Contact: Monty Jones, (512) 499-4363

Date: February 19, 2003

Prepared Remarks by Mark G. Yudof, Chancellor

Delivered: February 19, 2003
Subject: Texas Compact proposals; current services budget; prospect of 12.5% cuts; long-range issues.

It is a pleasure to return to the Subcommittee for discussion of funding for the next biennium, although I suppose all of us wish we had more optimistic things to say about the prospects for the state budget.

We face one of the most extraordinary budget crises in the history of Texas -- not quite as bad as in the 1830's when the Texas Republic financed its meager budget with "redback" paper money, or in 1933 when a Depression-era deficit led to the state depository shutting its doors, the state being declared in default on its bonds, and state expenditures being slashed by 20%. Not quite that bad, but bad enough. [sources: Texas Almanac and Texas: A Modern History by David G. McComb].

The University of Texas System is committed to doing its part to help the state deal with the current crisis.

We understand the hard realities faced by this Subcommittee and other members of the Legislature. We do not envy the task ahead of you.

We don't look at this as simply your problem. The problem is shared by all of us, and all of us need to work on the solutions -- creatively, in a spirit of collaboration, and with a shared sense of responsibility.

It is, of course, my duty always to give you my candid assessment of the needs of higher education and the impact of any proposals on the quality of university services. It is your duty to make the tough decisions.

There will be no free ride.

If general revenue appropriations are cut and other sources of revenue do not increase, there can be no doubt that the quality of educational services will be affected.

Administrative efficiencies and cost-savings initiatives -- which the U.T. System has been pursuing aggressively for many years, and which we will continue to pursue -- can certainly help ease the impact.

But there is a point beyond which budget cuts could not be absorbed without the effects being felt by students, faculty, patients, and the millions of other Texans who benefit from university services.

It is also one of my responsibilities to focus on the long-term ability of U.T. System institutions to serve the people of Texas -- to look beyond the immediate challenges and to help our campuses develop strategies that address the state's long-range needs, among them the need:

• to increase the rates at which Texans from all groups, backgrounds and regions enroll in and graduate from colleges and universities [The state's Closing the Gaps plan envisions almost 227,000 more students in Texas higher education by 2010 if the state reaches the attendance rates of other large states.];
  
  
• to enhance the quality of educational services provided to this growing student population;
  
  
• to strengthen the ability of Texas universities and health science centers to provide medical services to patients and to contribute to the nation's research agenda;
  
  
• to enhance the process of transferring the results of university research into economic development and diversification;
  
  
• and to develop new approaches to higher education governance and accountability that encourage greater transparency.

These are not issues only for one legislative session or one biennium. They are issues that you and I will be dealing with for at least as long as we hold our current positions.

Overview of the Budget Situation

The U.T. System, like all state agencies and universities, has been analyzing various budget scenarios for the new biennium.

In the broadest terms, we face this situation:

• In the original appropriations for the current biennium (2002-2003), the U.T. System received $2.7 billion in general revenue.
  
  
• To maintain current services, the U.T. System would require a minimum of $2.9 billion in general revenue appropriations for the new biennium (2004-2005). (To accommodate increased number of students, increases in health care costs, inflation, etc.)
  
  
• Under the prospect for cuts of 12.5% for the new biennium, as outlined by the LBB (Legislative Budget Board), the U.T. System would receive about $2.4 billion in general revenue. This would be only 2.8% more than the System received three biennia ago (1998-1999).

My purpose this morning is to discuss the impact of various budget possibilities. The most important questions are: How would core services be affected? How do we meet our fundamental obligations?

Update on Achievements During the Current Biennium

Last week, I shared with the Subcommittee an overview of the U.T. System and a brief account of how the System and its 15 institutions have responded to the directions for cuts of 7% in general revenue for the current fiscal year.

Today I would like to summarize some of the accomplishments of the U.T. System since the 77th Session, and then to discuss funding issues for the new biennium.

• Enrollment is up 10.5% (16,171 additional students) across the U.T. System since fall 2000. [From 153,490 in Fall 2000 to 169,661 in Fall 2002]
  
  
• The number of degrees conferred annually has grown by 4.6% and now exceeds 30,700.
  
  
• Research expenditures have grown almost 30% since FY 2000 and now approach $1.4 billion (85% financed by federal government).
  
