Finishing Strong: Achieving the Next Level

Joel Seligman Report to the Faculty Senate
April 12, 2016

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Within three months, we will complete the most successful capital campaign in our history.

By March 31, 2016, we had raised more than $1.33 billion, with all six of our academic divisions exceeding their original goals.  Most recently, the Simon School announced a
$20 million commitment from an anonymous alumnus, which raised Simon’s campaign total to $94.5 million or 111 percent of their $85 million goal.

• We had created 100 endowed professorships, with Trustee Bob Keegan having established the 100th endowed professorship at our March Board meeting.  By the conclusion of our Campaign on June 30th, we seek to double the 107 endowed professorships created during the first 155 years of our University.
• The Campaign had provided $218 million in additional student support, with the two largest gifts during this campaign designated for student scholarships.
• The Meliora Challenge also had galvanized lead gift support for more than $850 million in support of new or renovated buildings, including the Golisano Children’s Hospital, Rettner Hall, LeChase Hall, Eastman Theatre, the Wilmot Cancer Center, and now Wegmans Hall.  Coordinate with these University projects has been construction of College Town, Brooks Crossing, and the new Interstate 390 Interchange Project.
• During the Campaign we have tripled annual giving to $15 million per year to provide unrestricted support for academic annual budgets.
• We have created the George Eastman Circle, now with more than 3,300 members, and 12 regional cabinets today in Boston, Chicago, Delaware Valley, Los Angeles, New York City, New York New Leaders, Northern New Jersey, San Diego, San Francisco Bay, Texas, Washington, D.C., and Westchester-Fairfield Counties.
• We have created One Rochester, the University’s faculty and staff giving campaign, and 44 percent of our faculty and staff collectively have contributed $65 million during the campaign.

Our focus increasingly is on achieving The Next Level, building on the momentum created by the Campaign and progress at the University to further strengthen our academic, clinical, faculty, student, and staff experience by 2020 when we anticipate that we may begin our next capital campaign.

Our pursuit of The Next Level will emphasize greater integration of academic and clinical division with Advancement and Communications strategic and operational plans.

At the October 2016 Board meeting, we will present:

• Senior Vice President for Research and Hajim School Dean Rob Clark, Provost and Dean of the Faculty of Arts, Sciences and Engineering Peter Lennie, and Medical Center CEO and School of Medicine and Dentistry Dean Mark Taubman on the development of a University-wide plan on how to implement and amplify the
  2013-2018 Aiming Higher Strategic Plan and Next Level White Paper for the period until 2020.
• Senior Vice President and Chief Advancement Officer Tom Farrell will provide an articulation of the new Advancement Strategic Plan, which uses the themes of our strategic plans to amplify our development efforts.
• Communications Vice President Elizabeth Stauderman describing efforts to create a coordinated Communications Strategic Plan.

Let me provide a framework for these strategic presentations by placing in context our organization, values, competition, decentralization, SWOT analysis, strategic priorities for  2015-2020, and finances.

I.  ORGANIZATION

As with many leading private research universities, the University of Rochester is a confederacy, combining seven schools, hospital and patient care, the Memorial Art Gallery, and auxiliaries, including residential life, dining, bookstores, and parking.

Our finances are heavily tilted toward hospital and patient care.  For the 2016 fiscal year, 73 percent of our $3.3 billion budget or $2.4 billion was generated by Strong Memorial Hospital, the University of Rochester Medical Faculty Group, the Eastman Institute for Oral Health and our affiliates, which include Highland Hospital, F.F. Thompson, the Visiting Nurse Service, and skilled nursing facilities.  This percentage of hospital and patient care is higher than virtually all of our peers.  Because of the investment community’s confidence in our clinical care management and University management overall, however, we have in recent years experienced credit rating upgrades.

Strong Memorial Hospital’s hospital and patient care represents 59 percent or $1.4 billion of the hospital and patient care budget, followed by the Medical Faculty Group with $391 million or 16 percent, Highland Hospital with 14 percent, and F.F. Thompson with 6 percent.

Of the $3.3 billion Consolidated University Budget, $547 million is the Core Budget. The Core Budget aggregates the operating budgets of the seven schools that utilize endowment.  When you add noncore budget items such as sponsored research, the budgets for these seven schools equals $915 million.

