One interesting development in labour-management relations over the past few years has been the increasing tendency of academic unions to claim that administration is spending “too much” on capital, and is raiding the operating budget (i.e. salaries) to pay for it. It’s possible that there is some truth to this in some places, but on the whole there seems to be a misunderstanding about the difference between how the terms “operating” and “capital” are defined in budgets, and how they are used in formal financial accounting systems.
Let’s take, for example, the situation at the University of Manitoba, where President Barnard recently laid out a case for a 4% cut to operating budgets, and asked for suggestions on implementation. The University of Manitoba Faculty Association (UMFA) responded saying no cuts were necessary because, according to the financial statements, the operating fund was consistently generating $40 million or more in Net Revenue, which was then being transferred to Capital. If only the institution would stop diverting these surpluses to new buildings, the argument goes, there would be no need for a 4% cut.
It is certainly true that if you look at the U of M financial statements, you will regularly see inter-fund transfers in the eight-figure range ($40-50M, often), which do not appear in the institution’s annual budgets. But the reason for this is that the term “operating expenses” means something different in budgets than it does in financial statements. In a budget, operating expenses means “what we need in order to keep things ticking over”, and includes salaries, benefits, heating, new computers, library acquisitions, as well as day-to-day repairs.
However, in a set of financial statements, the definition changes somewhat. Here, “operating expenses” means “whatever we spent money on this year that has no depreciation value”. So when you look at a budget, or if you look at CAUBO reports, there are a whole bunch of things from the operating budget that suddenly appear in the capital budget when you see them in financial statements. In particular, things like debt payments, renovations, library acquisitions, furniture, and ICT equipment. At the University of Manitoba, for example, once you add up the various operating budget categories that cover those items, you find you can explain well over half of the “surplus” that’s been “transferred” from one budget to another. It’s not a question at all of “profits” and “diversions”, it’s simply a question of accounting conventions.
If this were something that happened at a single university, I wouldn’t be writing about this: I’ve got no particular beef with UMFA. But it’s not. Allegations about management taking huge operating “surpluses” and making them disappear into capital budgets has been a feature of labour-management confrontations at a number of schools in the past few years. Just from memory, it was a significant point of contention at Windsor, UNB, and St. FX – it may well have been an issue elsewhere, and I didn’t notice.
But my brief meander through this topic raises an important question: if I can figure this stuff out (and I’m definitely not an accountant), why can’t faculty associations? Are all of the faculty unions that dispute this point genuinely making the same honest error? If so, wouldn’t it be good to apologize for the error and false insinuations, and move on to more productive matters?
Or: is there a deliberate strategy at work of delegitimizing management by accusing them of fiddling the numbers, while knowing that these accusations rest, at least in part, on a confusion of accounting terms?
I really hope that latter possibility isn’t true. But the next time you hear a story about management plundering the operating budget for capital funds, just remember to ask some questions about definitions before you swallow the story whole.
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Alex: this is important. But I think we need to work through an extremely simple example or two, to make it clear. Maybe something like this:
Student fees are the only revenue, and bring in $100 per year. Instructors cost $60 per year. There is one classroom. A new classroom costs $400, and lasts for 10 years then must be replaced. No other expenses. Ignore interest and inflation.
This university is breaking even. It’s sustainable (if nothing changes). Every year it puts $40 into the capital budget to cover straight-line depreciation on the classroom, and every 10 years it takes $400 out of the capital budget to replace the classroom.
Does that example work?
This blog entry doesn’t account for all inter-budget transfers–only about half. And it commits a standard Fallacy of Argument–“Neglected Aspect.” (E.g. of neglected aspect: one child got sick after receiving the measles shot, so one must pay no serious attention to the 10 million children who were vaccinated, but didn’t get sick and thus will not get measles) In this case, the neglected aspect is the huge commitment of universities to bonds sold on the international bond market to pay for buildings. UBC’s physical plant is mostly (and I do mean “mostly”–more than 50%) constructed on the basis of bonds, guaranteed by the state (by BC and by the U of BC). It’s those bonds that produce all or most of the instant cash needed for the high rises at Ponderosa, the new Alumni centre, the expanded SUB (yes, the students will pay–but what they’re paying is instalments over the next 30 years on bonded debt).
There is not always much justification for expanded physical plant at UBC (or elsewhere in Canadian higher ed, for that matter). Administrations in Canada and the USA feel obliged to play this expensive game.
And will it cost us? Yes, BC taxpayers will have eventually to pay their share of the bonded debt; and all of those buildings will have to be operated and filled with staff, however luxurious and unjustified those buildings may be. Meanwhile, the proceeds of UBC real estate development are used, in part, to repay bonded debt–some real estate lease proceeds do come back as “grants” for arts and science research at UBC–but a l-o-t of that cash will be required for debt servicing.
The consequences of endless university growth, including physical growth, are great. One consequence is the sense that the high administration is out of control–and certainly, not listening to faculty associations and unions.
I can’t think of one building project in Canadian university history that was stopped or even slowed as a result of faculty union/association criticism. Not one.
Your point about debt servicing being a round-about capital expense is a good one. This now leaves the question of how much building is really useful — new classrooms for new pedagogies and new subjects — and how much is mere pyramid-building.
I’m a former UBCer, and it strikes me that the problem is particularly acute on the Vancouver campu because so few of the UBC buildings were really designed to last in the first place. There are still one or two army-surplus huts from the immediate postware period around. Last I saw, many of the annexes from the 1970s are still standing.
On every campus, there’s a churn of building to replace existing buildings, but I think that in the case of UBC, it’s probably worse.
Hi Bill, I just wanted to let you know Im a student at Capilano University and that they have had building development strongly slowed and affected by the unions. Additionally, local government fights against them in many aspects. Either on purpose or due to mindless bureaucracy. Government seems to be the point of problem for most, if not all of the education problems from what I have seen. Your point on reducing physical/capital building growth is hugely valid. MIT and Harvard are years ahead and have progress on their online courses. They also have amazing intensives for executives. Or more simply put, doers.
The education system is a mess, but administration aren’t allowed to really implement solutions due to government. Professors often see the problems in the system and meet the cement wall of admin which is placed by government. Then unions pretend to be useful and cause “media worthy” events/claims and continue to generate no value while sacking up value from other much needed areas.
One of my goals with my project is to make real education a priority where students and change agents get to build experience via our project system. Been working on the system for over 2 years. Hardest part has been getting good developers. But that’s the classic chicken and egg of any innovation.
Perhaps more public awareness about how the education system needs to change, rather than have people just pointing fingers, might cause some substantial progress. Anyone interested in fixing this relatively simple problem, email me: chris@woeigo.com