U-M Monitors Financial Crisis, Remains Financially Sound

A number of people have expressed concern about the possible effects of the global financial crisis on the operations of the University. At this point, thanks in large part to the prudence of our financial management policies and practices, the University is in sound financial shape. We continue to closely monitor this crisis.

“Our investment, debt and cash management policies are structured to withstand significant volatility in the financial markets,” says Tim Slottow, executive vice president and chief financial officer.

U-M’s ongoing focus on operations, cost containment and flexibility mean that the University fully expects to continue with its FY 2009 plans and maintain its focus on excellence in all teaching, research, clinical, and auxiliary operations and initiatives. As we plan for the next fiscal year, we will keep a close watch on how the crisis is likely to play out, and develop contingencies as necessary to ensure we sustain and enhance our commitment to excellence in all our operations.

The University will continue to concentrate on making a U-M education affordable and anticipates an increased need for financial aid. Families who face severe financial problems due to job loss, foreclosure or business declines are encouraged to make the U-M Office of Financial Aid their first point of contact for help with loans and advice.

The University of Michigan is financially sound. We continue to monitor the U.S. financial situation.

  • The Regents adopted a prudent, balanced budget in June.
  • U-M maintains its AAA bond rating, Standard & Poor’s highest grade.
  • One of U-M’s strengths is its highly diversified investment portfolio.
  • Endowment creates a predictable revenue stream to support the University’s academic and other programs even when the markets are volatile.
  • We can cover any contingencies at this point.

The U-M Health System remains financially healthy

  • Patient volume is up.
  • The Health System is hiring more nurses, pharmacists, physician assistants and other caregivers to meet the growing demand for care.
  • To protect patient-care services and maintain a positive operating margin, the Health System has asked certain administrative areas—human resources, communications, information technology and finance—to freeze hiring.
  • Many areas of the hospitals and health centers also have been asked to reduce expenses in day-to-day operations.
  • Unfortunately, despite these other efforts, reductions in force will be necessary in a few departments. Fewer than 80 employees will be notified in December of a reduction in force affecting their positions; all will receive pay until at least the end of January 2009, along with comprehensive career transition assistance.
  • Health System construction projects continue on schedule.

U-M invests for the long-term

  • The volatility of markets and inflation make it essential the University invest and spend prudently for the long-term.
  • Last year’s 26 percent earnings on endowment were exceptional, as were the 17 percent annualized return the University has realized over the last five years. We noted last October that we expected to enter a period when earnings on investments would be much lower.
  • U-M’s annualized return of 17 percent over the last five years places the University at the upper end of the top quartile of all endowments, as reported by Cambridge Associates.
  • In 2001 and 2002, the rates of return were negative (– 4.4 percent and –5.5 percent, respectively); distributions from the endowment were nevertheless available to support programs.

U-M’s investment strategy is designed to protect the endowment from the ups and downs of the market

  • U-M’s endowment consists of about 6,200 separate funds, the great majority of which are restricted by the donors who created them so that they can be spent only on specific activities and are not transferable.
  • Earnings from invested funds are used for purposes donors designate. Any earnings above expenditures are added back to the invested principal to preserve the fund’s long-term purchasing power against normal inflation and volatility in capital markets.
  • U-M uses a multi-year moving average market value of the endowment to determine how much will be spent from the endowment each year. This allows U-M to smooth or stabilize endowment distribution year-over-year so operating budgets are insulated from the volatility in financial markets and receive dependable support over time.
    [NOTE: U-M tends to spend 5 percent or slightly more from endowment each year. The moving average market value used to calculate how much endowment money will be spent is in the process of going from six to seven years.]
  • When the market is down, returns can fall. In down years, we must draw on funds conserved from more successful years.

U-M’s capital financial strategy anticipates market volatility

  • The University's financing strategy anticipates volatility in the debt markets, and U-M has structured its policies accordingly.
  • U-M's AAA bond rating and investor confidence in the University's ability to repay what it borrows is one factor that allows U-M to sell bonds that are paying an average effective interest rate of 3.4 percent in 2008, one of the lowest interest rates among its public higher education peers.
  • The University transferred variable rate bonds underwritten by Lehman Brothers to J.P. Morgan when Lehman started experiencing financial difficulty. Those bonds have been successfully remarketed.
  • Although dollar amounts vary by the number and scale of projects in progress, U-M has on average financed approximately one sixth of our annual capital spending through debt. Donations, investment proceeds and U-M resources are the other major funding sources for capital projects.
  • So far, the U.S. financial situation has not had a significant impact on U-M construction projects.
  • Volatility in financial markets can be a double-edged sword for campus construction. Costs of materials tend to decline during times of uncertainty, but it also may be more difficult to find and purchase some materials.

