The University of Michigan, an encyclopedic survey ... Wilfred B. Shaw, editor.
University of Michigan.
Page  12

FINANCIAL SUPPORT AND ACTIVITIES

Current Operating Funds

In the period from 1940 to 1977, the amount of annual revenues for current operations has increased from $12,500,000 to $424,500,000.

Three sources of revenue have grown much more significantly than other sources during this long period. Federal support was practically nonexistent in 1940 but has now become a significant part of the revenue pattern, amounting to $72,500,000 in 1976-77 or 17 percent of all revenue for operations. Gifts and other grants have grown by a ratio of fifty times the 1940 level, and the University in recent years has won national recognition for its gift development and gift receiving program. Hospital service costs have risen so rapidly in the last few years and types of services have also so increased that the revenue for this activity is now 46 times that of 1940.

Student fee revenue has maintained the same relationship to the total as existed in 1940. State appropriations, however, have decreased in their share of support for educational and general programs.

The following table of revenues by source in ten-year comparisons since 1940 describes the various major categories of current operations support: Page  13

CURRENT FUNDS REVENUES BY SOURCE
(dollars in thousands)
1939-40 1949-50 1959-60 1969-70 1976-77
Educational and General
Student fees $ 1,812 $ 6,542 $ 9,466 $ 29,562 $ 63,001
State appropriations 4,610 11,436 33,687 68,578 114,737
Federal contracts and grants 15 3,188 23,027 60,754 72,500
Gifts and other grants 419 1,102 5,039 16,875 20,726
Investment income 638 779 2,196 6,081 9,382
Departmental activities 432 1,738 3,746 7,585 15,908
Less restricted revenues held for future expenditure ( 2,596) 381 ( 2,553)
Total Educational and General $ 7,926 $24,785 $ 74,565 $189,816 $293,701
Auxiliary Activities
Hospitals and medical services $ 2,177 $ 6,443 $ 14,065 $ 42,333 $100,697
Student residences and centers 2,075 5,139 9,735 14,748 20,861
Athletics, student publications and other 408 1,827 2,625 5,366 9,199
Total Auxiliary Activities $ 4,660 $13,409 $ 26,425 $ 62,447 $130,757
Total Revenue $12,586 $38,194 $100,990 $252,263 $424,458

Page  14The changing functions of the University over the years are reflected in the unusual relative growth of funded research expenditures and student-aid payments. In addition, support services expenditures have increased due to the complexity of present programs for students, faculty, and staff, compared to 1940. Details of expenditures by program are shown for ten-year periods from 1940 in the following table: Page  15

CURRENT FUNDS EXPENDITURES BY PROGRAM
(dollars in thousands)
1939-40 1949-50 1959-60 1969-70 1976-77
Educational and General
Instruction and departmental research $ 4,619 $10,900 $ 29,403 $ 72,926 $127,813
Other educational services 88 248 663 2,708 6,253
Libraries 372 879 2,048 5,989 8,961
Organized research 207 4,639 24,253 52,421 66,782
Extension 131 516 1,075 1,957 2,847
Student services 332 905 2,982 4,744 7,860
Student aid 185 693 2,142 17,069 21,852
Public services 30 535 1,461 3,359 3,908
General administration 651 1,494 899 1,958 5,202
Business operations 116 704 1,569 5,728 8,239
Operations and maintenance of plant 921 2,175 5,420 12,195 27,255
Plant improvement 6 500 2,499 9,989 7,155
Total Educational and General $ 7,658 $24,188 $ 74,414 $191,043 $294,127
Auxiliary Activities
Hospitals and medical services $ 2,045 $ 6,388 $ 13,878 $ 42,510 $ 98,211
Student residences and centers 1,854 4,931 9,875 14,645 21,040
Athletics, student publications and other 408 2,020 2,672 6,139 8,859
Total Auxiliary Activities $ 4,307 $13,339 $ 26,425 $ 63,294 $128,110
Total Expenditures $11,965 $37,527 $100,839 $254,337 $422,237

Page  16Higher education expenditures are characterized as salary-intensive. The following table compares ten-year periods from 1940 for current funds expenditures as reported by object classifications. Direct salary expenditure as a share of the total is relatively stable, ranging from 60 to 66 percent over the years. The institution of significant staff benefit programs over the years has resulted in a total compensation percent of over 70 percent in 1976-77.

