including $536 million in federal dollars. It ranks only behind Johns Hopkins and the University of Washington in federal research and development spending.

With the strong foundation of state support over the past 188 years, the University has been able to develop a world-class university with exceptional facilities for teaching, research, and service to the state and the world.

The University of Michigan undertook an economic impact study in 2003, taking a rigorous, conservative approach to measuring its effects. The study focused on two very important aspects of job and revenue contributions. The first analyzed the impact on the economy in general, including the University’s spending on the hospitals, instructional activities, student support, and research; its employment base; student and visitor expenditures; and spending by hospital patients and their families. The study found that U-M creates an zadditional 1.5 jobs for every person it employs. This contributed over $4 billion in compensation and personal income in the state of Michigan in FY 2001, leading to state tax revenue of $271 million in that year. Given the FY 2001 base and supplemental appropriation of $368 million, state revenue generated by U-M operations represented a 73.6% return on appropriations.

The study focused particular attention on another important aspect of economic impact: the University’s “export contribution.” If UM-AA ceased to exist, a portion of its job-creating and revenue-generating activities would be shifted to other institutions within the state. For example, a patient would seek treatment at one of the other hospitals in Michigan, and a student would enroll in another public university.

Due to U-M’s unique position as a world-class educational, medical, and research facility, however, some of its activities could not be recaptured by Michigan institutions. Those activities might be exported outside the state’s borders. This would include losing the U-M students whose second-choice university was an institution such as Northwestern, Boston University, or Cornell, for instance. In addition, this would include the loss of federal grants that would flow to scholars at universities outside of the state, and the loss of major gifts and contributions that would not be donated. A conservative estimate is that the export contribution of the University to the State was $175.5 million in FY 2001, revenues that would be a pure loss to the Michigan economy.

In addition to the measurable contributions included in the study, there are a number of real, but less tangible, economic benefits that also contribute to increased state revenues. They include amenities associated with the presence of the University, such as intellectual, cultural, and recreational enrichment. Those factors play a strong role in helping the state attract higher-paying jobs and retain young welleducated professionals in those industries. And, they include U-M’s “education premium.” The University has a high graduation rate—at nearly 87%, one of the highest of any public university in the country—and its graduates emerge prepared to succeed in a knowledge economy. In addition to increasing the knowledge capital of the state, this also boosts earning, personal spending, and resultant state tax revenue.

The study included only the University’s direct economic contributions in research and development, entrepreneurship, and innovation; but there are substaintial indirect effects from those activities as well. The University’s research volume is remarkable; the University captures about twice as many federal research dollars as the other Michigan public institutions combined. Last year the University of Michigan brought $536 million to the state in federal research money. While the economic impact model accounted for the expenditures of those dollars and other state and private research funds, it did not include other spinoff effects of technology transfer.

The University of Michigan’s technology transfer initiatives seek partnerships with communities and businesses to put its newly developed technologies—quite literally—to work. In FY 2004 the University recorded 285 new invention disclosures, 73 new license agreements, 13 new business startups, and nearly $12 million in licensing revenues. Thanks in large part to the University’s research activities and its state-partnered initiatives in the Life Sciences corridor, southeastern Michigan has become a technology and biotechnology hotspot, attracting and supporting the kind of businesses that will fuel the Michigan economy in the 21st century. U-M’s Institute of Labor and Industrial Relations estimated that the University’s research component increased the annual private sector wage in the Ann Arbor metropolitan area by an average of nearly $5,500 in 2001.

U-M economists George Fulton and Donald Grimes recently conducted a regional economic analysis and outlook commissioned by the Ann Arbor News. Their study concluded that the University of Michigan’s economic reach in Washtenaw County is one of its primary benefits. The research noted that, between 1990 and 2004, employment in the Ann Arbor area grew almost twice as fast as it did in Michigan as a whole. The region’s job losses in the industrial sector are being replaced by high-wage/higher –education jobs in other sectors. The study found that the Ann Arbor area has been one of the most successful localities in Michigan in making the transition from the traditional industrial economy to a knowledgebased economy; and, that much of the credit for the area’s success is due to the presence of the University of Michigan and the research it generates.

The importance of these effects undoubtedly boosts the state’s return on its investment of appropriations far higher than the 73% cited earlier. In 2002, a broader economic impact study, authored by the Michigan Economic Development Corporation and the Presidents Council, estimated the contributions of the state universities in total. The MEDC determined that for each dollar of the state government’s share of the universities’ operating costs, the state’s economy receives a return of $26.

