Contact: Monty Jones, (512) 499-4363

Date: February 24, 2003

Prepared Remarks by Mark G. Yudof, Chancellor

Delivered: February 24, 2003
Subject: The University of Texas System Administration - Cost-Effective Services that Add Value to System Campuses

Good morning, Mr. Chairman and Members of the Committee.

Thank you for this opportunity to discuss the University of Texas System Administration.

We have received a list of questions regarding budget and management details, and we are providing you with the information requested. We would be happy to provide the Committee with any additional information.

With the Committee's permission, I would like to present to you an overview of the U.T. System Administration and a review of what we are doing to be more efficient and more cost-effective.

Since becoming Chancellor last summer, I have been reviewing the services provided by the System Administration, as well as its structure and organization. I have made some changes, and more are on the way.

My approach is this: We are doing a good job, but there is always room for improvement. This is a continuous challenge which we must address every day as well as in planning for the longer term.

Among the administrative changes that have been made in recent months, these may be of interest to the Committee:

As you may expect, I have made changes in the top levels of the administration so I can have my own team in place. This has meant not only several new faces but also the creation of a few new positions.

One of the most important of these is the position of Executive Assistant for Accountability and Performance. I believe so strongly in accountability that I want the person leading this effort to report directly to me.

In January, I initiated a comprehensive review of the staffing levels at all operating units of the System Administration. The Vice Chancellor for Administration and the System's Budget Director are conducting this review, which seeks to answer questions such as, do the various administrative offices have the right number of staff; are we top-heavy in some areas; should some offices be merged or even abolished; how can we realign resources to do a better job. So far, 10 of these reviews have been completed. When all are complete, I will make decisions about reorganization of our workforce and reallocation of resources. Although the details must wait until the end of this process, it is clear that the overall result will be a smaller System Administration - streamlined and more efficient.

Related to this review is an examination of whether some functions of the System Administration could be better performed at the campus level. One example is the System's role in starting up a distance education operation. We are considering whether this activity is now sufficiently developed so that many of these functions can be taken over by the individual component institutions of the System.

Another change was initiated last November when, in anticipation of a worsening state budget situation, I ordered a hiring freeze at the System Administration. This freeze is continuing indefinitely. No vacant positions can be filled without my direct approval, and I will fill a position only if failing to do so would make it impossible for us to carry out our responsibilities.

So far, the hiring freeze has resulted in a reduction of 32.8 FTE employees in the System Administration. Of these, 9.4 FTEs were positions paid from appropriated funds, and there is no doubt that we will have further significant reductions in the months ahead.

Of course, we prefer to reduce the number of staff through attrition and reorganization, rather than layoffs, but nothing can be ruled out in these times of extraordinary budget crisis.

Based on these developments, I hope you will agree with me that the System Administration is headed in the right direction.

As further evidence of the progress we are making, we now have fewer filled FTEs in most System offices than had been budgeted last summer for the current fiscal year.

Unfortunately, the System Administration remains over the cap for FTEs as provided in the Appropriations Act. I am concerned about that, and I am confident that significant improvement will be made in the next few months.

COMPLEXITY AND DIVERSITY OF THE U.T. SYSTEM

In order to understand the range of possibilities for new efficiencies at the System Administration, it is necessary to have a view of the size and complexity of the U.T. System and the major responsibilities that have been assigned to it for the teaching, research, health care, and public service mission of Texas public higher education.

Institutions within the U.T. System educate one-third of all public university students in Texas and two-thirds of all students at health science institutions - a larger proportion, by far, than any other system in the state. In fall 2002, System institutions had 169,613 students, including 159,850 at general academic universities and 9,763 at health science institutions. System-wide, there are 86,000 employees. No other university system in Texas comes close to having this many students and employees.

The System-wide operating budget is $7 billion per year, including $1.4 billion in research expenditures (85% of which are from federal or private funding sources) and more than $1 billion in indigent health care in FY 2002. In addition, the System has a six-year capital budget totaling $3.7 billion. The System has more than $22 billion in total assets, including more than $11.7 billion in investments under management.

By these and many other measures, the U.T. System is by far the largest university system in the state. Compared with the next largest system in the state, the U.T. System has 75% more students; more than three times as much in annual research expenditures; and an annual operating budget that is about three-and-a half times larger.

