FEBRUARY 3, 2004


Testimony of USM Chancellor William E. Kirwan


Mr. Chairman and members of the Committee, thank you for this opportunity to testify on the Governor's FY05 budget recommendations for the University System of Maryland (USM).

I will cover three topics this afternoon. First, I will offer some general context regarding the Administration's budget proposals for the USM and the steps we plan to take to create a balanced budget for FY05. Second, I will raise some longer term issues facing higher education and our state and offer some thoughts on how we - higher education and state government - can work together to insure the brightest possible future for our state and its citizens. And, finally, I will respond to the legislative analyst's comments.


I. FY 2005 Budget Context.

This past fall, the Administration set a goal of avoiding further cuts to the System's General Fund appropriation, in other words, a goal of "level funding" for USM. The FY2004 General Fund appropriation is $746 million, and the Governor has indeed recommended the same $746 million for FY 2005. In addition, he has included an increase of $1.1 million in the General Fund to support the opening of the Hagerstown Educational Center, and a $100,000 increase to the Coppin University budget for management of its enhanced capital construction program. The item for Coppin is one small but highly symbolic example of Governor Ehrlich's response to the Office of Civil Rights Settlement Agreement. He is to be commended for keeping and exceeding commitments to the State's Historically Black Institutions.

While our General Fund Budget is "level funded," unfortunately our costs are not. Our most recent estimate of cost increases in FY 05 totals approximately $80 million over the FY2004 State Supported Budget of $1.66 billion. These costs increases are real and unavoidable. Consequently, we must find a way to address them. I'll go through the list of increases in some detail in just a moment but, first, let me remind you of a very basic point.

The State Supported Budget has two major revenue sources. The General Fund is one source and, as I just said, it is essentially frozen. The other major source is Tuition and Fee revenue. Thus, the only options for balancing our budget are tuition increases, further budget cuts, or a combination of both. So, let's walk through the numbers. I ask you to turn to Table I at the end of my printed testimony.

First, let's review the expenses. (Line by line discussion)

  • Regarding the Merit Pay adjustment of $23.3 million, the Current Services Budget guidance for the various departments and agencies of the State, including the USM, was to self fund the cost, as General Funds would not be provided. Although it is difficult to self fund an item of this magnitude, we are prepared and determined to do so because our employees have not received any kind of pay increase for over three years. Incidentally, the proposed Cost of Living Adjustment included in the Governor's Recommendations is not part of the cost estimate. It is our understanding that General Funds will be provided, if the COLA is approved by the General Assembly.

  • In the case of the $13.1 million for Employee Health Benefits, when we submitted our USM Budget Request to the Department of Budget and Management last August, we were instructed to exclude from our budget request the anticipated Employee Health Benefit cost increases. I believe the Administration was exploring government-wide alternatives for dealing with the anticipated, and hyper-inflationary, growth in health care costs. At this point, however, it appears that we will likely be required to find alternatives to funding the health increase. Therefore, this obligation is now included in our cost estimate.

  • There are a number of other obligatory cost increases, for example, the amounts associated with the opening of new facilities at $9.2 million and debt service on Academic Revenue Bonds at $2.1 million. We have witnessed sharp increases in energy costs, but for other non-salary expenditure categories we used a very modest inflation factor of 2%. These total just about $10.7 million in costs.

  • Also, included in our cost estimate is a tuition set-aside for Need-Based Financial Aid. This would help our neediest students deal with the tuition rate increases. It is an issue of great importance to me personally. Incidentally, I want to publicly thank the Governor for including in his recommendations to the General Assembly a $16 million increase in need-based programs in the Maryland Higher Education Commission budget. I urge you to support this item in the Governor's recommendation.

  • Finally, let me note - and this is a very important and disturbing point - other than UMUC, the budget includes no provision for increased enrollment.

I think you will agree that all the costs increases on this list are unavoidable.

Now, let's see how we will cover these costs.

In the System's FY 2005 budget submission, the Board increased tuition rates, resulting in $55 million in tuition revenue. This includes in-state undergraduate tuition rate increases ranging from 2.0% at UMUC to 11.4% at UMCP. The composite percentage increase is 9.3%. The Tuition Revenue changes are included in the Governor's Recommendations. The additional tuition revenue is less than the estimated cost increases because we all share concerns about tuition affordability and we wanted to keep the overall growth rate in tuition under 10%.

As I just noted, the tuition revenue will cover only a portion of the cost increases. We have built into the budget $16.8 million in cost savings associated with the Regents initiative on Effectiveness and Efficiency (E&E). The Regents, the System Office, and the institutions are hard at work identifying areas where we can reduce costs, while continuing to build the overall quality of our institutions. Most of our activities are coalescing around four major areas:

  • Reducing the cost structure through initiatives like shortening time to graduation, and inter-institutional partnerships for administrative operations;

  • Managing enrollment growth in as prudent and cost effective manner as possible;

  • Building non-state revenue sources;

  • Shifting costs savings into areas that maintain and build academic quality.

We will continue to report to you on our progress with the E&E effort.

Taken together, the additional tuition revenues of $55.0 million and the $16.8 million in efficiencies will cover $71.8 million of our increased FY05 costs. We will have to close the remaining $8 million gap through additional cuts to our budget.

Given that our enterprise is largely human resource driven, the only way we can close this gap is by further reductions in staff. Over the past several years, we have been very restrictive regarding staffing additions on the State Supported side of the budget. This is not good news, as we have additional students coupled with fewer faculty and staff. I ask you to turn to the next page and look at Table 2. As you will note, State Supported positions - the jobs that are dedicated to instruction and support - are down by just over 700, a reduction of 5% in our workforce since FY 2002. Incidentally, USM has cut approximately one-third of the total 2000 positions eliminated from the state budget over the past two years and we are only 7.5% of the state budget. As a result of these cuts, the ability to sustain quality and services at USM is emerging as very real concern.