Current Funds
Expenditures by Object Classification
(dollars in thousands)
1939-40 1949-50 1959-60 1969-70 1976-77
Salaries $ 7,685 $24,987 $ 66,098 $155,300 $254,158
Staff Benefits -0- 985 4,477 17,521 41,959
Nonsalary 4,280 11,555 30,264 81,516 126,120
Total $11,965 $37,527 $100,839 $254,337 $422,237

State Appropriations for General Operations

In 1940 state appropriations for general operations were made biennially, and biennial appropriation periods continued through 1945-47. Top limits were put on these appropriations: $4,804,000 annually for the 1941-43 and 1943-45 bienniums, and $5,867,451 annually for the 1945-47 biennium. An additional appropriation in the amount of $1,250,000 was authorized for current operations in the 1946-47 year.

Also, during the war years, additional appropriations for "state and national defense" were made: $200,000 in 1942-43, $520,000 in 1943-44, and $133,333 in 1944-45.

Beginning in 1947-48 appropriations were made annually from state general funds. For the next ten years, these increased regularly as shown in the following table: Page  17

Year Annual Appropriation Increase Percent
1947-48 $ 8,670,000 21.8
1948-49 9,750,000 12.5
1949-50 11,436,315 17.3
1950-51 13,156,822 15.0
1951-52 14,845,000 12.8
1952-53 16,936,650 14.1
1953-54 18,796,000 11.0
1954-55 21,052,996 12.0
1955-56 24,383,030 15.8
1956-57 27,500,000 12.8
1957-58 30,250,000 10.0
1958-59 30,000,000 (00.8)

Economic conditions deteriorated in Michigan during 1957-58. This economic situation resulted in a reduction in state appropriations for operations in 1958-59, compared with the previous year, which caused the adoption of an austerity budget. Also in 1958-59, beginning in December, the state's cash position was so low that monthly payments of authorized state appropriations were suspended for several months. This resulted in the University borrowing from banks to meet payrolls. It was also necessary to defer vendor payments, reduce inventory levels, and take other measures to conserve cash. These suspensions were made up by the end of the year.

Since 1958-59 state appropriations for operations each year have never fallen below the previous year's level and have usually provided increases, albeit at levels insufficient to maintain the former ratios of General Fund support. Increases in student fee revenues have been the sources for making a minimal budget possible in recent years. State appropriations since 1958-59 are reported as follows: Page  18

Year Annual Appropriation Increase Percent
1959-60 $ 33,367,275 11.2
1960-61 35,228,953 5.6
1961-62 35,376,647 .4
1962-63 36,667,157 3.6
1963-64 38,225,255 4.2
1964-65 44,086,139 15.3
1965-66 51,255,266 16.3
1966-67 58,094,886 13.3
1967-68 59,160,998 1.8
1968-69 63,272,392 6.9
1969-70 67,317,141 6.4
1970-71 72,632,463 7.9
1971-72 76,573,280 5.4
1972-73 87,680,000 14.5
1973-74 97,778,100 11.5
1974-75 106,603,005 9.0
1975-76 109,848,476 3.0
1976-77 112,495,597 2.4

Another financial crisis of sorts in state funds occurred in 1976. The state's solution for this was a change in its fiscal year. Appropriations were authorized for a short 3-month fiscal period, July 1 to September 30, 1976, with no increase in the monthly payment levels from the 1975-76 fiscal year. The fiscal period of October 1 to September 30 was adopted by the state in 1976-77. The University has not changed its July to June fiscal year.