  
• The number of patients treated at U.T. System hospitals and clinics now exceeds 4 million per year, and we provide more than $800 million in indigent care annually.

In addition, our institutions continue to pursue, through every means available and as one of their highest priorities, the extension of educational opportunity to all Texans regardless of race, ethnicity, region, or economic background.

Since I was named chancellor last summer, my appointments to senior administrative positions in the U.T. System have further diversified the leadership.

As my administrative team and the Board of Regents have developed plans for the years ahead, we have focused on four fundamental topics, around which almost all higher education issues can be grouped:

Access, Affordability, Quality, and Accountability

These topics are, of course, closely inter-connected. For example, access and affordability mean little without high-quality academic programs, and accountability permeates all other issues.

We believe that many of the proposals that we have developed will be of practical value during the current budget crisis...but they are also consistent with the fundamental principles that Texas public higher education must be accessible, affordable, of high quality, and fully accountable. It is always a happy occasion when the practical solution to a problem is also the right thing to do as a matter of principle.

Promoting Educational Opportunity

The U.T. System is committed to promoting access and affordability through close collaboration with the Texas Higher Education Coordinating Board in the statewide Closing the Gaps initiative.

We also continue to pursue very extensive outreach programs with the public schools, as well as our Every Child/Every Advantage initiative, which aims at improving teacher education, strengthening the professional development of current teachers, and applying in Texas classrooms research-based approaches to teaching and learning.

We also have joined forces with the Texas A&M University System and community colleges in Tarrant County and Laredo to develop new techniques to facilitate student transfers among different levels of higher education. And with a magnificent grant from the Houston Endowment, we will be preparing students for the TAKS test and teachers for qualification under the federal "Leave No Child Behind" Act.

Within the U.T. System, Dr. Ed Sharpe is coordinating these initiatives as vice chancellor for educational system alignment.

Current Services Funding for the 2004-2005 Biennium

I turn now to a more thorough account of the various budget scenarios for the new biennium.

Given the enrollment increases that I have mentioned, cost increases in providing indigent health care, general inflation, and other factors, we estimate that a "Current Services" budget would require an increase of $211 million in general revenue appropriations for U.T. System institutions for the next biennium.

This would be a biennial increase of 7.2%. This would bring general revenue for the System to the level of $2.9 billion that I mentioned earlier. (For comparison, the average rate of increase in general revenue for the System in each of the last two biennia was 8.7%.)

As the U.T. System and the rest of Texas higher education continue to make progress in increasing enrollment, it is clear that the priority for state appropriations will continue to be funding through the formulas for essential educational functions.

I will discuss formula funding in more detail in a moment when I deal with the prospect of 12.5% cuts. In broad terms, the formulas help allocate appropriations for higher education's core services -- for paying salaries for faculty and the support staff who make the teaching and research functions possible, for buying library books, for providing student services, and doing all the other jobs that have to be done to keep a university open and meeting the needs of its customers.

Current services funding would enable universities to retain current faculty and staff and employ the additional teaching, research, and administrative personnel required to properly serve the larger student base. This level of funding would also serve to properly maintain the campuses, purchase the required supplies and library materials, and provide for other necessary services, including cost increases for indigent health care.

I realize the difficulty we are all facing in the effort to finance a reasonable set of programs and maintain current services to the people of Texas, and I will comment later in this presentation on the strategies the U.T. System may have to employ to operate with funding significantly lower than the requirements I have outlined here.

Enhancing Academic Quality and Strengthening Research Competitiveness

We are committed to continuing enhancement of the quality of university services. The U.T. System believes that the achievements of tomorrow should be better than yesterday's best, and that Texas deserves education, research, and health care services of the highest quality.

As I have already noted, support for higher education through the formula funding system will enable institutions to make the necessary expenditures -- the investments, if you will -- that yield high quality services.

I also would like to outline proposals for strengthening the research competitiveness and output of institutions across the System.

A significant acceleration of research activities is within reach and will be good for Texas. The heart of the university research enterprise is outstanding faculty with access to advanced facilities and equipment. These faculty are the ones who succeed in attracting external research grants and in recruiting highly talented graduate students.

Our plan is to encourage the recruitment and retention of such faculty through expanded and new collaborations between the academic and health science components of the U.T. System.

