Later in the meeting I will ask for your approval of the state budget request for 2005, which was sent to you last week.   We have requested only what we received in appropriations in the current year—$327 million, or ten percent less than the appropriation for FY 2002.   Further cuts, which are a distinct possibility in light of the State's fiscal circumstances, will pose significant threats to the University.   As we go into the planning cycle for FY 2005, I want to take just a few minutes to sketch the situation and the risks that we see.

The recent cuts to high education funding are staggering.   During fiscal year 2003 we absorbed a mid-year cut of $13 million.   The state appropriation for 2004 was a base cut of $36 million relative to 2002.   To put that into perspective, the base cut that we have already absorbed is almost $1000 per student. This week news sources are reporting a preliminary recommendation of a 6% cut in the higher education appropriation. That would make the cut almost $1500 per student.   And we may well see additional cuts FY 2005. Meanwhile, we continue to face increases in costs, some of them escalating dramatically as in the health care arena. And we are teaching more students than ever.

As we have discussed many times, the University has cut costs deeply over the past two years.   The budget for the current year embodies some $37 million in cost reductions that went into effect this year, and tens of millions more in ongoing cost reduction programs, especially in energy costs and business operations.    We have eliminated over 300 jobs and open positions. We have reorganized and streamlined operations in major units including the libraries and Human Resources and we have introduced electronic business processes to replace more expensive manual transactions.   Schools and colleges have had to eliminate sections and increase class sizes.   Not a single executive officer accepted a salary increase this year.   And right now we are considering a cost-sharing model for health care premiums that will trim $6 million in the general fund ($20 million overall) from the University's health care contribution for 2005 and more in the years to come—but of course we know that even as we move closer to adopting that model   we will still see the institution's health benefits cost increase substantially.

The cuts in academic programs that we have undertaken thus far are having serious consequences. Here are a few examples. In LSA we eliminated 21 faculty lines, through attrition, meaning that a number of important departures have not been replaced.   Thus, Biopsychology and Cognition, with over 450 concentrators, now offers what was a senior seminar meant for 25 students as a lecture course for 250 students.

Similarly, about half of the 227 seats in capstone seminars for political science majors have been eliminated, meaning that many of our majors simply will not have the opportunity for a small, advanced seminar with senior faculty.  

Each of these examples is serious, but the next round of cuts threatens to cut into our core academic activities, something we have worked very hard to protect up until this point.   Last year, our top priority was to protect undergraduate instruction but that will be impossible to do as successfully this year.   To make further reductions, we're looking at a number of very difficult prospects that would reduce student-faculty contact in small group settings—things like significant scaling back of freshman seminars, and curtailing   living-learning   programs, significant community outreach programs, and more.    We will continue to do all we can to maintain the quality of our students' educational experience, but there are no easy answers.

You have often heard me speak of the value of the distinctive education that we provide at Michigan, an education that draws on the strength of our faculty and the breadth and depth of our programs of teaching and research.   The value shows up in many ways.   The most direct is increases in income—the rate of return on investments in education is among the highest reliable returns on investment available in the economy.   It also shows up in returns to the State's economy.   A dollar's worth of expenditure at this University increases income in the State by a total of about $2.50, including the original dollar.   This University brings hundreds of millions of dollars a year to the State in the form of tuition, sponsored research, and other expenditures in the local economy.   If we add in the increases in income to our graduates, the effect is higher yet.   The state is well served by its expenditure on higher education, and especially the University of Michigan.  

Equally important are values that are harder to measure.   We enable our students to lead lives that are personally and intellectually, as well as economically rewarding.   We—and other research universities—are the wellspring, through both basic and applied research, of the nation's prosperity, which depends on continuing innovation.   We preserve the culture and knowledge of the past, and create the culture and knowledge of the future.   We provide a place for debate and experiment, for expression of the intellect and the spirit.

We face difficult choices.   With certain increases in costs and the absence of growth in the state appropriation (and with the likelihood of continued deep reductions) we must in some combination find revenue and reductions in expenditure. There are really only two ways to increase revenue—private giving and increases in tuition.   We are planning a major fundraising campaign that will be critical to our future stability and leadership, but it cannot be considered a short term fix—nor will it ever replace the important fundamental state support and this university's compact with our home state. We will of course continue to reduce expenditure everywhere we can, but I hope that we will not be forced to choose reductions that will compromise the extraordinary quality and nature of this institution.

Increases in tuition will need to be a part of the strategy, but we will work to make sure that any tuition increase is matched with significant increases in financial aid. As a public university, we have a special obligation to assure we continue to be affordable and we will fulfill that commitment.   As the University of Michigan we have a special obligation to be both excellent and accessible.

It is important to note that a student and family's financial contribution, in the form of tuition, does not cover the full costs of a student's education.   We rely on other sources, including philanthropy and the state appropriation, to cover the difference. As you all know, last year the University's tuition increase was among the lowest in the state due in great measure to the measures that we took to cut costs. But as the state reductions continue we know there is not much more we can do on the cost-cutting side without jeopardizing our core academic programs, and even then, the savings can take many years to materialize.

In the coming months, as our cost picture and the state's economic and fiscal situation become clearer, I will be coming back to you with detailed options and plans.   The Deans and the Executive Officers are, of course, already looking at ways to reduce costs, and are identifying what is most important) and what, although still of value, is least important.   But after last year's cuts, further cuts will be much more difficult and will be costly to our quality.

Public higher education has taken the most severe of the state budget cuts so far, and we are doing all we can to preserve the vital role that we play for our state and in the lives of our students. But we are in the midst of a funding situation that is, in my opinion, a substantial threat to academic excellence and to student access.   We will work hard with the state's leaders to assess the potential impact and plan for long-term stability that will preserve our ability to serve the people of this state in the future as we have in the past.