One of the biggest differences between the U.T. System and other Texas university systems is in the amount of health care delivery and health research conducted in the U.T. System. The six U.T. System health institutions account for about half of the System's employees, 64% of the System's total operating budget, and 65% of the annual research expenditures.

Within the System's six health institutions, there are four medical schools, two dental schools, and four nursing schools, as well as schools of allied health science, biomedical sciences, health information sciences, and public health. The health institutions include M. D. Anderson Cancer Center in Houston, currently ranked as the top cancer center in the world, and the U.T. Health Center at Tyler, whose mission includes a mandate from the Legislature to lead the state's fight against tuberculosis. Through three teaching hospitals owned by System institutions and numerous affiliations with other teaching hospitals, as well as a network of community clinics, the health components are major providers of health care. System hospitals and clinics have more than 200,000 admissions per year and treat more than 4 million outpatients annually. The health components also operate four extension campuses in South Texas and four satellite teaching and research programs in public health. The state contracts with the U.T. Medical Branch at Galveston to provide comprehensive health care to more than 100,000 inmates of the state prison system.

The System's nine general academic universities are equally diverse. They include U.T. Austin, a large internationally renowned comprehensive research university with a wide range of undergraduate, graduate, and professional programs, and annual research spending of more than $321 million; several emerging research universities; and institutions that primarily serve undergraduate students or students from a particular region. The largest of these institutions has more than 52,000 students, the smallest about 2,700. The academic components include three schools of architecture, nine schools of business and management, eight colleges of education, seven colleges of engineering, three schools of nursing, a law school, a college of pharmacy, as well as other colleges and schools that include liberal arts, natural sciences, social work, public affairs, fine arts, and library science.

In addition to the main campuses of the 15 components, U.T. System institutions have a significant presence in many other Texas communities, from Bonham (the Sam Rayburn Library) to South Padre Island (Coastal Studies Lab), and from Longview (Longview University Center) to the Davis Mountains (McDonald Observatory).

Numerous interactions among these diverse institutions are facilitated by virtue of their being included in the System. Among the most important are many collaborative academic and research programs, through which two or more campuses are able to share faculty and other resources. Younger institutions are able to benefit from the expertise at more established campuses in order to "jump start" new academic programs. And by sharing personnel and other resources, it is possible to deliver educational services to areas of the state where this would not otherwise be cost-efficient.

A few examples of these partnerships are the collaborative pharmacy program pioneered by U.T. Austin and U.T. San Antonio, a variety of health education programs that involve partnership between U.T. El Paso and the U.T. Health Science Center at Houston, biochemistry and bioengineering programs involving U.T. Arlington and U.T. Southwestern, and a medical management program involving U.T. Dallas and U.T. Southwestern.

The System Administration is seeking to expand this already extensive series of partnerships and collaboration among System components. We are focusing, in particular, on ways to accelerate research concentrations through new partnerships between the System's academic and health institutions in various fields of the biosciences and biotechnology.

WHAT DOES THE SYSTEM ADMINISTRATION DO?

The U.T. System has more complex central responsibilities and is composed of more diverse types of institutions, many of them with more complex missions than institutions outside the U.T. System. This complexity and diversity sometimes results in administrative needs not found elsewhere.

The U.T. System has special administrative responsibilities related to the fiduciary responsibility of the Board of Regents for the Permanent University Fund and other endowments, administration of bonds backed by the PUF, and management of University Lands in West Texas.

The System Administration assists the Board of Regents and carries out the Board's policies and regulations; works with the Board of Regents on strategic planning for the System; provides a wide range of centralized, cost-effective, and value-added services to the System's 15 component institutions; and has special additional responsibilities derived from the Texas Constitution and statutes.

The administrative offices of the U.T. System have 259.8 budgeted FTE employees paid from appropriated funds (general revenue appropriations and the Available University Fund). In addition, the System Administration has 305.4 FTE employees who work in fee-for-service activities, that is, operations that are funded by user fees or other money generated by the operations themselves.

The System Administration's original operating budget for FY 2003 is $36.8 million. Of the total, $26.3 million comes from the AUF; $996,000 comes from general revenue appropriations; and $9.5 million comes from non-appropriated funds such as gifts, grants, and contracts. (These figures exclude pass-through funds for the Regional Academic Health Center in the Lower Rio Grande Valley and the Laredo campus extension.)

