Cuts Questioned at U of Chicago

Faculty members and students worry they're paying the price for construction projects amid a focus on cutting administrative costs.

June 9, 2016
University of Chicago

Budget cuts are drawing protests at the University of Chicago amid worries academic departments are being asked to pay for a past construction boom -- and faculty members fear that their historical influence on major decisions is being diminished.

Faculty members, students and staff have questioned a recent request to draw back academic division budgets by 8 percent as the university seeks an estimated $30 million in savings during its second round of cost cutting in two years. The university’s administration has indicated it needs to contain administrative costs as its overall operating budget has continued to grow.

Higher education finance experts, meanwhile, said the university’s move to contain costs reflects the changing realities across the sector. Public universities and small liberal arts colleges aren’t the only ones facing harsh financial realities. Even premier private research institutions -- like the University of Chicago, with its $7.55 billion endowment and prestigious partnerships like the planned Obama presidential library -- are having to adapt.

Reasons given for the cuts at the University of Chicago include falling public grant dollars -- as government grants and contracts slipped to $357.1 million in 2015, down from $417.9 million in 2011 -- along with higher debt costs and rising administrative expenses, according to faculty members. Administrators have said staff positions were not reduced in the past as grant dollars that paid for those positions expired, according to Willemien Otten, a professor of theology and the history of Christianity who is the president of the University of Chicago chapter of the American Association of University Professors.

Divisions within academic departments have now been asked to find cuts of 8 percent, and nonacademic departments were also asked to make budget cuts, Otten said. The cost reductions, which are for the upcoming fiscal year starting in July, come after academic departments had to trim 2 percent from their budgets and nonacademic departments were asked to cut 5 or 6 percent for the fiscal year ending in June 2016.

University leadership believes much of the savings can come from attrition and changes to hiring. Faculty members’ major concern is that the cuts are resulting in layoffs, Otten said. Departmental secretaries seem to be a target in many cases. Many are also worried about a move to change to a shared-services model for back-end staff, objecting that it could shift support services away from the department level. Much of that concern stems from the fact that few details of the plan have been released, Otten said.

The talk of budget crunches has caused tension on the University of Chicago’s campus heading into the convocation this weekend, where the university will be conferring degrees, Otten said.

“It’s not a great atmosphere at the moment,” she said. “It certainly cuts into the festivities.”

A petition posted over the weekend called for all layoffs to be put on hold and for the move to shared services to be halted for the time being. It had 577 signatures as of Wednesday afternoon.

“We are concerned about the lack of transparency in the decision-making processes involved and demand that these processes be democratized rather than imposed from above,” said the petition, addressed from graduate students, undergraduate students, employees, alumni and faculty.

No one from the University of Chicago was available for comment on the cuts. But a university spokesman provided a statement.

“The University of Chicago is committed to supporting an ambitious and growing academic enterprise with broad impact, while limiting administrative costs,” it said. “This will ensure a financially sustainable basis for the ongoing investments the university is making in support of faculty, academic initiatives and comprehensive support for students. While the cost containment will be achieved primarily through attrition and controls on hiring, some reduction of current staff positions is also necessary.”

Layoffs could total 100, and more are planned for December, Crain’s Chicago Business reported. The university employs more than 24,000 total people. More than 8,100 are university staff members, and more than 2,700 are university faculty members and academic appointees. Another 7,557 work for the University of Chicago Medical Center.

Staffing would seem to be a prime target for budget cuts, because compensation costs are the largest expense the university faces. Compensation expenses -- salaries and benefits for faculty and staff -- were 56.2 percent of the university’s $3.7 billion in operating expenses for 2015, according to posted financial results.

And the university has been running on slimmer margins of late, finishing 2015 with a surplus of $13.4 million. That was down from a surplus of $22.5 million in 2014. In 2013 the university posted a deficit of nearly $6.1 million, representing a break from stronger past years, when surpluses totaled $79.2 million in 2012 and $127.1 million in 2011.

But compensation expenses have not been growing as quickly as other operating expenses. Total compensation expenses jumped 25.2 percent from 2011 to 2015. Other operating expenses -- line items including expenses like utilities, repairs, equipment depreciation, services, supplies and interest paid on loans -- rose slightly faster at a rate of 28 percent.

A part of that rise is interest expenses, which grew to $130.7 million in 2015, up from $84.2 million in 2011. The recent focus on balancing the budget comes after years of construction, Otten said. Now faculty members are wondering whether their departments and their support staff members are paying the cost for rising interest on loans and for resources being spent on construction that could have been routed elsewhere.

“One the one hand, they kind of went over the budget, more or less on purpose; on the other hand, they’re now being driven to have a balanced budget within a few years,” Otten said. “There is an added sense also that the university got into financial trouble for this, and now people who do not bear the blame for it have to bear the brunt of it.”

The university's debt has grown rapidly in recent years. Notes and bonds payable totaled $4.2 billion in 2015, up from just over $3 billion in 2011 and more than double the 2007 figure of $1.8 billion. The increase has come as assets listed under land, buildings, equipment and books are up sharply, rising to $4.4 billion in 2015 from $3.2 billion in 2011 and $2 billion in 2007. That would appear to hold with trends of the time frame, when many universities built facilities financed by debt in order to take advantage of what were seen as historically low interest rates.