2) Briefly describe the impact of the 15-16% cut in State Appropriations in the last two years to your university. What cost-effective savings have been implemented at your university?

The funding cuts of the last two years have been extremely challenging for the University of Michigan-Ann Arbor. They come at a time when the University’s level of activity is growing, not shrinking; the advancement of technology and the generation of new knowledge in all fields grows at an accelerating pace each year.

In this environment, the University has endeavored to meet the funding cuts in a way that preserves, as much as possible, its core strength and the quality of its academic programs.

The University budget principles state that the quality of academic programs is paramount, that the University must carefully evaluate its priorities to invest in those that are most important, and that where possible the University will seek efficiencies and savings and avoid duplication across its operations.

One cost-effective program has been a new cost-sharing model for health care premiums. Just implemented in 2005, it will save $6 million from the general fund, and $20 million total. This is not just savings to the University, but an incentive for employees to choose the most efficient health care plan for their specific needs and to utilize their health care benefits wisely by avoiding unnecessary costs. The University has also implemented a pharmacy benefit manager as part of prescription drug coverage for all employee health insurance plans, attaining an estimated savings of $1.9 million in FY 2004.

The University has continued to seek new savings and efficiencies in its energy usage. The Energy Star program, which entails installing energy-efficient lighting, heating and cooling, and mechanical systems, is now yielding the University an estimated annual savings of $9.5 million and has reduced thermal energy usage by 15 percent and electricity usage by 20 percent. The University’s practice of cogeneration (the combined use of steam and electricity) saves approximately $4 million annually and means the U-M Central Power Plant operates with 86% fuel efficiency, more than double that of most private power plants.

In addition, many cost-cutting programs enacted over the last several years continue to spare the University what would otherwise have been significant cost increases, on an ongoing basis. These programs include the negotiation of favorable prices through the Prime Vendor Program, which attained an estimated $7.8 million savings in FY 2004, and use of information technology to improve processes in purchasing has led to nearly $580,000 annual savings in reduced staffing. The University has also saved on postage and printing by eliminating many printed publications and producing electronic versions of newsletters, course catalogs, and employee pay stubs. Many basic services, such as custodial services, have been curtailed.

However, these cost-effective measures have not been enough to make up for the one-time state cuts of $29 million and the combined loss of $43 million in base funding. Other across-the-board cuts have been necessary. Cuts were planned to have the least impact on the quality of the student academic experience and on students’ timely progress towards graduation.

For example, departments in Engineering, LS&A, and the Business School have reduced course sections in some areas, increased course sizes, and reduced reliance on adjunct and visiting faculty. In Political Science, one of the University’s most popular undergraduate majors, enrollments in some upper-division courses have been raised from 45 students to 80.

Departments are bringing fewer visiting faculty and guest speakers to campus. Departments are reducing their use of temporary personnel to fill vacancies left by staff members on sick leave or vacation, as well as open positions that haven’t been filled yet. Many vacancies will be held open indefinitely, or the open positions will be eliminated. FY 2005 has seen a reduction in 125 staff positions in academic units. In addition, at least 50 faculty positions left open by retirements or attrition have been eliminated. Those reductions came on top of 275 staff positions and 50 faculty positions cut in FY 2004.

The University Library has cut journal subscriptions by 1,000 titles and monograph purchases by 5,000 titles. Service hours at some of the campus libraries have been reduced, and the Library has postponed some important technological upgrades. Computer replacement cycles continue to be extended, which means departments must manage their business with older computers and less-advanced related technologies.

Some schools have postponed planned upgrades to their instructional technology. The College of Engineering, for example, has extended its infrastructure upgrade cycle in some teaching labs to nine years. For a highly ranked Engineering College, this is close to unacceptable, especially when educating students for the changing technology requirements they will face upon graduation.

Overall, this is not a sustainable model. Such severe cuts in state appropriations cannot be sustained without a significant loss to long-term academic quality at the University of Michigan.

3) What is your university doing to sustain affordability for the citizens of Michigan?

The University of Michigan is committed to the important goal of protecting affordability and accessibility for academically qualified students in this state. The University must reach out to students with financial need, and recognize that college affordability depends on many factors, including how much financial aid is available and how much debt a student will have to take on in order to complete a college degree.