The Texas Constitution stipulates that the portion of the Available University Fund allocated to the U.T. System may be used only for retirement of bonds backed by the Permanent University Fund, for "excellence" programs at U.T. Austin, and for the System Administration.

Because of economies of scale and other efficiencies, administrative costs of the U.T. System are relatively low. On a System-wide basis, the portion of the total budget of the System Administration and its component institutions devoted to administrative expenses approximates 8%. By our calculations, this administrative expense rate is slightly higher than in the Texas Tech University System and slightly lower than in the Texas A&M University System.

While we are sensitive to the magnitude of administrative costs at the System level, we believe the System Administration adds real value to the component institutions and to the state as a whole.

VALUE-ADDED SERVICES

In some cases, the System Administration acts as a facilitator of functions that are largely decentralized at the campus level, and in other cases the System provides centralized services directly.

The goals are to centralize services at the System level when that is the most efficient and cost-effective way to deliver the services, but to decentralize functions at the campus level when that makes the most sense. As indicated earlier, we continue to evaluate various services to see if they are being administered at the appropriate level.

Functions that are largely decentralized at the campus level include admissions at the general academic institutions, financial aid, student services such as advising and counseling, most information technology operations, academic programming, curriculum development, faculty and staff hiring, and a host of other activities.

Services currently provided by the System Administration that add value to the component institutions include the following:

Health Affairs. The System facilitates delivery of basic health and academic services through the Office of Health Affairs, which works with the six health components on strategic planning, joint purchasing plans, quality assurance, compliance with Medicare and Medicaid programs, monitoring the institutions' financial health, monitoring the integrated practice plans for health care professionals, and other functions. The office also encourages collaborative academic and research programs, including those involving both health and academic components. One of these initiatives, for example, envisions a significant expansion of collaborative research programs involving U.T. Southwestern Medical Center at Dallas, U.T. Dallas, and U.T. Arlington.

Other services provided by Health Affairs include:

• Texas Medical and Dental Application Service. This service, mandated by the Legislature in 1999 to serve all public medical and dental schools in the state, and expanded in 2001 to serve the Texas A&M veterinary school, facilitates student applications as well as admission decisions by the various schools. This highly cost-effective service is supported by application fees assessed to the prospective students and operational fees assessed to the schools. The service processes 19,000 applications annually from 4,000 applicants to the 11 public schools that participate. The U.T. System maintains operational control over the service, which also is guided by a steering committee of representatives from all participating schools. Students save by paying only one fee and filling out only one application, although they can apply to multiple schools. The schools benefit from consistent, uniform interpretation and application of state law and a reduction in duplicated efforts. Reporting of admission date to the state and federal governments is also simplified. At a time when a national application program has been plagued with disorder and confusion, Texas has led the way in streamlining and simplifying the application process to health professional schools, and the U.T. System has been the leader for Texas in this effort.
  
  
• Joint Admission Medical Program. This statewide program, known as JAMP, was created by the 77th Legislature to support and encourage highly qualified but economically disadvantaged students in preparing for and succeeding in medical school. In recognition of the efficient and cost-effective administrative record of the U.T. System, Legislation creating the program authorized participating higher education institutions to delegate administrative functions to the U.T. System's Medical and Dental Application Service. JAMP, a partnership among 45 public and private higher education institutions, awards scholarships and stipends for summer enrichment programs, provides mentoring and advising to undergraduates, offers internships at medical schools, and guarantees admission to medical school if all requirements are met. Funding is through appropriations to the Texas Higher Education Coordinating Board, which transferred the funds to the U.T. System in an agreement with a council of participating institutions.

Academic Affairs. The System facilitates delivery of services by the nine general academic institutions through the Office of Academic Affairs. This office assists the institutions with strategic planning, reviews and approves academic programs, helps facilitate start-up programs, helps reduce duplication in academic programming, and ensures compliance with regulations of the Texas Higher Education Coordinating Board. The office also facilitates the centralized purchase of databases for component libraries, making these advanced research materials available on a cost-effective basis to even the smallest libraries in the System.

