Testimony of University System of Maryland
Regent David Nevins,
Chancellor William E. Kirwan,
and President Catherine Gira
Senate Bill 112, Senate Bill 473, Senate Bill 770
and Senate Joint Resolution 9
Senate Budget & Taxation Committee
February 25, 2004
Today, the Senate Budget & Taxation Committee will consider a variety of bills related to tuition and State general fund support. The University System of Maryland (USM) appreciates the opportunity to comment on these bills, and on our efforts to manage USM institutions in these very challenging times.
The Board is encouraged by the interest of many legislators and the Governor in restoring the traditional "partnership" that has existed between the State, our students, and our institutions. As is obvious today, many proposals have been offered to define this partnership. In addition, the Governor has indicated that he would like to work with USM and the legislature to develop a "recovery plan" for higher education in Maryland. The Board has consistently stated its belief that it is vital for the State to reinvest in public higher education as the fiscal condition of the State improves.
The Board recognizes, however, the fiscal condition of the State, and the challenges the legislature and the Governor face in developing a comprehensive revenue solution. Our role here today is not to "pick and choose" between revenue solutions, or to opine on the wisdom of "mandating" funding. We are here to clearly state our desire to be a partner with the State in providing high-quality, affordable and accessible higher education to a growing number of Maryland students, and to convey our commitment to effectively and efficiently manage resources that are provided by the State and our students.
Budget Status and Recent Action of the Board of Regents
The members of this Committee are intimately aware of the difficult fiscal situation the State has been faced with since late 2002. A series of reductions have been made to the State's budget since November 2002 as a result of the downturn in the economy and the resulting impact on State revenues. The USM Presidents and Board of Regents have worked hard to maintain the quality of USM institutions in the wake of reduced State support. Tuition increases have been one component, but not the major component, of how we have managed through these times. As you know, we have also reduced staff, cut other costs, and improved the efficiency of our operations.
The Board has made several presentations to this Committee regarding USM's FY 2003, FY 2004 and FY 2005 budgets, and we will not repeat those presentations today. In short, the State's fiscal condition has led to a reduction in USM's general fund budget of over $120 million since FY 2003. Our general fund budget is now lower than our FY 2001 budget and only $27.3 million more than our FY 2000 budget. We now serve 11,000 more students than we did in 2001 and we continue to absorb increasing costs for mandatory items such as health insurance, debt service, and utilities, which further adversely impacts our finances.
The Board unanimously adopted a Resolution of principles (attached as page 12) at its December 19, 2003 meeting. In short, the Regents want to restore the historic partnership between the State, the students, and the institutions to meet the State's goal of national eminence, while promoting our mutual goals of affordability, predictability and accessibility. The Resolution also indicates that the Board takes very seriously its responsibility to operate as effectively and efficiently as possible in managing resources from the taxpayers and our students, and pledges to continue to implement best practices to maximize resources. The Regents recognize the critical importance of their governance role over the institutions and assure the legislature that the Board can and should be held accountable for managing the affairs of USM. The Board needs the support and partnership of the Governor and legislature in continuing to have the flexibility to responsibly govern and manage USM consistent with the policy directions of the legislature.
Also at the December 19 meeting, the Board took a major step towards providing predictability for students by revising USM's tuition policy. USM institutions will now broadly publish a schedule of anticipated tuition rates for the upcoming 4-year period, in order to help students and their families plan for college expenses. Of course, our ability to meet the planned tuition levels is heavily dependent on the funding our institutions receive from our State partners.
Tuition and State General Fund Support
USM institutions rely on three major funding streams to support their operations - State general fund support, tuition revenues, and research funding that the institutions compete to receive. Tuition revenues and general fund revenues provide the bulk of USM's "State support." As the pie charts below show, in 1995 State general fund support accounted for 58% of our "State support" and tuition accounted for 33%; in 2005, State general fund support fell to 43%, and tuition revenues increased to 46%.
It is well established that tuition revenues and State general fund support fluctuate in an inverse relationship. A recent survey by the State Higher Education Executive Officers (SHEEO) concluded that the level of "'general fund appropriations' was by far the most significant factor" considered in setting tuition levels. (SHEEO, "State Tuition, Fees, and Financial Assistance Policies, 2002-2003," June 2003.)
The relationship between general fund support and tuition can be demonstrated by reviewing Maryland's recent history. In Maryland, significant cuts to higher education have occurred during the last two recessions, leading to larger than normal tuition increases. When general fund support was strong, tuition increases were mitigated. In fact, Maryland leaders imposed a de facto tuition cap in the late 1990s and early 2000s, by providing significant general fund support to USM in order to help our institutions compete with our national peers. In return, the Board of Regents agreed that tuition would not increase by more than 4% per year. The graph below illustrates the relationship between State general fund support and tuition increases in Maryland.
