The flap in Madison over the appropriate level of reserves for the UW System tees up an opportunity for a broader look at the financing of what may be the state’s finest asset.
First, an observation: if the auditors had found deficits or fund shortages, the flap would be a lot more serious and even more politically combustible. So, at least we have a problem of too much money on the books, not too little.
Further, there is even more money floating around the system than the Legislative Fiscal Bureau discovered in an audit of its general accounts. It’s in the off-balance sheet accounts of organizations like the UW Foundation, the Wisconsin Alumni Research Foundation (WARF) and other foundations like the UW Madison Hospital Foundation and University Research Park.
Take WARF as an example. It has assets of $2.5 billion, not counting the present value of its flow of royalty income. Those assets are included on the balance sheet of other major universities, but not in Wisconsin.
WARF brings in royalty income from patents
of more than $50 million per year, and, at a modest 5% return on its portfolio, another $125 million per year. That’s $175 million per year. (It probably does better than 5% in most years.)
Its mission is to support UW – Madison, so it gave $48.3 million in research awards on the campus in 2010-11. The question arises as to where the rest of the dollars go. Some supports its staff, and some gets plowed back to build its principal. That’s how it got to $2.5 billion.
The UW Foundation also tops $2 billion in assets, and it also is not on the balance sheet of the system. The UW medical organizations are home to another $1 billion in assets, growing at $100 million per year.
With the $1 billion in reserves (some for restricted purposes), there are more than $6 billion in assets managed in separate fiefdoms – and not publicly, collectively reported. These foundation serve the system well and often can get projects done that might not get done through the clunky bureaucratic and political channels that affect the university’s normal finance channels. New dormitories built by the UW – Milwaukee Real Estate Foundation are an example. (Disclosure: I am on the board of its parent UWM Foundation.)
In another example, WARF recently teamed with the State of Wisconsin Investment Board to create a $30 million initiative to fund startups in the information technology sector. Think what more WARF could do with its financial muscle if incorporated into the system’s statewide mission.
WARF also made a major investment in the Discovery Institute in Madison. Despite such investments, it has grown its portfolio from $963 million in 2002 to $2.5 billion. That’s a nice track record on the investment side.
The UW Hospital and Clinics Authority showed $774 million in assets on its separate books at the end of 2012, up $106 million on 2012 and $95 million in 2011.
There is also $180 million in a separate, unconsolidated UW Medical Foundation.
The point is that there are many buckets of money across the UW System for various worthwhile purposes. The controversial “reserves” are in many accounts at different banks, aimed at projects on the 26 UW campuses. Chancellors and deans dispute that contention that the reserves are excessive.
That said, there needs to be a lot more transparency, which could be accomplished with a consolidated balance sheet. That level of reporting would allow for a more strategic allocation of the system’s resources.
Some decentralization of fund allocation to the campuses is desirable. Campus scholarship foundations created by local donations, for example, should remain local. But some guidance on fund raising and investments from system might help.
The absence of transparency has led to distrust both ways between the legislature and the university. That is unfortunate. They need to be pulling together for the good of the state’s citizens.
It’s clearly time to bring the Wisconsin Idea to bear. That’s the time-honored method of pulling together the best minds in the state to sift and winnow complex issues.
Gov. Walker and UW President Kevin Reilly should assemble a task force of financial and governance experts to tackle the UW’s fiscal issues. They should address:
o The right level of reserves for the system as a whole and for each of the campuses.
o The management for best returns for all the buckets of money. (Some of it probably is not even invested.)
o The alignment and use of the consolidated balance sheet of assets to accomplish the strategic objectives of the university across the state.
o The impact of returns from the consolidated UW balance sheet, including the reserves, on tuition levels. All citizens agree they are too high.
The recommendations from a high-powered task force could go a long way to restoring the trust between government and university leaders. We need them on the same page.