Other services of this office include:

• Distance Education. The System operates the UT TeleCampus, a centralized support facility for web-based distance education programs at each of the component institutions. The TeleCampus, a nationally recognized leader in this field, assists faculty at all campuses with curriculum development and manages a full range of online services for distance education students. More than 100 faculty members across the System teach at least one online course. Online offerings include seven master's programs, as well as the basic freshman and sophomore curriculum, and many allied health and medical courses.
  
  
• PK-16 Services. The U.T. System seeks to promote a seamless system of education from the earliest years of formal education (pre-kindergarten) through the baccalaureate level. In this regard the "K-12" educational system and the traditional four years of study leading to a bachelor's degree are envisioned as part of one continuous process that we designate as "PK-16." All U.T. System institutions operate extensive outreach programs to assist this PK-16 system. The U.T. System coordinates and encourages these activities at the 15 campuses and also operates System-based programs in this area. System activities include the Every Child, Every Advantage initiative, which aims to improve teacher education, enhance professional development of current teachers, and apply research findings /to curriculum and instruction in Texas classrooms. Another project is an elementary charter school that will open in Austin in Fall 2003. In addition, the System has received a grant from the Houston Endowment to help prepare students for the TAKS test and to help Texas teachers qualify for special designation under the federal No Child Left Behind Act, using the resources and expertise of the UT TeleCampus

Facilities Planning and Construction. The U.T. System provides an invaluable service to its institutions as they seek to provide and maintain facilities in which faculty and students can learn and conduct research. The Office of Facilities Planning and Construction manages projects included in the System's six-year $3.7 billion Capital Improvement Program. The office develops guidelines for component submittals for the CIP; organizes the overall capital program; maintains databases on costs and schedules as benchmarks for new construction; provides technical expertise to the component institutions in architecture, engineering, landscape architecture, and interior design; manages key phases of major projects, including design, procurement, construction, and commissioning; administers all contracts for major projects; coordinates a dispute-resolution process; and conducts building code reviews and provides code interpretation. The office oversees a major portion of the System's programs to increase contracting with Historically Underutilized Businesses. These efforts include a Bonding and Technical Assistance program to help relatively inexperienced companies participate in construction contracting. The office also coordinates development of campus master plans for land use, facilities needs, and architectural standards. According to benchmark surveys on construction and renovation management fees of major industrial corporations, several private construction management firms, and similar Texas state higher education systems, the U.T. System fees for facility planning and construction are the lowest.

Legal Services. The Office of General Council is, in effect, a full-service law firm that provides legal services to the System administration and all 15 component institutions. The level of expertise in this office across a broad range of legal issues would not otherwise be available to our campuses - certainly not in such a cost-effective manner. Attorneys in the office specialize in fields such as oil and gas law, contracts, intellectual property, tax law, claims and bankruptcy, and medical liability. The office also coordinates litigation with the state Attorney General's office, and, in come cases, private law firms that are engaged case-by-case (often on a pro bono basis). In addition, the office plays a key role in the System's compliance program.

• Medical Malpractice Insurance Program. Another important role of the Office of General Counsel is management of the System-wide Medical Malpractice Insurance Program. For 25 years, the System has operated a highly cost-effective medical liability benefit plan for physicians at U.T. System institutions. The plan, which supports itself through premiums paid by the physicians, is authorized by the Texas Education Code. The plan's annual rate average is $8,856 per physician. Private coverage would cost more than three times as much. The medical liability program operates a health care quality and risk management program for health care personnel at the System's six health components. The program includes a website with online educational and training materials for physicians.

University Lands. In conjunction with its responsibilities for the Permanent University Fund, the U.T. System manages the 2.1 million acres of University Lands, which historically have been the underlying resource of the PUF. Since the PUF and the income generated by these lands benefit 18 institutions in both the U.T. and Texas A&M systems, it is clear that the various institutions must depend on an entity beyond their campuses to oversee these assets. The U.T. System administration has had this historic role. The U.T. System has staff based in Midland for this purpose, as well as staff in Austin who are responsible for accounting functions related to University Lands. (Texas can thank the U.T. Board of Regents in the early part of the 20th century for surveying and preserving these lands as university resources for the benefit of the entire state.)