The "boom and bust cycle" that has occurred in Maryland also occurs in most other States. The current revenue problem Maryland is experiencing is occurring across the country. As in past revenue crunches, many States are cutting higher education appropriations more deeply than other programs are being cut. The graph below illustrates, on a national level, the relationship between general fund support and tuition increases.
The Board's Resolution and the Bills Being Considered By This Committee
"Partnership" and enrollment demand
The three "cap" bills the Committee is considering vary in several ways. We are concerned that Senate Bill 473 requires an artificially low tuition cap, without providing any predictable support from the State. This is a counterproductive approach and we urge that it be defeated. If enacted, it would cause a dramatic reduction in student services, not to mention a diminution in the quality of our institutions. While students may be "protected" from large tuition increases, they will surely find fewer academic advisers, fewer course selections, larger class sizes, and lower quality institutions when they begin the Fall 2004 semester. You will hear from the students here today regarding the impact to students of caps without sufficient State support.
It is important to note that USM institutions are not "overfunded" when compared to their peer institutions. State support in the late 1990s helped USM institutions achieve, on average, 90% of the State's funding goals as articulated in the "funding guidelines" developed by the Maryland Higher Education Commission in accordance with State law. Today, we have dropped to approximately 63% of the funding goal. Artificially constraining USM's resources will place us at an even greater competitive disadvantage.
Three other concerns must be raised. First, there is a Higher Education Price Index (HEPI) that measures the increase in the cost of purchasing the basic goods and services that are common to the operation of higher education institutions. This is similar to other sector-specific indices, such as those for the health industry, the energy index, the wholesale price index and housing construction. For FY 2003, the HEPI was 4.8%. Limiting one-half of USM's tuition revenue stream (revenues from in-State tuition) to 2.3% growth (the 2003 Consumer Price Index, which is the mechanism by which tuition is capped in SB 473) and providing no guaranteed increase in half of our revenue base (State general fund support), provides for predictable total revenue growth from those sources of approximately 0.6%. The market will not bear out-of-State tuition increases (the remaining one-quarter of USM's total budget) large enough to produce the necessary growth in USM's total budget. This structure is clearly insufficient to meet the basic cost of providing necessary instructional and support services to students, and will make it impossible for Maryland to improve its quality relative to its peers.
A related consequence is the negative impact on access. USM institutions are already facing a pressing decision on how to accept additional students with a "flat" or declining budget. Simply put, institutions cannot keep accepting more students without additional State funds. Tuition covers only a portion of the cost of serving a student; the difference has traditionally been covered by the State. The National Center for Public Policy in Higher Education recently reported that reductions in State support, coupled with the resulting tuition increases, resulted in more than 250,000 qualified students being denied access to college last year. California recently estimated that the State will be unable to educate over 120,000 students this year because of budget difficulties. The University of California announced it would not even consider over 1,500 applications from community college transfer students, and California State University announced plans to cap enrollment next year. Similarly, public higher education institutions in Florida turned away an estimated 35,000 students last year. This is an unacceptable option for Maryland, a State in which the economy relies on a highly educated workforce. To compound the problem, Maryland faces the fourth largest growth rate in college-age students in the country, with a large number of students who would be the first in their family to attend a higher education institution.
Finally, bond rating agencies, in the context of the federal debate about tuition caps, have expressed grave concern about tuition caps in the absence of increased state support because caps constrain the ability of institutions to protect their resource base. Moody's concluded that cap proposals "could pose a serious credit risk for the higher education sector overall," explaining that "since tuition . . . is the second source after state appropriations for most public institutions, constrained ability to set their own prices could limit the financial flexibility of these organizations." Standard & Poor's commented that the "establishment of price controls on the industry would be unprecedented and would likely have a detrimental effect on the credit quality of public and private universities. . . ." Fitch Ratings concluded that such caps "might pressure bond ratings" and stated that "Fitch regards the ability of public and private colleges to raise tuition and fees as a key source of credit strength."
Senate Bill 112 and Senate Bill 770 take different approaches to address the State's partnership role. Senate Bill 112 provides the prospect of significant additional general funds in FY 2005, and a mandated funding increase of $117 million in FY 2006. A revenue source is not identified. Senate Bill 770 identifies a revenue source (an increase in the corporate income tax rate from 7.0% to 7.9%) which funds all of the $25 million increase in FY 2005, and 3 percentage points of the 5% increases in FY 2006, 2007, and 2008.
