MARYLAND SENATE BUDGET AND TAXATION SUBCOMMITTEE ON EDUCATION, BUSINESS AND ADMINISTRATION
HEARING ON
UNIVERSITY SYSTEM OF MARYLAND BUDGET FOR FISCAL YEAR 2005
January 30, 2004
Testimony of USM Chancellor William E. Kirwan

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

I would like to briefly cover three areas. First, I will offer some general context regarding the Administration's budget recommendations. Second, I will discuss the challenges it poses with respect to tuition and enrollment. I will also comment on academic quality as it relates to the USM's contribution to the economy, a critical area of risk as we manage the budget. Third, I will attempt to respond to the legislative analyst's comments.

To begin, I do not envy your task. I recognize the difficult choices you face. As the Chairman indicated, it is our hope the elected officials come to an agreement on the revenue side of the budget.

I - FY 2005 Budget Context

The Administration sought to "level fund" the System's budget, having as its goal avoiding further cuts to the General Fund appropriation. The FY2004 General Fund appropriation is $746 million, and the Governor did recommend the same $746 million for FY 2005. In addition, the Administration recommended an increase of $1.1 million in the General Fund to provide for the opening of the Hagerstown Educational Center, and a $100,000 increase to the Coppin State College budget for management of its enhanced capital construction program. The item for Coppin is only one small measure of Governor Ehrlich's actions on the Office of Civil Rights Settlement Agreement. He must be commended for keeping and exceeding commitments to the State's Historically Black Institutions.

Our most recent estimate of cost increases totals $80.0 million over a FY2004 State Supported Budget of $1.66 billion.

The State Supported Budget has two major revenue sources. The General Fund is one major portion of the State Supported budget; again, it is essentially frozen. The other major piece of State Support is Tuition and Fee Revenue. In the System's FY 2005 budget submission, the Board increased tuition rates, raising $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. While additional tuition revenue is less than the estimated cost increases we worked to keep the overall growth rate in tuition under 10% because of serious concerns about tuition affordability.

Most of the additional tuition revenue is directed at covering a portion of the State Supported cost increases. For example, two major obligations are Merit Pay adjustments totaling approximately $23.3 million and Employee Health Benefits (and other employee fringe benefits increases) of about $13.1 million. (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.) A table showing cost increases is included in you packet. [see Table 1.]

• Regarding the Merit Pay adjustment, the Current Services Budget guidance was for the various departments and agencies of the State, including the USM, to self fund the cost as General Funds would not be provided.

• In the case of 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. Thus, 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.

There are two cost items that we have subtracted from our original cost estimate:

• We anticipated that the budget recommendations would restore the State's 401a Retirement Match Program. It did not, so our estimated costs are reduced by $2.0 million.

• The Governor's Capital Budget Recommendations provide General Obligation Bonds for a number of new facilities at our Historically Black Institutions. This has the effect of reducing the debt service requirement on USM Academic Revenue Bonds by $2.4 million. Well beyond the matter of debt service payments, the Governor has demonstrated his strong support for the HBIs not only in the Capital Recommendation but in additional operational support within the MHEC budget. The actions will have a dramatic and positive effect over time.

Included in our cost estimate is a tuition set-aside for financial aid. This would help our neediest students deal with the tuition rate increases. It is an issue of great importance to me personally. The Governor included in his recommendations to the General Assembly a $16 million increase in need-based programs in the Maryland Higher Education Commission budget. It may have the effect of reducing a portion of the need we built into our obligations schedule. I urge you to support the Governor's recommendation.

It is important to note that the only enrollment growth that is included in the budget before you is for one institution, namely, UMUC. We did request general funds in the supplemental budget request but in keeping with the policy on level funding the general fund, the request was denied. It would take $5.8 million, net of tuition, for potential enrollment growth of approximately 1,287 full-time equivalent students (FTES) at ten of our institutions. Again, this is not part of the current cost estimate.

Balancing the Budget - As mentioned earlier, the tuition revenue will cover only a portion of cost increases. Originally, we built into the budget approximately $17.0 million in cost savings associated with the Regents initiative on Effectiveness and Efficiency (E&E). Taken together, the additional tuition revenues of $55.0 million and the $17.0 million in efficiencies will cover $71.8 million of costs prior to considering any further deposits into our State Supported fund balance. We are working on closing the remaining gap of $8.0 million, one that is largely attributable to the Health Benefits cost increases. Again, no provision is made for expanding enrollment at institutions other than UMUC.