You will also note a growth in positions in our non-state supported budget. Let me emphasize that the funds supporting these positions come mostly from research dollars or self-support auxiliary enterprises. The individuals in these positions are carrying out specific, dedicated responsibilities tied directly to their funding source. As a result, their efforts in no way compensate for the loss of personnel in our state supported budget.

One final point. Over the past two years, we have experienced a combination of about $290 million in budget reductions and unavoidable cost increases. Of this total, about 55% has been addressed through cuts to our budget and staffing levels and 45% has been addressed through increased tuition revenue.

This concludes the analysis of our FY05 budget. It is not a pretty picture but it's the best we can do under the circumstances.

II. Looking to the future.

I'd now like to comment briefly on a longer term issue that is of vital important for our state... access to a high quality higher education that is affordable.

Why is this such a crucial issue for all of us? It's because quality higher education has become the key to a successful life and a successful state economy.

Gone are the days when a high school degree and a strong work ethic all but guaranteed a good job and a high quality life. Our economy has changed from one dependent upon muscle power to one driven by brain power. A highly skilled workforce, creativity, innovation ...these are the keys to success now and in the future.

The importance of a college degree today is easy to quantify. The average annual salary differential between those with only a high school degree and those with a college degree is over $20,000. This equates to a life time earrings differential of almost $1 million. Moreover, college graduates have an unemployment rate that is about one-half that of high school degree only graduates and they have much greater health and retirement benefits. We need to insure that every qualified high school graduate has a chance at a high quality university experience.

But, great universities do much than just produce a talented workforce. Through their research efforts and knowledge transfer, they help grow the economy and create a higher quality of life for all.

The good news is that Maryland is very well positioned for success in the knowledge economy. We rank

  • First nationally in the percentage of our population with college and advanced degrees;
  • Second in the number of knowledge jobs; and
  • Fifth, as measured by the New Economy in future capacity for knowledge jobs.

And that's not all the good news. Thanks to Johns Hopkins University, the USM institutions and the abundance of federal labs in Maryland, we are

  • Number one per capita expenditures on R&D; and
  • Amazingly for the size of our state, number two in total expenditures.

You might say we've been dealt a winning hand. But the key to cashing it in is sustaining and advancing the high quality system of higher education you have helped create in Maryland. Here I mean the total system...four-year publics, community colleges and the private institutions. It's a phenomenal resource that is ours to lose.

But lose it we will if we don't face up to a huge challenge. Projections by MHEC and a separate study done at the General Assembly's request by the USM and the community colleges show that we can expect an increase in enrollment demand of between 20% and 30% over the next five or six years. That's phenomenal growth which, without careful planning and investment, will overwhelm our higher education institutions. It will force them to either turn away massive numbers of students or grow into mediocrity. Either of these two outcomes would be a calamity for our state.

If we are going to be successful in meeting this challenge, we must have a partnership between higher education and state government. In this partnership, each of us has an important role to play.

For our part, we must hold down costs and be accountable for doing so. Here are some of the things we're doing to meet this obligation:

  • As I mentioned earlier, the goal of the Regent's Effectiveness and Efficiency Initiative is a significant reduction in the overhead of our academic enterprise. We intend to report annually on the successes of this initiative.
  • We created a new Tuition Policy that requires much greater transparency on tuition costs and requires each institution to document steps to lower costs before increasing tuition. The policy will also provide four year projections on future tuition levels so that our students can plan better for their total college costs.
  • We've strengthened our partnership with the community colleges. We have teams working to improve the transfer process and to create new two-plus-two programs in areas of great need like teacher preparation.
  • Also in partnerships with the community colleges, we're creating regional centers at Shady Grove and Hagerstown. These Centers will enable us to provide four-year degrees to a substantial number of students at a much reduced cost to the state.
  • And we're establishing special two-plus-two partnerships between UMUC and the community colleges, which will enable students to enter a community college, complete an AA degree and graduate from UMUC with a four-year degree, without ever leaving the community college. Again, this will provide four year degrees at much lower cost to the state.

These are significant steps toward insuring a strong system of higher education in Maryland now and into the future. But they will not be enough.

There is a crucial role for the state to play in this partnership. We cannot continue to meet rising costs and expand capacity through large tuition increases. That will defeat our goals of access and affordability. And we cannot address cost and capacity issues through continued budget cuts. That will erode our quality. We need the state to be our partner by providing predictable and sufficient General Fund allocations to sustain our quality and address the growing enrollment demand. As a state we have the resources to do just that. The only question is: Do we have the will? We are a wealthy state. We rank 4th in the nation in terms of per capita income but we rank 35th in the investment of personal income in higher education.

What needs to happen is captured well in the Board of Regents' Resolution that Chairman Kendall cited:

"...the State must provide an adequate and reliable appropriation of funds to meet its fair of share of higher education costs..."


" ...the USM must ensure affordable and predictable levels of tuition and, in partnership with the state, provide adequate levels need-based financial aid..."

"... and the State needs to hold the USM accountable for agreed upon cost-saving targets..."

We want to work with you toward these ends. We urge you to take the necessary steps and create legislation that will accomplish these goals. But time is running out and so much is at stake. I'd be happy to respond to any questions you may have about these comments.

Let me now turn to the analyst's questions... (Please reference Legislative Response)