Again, the Board recognizes the difficult fiscal condition of the State, and the efforts of the General Assembly and the Governor to reach a consensus on future revenues. It is the Board's estimation that, if that consensus is reached and a revenue solution is found, the approach in either bill would meet the Board's goals of a partnership ensuring access, affordability, and continued progress towards achieving legislatively-mandated national eminence for the time periods outlined in the respective bills. The Board is highly supportive of this approach. For reasons discussed below, the approach in Senate Bill 770 would be a concern if it continued for a time period longer than the four fiscal years covered by the bill.
Senate Bill 112 contains a provision that the Board believes is very important if the General Assembly and Governor undertake a long-term approach to this issue. Senate Bill 112 recognizes that in-State undergraduate enrollment growth requires growth in State support. The "per student" funding approach in this bill is similar to the approach that this State uses to fund K-12 education (and to fund private colleges and universities and community colleges) and that is used as a factor in funding higher education in States such as California, Texas, and New Mexico. The lack of a per student funding component in Senate Bill 770 would concern the Board if it became the permanent funding approach. A funding approach that includes additional funds for new in-State undergraduate students will help institutions meet demand, and provide an incentive for institutions to increase their in-State student population.
Current funding approaches, which do not utilize an adjustment for enrollment growth, have resulted in an increase in per student State support for USM from $6,756 in 1994 to $7,816 in 2004, an increase of 13.6% over 10 years (or slightly more than 1% per year on average). In constant dollars (adjusted for inflation), State support has declined from $6,756 to $6,189 over that same period.
The Board understands that the goal of these proposals is to ensure that tuition rates are reasonable and affordable. Each of these proposals would set limits on in-State undergraduate tuition rates - the Consumer Price Index for two fiscal years in Senate Bill 473; 4% for at least 10 years in Senate Bill 112; and 5% for four fiscal years in Senate Bill 770. Additionally, Senate Bill 112 would reduce the current tuition rates by approximately 11% in FY 2005 and Senate Bill 770 would cap FY 2005 rate increases at 5%, requiring a reduction of approximately 4 percentage points in the rates approved by the Board in October. While the Board generally opposes the notion of tuition caps, we understand the concerns of the legislature and the Governor for the affordability of higher education. If sufficient State general funds are provided, the Board would be supportive of mitigating tuition increases, as was done in FY 1999-2002.
"1" We note that Senate Bill 112 appears to have a
drafting error. We believe the intent of the bill is
to require a tuition reduction only if the State provides
the $76.6 million increase indicated on page 4, lines 14-17.
We have suggested an amendment to address this error.
In addition, the Board is in the process of working with the USM institutions to provide additional need-based financial aid to our students. In order to mitigate the impact of recent tuition increases, USM institutions set aside 8% of the increase in FY 2004, and 9.2% of the increase in FY 2005, to provide need-based aid. As we noted in our budget testimony to this Committee, we support the Governor's decision to increase the State's efforts to aid needy students and families.
Each of the bills the Committee is considering will provide predictability to students and their families. Again, the Board supports providing predictability if accompanying State revenues are provided to ensure that quality is maintained, classes are available and appropriately sized, and necessary services (academic counseling, health, library, etc.) are offered to students.
An important part of the new tuition policy adopted by the Board in December is the publishing of a 4-year tuition plan for each institution, based on certain assumptions about the level of future State general fund support. This will provide an enhanced level of predictability for students, allowing them to plan for reasonable tuition increases. The reliability of the 4-year plans will be enhanced if the Board has some level of certainty regarding the level of State support for USM institutions. The Board will work with you to meet your policy expectations.
Efficiency and "cost-saving targets"
The Board takes very seriously its obligation to operate as effectively and efficiently as possible. Senate Bill 112 and Senate Bill 770 each contain language relating to "efficiencies" the Board must achieve. The bills recognize the intensive efforts of the Board, which formed an Effectiveness and Efficiency Workgroup in June 2003. This Workgroup is considering every aspect of USM's operations, including the size and compensation of USM staff; the utilization of USM facilities; faculty workload; shortening a student's time to degree; and increased collaborations and other initiatives to reduce the overall cost structure. In some areas, such as staff size and compensation, we have examined the facts and concluded that our practices meet or exceed the practices of our national peers. In other areas, such as faculty workload and time to degree, we have identified the need for further analysis and improvement. The Board wants to assure the General Assembly, the Governor, and the public that we are committed to being responsible stewards of the public's money.