The chart below highlights the differential size of our schools using Fiscal Year 2016 numbers.  In the chart, Arts, Sciences and Engineering combines two schools – the School of Arts and Sciences and the Hajim School of Engineering and Applied Sciences, which prepare consolidated financials and jointly engage in many programs:

School	Budget ($M)	Students	Faculty
Arts, Sciences & Engineering	$379	5,327 Undergraduate 1,264 Graduate	357 Tenure Track
School of Medicine & Dentistry	$377	400 MD Students 460 Graduate 750 Residents and Fellows	796 Tenure Track 203 Clinical 496 Service, Professional, Research
Simon Business School	$50	298 Full-time MBA 311 Full-time MS 45 Doctoral 450 Part-time	44 Tenure Track 21 Non-Tenure Track
Eastman School of Music	$43	540 Undergraduate 352 Graduate	87 Tenure Track
School of Nursing	$23	268 Undergraduate 219 Graduate	15 Tenure Track 40 Full-time Non-Tenure Track
Warner School of Education	$15	592 Graduate	20 Tenure Track 14 Clinical

II. VALUES

 Unlike publicly traded business corporations, which emphasize net profit for their shareholders as the dominant objective, research universities harmonize several values in framing their objectives.  In 2005 I characterized four core values of the University of Rochester:

• Academic excellence
• Academic freedom
• Diversity and
• Commitment to our community

Today I would add:

• Clinical excellence, including safe, high-quality patient care and
• Financial sustainability

If we succeed, it largely will be because of academic excellence that is sustainable over time.  We are not trying to be the least expensive or a low cost provider.  Our mission emphasizes academic excellence.

To be able to attract and retain the most outstanding faculty and students, our commitment to the core values of diversity and the community are particularly significant.  In the 21st century, universities that do not include a diverse faculty, student body, and staff are not viewed as attractive by the most outstanding faculty and students regardless of their gender, race, religion, or other attributes.  Similarly, for an urban university such as the University of Rochester not to make a fundamental commitment to the community would undercut support from those in the community as reduce the attractiveness of our University to faculty, student and staff.

III. COMPETITION

 We compete in multiple markets simultaneously.  U.S. News rankings of national universities focus on undergraduate programs, but this vastly oversimplifies the realities of our competitive sets and is subject to well-known methodological limitations.

Our hospitals, for example, compete in national and regional clinical markets for market share and margins and compete nationally for recognition of achievement.  UR Medicine (Strong Memorial and Highland Hospitals) remains the strongest within Monroe County with 50 percent of discharges and is increasingly significant in an area of four counties with 56 percent of discharges.  Strong Memorial Hospital also regularly is recognized as the regional leader in U.S. News with six adult and pediatric programs currently listed in the national Top 50 rankings; no other full-service hospital in upstate New York received recognition for a single Top 50 ranking.

Our research programs compete nationally in terms of aggregate sponsored awards (which we usually articulate by normalizing by the size of our faculty) and in specific departmental or specialized areas.  For fiscal year 2014, when normalized by faculty size, our federal research expenditures were 19th among national research universities.  For several years we have received $350 million or more in sponsored research.

Each of our academic programs competes in multiple ways, including for students, for faculty, for recognition, and often for research dollars.  The nature of the competitive set varies.  With students, our effective competitors tend to be the nation’s leading private research universities.  For faculty, we tend to compete against higher ranked schools where we often have advantages with respect to cost of living, the quality of local school systems, social amenities, talented faculty in specific departments, and our ability to use resources effectively in individual cases, for example, to create endowed professorships or to provide attractive research opportunities.

IV. DECENTRALIZATION

As with many of our peer institutions, we operate on a decentralized basis.  The Medical Center and each school prepare separate budgets, have separate leadership, and prepare separate strategic plans.  Central programs such as Advancement are paid by allocations from the Medical Center and the schools.

Decentralization as a management approach was popularized by Harvard (“every tub on its own bottom”) and by universities that follow the University of Pennsylvania Responsibility Centered Management approach.  Under this approach, tuition, research dollars, endowment income, and clinical care revenue are received by the center that generates the resources.  Key decisions on budgets, program expansion or contraction, size of the center and internal structure typically are initiated at the school or center level rather than centrally.  Central administrative and service costs such as advancement, administration, and public safety are allocated to each division.

A powerful advantage of the decentralized leadership approach is that the decision makers are those who are most familiar with the operational realities of their schools or programs.  Those in the Medical Center, for example, make better decisions about surgical procedures than central administration usually could.  Similarly, Arts, Sciences and Engineering normally makes better decisions about whether to expand or create new programs than a central administration usually could.

There also are some disadvantages to a decentralized structure in terms of duplication of efforts and difficulties establishing inter-school coordination as well as establishing or enhancing University programs and identity.