The Office of Financial Aid is available to help

  • We care deeply about the potential impact of the financial situation on our students and their families.
  • Families that have experienced a significant change in their financial circumstances are encouraged to contact the Office of Financial Aid to discuss available options. It is not too late to apply for loans for the current academic year.
  • Tight credit markets can make it harder for students and families to obtain private loans to help cover the costs of education.
  • A number of lenders have informed the Office of Financial Aid that they have ceased to offer or have temporarily suspended their private loan programs or may impose more restrictive credit requirements. The office continues to refer students to viable sources for private loans.
  • So far, a small number of students have notified the University that their parents are no longer deemed credit worthy, and those cases have been successfully addressed.
  • A decline in family income may make a student eligible for more financial aid.
  • U-M meets the full demonstrated financial need of all undergraduates who are state residents.
  • U-M students always are encouraged to complete the Free Application for Federal Student Aid (FAFSA) so they can take advantage of all need-based financial aid programs.
  • The FAFSA determines financial need and how much the student’s family should contribute to the cost of their education.
  • Federal Direct Stafford Loans offer the best options for interest rates and borrower benefits, according to the Office of Financial Aid.
  • If students need to borrow additional funds, the Federal Direct PLUS Loan for the parents of undergraduate dependent students and the Federal Direct Grad PLUS Program for graduate students also are good choices.

Students encouraged to look into Federal Direct Loans

  • U-M has participated in the Federal Direct Stafford Program since its inception 14 years ago because it provides a better federal loan delivery system for U-M students at a lower cost to the taxpayer than the Federal Family Education Loan (FFEL) Program.
  • Students receive money faster through the Direct Loan Program.
  • We have confidence in the availability of loans through the Direct Loan Program because funds come directly from the federal government and are not subject to the liquidity problems experienced currently by banks and other financial institutions that provide loans through the FFEL Program.
  • More than 400 colleges joined the Direct Loan Program this year so their students have a reliable source for federal loans.

U-M takes the long-term view toward fundraising

  • U-M takes the long-term view toward fundraising.
  • Bequests and life income gifts help U-M ride out down times in the economy.
  • In 2007, U-M received nearly $39 million in donations because of decisions made five, 10 or 20 years ago to include the University in estate plans.
  • The Center on Philanthropy at Indiana University examined the impact of recessions and economic slowdowns on charitable giving from 1967 to 2007 and reported: “When the economy shows stress, whether it is a recession or not, giving may grow more slowly. It is important to note that giving still grows.”
  • The last U.S. recession began March 2001 and ended November 2001. U-M’s cash receipts from donors declined from $231 million in 2000 to $218 million in FY 2001 to $168 million in FY 2002 before increasing in FY 2003 to $184 million. Receipts have increased each year since and totaled $342 million FY 2008. Other factors may have contributed to the temporary 2001-2003 downturn in giving: U-M was in a quiet/non-public phase of its spectacularly successful Michigan Difference campaign, and U-M experienced changes in the presidency. Mary Sue Coleman was appointed U-M president in August 2002.
  • When the Center on Philanthropy at Indiana examined giving patterns by sector, it noted that gifts to education between 1967 and 2007 dropped in five of 11 recession years. The average annual growth in giving to education was 3.1 percent during the 40-year period. “This led to an average annual change in recessions of a drop of 1.1 percent, and a sharper drop, -1.9 percent, in years with eight months or more of recession.” Reported in “Giving USA Spotlight.”

U-M anticipates changes in federal research funding levels

  • Federal research funding is likely to stagnate in coming years so U-M must rely more on partnerships with businesses, industry and foundations.
  • U-M research expenditures reached $875.8 million in fiscal year 2008, a 6.4 percent increase over the previous year and an all-time high.
  • The federal government provided 69.8 percent of the funds. Investments by the University, industry, foundations and the state accounted for most of the rest.
  • The U-M consistently ranks among the nation's top five research universities, based on R&D expenditure statistics compiled by the National Science Foundation.
  • U-M's new Business Engagement Center opened in May. The center provides one-stop shopping for businesses seeking student talent, University expertise, professional development for employees and research partnerships.
  • By strengthening ties with the private sector, the University can secure its future as a research powerhouse while helping to revive Michigan's struggling economy.

Employee Retirement Savings

  • U-M offers generous retirement savings contributions and encourages employees to plan for their financial future by participating in its retirement savings program.
  • Fidelity Investments and TIAA-CREF, the two investment firms used by the U-M, have Web pages that provide investors with their perspectives on the current U.S. financial situation and the importance of long-term diversified investing.
  • Market volatility is of greatest concern to retirees and employees close to retirement. Both TIAA-CREF and Fidelity provide one-on-one counseling for clients.
  • U-M retirement counselors also are available to meet with employees who are close to retirement.

Updated: December 1, 2008