Senate Joint Resolution 9
Senate Joint Resolution 9 proposes a Commission to Study Maryland's Commitment to and Funding of Higher Education. The Board assumes that such an approach would be taken if the Governor and General Assembly do not come to a resolution on revenues, and funds are not available in the near future to meet the needs of students and the USM institutions. The Board's preference is to come to a reasonable resolution of the funding issue. If a revenue agreement is reached, the Board strongly feels that State funds should be reinvested in public higher education. If a revenue agreement is not reached, it is reasonable to study options for supporting higher education, if the goal is to dedicate resources in the future. The Board would be strongly opposed, however, to any approach that would cap tuition without sufficient State support until the completion of the study. Such a proposal would further erode the progress that USM institutions have made.
The past two years have been very difficult for the State, the Board, and the USM community. The Board and the USM community have done their best to maintain the quality of the institutions that the General Assembly and Governor have worked so hard to build. This has required difficult decisions to raise tuition, implement certain personnel actions, and reduce spending in many areas. We are very mindful of what is at stake - the most highly educated workforce in the Nation; affordable education opportunities for a growing and diverse student population; and the rapidly improving national reputation of our institutions. The Board is committed to restoring our partnership with the State to preserve these vital Maryland resources.
Senate Bill 112 and Senate Bill 770 address the issue of affordability of higher education and provide institutions with resources necessary to operate for the time period covered by the respective bills. These bills would restore the partnership between the State and the students, and recognize the duty of the Regents and Presidents to operate USM institutions effectively and efficiently. The commitment of State resources in these bills ensures that students could expect reasonable, affordable tuition increases. The Board very strongly feels that any long-term approach to funding higher education must include a component that recognizes, encourages, and funds enrollment growth.
The Board and the USM institutions are mindful of the fiscal condition of the State, and the efforts of the General Assembly and the Governor to reach a consensus on revenues. The Board strongly supports the policy and funding goals of Senate Bill 112 and Senate Bill 770 and believes the State must reinvest in public higher education as funds become available. It is our hope that a resolution to the State's fiscal problems will be reached, making it possible for the State to re-enter into a partnership as envisioned in these bills. Our partnership is essential to addressing these issues, and the Board pledges to work with the Governor and General Assembly to set policies consistent with your policy direction. The Board would appreciate your support for our flexibility to set that direction in Regent policy for USM institutions.
Specific Concerns In Senate Bill 112, Senate Bill 770 and Senate Joint Resolution 9
Senate Bill 112
FY 05 Tuition Rates. On page 5, lines 37-39 through page 6, lines 1-3, the bill requires a certain reduction in the FY 2005 tuition rates that have been approved by the Board for Academic Year 2004-2005. The reduction, however, is not made contingent upon the receipt of additional general funds as potentially provided on page 4, lines 14-25. We believe this is a drafting error, as other provisions of the bill make the imposition of a tuition cap in future fiscal years contingent upon the receipt of a certain level of general funds (page 6, lines 4-16).
Effectiveness and Efficiency. On page 5, lines 6-7, the General Assembly expresses its intent that USM be a national leader in transforming the business model of higher education to provide services "at below average cost." The Board is actively seeking to transform the business model for higher education; in fact, that is the focus of the Board's Effectiveness and Efficiency Workgroup. The use of the phrase "at below average cost" implies a funding level for higher education below the average of USM's peers across the country. This is inconsistent with the funding guideline goals of the State, and with the provisions of Section 2 of the bill (page 6, lines 24-28) which encourages efficiency by setting a goal of 90% of the funding guidelines. The Board recommends that "at below average cost" be deleted, and "reduce its cost structure" (page 5, line 4) be replaced with "control costs".
Definition of tuition. The definition of tuition (page 5, lines 23-27) makes clear that the bill applies to "undergraduate resident" students. On page 6, lines 4-11, language in the tuition limitation provision that repeats the focus on resident undergraduate students may be redundant.
Senate Bill 770
Effectiveness and Efficiency. On page 3, lines 11-14, the General Assembly expresses its intent that USM be a national leader in transforming the business model of higher education to provide services "at below average cost." The Board is actively seeking to transform the business model for higher education; in fact, that is the focus of the Board's Effectiveness and Efficiency Workgroup. The use of the phrase "at below average cost" implies a funding level for higher education below the average of USM's peers across the country and is inconsistent with the funding guideline goals of the State. The Board recommends that "at below average cost" be deleted, and "reduce its cost structure" (page 3, line 11) be replaced with "control costs".