Decentralization, in sum, involves a trade-off.  Once the decision is made to operate on a decentralized basis, there are opportunities to modulate how decentralization operates programmatically.  At the University of Rochester, for example, without changing the basic decentralized model, during the past ten years we have evolved more explicit emphasis on coordinating central programs in Advancement and Communications because of the perceived net benefits of doing so.  Management of the endowment is a clear example where scale economies achieved by having a single central investment office has achieved a demonstrated value.

V. SWOT ANALYSIS

At the University level, our current strengths, weaknesses, opportunities, and threats can be summarized in these terms:

STRENGTHS

• Best in class or near best in class programs and/or faculty in selective programs such as the Eastman School of Music, Optics, Brain and Cognitive Sciences, Finance in the Simon School, and the RNA Biology program in the School of Medicine and Dentistry.  Other academic strengths include the double helix curriculum in SMD and the unification model in the School of Nursing.
• Strong academic programs, with the Arts, Sciences and Engineering enrollment model having been a notable success with a gain in the two-score equivalent SAT from 1304 to 1389 (87th to 94th percentile) between 2005 and 2015 simultaneous with increases in diversity and growth in size of Arts, Sciences and Engineering programs.  Notably also, the School of Medicine and Dentistry is among the 20 most selective medical schools in the country with an acceptance rate of less than 5 percent.
• Proven ability to engage in large-scale multidisciplinary projects such as our Laboratory for Laser Energetics or our burgeoning Data Science and Neuroscience programs.
• Leading health care programs in our region.
• Support from alumni and donors as reflected in the success of the Meliora Challenge campaign.
• Financial management measured in terms of endowment spending now at 5.8 percent computed on a five-year rolling average compared to 6.9 percent in 2000, a strength recognized by recent credit rating upgrades such as Moody’s, which in June 2015 recognized “the University’s presence in the region as a prominent academic medical center, strong student demand and growing health services, large impact on the City of Rochester as the largest employer, consistently positive operating performance, improving fundraising, and strong fiscal management team.”

WEAKNESSES

• Some aging facilities, with specific core buildings or classrooms or laboratories in the Medical Center, River Campus, or Eastman in need of renovation.
• Relative size of our academic programs – compared to our key peer group, the Association of American Universities (AAU) private universities with medical centers, our faculty and students in aggregate are about 50 percent of our peers.  When you exclude outliers such as NYU and USC from these data, we are approximately 60 percent of our peers.  Our smaller size is a mixed blessing.  Smaller size can be a positive factor when it encourages and supports faculty and programmatic collaboration.  At the same time, smaller size can limit our ability to initiate or develop new or expanded programs at scale.
• Relative size of our endowment – our endowment of just over $2 billion is approximately half the average of our close peers (non-Ivy research universities, for which the mean endowment value is $4 billion).  Our current endowment is 43rd largest overall.  Rochester’s endowment is just 6 percent of the largest university endowment, which is Harvard’s, at $36 billion.  This means that a 10 percent gain for Harvard increases its endowment size by $3.6 billion, while a 10 percent gain for our University increases our endowment by $200 million.  No other single fact so clearly highlights the need for our University’s strategy to be disciplined and focused on a small number of key programs where we can effectively compete rather than emphasizing across the board approaches.

OPPORTUNITIES

• The 2015 Aim Photonics and Upstate Revitalization Initiative awards provide potential new opportunities to amplify our best in class or near best in class Institute of Optics, accelerate completion of the first $100 million in commitments to our Data Science initiative, and help fund new major projects, including expansion of our Laser Lab facilities and the Rochester Neurorestoration Institute.
• There are opportunities to strengthen our clinical health care systems, which already has begun with the Medical Center’s recent affiliations with F.F. Thompson, Noyes Health in Dansville, and Jones Memorial in Wellsville.  Community hospitals nationally have sought and are seeking affiliations with health care systems that can provide medical professionals, orchestrate cost efficiencies, and link community hospitals to tertiary hospitals such as Strong Memorial Hospital.
• There also are opportunities for continued strengthening of the relationship between the University and the community as evidenced by our growth in employment (now more than 27,500 in full and part time employees; more than 23,000 full time equivalent employees) and strengthening of our role in pivotal community projects such as East High School, Eastman Business Park, and the Downtown Innovation Zone.

THREATS

• Uncertainty of health care finance at federal, state, and third party payer levels, including uncertainties related to levels of financial support, emerging reimbursement models (fee for service versus population health management), and our competitive set.
• Uncertainty with respect to federal sponsored research support, which has in real dollar terms systematically declined for close to 15 years.
• Pressures on our ability to raise tuition deriving from such issues as parental and student capacity or potential competition from international or online programs.
• Generalized risks such as those of a recession or an international event that, among other consequences, could undercut international enrollment, now 24.2 percent of University of Rochester students.
• Volatility in the capital markets could reduce endowment available to be distributed and fundraising.