In San Antonio, we will continue to encourage the development of the Institute of Life Sciences, which involves partnerships between U.T. San Antonio and the U.T. Health Science Center at San Antonio.

In the Dallas-Fort Worth Metroplex, we are promoting new collaborations involving U.T. Arlington, U.T. Dallas, and U.T. Southwestern Medical Center. I believe we have a special opportunity at the Metroplex institutions to create a series of endowed chairs with joint appointments -- using a combination of modest state funds and substantial investment of private funds -- to encourage new research collaborations that can attract additional federal research funds to the state.

And in El Paso, we want to capitalize on the potential for partnerships between U.T. El Paso and the health education programs operated in that city by Texas Tech, including the possibility of expanding Texas Tech's programs into a new medical school.

Continuation of the excellence funding created by the 77th Legislature would be of benefit in pursuing these partnerships and other research initiatives.

Fundamental to the success of the kind of partnerships I have described, as well as to our overall research enterprise, would be a change in the way the state treats indirect cost reimbursements that accompany federal research grants. The current policy of the state capturing 50% of these reimbursements is, in effect, a tax on research.

Retention by universities of 100% of the indirect costs would boost the research enterprise, make more seed money available to attract additional federal research grants, and reward institutions for attracting external research dollars to Texas.

As you know, the Texas Comptroller has estimated that for every dollar of university research expenditures, there is a boost to the Texas economy of $3.32. In the light of this multiplier effect, a change in the treatment of indirect costs would constitute a powerful investment in the state's economy.

Enhancing the Quality of Health Education and Health Care Services

Another critically important issue of quality relates to health science education in the U.T. System and the delivery of health care services at U.T. System clinics and hospitals. Among these funding needs are:

• The need to provide continuing operational support for the Regional Academic Health Center in the Lower Rio Grande Valley. The mission of the RAHC remains only partially realized because of funding shortages. Fulfilling the original vision of the Legislature for this initiative would require an additional $19 million in the new biennium.
  
  
• Support for providing indigent care at the U.T. Medical Branch at Galveston and the U.T. Health Center at Tyler. The rapidly increasing volume of indigent health care demands has restricted delivery of health care. The delivery of care has been further affected by the nationwide shortage of nurses and increasing pharmaceutical costs.
  
  
• Assistance to the U.T. Health Science Center at Houston in paying for the damage from Tropical Storm Allison. The institution has requested emergency assistance from the Legislature totaling $34.9 million to pay for repairs that have not been covered by insurance and assistance from the Federal Emergency Management Agency.

Deregulation and Accountability

The U.T. System wants to work with the Legislature to develop stronger methods of public accountability for higher education, as well as to enable higher education to function in an environment of less centralized regulation.

Deregulation in selected areas, coupled with improved methods of accountability and tuition flexibility, would help institutions become more efficient, more responsive to changing conditions and needs, and in a better position to maintain the quality of their services to the public. These are complex matters that will be addressed by legislative committees on other occasions.

Financing Higher Education in the Current Environment

To return now to the issues before the Subcommittee, the Zero-Based targets assigned to state agencies and higher education institutions for the new biennium represent a 12.5% cut in general revenue appropriations from the original 2002-2003 levels. This would be a cut of some $340 million for the U.T. System, and would result in the $2.4 billion in general revenue that I mentioned earlier.

Now, $2.4 billion is a lot of money, but so is the amount that would be cut to reach that figure.

Cuts of the magnitude of $340 million would require a reevaluation of spending priorities in order to protect basic educational services as much as possible. Certain institutional imperatives or core functions would be at the top of any list of priorities.

For example, we must continue to pay debt service on outstanding bonds, and we must find ways to meet the essential obligations of teaching, patient care, and research.

All of these core functions are supported through formula funding, but much of the special item funding in the Appropriations Act also helps institutions meet their core functions.

I would like to discuss these two types of funding in more detail.

Formula funding is, historically, the broadest technique employed by the Legislature to allocate state appropriations according to institutional need, as indicated by various standardized measures. As such, formula funding is designed to pay for the basics of instructional costs and necessary support services.

I have mentioned the importance of formula funding in paying for faculty salaries, buying library books, and providing student services such as advising and counseling. These appropriations also pay for functions such as student recruiting; admissions and registration; the business and fiscal management offices of an institution; academic administration such as the offices of deans and department operations; campus security; maintenance of the physical plant; classroom and laboratory furniture and supplies; telephone services; and a host of other items.

