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Opinion: The University's View of Financial Self-Sufficiency
• Leonard S. Sandridge

Editors Note: Executive Vice President and Chief Operating Officer of the University of Virginia Leonard Sandridge delivered these remarks to the Law School’s Business Advisory Council at a reception and dinner in the Dome Room of the Rotunda on September 11, 2003.

The Dean has been kind enough to ask me to share with you something that I think he and I both agree is good for the University of Virginia in the broadest sense, as well as good for the Law School. It has to do with the concept we have come to know as Financial Self-Sufficiency.

I think we started on this trek as long as 20 years ago. I remember being asked to go to the Law School in the mid- to late-’70s, when we just had an accreditation visit. At the conclusion of that accreditation visit we had an exit interview. Those who had examined the Law School and its performance made the comment that there were some things that were lacking for this Law School in the way of financial investment. The second part of the statement, though, is the thing that really gave us some direction about Virginia. Their comment was, “Shame on you — you’re giving your product away. If you charged an appropriate tuition, you would have the resources necessary to support this institution.”

Beginning then we started to gradually restructure the pricing policy of the Law School, and that has accelerated in the past five to seven years to the point where we’ve achieved a situation that I describe as Financial Self-Sufficiency.

Let me be sure that I say at the beginning that none of us can imagine the University of Virginia without this Law School — and I hope you would agree that none of us could imagine the Law School without the University of Virginia. We are not talking about going private or doing anything of that nature at all.

But in 1995 our Board of Visitors agreed to work toward a concept that would allow us to build on our strengths at this University, specifically the Law School and the Darden School, where we have the capacity both from a private fund-raising perspective as well as an ability to charge market rates for tuition, to try to develop a model that will be good for the schools and good for the University of Virginia.

LET ME BE SURE THAT I SAY … that none of us can imagine the University of Virginia without this Law School.

Perhaps a better place to start is to get to the midpoint and explain Financial Self- Sufficiency as we know it today (and I should report to you that the Law School has achieved Financial Self-Sufficiency in the fiscal year that we are in right now).What it means is that the Law School and Darden School benefit from 100 percent of the tuition they raise, they benefit from all the gifts they receive (as you’d expect, that’s true of all the schools), they benefit from their application fees, from their library fines, and from their endowment income. In return for getting all that revenue, they then are expected to pay their operating costs to a degree that other schools do not. They not only pay their direct costs for instruction and teaching, they also pay for the maintenance and operations of their facilities, and for capital costs associated with their buildings. In addition to that, and this became a key, I should be honest and say it was also a point of great discussion (do not ever think your Dean and his predecessors cannot negotiate well), we established a “tax” as the Dean calls it — an indirect cost as I would describe it — of ten percent of the tuition revenues, which the Law School contributes to the University for the services it receives from the central administration. That is an indirect cost rate that is well below what we accountants could demonstrate ought to be charged, but is well above anything we ask our other schools to pay. And so that ten percent of tuition revenues then goes back to the institution and gets plowed back into those schools, particularly Arts & Sciences, which frankly are not capable of charging market rates in the same way the Law School has done.

WHAT DOES THE LAW SCHOOL get out of [Financial Self- Sufficiency]? Well, the Law School has the ability to predict in its planning what its resources will be in the long term.

The Law School sets its tuition by benchmarking against a peer group of the top law schools in the nation. We have agreed that we ought to set our out-of-state tuition at close to what the private law schools charge. We have worked with our Board over the last several years to reach an agreement on something that was a little bit more difficult than one might originally have expected, and that is that we have set a $5,000 differential between in-state and out-of- state tuition — a differential that is substantially smaller than what we started with, but with a price that is lower than the Darden School. [Editor’s Note: Tuition will be set at the $5,000 differential for first-year in-state students in fall 2004, and to the remaining classes over the next three years. This differential is subject to approval by the Board of Visitors.] Because we are a state institution we believe it is appropriate for the sons and daughters and citizens of Virginia who pay taxes to get a lower tuition than out-of-state students. We are essentially imposing that on the Law School, and the University, through central resources, pays half of that $5,000 differential. What that comes down to in simple words, is that for every in-state student the Law School admits, the institution pays an “application” rate of $2,500 [from the state’s General Fund appropriation.].

What does the Law School get out of that? Well, the Law School has the ability to predict in its planning what its resources will be in the long term. It can influence dramatically how much revenue it will generate by the way it structures its pricing plans. It is able to recommend its tuition and salary increases. By law, setting tuition is reserved by the Board of Visitors, but I can tell you that when the Law School makes a recommendation I would be greatly disappointed in our own ability to deliver if we didn’t grant what was proposed. With one exception in 20 years, and that was a very unique circumstance, the Board has always granted to the Law School what it recommended.

What does the University get out of this? Well, we have been able to succeed in building on the strengths of our professional schools — Law and Darden. Additionally, we have freed up institutional resources to invest in the College, Nursing, Education, and Architecture, which by any standard do not have the resources or the ability to generate them that the Law School and Darden School can and do. But we also have been able to invest $2 million each year into Arts and Sciences as a result of this agreement with Law and Darden. That is important for a reason.

