EDUCATION AND ECONOMIC DEVELOPMENT
UNIVERSITY SYSTEM OF MARYLAND
BUDGET FOR FISCAL YEAR 2005
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
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
Managing enrollment growth in as prudent and cost effective manner
Building non-state revenue sources;
Shifting costs savings into areas that maintain and build academic
We will continue to report to you on our progress with the
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
- 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
These are significant steps toward insuring a strong system
of higher education in Maryland now and into the future. But they will not
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
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)