Imagine that you are standing on the ground looking up at the fiscal cliff. You, the layperson, will probably see impending doom, the nation’s slow economic recovery teetering on the precipice and vital programs and services skidding over it.
University of Minnesota Chief Financial Officer Richard Pfutzenreuter looks up and sees all of that. But much like a geologist who would see layers of minerals, substrate and earth, Fitz, as the CFO mercifully allows himself to be called, also sees countless individual revenue streams and outlays.
Unless Congress acts quickly and decisively to stop the Budget Control Act of 2011 from going into effect Jan. 1, Fitz is going to be the guy who has to come up with a parachute big enough to minimize the pain when the U of M hits the abyss. He’s not a magician, and viewed from just about any vantage point, the forecast is dreadful.
In a recent interview, Pfutzenreuter described the scope of the problem. An edited transcript of that conversation follows:
MinnPost: What impact could the fiscal cliff have on the U of M?
Richard Pfutzenreuter: I categorize the impact on us in sort of four general buckets, the first being student aid. The good news there for students is that the federal Pell funding for 2013 has already been passed and is not being sequestered.
MP: When you say sequestered, what does that mean?
RP: That means that they’re in the federal discretionary budget and that entire budget is subject to about an 8 percent across the board cut.
We don’t expect anything to happen to Pell grants to need-based students, the biggest and most important federal financial aid program.
Now there’s an American Opportunity Credit that families and students can apply for. That’s a federal credit for $2,500 annually. That was part of the stimulus bill. That goes away. So that will be a hit on families and students in the fiscal cliff.
There’s what they call secondary-education opportunity grants, federal work-study grants, opportunity grants, TRIO programs, a whole bunch of small but important aid programs or funding that we get from the federal government to help students.
Work study, for example, is a form of financial aid. Those programs are subject to sequestering in the fiscal cliff, and in that area we would expect to lose probably a combined half a million to $600,000. We predict that somewhere between 90 and 100 students won’t be able to participate in work-study programs, which is an important form of financial aid.
MP: What’s the second bucket?
RP: The big hit, obviously, to the university is in the federal research-funding area. We have expenses, so the best we can do is say, OK, what did we spend in fiscal 2012? Last year we spent about $600 million, and those programs are all subject to being sequestered.
That’s what’s in the fiscal cliff legislation that’s enacted, so that’s automatic, across-the-board nondefense discretionary spending at the federal level, and that’s where research money for the university comes from. That’s money from the National Institute of Health and National Science Foundation.
What’s unclear at this point, of course, is how would they implement that cut? Would they simply lower awards that are up for renewal? Would they cut back on new awards? Or would they come in and just reduce existing awards that they’ve already authorized by that 8 percent figure?
If they did it across the board and took it out of what we currently spend, that’s about $50 million to us. The challenge we would face is the folks whose salaries we pay from those dollars — researchers, scientists. We would not be able to find another home for them in terms of the budget.
We don’t know how they’d implement the cut. Some say that they would simply have to not give as many new awards going forward. So for example, a faculty member whose got a three-year award and is at the end of their third year. They’re going to reapply for the grant, and the federal government would say, “Sorry, because of the budget cuts, we can’t fund your research for another three years.”
Or they come in and they say well, we funded your research two years ago and we gave you $8 million, but we’ve got to cut it by 8 percent. It will probably be some combination.
MP: So the possible implications are salary lines lost, research interrupted …
RP: Yes, research interrupted and people laid off.
MP: It sounds like there are alternatives for how to spread the pain out.
RP: It would be the implementing agencies. Their budget authority would drop 8 percent. So NIH has a $2.4 billion dollar budget, and the head guy at NIH would see their authority drop 8 percent, and they would have to decide how to implement that reduction.
MP: I don’t want to derail you from laying out the four buckets, but is higher ed able to get a word in with those agencies? Are you able to say to them, here’s what would be least awful for us?
RP: Inside an agency like NIH there are program managers who have contacts with faculty, and I know that those program managers at the federal level have been talking to faculty around the country, seeking input and giving them a heads-up on the fact that it could happen. The practice could vary from being one way at NIH and another way at the National Science Foundation.