Board for Lease of University Lands. The U.T. System provides staff support and management assistance for the Board for Lease, a state agency that includes the Commissioner of the General Land Office, a U.T. System regent, and an A&M System regent. This board is in charge of awarding bids for oil and gas leases.

Workers' Compensation Insurance. The U.T. System operates a self-supporting and cost-effective Workers' Compensation Insurance Program for all 86,000 employees of the System Administration and the 15 component institutions. Coordination of environmental health and safety activities is a vital element of the program and helps keep costs down. The program, whose statutory authority is found in the state Labor Code, is one of the lowest-cost WCI programs anywhere. U.T. System component institutions paid an average of 32 cents per $100 of payroll for coverage in FY 2002. State agencies under the Texas State Office of Risk Management paid $1.25 per $100 of payroll for WCI coverage in FY 2001, and higher education institutions under SORM paid an average of 58 cents.

Employee Group Insurance. The U.T. System has been authorized by the Legislature to operate an Employee Group Insurance program. Statutory authority is in the Texas Insurance Code. Customers include the human resources offices at all component institutions, 70,000 employees, 11,000 retirees, and 65,000 family members. The System's EGI office issues proposals for group plan contracts, analyzes bids, makes recommendations to the Board of Regents on which bids to accept, and is responsible for overall management of the contracts. The program is funded by premium sharing funds from each component institution, additional employee fees, and interest earnings.

Travel Program. The U.T. System operates a consolidated travel program which manages travel budgets and services throughout the System for non-state contract vendors. The program is authorized in Texas Government Code. The program, which is operated with only one FTE employee, helps ensure cost containment and compliance with state, university, and travel vendor guidelines. The program is funded through a fee of $1.35 on each transaction. During the last fiscal year, the program's cost-containment efforts resulted in a savings of $73,000 in fees requested vs. fees subsequently negotiated with travel agents, and $140,000 in services secured for areas not covered by state travel contracts.

Compliance Program. A System-wide Compliance Program helps ensure that all component institutions are in compliance with the hundreds of laws, polices, and regulations that higher education institutions are subject to. Because of the diversity and complexity of activities within the U. T. System, it is necessary to make employees aware of an extraordinary range of laws and regulations. These include federal issues such as Medicare and Medicaid; fair labor laws; student and patient privacy; the use of animals and persons in research; environmental protection; occupational health and safety; disposal of hazardous waste; and tax laws. State laws and regulations range from purchasing procedures to use of state property, from ethics laws to the open records and open meetings acts. Numerous private entities also regulate public higher education, from the National Collegiate Athletics Association to accreditation bodies. The System compliance office includes special working groups that focus on "high-risk" areas such as fiscal management, intercollegiate athletics, managing research grants, endowment management, and conflict of interest rules. Annual training for all System Administration employees includes topics such as equal employment opportunities; sexual harassment; record keeping procedures; contacts with the news media and government agencies; contracts and purchasing; copyright laws; drug-free and weapon-free workplace regulations; the Family Medical Leave Act; outside employment; timekeeping rules; regulations governing political activities; preventing fraud and errors; use of state property, and workplace health and safety. The System Compliance Program has received a Best Practices award from the Southern Association of College and University Business Officers, recognizing the program as a model for other universities.

Budget Services. The System Administration coordinates preparation by the component institutions of annual operating and capital budgets, oversees compliance with state laws and regulations pertaining to budgets, and compiles budget reports required by the state.

Auditing. The System's Audit Office provides over 18,000 hours of auditing services at the System Administration and through special audits at the component institutions to ensure effective operations and compliance with all laws, regulations, and procedures. These services include management, financial, compliance, operational and information technology system audits. The Audit Office provides oversight and direction to the institutions' audit functions, and approximately 300 audits are completed annually between the System office and the institutions' local audit offices.

Real Estate Services. The System assists the component institutions with the purchase and sale of property; property leasing and management; and due diligence on gifts of real estate.

