Questions arise over mounting shortfalls

7/19/2003

Medical College of Ohio, which has graduated thousands of new doctors and provided training to an estimated 80 percent of Toledo area doctors, is bleeding financially.

The state facility has lost money five years in a row. It is projected to lose $7.8 million in fiscal year 2004, which started July 1.

MCO's board of trustees was expected to approve the 2004 budget June 30, but trustees are so concerned with the mounting losses that they have demanded cuts. The board is expected to meet later this month to approve a revised budget.

Russell Armistead, who was hired by MCO's trustees last year to fix the institution's financial problems, maintains that a big part of the college's deficit this fiscal year is caused by a change in accounting methods. In fact, it's the only public college in Ohio attempting this accounting method.

It has to do with depreciation and how MCO and other public colleges account for it.

Here, in simple terms, is how depreciation normally works. Say you add a wooden deck on to your house for $5,000 and you estimate it will last five years before it needs replacing. So, you divide $5,000 by 5 and put aside $1,000 each year into an account. At the end of five years you should have close to what you need to replace the deck.

That's basically what every private company does - set aside a certain amount of money each year to cover both annual upkeep and replacement of buildings and equipment. But until 2002, no public college in the country was required to account for depreciation on everything from a photo copier to a campus buildings.

Colleges are now taking depreciation into account, but the way most do so makes that expense less painful than if they accounted for it the way private companies do. What usually happens is a college notes its depreciation expense in its financial statements at the end of the year, but it does not set aside money annually to cover all of those expenses.

And Mr. Armistead thinks that is wrong.

He believes MCO has been spending too much and not making enough.

If he did not count depreciation - or counted it the way all other Ohio colleges do - Mr. Armistead maintains that MCO's hospital operations would “make” $12 million this fiscal year, and the college side would break even.

Nevertheless, he said he is convinced MCO has to account for depreciation the way businesses do because, with continuing erosion in state financial support, there's no guarantee Ohio will always provide enough for new buildings and upkeep. He also believes that by not counting depreciation in an annual budget, MCO will eventually get the attention of state auditors and will be penalized.

Not everyone agrees with this thinking. Gaylyn Finn, associate vice president for finance at Bowling Green State University, said it is just as likely the state would frown upon a college holding on to large cash reserves generated by depreciation as MCO wants to do, and at the same time raising tuition.

“It would be wonderful to set aside cash for the amount you're depreciating, but if we raise tuition and said OK we've got this fund so we can replace buildings, they [the state] would go, `what?'” he said. “We'd have the state down here wondering what we were doing with all that money.”

Jack Armul, associate vice president of finance for the University of Toledo, agrees with Mr. Finn.

“In a perfect world, I'd love to budget for depreciation, but this isn't a perfect world,” he said.

Mr. Armistead said both Mr. Armul and Mr. Finn make valid points, but he still believes MCO must budget for depreciation.

He also pointed out that, unlike UT and BGSU, MCO has to support a hospital, which does not get any state support. More than half of MCO's depreciation comes from the hospital.

He stressed that it is up to MCO's board of trustees whether to agree with him and to budget for depreciation. The board could just decide to depreciate like every other college in the state, he noted.

Joe Case, a spokesman for the Ohio Auditor's Office, which reviews and signs off on all financial statements for state institutions in Ohio, said MCO would be the only state agency attempting to account for depreciation in its operating budget.

He said what MCO is attempting is not against the rules, just unusual.

Richard Petrick, vice chancellor for finance for the Ohio Board of Regents, said the board does not have a position on how colleges count depreciation, as long as they do.

Mr. Armistead knows he is out on a limb for his way of counting depreciation; or as he puts it, “out on the bleeding edge.”

Bleeding because, while depreciation might seem like a confusing accounting maneuver, making it count the way MCO wants to has real consequences.

To make MCO's accounting method work, the college will have to tighten its belt even more. Depending on what MCO's trustees decide, this tightening could result in painful layoffs or programs being cut.

Thomas Kosek, head of the AFSCME Local 2415, which represents 1,600 of MCO's 3,000 employees, said “morale is so far down” among MCO employees because of recent layoffs, and news of more cuts on the way.

Depending on whom one talks to at MCO, Mr. Armistead is either a financial genius making some tough decisions that should have been made years ago, or an overpaid consultant who should go away.

At one point, MCO was paying him $2,000 a day - prompting jokes from Jay Leno of The Tonight Show, which showed a clip of The Blade story announcing the hiring. He is now paid $33,333 a month - which works out to about $1,700 per day for a 20-day work month. MCO has also paid for a two-bedroom apartment for him - worth $22,000 so far - as well as travel expenses of $21,000.

Mr. Armistead points out that he does not get any benefits from the salary, and he is filling two jobs - director of MCO Hospitals and vice president of finance for MCO.

George Chapman, an MCO trustee and chair of the board's finance committee, scoffs at the criticism of Mr. Armistead's salary.

“I think Russ has been worth everything we pay him,” he said.

“We brought him [Mr. Armistead] in because of his expertise, and we wanted to send a message to the MCO community that this was not business as usual,” Mr. Chapman said.