Regardless of how the university arrived at its current financial situation, ratings agencies have taken notice. In February Standard & Poor’s downgraded the University of Chicago’s long-term debt rating, citing recent and expected operating deficits as well as high exposure to the health care industry due to the University of Chicago Medical Center and high maximum annual debt service costs. In its own ratings note, Moody’s Investor Service called the university’s employee benefit liabilities significant and said its exposure to the volatile health care sector could be a challenge.

Still, Standard & Poor’s assigned a high rating to the long-term debt because it judged the university to have stable enrollment, a good reputation, strong fund-raising capability and good strategic planning and management. Moody’s affirmed its own strong long-term debt rating and assigned a stable outlook in February, calling the university a globally prominent research university with strengthening undergraduate demand and fund-raising prowess.

When administrators briefed faculty representatives on the needed cost cutting, faculty members raised concerns about who, exactly, would bear the brunt, said Bruce Lincoln, a professor of the history of religions in the University of Chicago Divinity School who is on the Council of the University Senate.

“They spoke of it in terms of administrative costs, but in response to critical questioning it became clear what they had in mind was people with five-figure salaries, not people with six-figure salaries,” he said. “It’s not the vice presidents. It’s not the higher-ups in the administration that they think are bloated -- in contrast to the opinion of a lot of faculty. But it’s secretaries and research assistants and lower-order people.”

Estimates of the total cuts being requested for the upcoming year have hovered around $30 million, which would be less than 1 percent of 2015 operating expenses. Faculty members are worried the cuts, no matter the size, will hit the heart of the university.

“Faculty and staff aren’t just labor costs,” Lincoln said. “These are people with extraordinary skills and real devotion. It’s not just cost control. And the more administrators march to the tune that is set by trustees, the worse it is for everything but the economic interests.”

That gets at a larger issue underlying faculty concerns: the way the university is being run.

Some have traced the last two years’ emphasis on cost containment to Joseph Neubauer taking over as chair of the university’s board of trustees. Neubauer, the retired chairman of food-service and uniform company Aramark Corp., was elected to the chairmanship in February 2015 after serving as a trustee since 1992. Yet some see him as taking over a board already packed with corporate executives and finance types -- and they see that board as imposing top-down decisions. While business leaders dominating boards of trustees is hardly new or unique to Chicago, the university's professors have taken pride in playing more of an active role in decisions than is the case at many other institutions.

“I honestly think that the big issue is that the direction of the university is much more in the hands of trustees than historically has been the case,” Lincoln said. “Power has shifted away from the faculty.”

The realities of university budgets often lead to conflict between faculty and administration in times of cost cutting. Personnel costs make up the largest expense line for most colleges and universities, said Bob Shea, a senior fellow for finance and campus management at the National Association of College and University Business Officers. Personnel costs typically make up between 50 and 80 percent of any given institution’s operating budget, he said -- meaning the University of Chicago is not exceptional with its 56.2 percent.

Yet the university’s cutting this spring does indicate that no corner of higher education is safe from trends sweeping through the books at universities across the country. While much of the talk may be about public universities shifting costs onto tuition payers as states withdraw support, or about small, private liberal arts colleges facing pressure because tuition and fees are their primary revenue source, no class of institution seems to be safe. The University of Chicago proves the most prestigious institutions can feel the pinch in their pockets.

“It doesn’t matter if you’re a community college or an elite research university,” Shea said. “It’s the cost structure.”

Higher education is broadly trying to shift from labor with high fixed costs to labor with more variable costs. Strip away the business-speak, and that translates to fewer tenure-track faculty members and more contingent professors that can lose or gain classes as demand changes.

“No one on the finance side is naïve about this issue,” Shea said. “There are many colleges, even of the same stature of Chicago, that have very thin margins, that run at breakeven, which isn’t a good place to be.”

The University of Chicago’s situation also fits into a larger picture of struggling higher education in Illinois, according to David W. Tretter, president of the Federation of Independent Illinois Colleges and Universities. Chicago is a competitive area for students, with many universities from surrounding states and across the nation seeing the region as a place to recruit. While the University of Chicago might not be as reliant on its home territory because its reputation allows it to draw students from across the country and around the world, Tretter worries about his state’s overall reputation.

Public universities in Illinois have been rocked by the state’s continuing budget impasse, which is now heading into its second year, Tretter said. Public institutions are being hit hardest. But even private universities are seeing their budgets thrown off as the state fails to disburse all expected dollars for its Monetary Award Program, which makes grants for low-income students attending college.

Many institutions covered the cost of grants with the idea that they would be reimbursed when the state finally appropriated funding. But as the budget standoff stretches on, stopgap funding hasn’t matched previous years’ levels. Earlier this spring, lawmakers passed stopgap funding amounting to little more than 40 percent of regular Monetary Award Program levels, Tretter said.

The overall environment has many students hesitating before enrolling at colleges and universities in Illinois -- public or private, Tretter said.

“The dysfunction, if you will, is bleeding over state lines,” Tretter said. “I have some institutions that, definitely, because of state conditions, are closely evaluating not hiring new people.”


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