Throughout, 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. Specifically, State Supported positions - the jobs that are dedicated to instruction and support - are down by just over 700, a reduction of 5% versus FY 2002. Quality and services are emerging as concerns. [see Table 2.]

The Regents and the institutions are hard at work identifying ways to reduce the cost structure. We described the framework for our Effectiveness and Efficiency initiative during our prior appearance before this Committee. To summarize, most of our activities are coalescing around four major areas:

• Reducing the cost structure - topics like shortening time to graduation, and inter-institutional partnerships for administrative operations;
• Managing enrollment growth in as prudent a manner as possible;
• Building non-state revenue sources;
• Maintaining quality.

We will continue to report to you on our progress.

II - Challenges

I would like to comment briefly on three challenges; tuition, enrollment growth, and academic quality.

1. There has been a great deal of discussion about tuition affordability. The recent and

sharp increase in tuition has given rise to a great deal of discussion focused on limits that could be placed on tuition rate increases. There is no denying that tuition for Marylanders is high, we are sixth in the nation. In no small measure this is tied to the relatively low level of General Funds for higher education. While we are 4^th in the nation in terms of personal income, we are 23^rd in general funds per student. Worse still, we rank 35^th in support for higher education on a per capita income basis. A resolution recently enacted by the Board of Regents spoke to the relationship between State support for higher education and tuition. The Board of Regents urges 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..."

"...Hold the University System of Maryland accountable for achieving agreed-upon cost-saving targets."

It is within this context that we respectively request that you consider any proposals that come before you.

2. You are all aware of the enrollment pressures that continue to mount. Joint Chairmen's Report language directed Maryland's Community Colleges and the University System to respond as to the State's ability to meet enrollment growth and workforce demands, while ensuring high quality, access and affordable tuition. We submitted the report to you in the Fall. All signs indicate that enrollment pressures will increase. If recent history is any indication - we have just over 19,000 more headcount students than in 1999 - and if Thornton succeeds as we all hope it will - demand will rise.

The aforementioned Regents resolution proposed that "...In partnership with the other higher education institutions in the state, accommodate, to the extent possible, the projected growth in enrollment demand." The two public systems are committed to managing enrollment. We are focused on:

• Maximizing current operating capacity
• Increasing Community College / USM collaborations (UMUC)
• Expanding Regional Centers
• Encouraging completion of the associates degree before transfer

3. I would like to offer you some comments regarding academic quality and its importance to our institutional capacity to help grow the State's economy through workforce preparation and research. This is a good news story, one which I hope will serve to reinforce what I know you understand about the importance of higher education to the State's economy. The following might be said about the Maryland economy:

• Maryland is ranked 1st nationally in % of population with college+ education
• Our State is ranked 2nd nationally in knowledge jobs
• This State scores highest nationally in Workforce Development
• Maryland is ranked 5th among the states in its capacity as a Knowledge Economy

What does this mean for the individual wage earner? The average earnings level for an individual with a baccalaureate degree is just over $50,000 per year, while a high school only graduate is under $30,000 on average per year. The unemployment rate for a college grad is half that of a high school graduate. More importantly, the real potential for job growth is on the knowledge side.

In aggregate economic terms, the research sector of our economy is a powerful underpinning. With national laboratories and the research conducted at our public and private universities, Maryland is ranked 1^st in the nation in research dollars on a per capita basis. Remarkably, we are second only to California - a state with seven times our population - in the absolute amount of federal research dollars expended. The research enterprise is at the core of our economy.

Research levels at University System of Maryland institutions continue to soar. Federal research dollar awards are estimated at $900 million. This is a result of the growing strength of our research faculty and staff and the support of the State. In addition to the very positive employment effects, the expanding prominence of the University System's research enterprise is a critical factor in new business development in the knowledge economy. Despite tough times:

• The Governor and General Assembly continue to support a strong capital facilities program;
• The Governor funded, and General Assembly approved, Sunny Day grants for major research parks at UMCP and UMB;
• The Governor provided $500,000 from TEDCO for technology transfer projects.

I wanted to reinforce this connection between academic quality and the future potential of the State's economy. More than ever, this relationship represents what is most at risk as we grapple with balancing the higher education budget.

I will now turn to the legislative analyst's comments.