The legislative fiscal agencies adopted a concept of formula-funding of higher education in 1975. They invited representatives from higher education and the Governor's Office to form a task force with them to develop a procedure for formula-funding. The task force made its first report in 1976. It became known as an "Investment Needs Model" at this time because it was apparent the resulting figures were much larger than could be actually funded by the state. The Governor's Office of Management and Budget utilized parts of the formula report along with some concepts of its own in making its recommended budget for 1977-78. The legislature used its own interpretation of the formula report for the actual 1977-78 appropriations. The formula is extremely complex and will need considerable change and refinement before Page  19it becomes an acceptable funding mechanism for all concerned.

Federal Support

Revenues from federal sources became significant following World War II. A long list of federal agencies has supported instruction, research, and student-aid programs at the University for a number of years. The defense agencies were dominant supporters of research at first, then the emphasis shifted to the Department of Health, Education, and Welfare, specifically the Public Health Service, for instruction and research in health-related fields. In addition to reimbursements for direct project costs, the government has shared significantly in the cost of overhead for projects.

Federal contracts and grants for educational and general operations at five-year intervals are as follows:

Year Amount
1939-40 $ 14,800
1944-45 1,842,643
1949-50 3,187,844
1954-55 9,310,835
1959-60 23,026,967
1964-65 42,037,732
1969-70 60,754,154
1974-75 68,304,463
1976-77 72,499,854

The federal government has furnished funds directly for many building and major renovation projects, including the following for which significant grants were awarded:

Federal Support Percent of Total
Animal Research Facility $ 206,529 40.5
Biological Station 550,000 68.9
Buhl Research Center 306,531 54.7
Dental and Kellogg Buildings 6,198,868 32.7
Fire Service Instruction 158,615 48.9
Institute for Science and Technology 427,234 12.9
Institute for Social Research 560,168 12.3
Page  20
Federal Support Percent of Total
Kresge Research Building Addition $1,579,522 22.8
Hatcher Graduate Library 1,458,333 14.2
Matthaei Botanical Gardens 358,991 20.0
Medical Science II and Furstenberg Center 2,664,250 19.6
Mental Health Research Institute 510,361 47.5
Modern Languages Building 1,000,000 18.1
Museums Addition 1,033,000 48.8
Portage Lake Observatory 250,000 33.6
Pharmacy Building 322,000 26.0
Public Health Buildings 5,164,142 53.4
Space Research Building 1,404,605 98.2
Hospitals 3,937,303 8.7

Since 1958 the federal government has funded the major portion (90 percent) of the government student-loan program.

The over-all support from federal sources has been a very important source of financial resources for graduate programs, particularly those in the health sciences, engineering, and physical sciences. Support to a lesser extent has been received for the humanities, languages, and social sciences.

Student Fees

Student fee revenues in 1940 amounted to 23 percent of educational and general revenue, excluding auxiliary activities. In 1977, revenue from this source was 22 percent, a stable relationship over the years. In dollar terms it had grown from $1,812,000 to $63,001,000.

During World War II the federal government paid to the University approximately $4,000,000 for contract instruction to servicemen from 1943 through 1946.

Following World War II, fee revenue paid by students was supplemented by the "G.I. Bill" through payments for veterans by the Veterans Administration of reimbursements for contractually-defined "costs of instruction." This supplemental revenue peaked in 1948-49 and gradually phased out in Page  21the 1950s. After the Korean conflict, this assistance program for veterans was modified by payment of the supplemental allowance directly to veterans, instead of paying the institution.

The term fees charged to students in Ann Arbor since 1940 have characteristically been single comprehensive fees covering instruction and various related student services. parts of these comprehensive fees were allocated to operate the Michigan Union and Michigan League, to supplement intercollegiate athletics revenue, and to support student organizations. Some allocations were also made to finance construction of the Michigan Union addition, North Campus Commons, Administration facilities, Chrisler Arena, and the Central and North Campus Recreation Buildings. Somewhat similar allocations have been made for Dearborn and Flint campus student fees. Beginning in 1976 a separate fee was assessed for health services.

