Rainy Day Education Funding

For years, the North Carolina legislature turned a blind eye to some questionable financial practices of the state’s systems of higher education. But those days may be coming to a close, thanks to the state’s $2.4 billion budget shortfall and a new legislative majority that is dominated by limited government advocates.

Before 2009, the legislature’s education appropriations subcommittees directed a steadily increasing flow of funds to the University of North Carolina, and to a lesser extent, the state’s community colleges. Even in the last couple of years, when the budget became an issue, the subcommittee sought to limit cuts to higher education rather than to reduce spending.

Because of this legislative largesse, along with a general lack of attention to accountability, the higher education systems were able to build up large discretionary funds—enough to permit them to withstand even doubledigit budget cuts without effect. They also used government money that was appropriated for one specific reason for very different purposes.

But this year, every dollar is needed to help balance the budget, and the financial practices of the university system are increasingly coming under the appropriations subcommittee microscope.

In one long-standing UNC custom, schools receive enrollment growth funding to hire new professors, but leave the positions unfilled. That money then becomes available for the chancellors to spend according to their discretion. When it’s time to reduce the budget, all the school loses are non-existent jobs and some discretionary funding. This may be a sensible, forward-thinking policy for the schools, but it is an unwarranted burden on the taxpayers, who are overpaying.

This extra discretionary funding can be substantial. Last fall, UNC-Charlotte’s chancellor Phillip Dubois sent a letter to the faculty in which he described how unfilled faculty positions have insulated the school from all but a few lay-offs—even with cuts at the 10 percent level:

The 10 percent budget scenario would lead to a loss of the equivalent of 205 positions (120 faculty, 85 staff). To be clear, these would not be current UNC Charlotte employees; rather, the reductions would be made from the open positions that we have held back from allocation to the campus. The current worst-case scenario would result in nine or fewer personnel lay-offs from our existing workforce.

To be even clearer, the above means that UNC-Charlotte received funding last year for 196 non-existent jobs. The money was spent instead on “one-time projects,” such as new equipment purchases and prepaid repair contracts, according to Dubois.

In a conversation with this writer at the February Board of Governors’ meeting, Dubois said that this is not his ordinary practice. Usually, he gets enrollment funding and immediately gives it “to the deans,” telling them to “go forth and hire.”

In the last two years, however, he has not done so, hiring professors only in a few strategic or high-demand areas. He said he had an ethical problem with hiring new professors when he knew he would have to fire them one or two years in the future.

Still, leaving funded positions unfilled is a common procedure throughout American academia that inflates the cost of a public university education.

Another tradition common in the UNC system involves what are commonly called “overhead receipts” or “facilities and administration receipts.” Federal research grants generally provide universities with some additional percentage of the grant amount (often around 20-30 percent) to cover costs that are not directly part of the research. These costs include laboratory space, salaries for project employees who perform administrative duties, and new grant-writing expenses. For 2010-11, these receipts totaled approximately $195 million for the entire UNC system, according to the legislature’s Fiscal Research Division.

In many cases, money for these expenditures is already provided by state appropriations. For instance, the overhead receipts may include money for building laboratory space that already exists and is available. Or, the money could provide some salary for an administrative staff member who is already funded by the state.

This obviously frees up some of the overhead receipts for other purposes.  Before 1999, in acknowledgement of the duplication, some percentage of these receipts—ranging from 10 percent to 50 percent, depending on the year—reverted back to North Carolina state coffers. But a UNC-friendly legislature ended that practice over a decade ago.

Even when there is no duplicate funding, overhead receipts are regularly used for expenses that have little or nothing to do with the specific project for which they were designated. According to UNC system guidelines, these uses include such vague activities as:

  • To foster research/creative activity in the classroom
  • To promote grantsmanship education
  • To support strategic initiatives

When overhead receipts came under close scrutiny in the 2002 and 2003 legislative sessions, it was discovered that overhead receipts had been used, among other things, to fund a chancellor search and to buy gourmet pizza.

In yet another situation, UNC Health Care has built up a $722 million stash of unrestricted reserves over the years. UNC-Chapel Hill chancellor Holden Thorp, who plays a major part in the hospital’s complex governance system, said that the reserves are mainly needed to help keep the hospital’s bond ratings high. Bond rating agencies expect organizations to have sufficient cash on hand to pay off much of their capital indebtedness in order to receive favorable ratings and low interest loans. Thorp also indicated that some of the funds will also be used to help build UNC Health Care’s planned-for $227 million, 68-bed hospital at Hillsborough. (The hospital’s media relations department was contacted for further elaboration about these funds, but did not respond.)

Notwithstanding Thorp’s remarks, this amount seems far in excess of the amount needed. Also at issue is the fact that the legislature appropriated much of this money for operating expenses—largely to pay for indigent care of individuals without insurance. Yet, according to Thorp, it is being used to support capital projects.

It is not just the UNC system that accumulates large funds out of unused appropriations. In one example, the North Carolina Community College System managed to accumulate over time almost an entire year’s appropriation for customized training (programs that tailor vocational training programs to meet specific employers’ needs). The state appropriates $12.2 million annually for this purpose; however, state statutes permit unspent funds to “remain available until expended.”  Over the years, schools in the system have saved up $11.7 million of “unexpended” customized training money.

Now that state coffers are empty, government-spending habits are undergoing closer examination, and legislators are looking for ways to recoup excess appropriations. Chances are that the overall cuts to the UNC system will clean out most of the funded but unfilled positions. But the legislature is also exploring more permanent fixes, which include:

  • A provision included in a recently introduced bill (S.B. 255) mandates that universities list all faculty hired annually. This will permit legislators to see whether enrollment funds are being used as intended.
  • Last year, the annual operating appropriation to UNC Hospitals was cut from $44 million to $36 million (for one year only), expressly because these unrestricted reserves have grown so large. This year, Governor Perdue’s budget recommends an $11 million reduction. But more recently, the education appropriations committee has begun discussing how to recapture some of the $722 million in existing UNC Health Care’s reserves, not just reducing the current annual appropriations.  
  • The same committee has looked into restoring the reversion of some research overhead funds.
  • Also under consideration by the education appropriations committee is a one-time reduction to almost the entire annual appropriation for the community colleges’ customized training programs. This will eliminate the $11.7 million extra that has been accumulated over the years.

It is about time somebody paid attention to improving financial accountability in public higher education. The North Carolina legislature’s joint education appropriations committee should be commended for its efforts to put a stop to sloppy and troubling practices.