VI. 2015- 2020 STRATEGIC PLAN PRIORITIES

• A leading priority at the University during the next five years involves completing the Medical Center’s clinical health network buildout.  As of the end of 2015, we own five hospitals directly or through affiliation, and we contractually manage two others.  We also are developing a network of ambulatory surgery centers, urgent care centers, community physicians and hospitals through Accountable Health Partners.  During the next five years, we can increase the number of relationships with hospitals and physician practices.  This growth in clinical care is coordinate with efforts to increase preeminence in research, health care education, and community service.  The enhancement of the Medical Center clinical care network likely will be consequential in terms of fortifying the financial stability of the University and Medical Center.
• Simultaneously we will emphasize programs in 1) Data Science; 2) Optics, Photonics, and Imaging; 3) Neuroscience; 4) the Humanities and Performing Arts; and 5) Revitalization of our Community.  We chose these areas in The Next Level white paper and subsequently because of our opportunity to build on existing or potential strengths of our faculty, including strengths that in some instances involve international engagement.  The key to success for these programs at the University is to pursue a small number of breakthrough programs at scale.
• Expanding innovation and entrepreneurship programs at the University of Rochester, including High Tech Rochester in the Rochester Downtown Innovation Zone and the River Campus Libraries’ iZone.
• Growth in the size of non-Medical Center programs such as a growth in the size of the undergraduate or master’s programs in Arts, Sciences and Engineering.  Our emphasis will be on continued improvements of academic quality to fortify the University of Rochester among the leading research universities.
• Expansion of on-campus, hybrid, and online master’s programs.  This will be a complementary area of growing strength for the University.  Our initial successes in the School of Nursing and the Warner School potentially can be replicated in the Eastman School, Simon School, and in Arts, Sciences and Engineering.  Opportunities for continuing education and lifelong learning also will be explored, including the potential of technology and online learning.
• Strengthening our commitment to the humanities and performing arts through such initiatives as the Humanities Center and the Institute for Performing Arts, both launched in 2015 by Arts and Sciences Dean Gloria Culver, as well as other programs in the Eastman School of Music and Memorial Art Gallery.
• Rededicating ourselves to the revitalization of our community through community engagement programs in all of our schools, the Medical Center, and Memorial Art Gallery; service as the Educational Partnership Organization for East High School; participation in economic development activities; and other activities.  We will, among other steps, focus on how we can generalize the lessons learned from the East High School initiative.

VII. FINANCES

• As part of our strategic plans, we also seek sustainable financial models for the University, with the goal of achieving 5.5 percent or less endowment payout on a five year rolling average basis by 2021 (we currently are at 5.8 percent) and the related goal of achieving 5.5 percent or less payout at all or virtually all academic divisions by 2021.  An ongoing dimension of achieving a sustainable financial model will be further cost efficiencies, including, when appropriate, further cost efficiencies that can be achieved by combining services often provided today on a decentralized basis.
• Completion of ongoing facility projects, including the Frederick Douglass Building, Prince Athletic Complex, the new Imaging Building next to the Laser Lab, and the second phase of the Golisano Children’s Hospital as well as meritorious new projects, such as expansion of the Medical Center’s Electronic Medical Record System and conversion to a 21st century Student Information System.  Our emphasis in facility projects also will include renovation of key facilities in the Medical Center, the Hajim Science and Engineering Quadrangle, and the Eastman School of Music.
• A critical variable in our University financial model will be the continued and growing success of Advancement.  Between 2001 and 2005, the University as a whole averaged $66 million per year in new gift commitments, of which an average per year of $63 million was in cash.  In the last five years, buoyed by the Meliora Challenge campaign, this total grew to an average of $140 million in gift commitments and $101 million in cash per year.  The recently adopted Advancement Building on Momentum operational plan projects further growth by 2021 to an average range of $175 to $220 million in total commitments and $135 to $175 million in cash per year.

CONCLUSION

 I am especially enthusiastic about our future.  We have made measurable progress together during the past 11 years by working together, listening to each other, understanding that success requires hard work, patience and appreciation of the trade-offs that any research university invariably must make. We have demonstrated that we can progress.  I look forward to working with you in the coming years to build on our momentum and work to take the University of Rochester to the Next Level.

For now, I close with the two questions that I pose at virtually every strategic planning meeting:  What are we missing?  What can we do better?