Rates for term student fees (resident undergraduate) have increased from $60 in 1940 to $464 for lower-level students and $526 for upper-level students in 1976-77. Nonresident rates have increased from $100 in 1940 to $1508 for lower-level students and $1626 for upper-level students in 1976-77.

Fee rates in effect in the fall of 1940 continued without change until the fall of 1945 when they were increased. From then until 1970 the rates increased every second or third year. Since 1970 fee rates for most student levels have increased every year. General fund budget needs have increasingly required more student-fee revenue to balance relatively diminishing revenue from other sources. Each time rates are increased, consideration is given to several factors: the dollar amount needed to balance the budget, comparative rates at peer institutions, and the costs of instruction.

In the fall of 1961 the deferred tuition and fee payment plan was instituted, whereby fees could be paid in installments throughout the term. Prior to this, fees were payable in full on registration day.

Differential nonresident rates have traditionally been Page  22assessed for those students who do not qualify as Michigan residents in accordance with Regental residency rules. These rules were modified in 1953 to less stringent definitions as a result of court decisions. The ratio of undergraduate nonresident-term rates to resident rates in 1940 was 1.67 to 1. This ratio gradually widened. In 1948 it was 2.5 to 1, in 1966 it was 2.87 to 1, and since 1972 it has stabilized at 3.25 to 1.

In the fall of 1976, a new fee-rate structure for undergraduates was instituted, whereby assessments were made for each credit hour enrolled, instead of a flat-rate comprehensive fee.

An indication of the change in rates since 1940 is shown in the following table of undergraduate academic year rates.

Student Fee Rates - Academic Year
Year of Change Undergraduate
Resident Nonresident
1940 $120 $ 200
1945 130 220
1946 140 300
1948 140 350
1950 150 400
1952 180 430
1955 200 470
1957 250 600
1960 280 750
1962 280 900
1965 348 1,000
1967 420 1,300
1968 480 1,540
1970 568 1,800
1971 660 2,140
1972 696 2,260
1973 800* 2,600*
1975 848* 2,756*
1976 928* 3,016*
Page  23

Gifts and Grants

The total value of monetary gifts over the years recognized in the University books of account has reached $455,997,370 at June 30, 1977. This includes gifts for operating purposes which have been expended and gifts for permanent purposes such as for endowments, student loans, and lands and buildings.

The University is nationally recognized for its volume of gifts. A significant part of this is represented by the Michigan Alumni annual giving program. In honor of the institution's Sesquicentennial year of 1967, a special campaign was mounted, entitled the $55 Million Campaign. It was very successful, resulting in gifts and pledges exceeding $72 million. In the last eleven years, annual gifts have exceeded $20 million every year except one, and have averaged over $24 million per year in this period. In 1973-74 the level was over $29 million, and in 1976-77 it was over $28 million.

In addition to the amounts received and booked as gifts, many pledges of future gifts have been made on behalf of the University, such as beneficiary designations in life insurance policies and in wills, and pledged payment of gifts in future years.

The following table describes the general uses for which gifts were received in ten-year periods from 1939-40: Page  24

GIFTS AND GRANTS
1939-40 1949-50 1959-60 1969-70 1976-77
Current Operations $ 419,470 $1,101,840 $5,042,896 $16,875,044 $20,725,855
Student Loans 8,610 16,654 99,398 93,717 142,227
Endowments 291,987 196,269 1,012,164 1,148,576 5,027,438
Physical Properties 1,048,133 82,048 2,259,225 1,146,066 2,416,986
Total $1,768,200 $1,396,811 $8,413,683 $19,263,403 $28,312,506

Page  25

Student Loans

Funds available for student loans have grown from $590,000 in 1939-40 to $44,098,000 in 1976-77. Of this latest figure, $25,302,000 have been received from the federal government under legislation which was first enacted in 1958 in response to a need for more trained citizens, as a result of the Russian Soviets' success with the first satellite launched in 1957, known as "Sputnik." In 1964 the Health Professions Educational Assistance Act was passed to provide matching funds for student loans in the fields of dentistry, medicine, nursing, and pharmacy. The remainder of the University loan funds have been made available from gifts, and $3,321,000 from University funds to match the federal provisions as required by legislation. Federal legislation also provides collection insurance guarantees for a part of the University loans.