Office of Finance. The responsibilities of this office include administering the issuance of bonds, including those backed by the Permanent University Fund and by revenue at the component institution. The office also contributes to oversight of the University of Texas Investment Management Co. (UTIMCO), the non-profit corporation created by the Board of Regents to manage PUF and other investments. Thanks to the work of the Office of Finance and other U.T. System entities, all PUF and U.T. System bonds have triple-A ratings from all three of the nation's major bond rating agencies. In their ratings reports, the agencies consistently cite the superior management and oversight capabilities of the U.T. System. The triple-A ratings, the highest possible, result in considerable cost savings. The System will save almost $1.7 million per year for debt to be issued in the current CIP as compared with the cost of debt for an AA-rated institution. According to data from the Texas Bond Review Board, the average issuance cost for Texas State bond issues (including higher education) in FY 2000, FY 2001, and FY 2002 was, respectively, $9.15 per bond, $7.92 per bond, and $9.19 per bond. The comparable cost for the U.T. System to issue debt over that time has ranged from $4 to $4.75 per bond. The U.T. System currently has $2.68 billion in debt outstanding (all types of bonds). An average of approximately $500 million of new debt is issued annually.

HUB Program. The System coordinates the Historically Underutilized Business program to assist efforts to increase business opportunities for previously under-represented groups.

Police Training and Services. Police and security services are coordinated across the System, and the System operates a police academy that is attended not only by future officers at the System's component institutions, but also by cadets who plan to work at many other universities in Texas.

Governmental Relations. The System also enhances the status of each component institutions through its office of Governmental Relations. This office provides research for legislators and other state officials, policy analysis, and bill analysis, as well as maintaining communications with legislative bodies and state agencies.

Fund Raising. The System assists the component institutions, particularly the smaller ones, in raising money from the private sector. In FY 2002, U.T. System institutions raised $488.7 million from the private sector. This is more than the annual state appropriations to any single general academic university in Texas.

Community Relations. The System's Office of Community Relations cultivates working relationships non-governmental organizations and community groups across the state to enhance the ways that System institutions can serve the people of Texas. Given the presence of U.T. System institutions in numerous communities across the state, the System seeks to make sure that we are good neighbors everywhere we are located. In many communities, a U.T. System institution is one of the largest employers in the area and plays a major role in the local business and professional communities.

ADDITIONAL REMARKS ON U.T. SYSTEM SERVICES

Many of the services mentioned above are provided on a fee-for-service basis. In fact, 54% of the System's FTE employees work in such units. The remaining functions are funded directly from state appropriations, either general revenue or the Available University Fund.

In addition to providing services to U.T. System component institutions, the System Administration serves universities outside the U.T. System in several ways. Some of these, such as the police training academy and the Texas Medical and Dental Application Service, have been mentioned above.

As can be seen from several examples discussed above, the U.T. System has been called on by the Legislature to assist not only the component institutions of the System but also universities outside the U.T. System and other state agencies. A further example of such services beyond the limits of the System is the Legislature's designation of the U.T. System Board of Regents to help manage the investment of funds from the state's tobacco lawsuit settlement. These endowment funds are managed through the University of Texas Investment Management Co. (UTIMCO). All nine of the state's health institutions, as well as the Baylor College of Medicine, benefit from the System's management of these funds.

Another example is the mandate from the 76th Legislature that the General Services Commission (now the Texas Building and Procurement Commission) would enter into a contract with the U.T. System to review the agency's processes and procedures for facility design and construction, procurement, and cost recovery. The idea for this audit, which was carried out by the U.T. System Office of Facilities Planning and Construction, came from State Representative Talmadge Heflin (R-Houston). Most of the recommendations of the U.T. System's audit of the agency have been implemented.

Many of the U.T. System services discussed above have been recognized as statewide and national models, extending the reputation of the U.T. System as an innovator in efficient and high-quality higher education administration. Among these models are the UT TeleCampus, the Compliance Program, and the Bonding and Technical Assistance Program to assist young companies in the construction industry.

I believe I have amply demonstrated that the System Administration adds value to the 15 component institutions of the U.T. System.

As I have said, we are reviewing all of these functions and the staffing levels in order to make new judgments about the possibility for savings and greater efficiencies.

This process is fully under way, but until we have carried it forward a little further, I will not be able to report to you on specific reallocations of resources. I can assure, the committee, however, that there will be such reallocations.

I have said that I believe the System Administration is doing a good job of husbanding its resources and of providing cost-effective services. While that is the case, it does not mean we are satisfied. We must do better, and we will.

Once again, I want to thank the Committee for its interest in the management of higher education.