Cutting the fundamental source of support for these functions would result, first, in new attempts to find efficiencies wherever possible without harming services, but at some point we would have no choice but to cut various services.

We could let the grass grow higher between mowings; reduce maintenance and janitorial services; postpone a wide range of purchases; continue the flexible hiring freeze that is now in effect; and take similar actions.

Eventually, we would see fewer professors, larger classes, fewer course offerings, more reliance on teaching assistants and adjunct faculty, fewer new books and professional journals in the libraries, and longer waits in line at all service offices, including hospitals and clinics.

The last recourse would include actions such as cutting academic programs, closing buildings, and firing employees.

Each campus would progress through these stages at somewhat different rates, but the effects would be felt by all.

The picture would vary partly because of varying amounts of special item appropriations from one campus to another. Special items would also be seriously affected by general revenue reductions of 12.5% in the next biennium, and many of these reductions would harm core services just as much as would cuts in formula funding.

In our analysis of how the cuts of 12.5% could be achieved, a preliminary estimate is that perhaps $115 million of the shortfall for U.T. System institutions could be resolved through a continuation of the kinds of actions outlined last week in our response to the 7% cuts for the current year, as well as the possibilities that I have just summarized.

The remaining gap -- some $225 million -- could be bridged by making fundamental changes in the operations of our institutions. In particular, funding for various special items would be at risk.

There may be a misperception that activities funded through "special items" in the Appropriations Act are non-essential or marginally important operations. This is not the case.

Special items come in all shapes and sizes and serve a variety of purposes and needs. All of them either directly or indirectly help institutions carry out their missions of teaching, patient care, research, and public service.

• Some activities are funded through special item appropriations because their unique needs, although vital as academic, research, and patient care units, are not met by formula funding.
  
  
• Some are actually quasi-state agencies within a higher education institution and carry out vital services for government, industry, and the general public.
  
  
• And some, such as Institutional Enhancement items, also provide for core support just as do the formula-funded items. (At some institutions, the Institutional Enhancement special item is a major source of funds for support of core functions. At U.T. Pan American, for example, it is 17% of the general revenue available for general operating purposes.)

I hesitate to begin naming entities at U.T. System institutions funded through special item appropriations because there are so many outstanding examples that I could discuss. I will limit myself to mentioning only one, the Automation and Robotics Research Institute operated by U.T. Arlington in Fort Worth. This is one of the best examples of a "special item" that combines multiple missions - teaching of undergraduates and graduate students, advanced research and development, and extensive industrial interactions. Furthermore, it is in a rapidly developing academic field that cuts across traditional disciplines and that has enormous economic development implications for Texas and the nation. This is one of the kinds of activities that great public universities are, traditionally, supposed to be engaged in.

There are not going to be any easy choices as all of us grapple with the state's revenue shortfall.

It will probably be no surprise to you that my real preference is not to make any cuts in higher education services -- neither in formula funding nor in special items. And I can make very good arguments for why Texas needs to increase its investment in higher education in order to serve the people of our state, as I am sure members of the Subcommittee can.

We face the reality, however, of a revenue forecast that does not fit very well with our vision for higher education, and with the continuing and expanding needs of the public.

Giving universities and their governing boards as much flexibility -- as much decision-making authority -- as possible would be one way to help them find their way through this hostile landscape with as little harm as possible.

The Governor in his Inaugural Address compared the state budget to that of a typical Texas household, and I think that comparison has merit.

In these times of extraordinary budget constraints, Texas higher education will keep food on the table and will pay the light bills.

We will look at every expenditure to see which ones are really essential.

We may have to delay putting a new roof on the house, and if so, our best hope may be that it doesn't rain too much for a while.

The family car will just have to last another year or two.

Our increasing enrollment might be compared to a new baby in a family, and just like that family, we know we will find a way to take care of the additional people at the table.

And, above all, we will stay together and work together, and hope for better times ahead.

I know I have discussed these matters at considerable length, and I appreciate your patience and interest.

Thank you for this opportunity to testify again to the Subcommittee. I would be happy to answer questions.

Read other testimony given to the 78th Legislature

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