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ED 17
Eliminate Institutional Enhancement Funding; Provide Greater Accountability for Special Item Funding

Summary

State appropriations for higher education institutions largely are determined through a formula funding system. Institutions can, however, compete with one another for “special item” funding—money earmarked for a specific purpose. Special items account for almost 10 percent of university appropriations. While many special items are worthy of earmarked funding, the overuse of special items works against the basic purpose of the formula system, which is to distribute funding equitably and without regard to institutions’ political clout. The Legislature should limit the use of special item funding by eliminating institutional enhancement funding, setting a cap on special item funding and funding special items based on a ranking recommended to the Legislature by the Texas Higher Education Coordinating Board.

Background

Texas is one of many states that use a formula funding system to allocate resources to public colleges and universities. These formulas consider objective factors such as student enrollment or square footage of physical space. Advocates of formulas argue that they limit competition among colleges and universities and allocate funding equitably.

In the 2002-03 biennium, nearly three-quarters of Texas’ total appropriations to public universities are driven by formulas.[1] An additional 16 percent of appropriations are for debt service, capital equity and excellence, staff benefits and Texas Public Education Grants. The remaining amount—more than $461 million or nearly 10 percent of total higher education appropriations—consists of special items.

Special items represent funds earmarked to support a specific program or activity at a university. These items are designed to reflect each institution’s unique missions or needs. Examples of special items are public service items, specific research programs, student nurse stipends, funding for separate campuses and specific, one-time capital expenses. While many of these items are laudable and deserving of state support, some are of less critical importance and have been characterized, rightly or wrongly, as “pork.”

The current biennium’s special item spending increased by 11 percent or $47 million over 2000-2001 levels. This increase is double the rate of increase for all appropriations to Texas public universities, which rose by 5.4 percent.[2] Examples of newly funded projects include $700,000 for border health research at the University of Texas at El Paso; $300,000 for Rio Grande heritage tourism at Sul Ross State University; $500,000 for a Center for Border Economic and Enterprise Development at the University of Texas at Brownsville; and $100,000 for Hispanic World War II oral histories at the University of Texas at Austin.[3] The 2001 Legislature also appropriated $1 million for repairs to the Hobby/Eberly Telescope at the MacDonald Observatory operated by the University of Texas at Austin.

The 1999 Texas Legislature attempted to control the growth of special items by dividing those that should be funded through special action (“true” special items) from those that do not merit such treatment. Items not determined to be true special items were consolidated into a single special item known as “Institutional Enhancement”; the specific items consolidated in this way were no longer listed by name in the General Appropriations Act. They include those that could be funded through funding formulas as well as capital projects, program development items and scholarships. The consolidation process did not cause any institution to lose funding. Institutions may but are not obliged to spend their Institutional Enhancement funding on the consolidated items.

In both the 1999 and 2001 sessions, funding for Institutional Enhancement was determined by combining the 1999 base with a further “enhancement.” For the 2000-2001 biennium, the enhancement was $1 million per year per institution. For the 2002-2003 biennium, institutions received an additional $1 million per year, except for those institutions in South Texas and the Border region, which received an additional $1.5 million. Universities that benefited significantly from the state’s two new “excellence” funds or that receive excellence funding from the Permanent University Fund did not receive the 2002-03 enhancement. Again, universities may spend enhancement funds as they see fit.

Institutional Enhancement funding kept institutional funding safe during the special items reform process. Given the tremendous discretion universities have in managing these funds, however, items funded by this line in the state budget no longer can be identified. The funding has become a lump sum that institutions may view as an entitlement, rather than spending that must be justified every two years through the appropriations process. The exception is Institutional Enhancement funding for public health-related institutions; in such cases, $1 million per year is earmarked for each campus they operate. Therefore, Texas Tech University Health Sciences Center receives $4 million to support its four campuses, while the University of Texas San Antonio Health Science Center receives $1 million per year for its single campus.

With few exceptions, special items are not used in funding the state’s public junior and community colleges. In fact, the Texas Association of Community Colleges has recommended that its members refrain from requesting special items and instead concentrate on the development and funding of an equitable funding formula. This helps to limit infighting among colleges and allows the association to lobby for funding that benefits all of its members rather than supporting initiatives that might pit one against another.

The Texas Higher Education Coordinating Board (THECB) recently studied the impact of various sources of funding on smaller universities. In its report, THECB noted that allocating a greater proportion of funding directly through formulas rather than special supplemental funding could eliminate or reduce the disparities between larger and smaller institutions.[4] THECB recommended that as much funding as possible be distributed through the formulas, since they treat all institutions the same.[5]

Special funding items have a place in higher education funding, but they should be strictly limited in number. The bulk of state aid to institutions should be distributed in an equitable and predictable pattern through existing formulas that generally do a good job in distributing state funding among many different types of institutions.

Recommendations

A. The Legislature should eliminate the Institutional Enhancement line item and reduce current funding for this item by at least half of current spending levels at all general academic institutions, public technical colleges and state colleges.

If an item is truly unique to an institution and serves a critical educational mission, it should be funded as a true special item. Because initiatives funded through the Institutional Enhancement line item may merit continued funding, each university should be allowed to retain up to 50 percent of its current Institutional Enhancement funding. These items, however, should be funded by name, with their purpose clearly identified in the appropriations act. The state should no longer provide significant amounts of funding through a mechanism that does not provide accountability for funding. This recommendation would not apply to Institutional Enhancement flowing to public health-related institutions, since it is used to support specific purposes.By eliminating at least half of the funding flowing through the institutional enhancement special item, $137 million in biennial savings would remain that could be used either for formula funding or to fund other critical state functions.

B. The Legislature should require that the Texas Higher Education Coordinating Board (THECB) review and rank all proposed special items submitted by institutions for funding prior to each legislative session. The number of items funded should depend on the availability of revenue for special item funding.

As the state’s coordinating body for higher education, THECB should review and rank all requests for special item funding submitted in each institution’s Legislative Appropriations Request. THECB has established four key goals for Texas higher education, and these goals should provide a framework for evaluating requests for special items. THECB should give preference to those items that either advance the state’s goals for higher education or are truly unique to an institution’s mission and cannot be funded through other means. The Legislature then should set a total funding amount based on available revenue and funding items based on the priorities recommended by THECB. This cap should help to limit the influence of politics on the distribution of funding among the state’s many institutions of higher education.

Fiscal Impact

Savings to the General Revenue Fund would result from eliminating up to half of the spending that currently flows through the Institutional Enhancement line item, except for that sent to public health-related institutions. This recommendation assumes that universities would argue successfully for special items funded through the half of the Institutional Enhancement funding amount that is not eliminated, and that spending on all other special items would remain constant at 2002-2003 levels. Limiting special item funding may result in reductions in FTEs, but institutions could continue funding these purposes from other revenue sources. Therefore, no reduction in FTEs is assumed.

Fiscal Year Savings to General Revenue
2004 $68,626,000
2005 $68,626,000
2006 $68,626,000
2007 $68,626,000
2008 $68,626,000


Endnotes

[1]Legislative Budget Board, Fiscal Size-up 2002-2003 (Austin, Texas, January 2002), p. 180.

[2]Legislative Budget Board, Fiscal Size-up 2002-2003, p. 177.

[3]Legislative Budget Board, Fiscal Size-up 2002-2003, p. 178.

[4]Texas Higher Education Coordinating Board, Formula Funding Study General Academic Institutions With Fewer Than 10,000 Students (Austin, Texas, July 19, 2002), p. 1.

[5]Texas Higher Education Coordinating Board, Formula Funding Study General Academic Institutions With Fewer Than 10,000 Students, p. 6.