Braking a Runaway Train

As this legislative session began, one question concerning higher education loomed above all: With a budget deficit of between $1.9 to $2.4 billion to fix, would the legislature really have the nerve to aggressively cut the University of North Carolina budget?

Or would the state’s traditional generosity to the university system continue? After all, the UNC system has fared better than other state agencies in the past two years, when lesser cuts were in order. It has a team of lobbyists, powerful friends on both sides of the political aisle, an enormous population of supportive alumni, and a media that was largely accommodating of increased spending on higher education.

Yet, so far the answer is definitely “Yes, UNC will take a funding hit this year.” At least that is the case according to the working version of the new education budget introduced by the House education appropriations subcommittee last week. This version will be revised many times before a final budget is achieved, but it provides the basic framework for subsequent adaptations.

Some reduction in UNC’s state funding is inevitable, because the gap between state revenues and expenditures is so large and because UNC makes up a substantial portion of the budget (14 percent). But it is not just the financial situation that has changed—the November elections ushered in a new philosophy of fiscal austerity as well.

Because of the new mindset in the legislature, and because UNC has been the recipient of legislative largesse in the recent past, the universities are likely to bear at least their fair share of this year’s austerity measures.  In the initial draft of the education budget proposed last week by the House education appropriations committee, UNC was given an overall cut of $447 million (with some additions), or 15.5 percent—the highest of any state agency. (The continuation budget—what this year’s state appropriations would be if no changes were made—is $2.887 billon).

Naturally, this development is not popular at UNC. At the April Board of Governors meeting, projections were unveiled showing that a 15 percent reduction would force a loss of 3,200 jobs—1,500 of them faculty positions. System president Thomas Ross immediately expressed his dismay at the proposed appropriations, stating that cuts of such magnitude “could not be absorbed without inflicting irreparable damage to our academic quality and reputation.” 

Yet there is some silver lining for UNC: The vast majority of cuts consists of a  $469 million “management flexibility reduction,” which permits the universities to decide how to cut, rather than having specific measures imposed on the system by the legislature. And while the 15.5 percent cut may seem huge, House appropriations subcommittee co-chairman Hugh Blackwell pointed out that the state’s appropriation makes up less than one-third of the university system’s entire $8.3 budget.

Additionally, many of the faculty positions are unfilled, meaning that there will be far fewer layoffs than 1,500 professors. Subcommittee member Paul Stam further put the lay-offs into perspective: The UNC system has an annual turnover rate of 10 percent of its 48,000 member workforce, meaning that roughly 4,800 employees leave the system each year as a natural process.

Another budget item reveals why the change in direction is so necessary. Despite the knowledge that large faculty layoffs were imminent, the system is once again significantly increasing enrollment for next fall. The budget proposal fully funds UNC’s request for $46.8 million in enrollment growth funds (a large reason why the total cut is less than the management flexibility cut). At the April Board of Governors meeting, several administrators and governors lamented that students were having trouble getting the classes they needed due to excessive enrollment in the face of two years of reductions; Board president Hannah Gage said that many new students were unable to take freshman composition classes until their sophomore years.

But to admit more students when it is obvious that the system will be even less capable of handling the demand for classes suggests a system in denial. Thus, the House budget provides a dose of reality with its cuts.

Some additions to the budget were largely forced by the UNC system’s long-term agenda of aggressive growth. For instance, the proposed budget includes an additional $18.5 million every year to maintain the system’s increasing number of buildings.

Another example of the costs of aggressive growth is the new UNC dental school at East Carolina, which starts classes in September. Its operating funds have been gradually increased over a period of several years to $11.5 million for the opening. This year, it is getting an extra $3.5 million—and some of it is to start dental clinics in the local area. Those could be considered “mission creep,” outside the scope of a university system.

Some well-chosen measures are included in the budget proposal. Last year, the legislature appropriated $2 million recurring for research into whether coastal waves can be converted into usable energy. This year’s proposal eliminates the appropriation. It also removes the permanent $12 million appropriation to UNC’s Center for Public Television. The center gets a one-year reprieve of $10.6 million, but will have to become self-supporting after that.

The proposal also temporarily ends a $44 million annual appropriation to the UNC Health Care for charity treatment of uninsured patients. The hospital system had managed to build up an enormous $732 million in reserves; the temporary adjustment will continue for at least two years.

The House budget proposal also tries to get a handle on the explosive growth in financial aid. State spending on financial aid and tuition waivers for college students currently exceeds $300 million annually. UNC need-based aid, given solely according to the family income of students, has grown much faster than enrollment, which was growing twice as fast as the population. Past legislatures ignored the unsustainable nature of disproportionately increasing aid, because financial aid for low-income students was seen as a means for politically correct wealth redistribution.

To accomplish the expansion of need-based financial aid without burdening the general fund—which may have forced more prudent action—the legislature in the past shifted its main funding source to the Escheats fund. Furthermore, past state governments enlisted the university system in its agenda to increase centralized control of the economy. The legislature attempted to anticipate future workforce needs, offering specific financial aid programs to address those needs—most often in nursing and teaching. The number of individual scholarship or tuition-forgiveness programs designed to attract students into K-12 teaching also increased.

Times have changed, however. The Escheats fund is threatened by huge demand and is in danger of disappearing by 2014. And many experienced teachers are out of work, indicating that the need is not as critical as previously thought—and there are more alternate paths into the teaching profession than in the past, making special financial aid programs even less necessary.

The house budget proposal directly addresses both of these problems. Thus, overall state expenditures on the UNC need-based aid programs will fall from $162 million to $127 million, due to a discontinuation of $35 million in non-recurring funds appropriation.  It will decrease further by a provision that limits need-based aid to only 9 semesters (one extra semester beyond four years) for each student. That will save $301,446 in 2012 and approximately $5 million in 2012-13.

Eventually, the Escheats portion of need-based aid will decline from $116 million this year to $32 million. To allow the Escheats fund to regain its stability, lottery funding and the General Fund (supported by tax receipts) will provide $51 million and $39 million, respectively, of the total $122 million proposed for state need-based aid.

Other financial aid programs will be reduced or eliminated as well. For one, the proposed budget eliminates the $4.4 million Student Incentives Grant, another need-based state program.

The budget also reduces state benefits for out-of-state students. No longer will foundations providing scholarship at state schools be charged in-state tuition and fees; they must pay the full out-of-state rate. That will save the state $6.1 million. Non-resident graduate students remissions (which help graduate teaching or research assistants with their tuition and fees) will be reduced, resulting in an $8.6 million gain for the state.

Another $10.4 million will be saved through a 10 percent reduction in state aid to private school students.

Two incentives to increase education majors will be eliminated: the $455,000 Future Teachers program and a $984,443 tuition waiver that permits nonresident education majors to attend UNC schools at in-state rates.

No budget is perfect, and this proposal by the House education appropriations subcommittee is still only the second step in a long process of give-and-take by both chambers and various committees (Governor Perdue’s budget proposal in February was the first, and her signature will be the last). Yet it addresses some of the excesses of the university system that have long been ignored by the state government.

With any luck, much of this version will remain when the governor finally signs this year’s budget into law.