March 19, 2012


B. Questions to the President.

From Seth Bank (electrical and computer engineering):

"President Powers, in your comments at the last faculty council meeting, you mentioned 'decreasing or flat resources' several times.  Could you please comment on UT's general financial outlook and whether decreasing or flat resources is a temporary challenge, or one that reflects the long-term reality?"

President Powers responded by saying the future financial situation was difficult to predict because a number of “moving parts” were involved. These included overall economic conditions, investment performance of University revenue-producing funds, and decisions made by the legislature. With regard to the economy, the president said the good news was that sales tax revenue had been improving steadily for about a year. In addition, he reported that oil, gas, and severance taxes had grown substantially as a result of increased production and revenues, particularly in the case of oil. Although UT’s West Texas properties have plentiful gas reserves, President Powers reported the land holdings were heavily weighted toward oil in comparison to the general energy market and doing quite well. As a result, the Permanent University Fund (PUF) was increasing in value, which made it a little easier for certain projects to be funded from this income source. Due to growth in the state’s so-called “rainy day fund,” President Powers perceived from his discussions with legislators and review of newspaper articles that there was some easing in the controversy over the potential future use of this fund. He thought the growth in this fund might provide a reassuring cushion for state leaders, should its use be recommended to deal with the budgetary issues still facing the state. Although he said the matter is still politically controversial, he perceived opinions to be “mildly on the more favorable side rather than the less favorable side of using the rainy day fund.”

According to President Powers, two “structural holes” exist in the state budget, which have a major, on-going impact on funding for higher education. The first is the gap caused by the lack of revenue generated by the margins tax approved several years ago to provide property tax relief. The margins tax on business was intended to put school funding on a somewhat broader basis than property taxes, but the calculation method for the margins tax resulted in what President Powers called “a substantial, several billion dollar hole” in state revenues. When coupled with the economic recession, this shortfall created serious problems for balancing the state’s budget, which negatively impacted funding for higher education. Because much of the state legislative budget for general revenue is already committed to Medicaid, Medicare, and other federally mandated programs, he said Article 3 funding for public and higher education comprises the only substantial portion of the budget that can be used to either balance the budget if there is a shortfall or to provide discretionary allocations if there is any extra money available. As a result, education faced a great deal of pressure during budgetary decision-making because it was the principal area where adjustments could be made. Because there are many more constitutional and federal legislative mandates pertaining to public education than higher education, funding for the latter was vulnerable to cuts. This structural hole, according to President Powers, is several billion dollars in size even without taking the shortfall in Medicaid and Medicare funding into account. Because the legislature still must deal with this funding gap, he perceived there might be a growing, but not guaranteed, sense among some legislators that the rainy day fund could be helpful in meeting the shortfall. President Powers said the financial situation for Texas higher education, although “not hugely better,” was somewhat better than it had been during the last legislative session, where there had been declining state revenues and a receding economy. According to President Powers, the political question, however, is where the legislature might chose to spend the resources if it decides to use the rainy day fund. The discretionary areas are health and human services, higher education, and public education for kindergarten through 12th grade (K-12). He believed the next legislative session would be “challenging,” saying his assessment was that funding levels would be flat to somewhat better than last time. He perceived there was a sense among many legislators, including the leadership, that higher education had taken a “big, big hit in the last legislative budget,” and the situation needed to be addressed. However, he added that it was difficult to predict how this political decision will turn out.

President Powers also discussed discretionary spending and tuition as budgetary matters of importance. He said a great deal of funding that comes to the University, such as grants and philanthropy, is earmarked for specific purposes and therefore cannot go into the discretionary part of the University’s budget. These resources are vital and help to create excellence here at UT Austin, but they do not provide budgetary flexibility. The campus has proposed tuition increases of 2.6% for in-state undergraduates and 3.6% for graduate and out-of-state students. The graduate student tuition increase would not provide discretionary flexibility because much of the money must go right back to the students to assure that UT Austin offers competitive stipends to recruit and retain high quality applicants. Although the tuition increases still pending at the Board of Regents would provide about $15 million in increased revenue, the president noted that this would not have a major impact on a budget totaling over $2 billion. With the tuition decision having been pushed back to the April 12 board meeting, President Powers said it would be difficult to publish tuition rates for incoming students and prepare the budget in a timely manner. This delay means that decisions on salary increases for University personnel would have to be put off until after the board has made its decision and could actually end up being consumed by increased benefit costs. As a result, he surmised that a flat budget would result for the coming year with maybe a little available for certain selected projects.

President Powers explained that monies from the Available University Fund are used in UT Austin’s general budget for academic activities and excellence. The payout of these funds depends on the PUF, which has been performing much better this year than in recent years. The low performance in the past was especially problematic because it coincided with reduced general revenue from the state. Through the next biennium, President Powers said it was difficult to predict the financial situation for UT Austin, but he thought it could be “mildly better” and “less challenging” than the last legislative session. However, he reiterated that the outcome would depend on the combined impact of economic conditions, tax revenue, and political decisions. The president said he hoped the information he provided was helpful. President Powers asked if there were other questions, and there were none.
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