A critical factor in maintaining affordability is the University’s long-time commitment to financial aid. For at least the last thirty years it has been the University’s policy to fully meet the demonstrated financial need of all Michigan resident undergraduate students. In addition, the University seeks to maximize grants and to limit the loan and work burden of resident students. To protect this policy, the University increases its annual institutional aid budget at a greater rate than that year’s tuition and fee increase.

Over the last year, the University has devoted increased attention to the issue of affordability; that work led to last month’s unveiling of an ambitious new plan to add additional financial aid resources for in-state students. The University will invest an additional $9 million dollars in seed money to initiate the new financial aid program, named M-PACT, that increases grants and reduces loans for more than 2,900 in-state undergraduates at the Ann Arbor campus.

M-PACT will increase the need-based grant assistance to $12,200 per year for students at the lowest income level— those from families whose financial circumstances make the students eligible for a full Pell grant. M-PACT aid will top off the University’s existing financial aid package with additional grants of $1,500, $1,000 or $500, depending upon the student’s financial need. In every case, the new aid produces a dollar for dollar reduction in loans.

Although the new program will bring the greatest amount of assistance to families at the lowest end of the income scale, M-PACT also is designed to support students whose families may earn slightly more than the amount needed to qualify for a Pell grant—typically in the range of $50,000 to $70,000 per year.

Also, one of the ways the University meets this goal is to take a responsible approach to setting tuition each year. U-M’s average tuition increase over the last five years has been the lowest percentage in the state among the fifteen public universities in Michigan, and also the lowest among the public universities in the Big Ten.

The University has launched a significant fundraising effort as part of The Michigan Difference campaign to support student scholarships and expand resources for financial aid in future years.

4) What do you hope to accomplish in the near future with the investments that you are making at your university?

The University takes very seriously its role in protecting the State’s important investment in institutional quality. The annual state appropriation is a critical foundation for the University of Michigan, allowing it to leverage that investment to access additional public and private funds, secure research dollars, and attract the best and brightest faculty, staff, and students. Below are several examples of investments that leverage state funding along with private giving to enhance academic quality and build in academic areas where there is increasing societal demand and opportunity.

Life Sciences: The Life Sciences initiative has been a hallmark partnership between the State of Michigan and the University. The University’s own Life Sciences Institute leverages that partnership, catalyzing new interdisciplinary research and creating a hub for new research activity across campus. The University is recruiting stellar junior and senior faculty whose work will create new knowledge and applications, and whose effort will contribute to the state’s blossoming life sciences industry.

Public policy: New growth is underway at U-M’s Ford School of Public Policy. It has long been a leader in public policy, as U-M offered the first Masters in Public Administration of any state university in the nation. Ninety years later, the need for public policy expertise is ever more urgent. Breakthroughs in science, technology, information, and medicine bring new and pressing public policy issues that demand thoughtful and disciplined analysis. In the fall of 2004, U-M broke ground for a new $34 million facility for the Ford School and its research centers such as the National Poverty Center and the Center for Local, State, and Urban Policy. The facility will be made possible through private gifts. The University is dedicating new resources to develop an innovative undergraduate program in public policy, and a program to address the specific issues related to advances in the life sciences as well.

Teacher education: The University has recently dedicated $1.2 million to transform its teacher education programs. This initiative puts new resources into the critical task of training future teachers, including advances in research and in practice.

The goal is to ensure that teachers who graduate from U-M will enter their K-12 classrooms with the best professional preparation possible.

Information technology: The School of Information has also been a place of recent and renewed investment. Areas of information science that did not even exist a decade ago have exploded in importance, and U-M has been a leader in these fields from the start. Areas such as health information and bioinformatics have underscored the critical importance of knowledge management in all industries.

Arts and culture: At a time when budget pressures have curtailed public funding for the arts, the University has filled an important niche with its Museum of Art. Museum attendance has risen by 50 percent since 1997. The University has unveiled plans for a 53,000 square foot addition to the facility, funded through private gifts, which will allow the University to make a much larger portion of its collections available to and accessible by the public.

Residence life: The University is also making new investments in residential life. The planned North Quad Residential and Academic Complex is designed to integrate students’ living environment with their academic experience. This technologyrich facility will support both faculty and students alike.

Classrooms and department space will share a building with residential living space, meeting spaces, study rooms, and performance venues. The new complex is part of a massive, multi-year residential life initiative (RLI) which will upgrade all existing residence halls and dining facilities in addition to providing contemporary new residence space for U-M students. The RLI is the largest investment in a students’ residential experience that the University has ever undertaken.