Since the first loans were granted in 1897, the University has awarded $84,498,000 in loans to students. In 1940-41, 2,080 loans were issued for $155,644, for an average loan of $75, compared with 17,747 loans issued for $9,545,413, for an average of $538 per loan during 1976-77. During World War II, the number of student loans dropped to about 400 a year, and then rose to nearly 4,000 during 1946-47. Student loans issued during 1950-51 dropped to 2,527 after most of the veterans had graduated. Since 1950-51, there has been an almost uninterrupted growth in the number of student loans granted per year, the average size student loan, and the amount of loans outstanding. As of June 30, 1976, 52,726 loans amounting to $40,696,000 are outstanding.

The increased demand for student loans is due to a number of factors. During this thirty-seven year period, 1940-41 through 1976-77, Michigan resident tuition rose from $120 to $928 per year, an increase of 673 percent. The room and board rate for a double room increased from $382 to $1,512 for a 296 percent rise. Enrollment in 1940-41 was 12,051 compared with 45,823 students for 1976-77, an increase of 280 percent.

Page  26

Endowment Funds

Endowment funds are created primarily by gifts. Fiduciary responsibility must be exercised to protect principal, produce income through effective investment practices, and protect wishes of the donors as expressed in the terms of gifts.

The oldest endowment account is the Federal Land Grant, valued at $550,984, which resulted from sales of lands in Michigan, the proceeds of which were earmarked for the University. These funds were retained in the state treasury, and the state constitution of 1835, section 5 of Article X, protected this amount for the benefit of the University in recognition of federal grants of lands for such purposes (see Volume I, pages 36, 118, 267, and 274). An annual payment of $38,569, representing 7 percent of the endowment principal amount held by the state treasurer, was made to the University by the state. When the state constitution was revised in 1964, this annual payment was discontinued as a separate payment, with the assumption that the small amount involved would be included in the annual state appropriation for operations.

The level of book value of endowment funds has increased from $14,764,000 in 1939-40 to $98,111,000 in 1976-77. At June 30, 1977, market values of the Endowment and Other Invested Funds amounted to $117,577,000 compared to $98,111,000 book value.

These funds are now entitled Endowment and Other Invested Funds and are divided into three sub-groups. The first group, labeled Endowment Funds, includes accounts which allow only the income to be expended, amounting to $62,892,000 at June 30, 1977. A second group, labeled Total Return Funds, includes accounts which allow both principal and income to be expended, and amount to $30,648,000 at June 30, 1977. Annuity and Life Income Funds make up the remainder, representing accounts where commitments exist for payments to living beneficiaries. Page  27

ENDOWMENT AND OTHER INVESTED FUNDS
1939-40 $14,764,124
1949-50 19,983,069
1959-60 32,104,848
1969-70 61,241,378
1976-77 98,110,702

Investments

Investments handled by the Investment Office include bonds, common and preferred stocks, mortgages (primarily for University staff members), short-term paper, some real estate properties, and miscellaneous contracts, certificates, and notes. A large source of funds for investment arises from the Endowment funds given to the University over many years. Also invested are amounts of cash temporarily held in various University funds. For many years the University handled its own Employees Retirement Fund for nonacademic staff members, which provided a large source of funds for investment, until the Fund was transferred in 1972 to the Teachers Insurance and Annuities Association and College Retirement Equities Fund.

The volume of investment activity handled by the Office has grown rapidly since 1940. The following table indicates annual investments in ten-year periods.