When we started to do this there were expectations that two bad things would happen: the first is that the Law School would not be considerate in its tuition-setting policies and tuition would go sky high. A few people also had a fear that the entire faculty would be paid at extreme rates. But what those people failed to recognize is that when you put the responsibility for the revenue side as well as the expenditure side on a good manager, the incentives are built in for them to run the Law School just like you run your businesses — and that is that you have to do what makes good business sense. And so we didn’t have any of those bad things happen.

Another fear was that the schools that are sometimes referred to as the “have-nots,” and I don’t like to hear that term but you will hear it when you’re on Grounds, would be upset that the Law School could have higher salaries and resources and could buy and build buildings. That hasn’t happened. Why? Because they know for a fact that because of the success of the Law School there is $2 million a year that’s going back to their budget that simply wouldn’t exist without this program. So in the long and short of it — all we have done is to simply align our incentives so the Law School and Darden School want the same things the University wants.

It is working well. We had planned to draw this transition out over four or five years before really reaching Financial Self-Sufficiency. The state saw fit to accelerate that by taking away state dollars to the point that we found ourselves having already achieved Financial Self-Sufficiency — through no fault of our own. So we chose to declare a victory this year and to sign the agreements with Law and Darden and since that time they have become financially self-sufficient.

Let me also say a little bit about your University because we are all part of the same organization. In spite of the fact that you hear a lot about state funds being cut dramatically — and they have been cut dramatically — your institution is doing very, very well. To put that in perspective, two years ago our state appropriation was $173 million in tax monies from the Commonwealth. This year it’s $114 million. In 1980 to 1989, just 12 or 13 years ago, 28 percent of our operating budget came from the state. This year, 8.1 percent comes from the state and that’s on a budget of $1.6 billion in operations. For the first time this year, the budget for the institution as a whole includes a larger amount from endowment income and private gifts than it does from state tax dollars.

In our view, that suggests that there are several things this institution needs to focus on. The first is that we have to acknowledge to ourselves that much like the Law School and the Darden School, we’re going to have to, as an institution, become much more dependent on tuition, and to recognize that as long as we can provide the appropriate financial aid to our students, we have to charge a reasonable tuition. We also have to admit to ourselves that for the future we will have to be second-to-none in our abilities to raise private monies. That is hard work but it is a task that this institution under the president’s leadership has demonstrated it can do quite well. We have to acknowledge to ourselves that when you have a situation where the amount of support from the Commonwealth is at the level it is today, then it is time to forge a new relationship with the Commonwealth of Virginia. Again, not to separate from the Commonwealth, not to become a private institution, but to suggest to the state that there are efficiencies that they can realize as well by allowing us to assume more responsibility for the governance of the operation of this institution.

I can report to you that the state has been very receptive to that. And in part they have been influenced by what they perceive as the success of the Darden School and the Law School and the work that we are describing to you here this evening. One of the big things that the state has always been concerned about is if we give you permission to raise tuition, what happens to those with financial need? And I often cite what the Law School has done in this regard by having a Loan Forgiveness Program for students who are expected to pay market rates for tuition. If they choose to go into careers of public service, loans are forgiven to those students so they have the opportunity to engage in public service if they choose to do so. That kind of responsible action on the part of the management of the Law School has served to help us as we have gone back to the state and talked about our relationship. I can tell you that this week we met with several of our key legislators and quite frankly we have been quite pleased with their reactions to our proposals and what we are saying to the state — that a form of self-sufficiency ought to apply to the entire institution.

Let me take this opportunity to thank you for the kind of commitment that you and so many of your colleagues around the country do make, not only to the Law School, but to the University of Virginia, as successful as it is. Your institution is doing well. We have an extraordinary Board of Visitors today. Gordon Rainey ’68, one of your own, is the Rector, [and I think he spends much more of his life in Charlottesville than he does in Richmond]. His leadership has been tremendous. We have excellent students — not only at the Law School, as you well know, but the undergraduate students who enter today are extremely impressive. And in the midst of the budget reductions, and I recognize what I am about to say is important only to an old financial officer, Standard & Poor’s came to us and upgraded our bond rating to a AAA and made us the second of any public university in the United States to have a AAA bond rating with S&P and Moody’s. Ironically, one of the reasons cited for the upgrade was that we are now in a place where we are less subject to the whims of the Commonwealth of Virginia.

I will tell you that what we have been able to work out for the Law School and the University as far as Financial Self-Sufficiency is good for all of us. I hope that three to five years from now we can come back and look at the success of it. I am honored to have been invited to have been with you and to visit with some of my old friends, and forever grateful for you and your support of the Law School.

Executive Vice President and Chief Operating Officer of the University of Virginia, Sandridge assumed this title in November 1999. He has served since 1990 in that role, with similar titles, as a member of President John T. Casteen III’s senior cabinet. He oversees operations of all non-academic support areas at the University, including athletics, student affairs, information technology and communication, management and budget, finance, UVIMCO, police, and compliance. In 1999, he assumed responsibility for the financial and managerial oversight of the Health System.

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