One could say let’s not fund first-time investigators, young faculty. Another could say let’s take it out of awards we made last year or let’s just cut everything across the board this year. It will be hard to say. One would hope for some uniformity, but different agencies, I think, will end up approaching it differently.
MP: And am I right in thinking that a drop in research dollars coming to the U is a problem for the state’s economy?
RP: Well, we pay taxes with those dollars, and that money gets spent several times in Minnesota. We buy supplies, lab supplies, from Minnesota businesses. So there’s a ripple effect to that $50 million.
Economists will give you a sense of how many times that ripples, but clearly, on the salary portion, which is up to $600 million, almost half of that money, almost $300 million is just in compensation for researchers and scientists. So it will have a ripple effect.
MP: Tell us about the third bucket. It’s the state’s fiscal health?
RP: It’s the fact that this federal cut would hit us and then we’d lay off people and it would have a snowballing effect. You could see the worry by the governor when he announced the revenue forecast of the possible impact on the state budget from that decline. I think he put the shortfall at almost $2.7 billion if we go off the fiscal cliff. How that comes back to bite us is, of course, in our state appropriation.
So if the state ends up with another $3 billion budget problem, we get bit not only by the fiscal cliff from the feds, the operating budget of the institution gets bit by the state, which will then, of course, set another set of spirals in motion, because we will then be forced to cut budgets.
Depending on the magnitude of that cut, what it does to tuition and what it does to laying off and dealing with employees or freezing salaries, is a whole other issue. And we won’t know that until we see if we go off the fiscal cliff and see what the Legislature does to address what could be a $3 billion deficit.
So we’re keenly aware if the feds go off the cliff, there’s another one, and it’s the state.
MP: At the very least, it sounds like it could drive a bulldozer through President Eric Kaler’s proposal to the Legislature this year.
RP: That would be a polite way of putting it.
MP: How about the Academic Health Center, the fourth bucket?
RP: There are a couple of things going on there. I call it an umbrella, the Academic Health Center when I talk about it, but it’s really two components. One is Fairview. What happens to Fairview, our partner? And what happens to the University of Minnesota Physicians practice plan?
There are two things in the fiscal cliff that will cause financial stress on Fairview and UMP. One is that they’ll reduce Medicare payments to physicians. Apparently, what they call the “doc fix” is a fix that Congress makes to a law that is in place that’s there every year. It’s a standing law that, unless they extend an old practice, would lead to a 27 percent reduction in Medicare physician payments.
For Fairview, I asked them how big a hit that would be to them, and they said about $15 million, and then to our practice plan, University of Minnesota Physicians, about a $6 million hit. Of course the practice plan helps support the medical school financially and by paying clinical salaries of our faculty. So that would not be good.
Then there’s another hit where the Medicare provider payment itself is reduced 2 percent, and that’s a hit of another $12 million to Fairview, and another half a million hit to UMP.
MP: So are you over there panicking?
RP: No. I think everybody feels hopeless to some extent. You saw the governor and other governors go see the president. Here, President Kaler has sent a letter to our congressional delegation. I think the political leadership running the country knows how much this is going to hurt, and I think everybody hopes they get it together and figure out how to fix it.
I believe they’re running out of time. I know that the politicians at the federal level are being optimistic by saying they can get it done, but I don’t think they can actually write all the legislation to fix it in time. Maybe they can pass some joint resolution that does this or that, but it has tentacles everywhere. So I don’t know how they’re going to get it done.
MP: If they do run out of time, are there stop-gaps that you can foresee?
MP: So there is no federal equivalent of, say, the K-12 school shift? There’s no …
RP: If they go off the fiscal cliff Dec. 31, I’m not coming into work on Jan. 2 in a total panic. We will manage. Certain things are probably, after Dec. 31, irreversible. They’re out of things that they can go back and still fix.
MinnPost: So, just because I think at this point in this interview most of our readers are probably ready to go hurl themselves off a bridge somewhere, is there anything that a civic-minded Minnesotan can do?
RP: Write their political leaders. Tell them to fix it.
We’re through the presidential election, we’re through the congressional elections, now we have to see what happens in the next three weeks, and then we’ll have another view, and the university will have to take that information and start to deal with it. Figure out where we’re going to go.