Definition of tuition. The definition of tuition (page 4, lines 29-33) makes clear that the bill applies to "undergraduate resident" students. On page 5, lines 30-37, language in the tuition limitation provision that repeats the focus on resident undergraduate students may be redundant.
Cost Containment. Page 3, lines 15-20, requires the Board to submit a certain report when it "implements cost containment measures." The report must detail measures the Regents considered to "reduce administrative costs" prior to "administering any layoffs or reductions to student services." The language is unclear, and overlooks the practical reality that the reduction of "administrative costs" often requires and encompasses layoffs and reductions to student services. To the extent this reporting requirement is good public policy, it should be extended to all units of State government.
Additionally, other provisions of the bill which focus on USM controlling costs and becoming a national leader in transforming the business model of higher education would seem to guarantee that the Board would be implementing cost containment measures every fiscal year, and filing this report. Further, the General Assembly reviews the USM budget every year, and has not historically been reluctant to evaluate cost containment alternatives that the Board has considered and implemented. Finally, in an era of collective bargaining, USM should not be required to give up its management rights in this area.
Audit Committee Meetings. On page 3, lines 21-23, the bill would require meetings of the Audit Committee of the Board of Regents to be public, and "internal audit schedules and reports" must be made public. This provision is problematic for several reasons. First, it is counter to every auditing and investigatory principle to release an internal audit schedule to the public. Such an action would provide advance notice to a suspected wrongdoer that his or her actions were about to be investigated, providing time to conceal information and documents. Second, the final report of an audit is already public information and will continue to be. Further, one purpose of an audit is to receive candid information about otherwise confidential issues; opening meetings to the public runs counter to that purpose.
Cap on Out-of-State Students. On page 3, lines 25-35, the bill caps out-of-State undergraduate enrollment at 30% of each institution's total undergraduate student body, with some exceptions. This provision is unnecessary, as current Board policy already sets this limit. While there is no indication that there would be any policy reason to revise the limit in the near future, it is appropriate to continue to vest the authority to set this policy with the Board of Regents.
Cost of Education and Out-of-State Tuition. Page 4, lines 1-9, essentially codifies the revised tuition policy of the Board of Regents. However, the Board's policy provides an opportunity for an institution to seek an exception "based on compelling reasons" to this requirement, if the calculated tuition level is higher than the market will bear. This is an important management flexibility that needs to be preserved.
Effectiveness and Efficiency. Page 10, lines 12-14, requires USM to achieve $17 million in effectiveness and efficiency savings in FY 2005. This is the target that the Regents have set to balance the FY 2005 budget in a "flat-funded" scenario. It is unclear whether this provision would require the institutions to still cut $17 million in personnel and student services if additional funds are made available in FY 2005, as is called for in other provisions of the bill.
Senate Joint Resolution 9
Membership. The Board respectfully requests that the Chancellor of the University System of Maryland serve as a member of the proposed Commission.
UNIVERSITY SYSTEM OF MARYLAND
BOARD OF REGENTS RESOLUTION
December 19, 2003
WHEREAS, the University System of Maryland is firmly committed to the goals of quality, access, and affordability, and;
WHEREAS, the University System of Maryland Board of Regents is the fiduciary and policy-making body for the 13-institution System, and;
WHEREAS, The University System of Maryland is mandated by the state to provide high quality education programs accessible to the citizens of Maryland and to maintain high level research and outreach programs to advance the quality of life and economic circumstances of all Marylanders, and;
WHEREAS, the State of Maryland's current economic conditions have resulted in budget reductions that impact the System institutions' ability to meet these mandates, and;
WHEREAS, as one part of the solution, the Board of Regents may need to raise tuition to a level that could compromise the System's mandates for access and affordability, and;
WHEREAS, as part of the long-term solution, the Board of Regents is reviewing every aspect of the System's operations to identify and pursue further cost-saving measures, and has committed to making the System a national model for the quality, effectiveness, and efficiency of its operations;
THEREFORE, BE IT RESOLVED that the Board of Regents calls on Maryland's state leaders to join the University System of Maryland in a compact to:
Provide an adequate and reliable appropriation of state funds to meet the state's fair share of higher education costs and the other aspects of the System's mission, as funds become available;
Ensure affordable and predictable levels of tuition and provide adequate levels of state and institutional need-based financial aid;
In partnership with the other higher education institutions in the state, accommodate, to the extent possible, the projected growth in enrollment demand;
Recognize the state's obligation to the Office of Civil Rights agreement,
Empower the System with sufficient management autonomy to optimize the use of its resources and streamline its administrative operations and;
Hold the University System of Maryland accountable for achieving agreed-upon cost-saving targets.