A report presented at the Feb. 3 Senate Executive Committee meeting says that while the university continues to face budget challenges, the methods it uses to prepare annual financial statements are transparent and sound.
"My feeling is we're about where we should be - the process seems OK," said Michael Sandretto, an accounting lecturer and the chair of the SEC Budget Committee.
"There have been some concerns that the university publishes (complicated) documents to obfuscate the budget," said the report. "The level in both the Budget Request and Budget Summary (120 and 145 pages respectively) seems entirely reasonable."
The report said the detail is necessary because of the "incredibly complex" operations of the U. of I.
The report, which also expounds on other university financial issues including pensions, was requested by SEC Chair and computer science professor Roy Campbell and will be presented at an upcoming meeting of the Urbana Academic Senate.
Sandretto's report also supports the university's practice of loosely held budget control. He said the size and scope of the university make a tighter, month-to-month accounting extremely difficult for researchers and others in the three-campus operation.
Despite adequate controls and oversight by the university in the budget process, the state's financial woes, such as underfunding the pension system and late payments, continue to impact the university negatively, he said.
Sandretto said the university's pensions are maintained by the State Universities Retirement System, which also manages pensions for some of the other state universities. Pension rules are complicated, controversial and substantially different for governmental units than for corporations. Under governmental accounting standards, SURS reports that the pension fund is underfunded by about $20 billion (SURS pension fund liabilities are $20 billion greater than SURS pension fund assets). Under the rules that govern corporate pension plans, the underfunding could be as much as $50 billion. He said the difference is because of how pension fund assets and liabilities are reported.
The amount shown for pension fund assets is reasonably close to their current value, he said, but the amount shown for the pension fund liabilities is not what SURS is required to pay retirees; instead, it is the present value of those payments. That is entirely reasonable, he said, because some payments will be made 70 years in the future. By investing a very small amount now, there would be enough to pay a very large amount in 70 years. There is not enough public information to know the amounts SURS expects to pay out over the next 70 years; that amount could be $180 billion.
SURS would need about $34 billion in assets to be able to pay the $180 billion because much of it will be paid far in the future. However, with only about $15 billion in assets, SURS would need to earn extremely high returns to cover future payments.
Sandretto said recent changes to the state's pension plans will substantially reduce the unfunded amounts, but there is not enough information to know by how much. He said unlike corporate pension funds, the state employee pension system is not insured. If the old plan had been kept, "a reasonable estimate is that SURS would have completely run out of cash in about 15 years," he said. "If the fund were allowed to run out, employees who are still working would receive absolutely nothing from SURS - nothing from the state's contribution and nothing of what an employee contributed. The pension plan will either change, or at some point, SURS will run out of cash."
The state appropriates funds for the university, but because the state's financial condition is weak, payments from the state to the university are made later than in the past. Though the state does send the entire amount appropriated to the university, both the timing and amounts of individual payments are uncertain. That makes month-to-month planning difficult and it requires that the university maintain large cash balances to cover the uncertain payments.
He said the university has significant unrestricted cash balances on its balance sheet, but that not all restrictions on the use of cash are reported as such on the balance sheet because they may not meet accepted accounting rules for what is considered restricted cash.
He also said the university has had a significant operating surplus for the past two years. However, those operating surpluses are probably too low, he said, because the university has many older buildings that are fully depreciated, and under accounting rules, the university cannot record depreciation expenses for those buildings.
Even after the adjustments to restricted cash and to the surpluses, the university does have resources to provide a supplemental pension plan to cover the substantial reduction in pension benefits under the state's revised pension plan, he said. The cost of any supplemental plan is highly speculative at this point because so many variables are involved. Depending on the supplemental plan, the annual cost could easily be in excess of $100 million for the three campuses.
Another issue is that new accounting rules will go into effect in 2015 that will require the university to include part of the unfunded pension liability on its balance sheet. It is difficult to know the effect because under the state's revised pension plan, the reported underfunding of about $20 billion will be significantly reduced. It is possible the liabilities on the university's balance sheet could be from $2.7 billion to as much as $10 billion, although that is a speculative estimate. "That might make the university financial statements the weakest of any major research university in the nation, although rating agencies may have already taken this into account," Sandretto said.
Benefits Committee chair John Kindt said that the pension problem continues to be confusing and could become more so once the recent legislative changes are challenged in court.
"We don't know what's going to happen," said Kindt, a professor emeritus of business and legal policy. "I wouldn't start setting (retirement plans) in concrete."
A recommendation in Sandretto's report calls for a closer look at the university's use of transfer pricing - the price that one unit charges another unit for students who take courses outside their unit.
He said studying the practice and recalculating the rate might provide incentives for campus academic leaders to admit more (or fewer) students in some colleges and to offer more (or fewer) courses in some colleges. He said the basic method was established many years ago and that rates had been increased over the years.
However, as the system stands, "That process gives colleges little incentive to accept additional students; it also gives them little incentive to accept students from other colleges into their most popular courses."
He said 51 percent of resident tuition is directly allocated to the colleges, with the rest going to university administration and then indirectly reallocated to the colleges. The rate is 23 percent for nonresident students.
"With more revenue directly allocated to colleges, colleges might decide they are better off financially if they increase faculty and admit more students in some departments," he said, "and better off if they increase faculty and admit more students from other departments. It's something you may want to look at because transfer prices influence behavior." Several committee members pointed out that tuition revenue is substantially less than published because of scholarships and other grants, which reduce tuition income. They also pointed out that the scholarships and grants have increased substantially in recent years.
Major discussion topics on the Feb. 10 senate agenda include an update on the university's foray into massive open online courses and a proposal by the Office of the Provost that would make changes in the campus policy on Specialized Faculty.