BOOK VALUE OF INVESTMENTS (dollars in thousands)
1939-40 1949-50 1959-60 1969-70 1976-77
Bonds $11,043 $23,917 $52,550 $ 93,294 $146,363
Stocks 515 4,537 17,784 44,806 46,949
Other 1,783 4,555 8,486 19,007 22,607
Total
Investments $13,341 $33,009 $78,820 $157,107 $215,919
The bond category includes both long-term and short-term securities. Market value compared to book value in 1976-77 Page  28was $235,600,000.

Policies governing investment procedures change from time to time to reflect financial markets and prospects.

In the 1943-44 President's Report, it was noted that the policy of that time "emphasized conservation of principal in comparison with production of income," which was a forerunner of an increasing concern over income maximization.

In 1945-46 the Regents adopted a policy statement as follows: "In order to carry out the wishes of the donors of endowment funds, due regard shall be given to the production of income from investments as well as to the conservation of the principal of the funds. The investment policy of the University shall be based on the principle of a broad diversification among various fields of investments and among various securities within these fields." No significant change took place, however, in the investments of University funds until 1951-52 when an agency agreement was entered into with the National Bank of Detroit for advice, consultation, and custodial service for investments of the larger endowment funds. At that time a formal program of investing in common stocks was started and, during the next 25 years, common stocks as a percentage of the total market value investment in the Endowment Funds increased from 13 percent in 1951-52 to 58 percent in 1976-77, at which time the maximum authorized limit was 70 percent of market value.

The Consolidated Endowment Pool is a group of individual funds, the terms of which do not require the assets to be invested separately. The principal of such funds must be maintained intact and only the income expended for the particular purposes for which the endowment was created. Thus, it is possible to take a long range approach to the investments of such funds. There is no problem of meeting any future obligations out of the principal, and the fluctuations of security prices are not of great importance except as they provide opportunities to buy and sell or to switch from one type of investment to another. Income is of prime importance, not only from the standpoint of amount but also of stability. Investments include common stocks, bonds, mortgages, land contracts, preferred stocks, and real estate. Page  29Share values are assigned for individual accounts and income distributed on the basis of these shares as currently valued.

The investments of working capital of various University funds are principally commercial paper and U.S. Government agency obligations. The maturities are short-term, and investments are adjusted on a day-to-day basis in accordance with the over-all cash position of the University. Fluctuations in the amount of these investments are therefore considerable.

The Reserve Funds - Investment Pool is a pooling for investment purposes of various University reserve accounts and other funds of this type. Although the funds in this pool may be drawn on for expendable purposes, it is expected that they will not be needed in their entirety in the immediate future. The investments are principally bonds of medium-term maturities. A moderate short-term position is maintained to provide liquidity.

The University has certain funds, mostly endowments, that must be separately invested in accordance with the terms of the gifts or bequest. In a few cases the terms also restrict the investments to certain types, such as bonds or other fixed-income securities. The investments of these funds are in accord with the restrictions or with the authorizations outlined above, with the exceptions of a few securities that have been retained at the request of the donors.

In accordance with the Bylaws, Sec. 3.07 (2), all investment transactions are reported to the Regents at the monthly meetings. The investments of the larger funds are reviewed with the Regents semiannually, and a report of all investments is submitted annually.

The Total Return Fund, established in July 1970, is a pool of individual funds, the terms of which permit the use of some or all of the capital gains, realized or unrealized, and principal in addition to ordinary income. The investment objective of the Total Return Fund is to maximize total return within reasonable standards of prudence. The term "total return" is considered to mean a combination of Page  30income in the ordinary sense and appreciation or depreciation in the market value of the investments, either realized or unrealized. The use of fixed-income securities, convertible issues, and common stocks is governed by the objective, rather than by any specific percentage limitations. There is no limitation on the selection of individual securities by the National Bank of Detroit, Trust Department, provided the University officers concerned with investment approve the purchases.

In 1975 a Donor Pooled Income Fund was established to produce income for beneficiaries with life-income interests.