The UW System Budget: An Overview

Good morning. We want to bring you up to date on the budget situation. It’s certainly been an interesting month. We very much appreciate the Governor’s help and the Senate pledge to restore funding from the cuts made in the Assembly version of the budget repair bill.

The Senate is expected to vote tomorrow to limit the UW System’s cut to about $20 million over the biennium, recognizing the important role that we play in state economic development. That would essentially restore our full economic stimulus package and enable us to enroll our full class of 133,630 FTE students this fall. We are very grateful for that.

And Governor McCallum has pledged to work on restoring our cut to his recommended level of $51 million – a cut that we have said we will live with. And we appreciate that very much.

As you know, the assurances we received enabled us to lift the admissions freeze two weeks ago and authorize our campuses to admit another 5500 FTE students. Those letters have gone out over the past two weeks.

However, a hiring freeze remains in effect until we know the final budget outcome so we are still at some risk of ending up with more students enrolled than our budget can accommodate.

During this process, we have all gotten the question: “Why is a $100 million cut so bad when you have a $3 billion budget?”

I want to spend a few minutes today answering that question. One thing we’ve all learned this past month is how little our budget is understood, at many levels. In the past, we have not done very well at explaining our budget to the public.

The March Regent action to pause the admissions process was really about living within our means. What was on the table was a cut that represented one-eighth of our state operating budget. It’s clear that many people don’t grasp why that would be a problem so let’s talk about that.

We have a very complex budget – funds come from many different sources, as you can see from this slide, and those funds are targeted for very specific purposes.
It is complex because these funds are allocated out to our 15 institutions and each institution manages its own operating budget for maximum efficiency. As you can see, state GPR dollars represent 32% of our operating budget and 99 cents of each of those state dollars go directly to our campuses. (Figure 1 pdf )

Our budget has grown more complex through the years. Where once the university was run primarily on student fees and state GPR dollars, that is no longer the case. Over the past ten years, GPR dollars have remained essentially flat when adjusted for inflation, as you can see in this slide. Meanwhile, our funding from tuition and fees and from all other sources has gone up. (Figure 2 pdf )

When the UW System was founded thirty years ago, the state provided half of its operating budget – now it provides one-third. The state budget has grown during this time, but higher education has become a lower state priority. (Figure 3 pdf )

As you can see here, during the last decade, the overall state budget has increased 74%. Meanwhile the UW’s GPR budget has increased 37%. The biggest growth in state government spending has been in Corrections, K-12 education and local government aid.

This next chart shows the actual dollar growth in areas of state spending. Overall state spending increased $4.9 billion since 1992, while state support for the UW System grew just $281 million. (Figure 4 pdf )

Why is this a problem?

It’s a problem because the university is one of the primary levers that the state can use to fuel state economic growth. Our graduates work for Wisconsin businesses and our faculty and staff assist local businesses and help spin off successful companies.
It’s a problem because the state depends heavily on UW graduates to fill its workforce needs. Just two examples: nine out of ten registered pharmacists in Wisconsin are UW graduates. Sixty-eight percent of Wisconsin’s K-12 teachers are UW graduates.

So how do we address this problem?

One way is to do more with fewer dollars by becoming a more efficient system.
Efficiency and accountability have been big priorities for this board and we are very proud of how effective and efficient this system is. (Figure 5 pdf )

We use national data to calculate our administrative costs and that data shows that our administrative costs are about half those of our peers in other states.
As you can see from this chart, with that efficiency, we actually save the state and our students about $115 million a year. This enables us to serve about 15,000 more students than our peer universities serve with the same dollars.

And we’ve accomplished these efficiencies despite taking $55 million in cuts to our base budget during the last decade, as is detailed in this chart. In fact, the university in the past has been cut even during the good times when state revenues were growing. (Figure 6 pdf )

But isn’t public higher education being cut throughout the nation?

Yes, other states have been cut but Wisconsin’s cuts to higher education over the past two decades have gone deeper. As you can see from this chart, only one Midwestern state – Ohio – has actually had an increase in higher education funding while Wisconsin and Minnesota have lost the most ground. (Figure 7 pdf )

With this context, let’s come back to the question of why a $100 million cut to a three billion dollar annual budget is so problematic.

This flow chart represents the primary point I want to make. (Figure 8 pdf )
As you can see, our funding comes from five general sources – the federal government; gifts, grants and contracts; auxiliaries, hospitals and other receipts; fees including tuition; and state GPR funding.
Funds that are received from these entities are, for the most part, targeted for very specific areas.

As you can see, the bulk of funding from the federal government goes to research, extension and outreach and student financial aid.

Funding from gifts, grants and contracts also largely supports research and public service.

Our auxiliary funding is used to operate residence halls, student unions, cafeterias, athletics, printing centers, parking, bookstores and the hospital.

The major sources of student services and instructional support – that is, the day-to-day teaching in the classroom – are state GPR funding and student fees.
In fact, virtually all student fee money is used for instructional support.
Of our state funding, a certain portion is restricted and can only be spent on specific areas designated by state law such as debt service, and utilities.

So the state funding that we control represents about $893 million. Of that, roughly 60 percent goes to instruction and student services. The rest is spent on our physical plant, libraries, technology, farm operation, research, financial aid and administrative support like payroll, personnel, and fiscal management.

This is the key number — $893 million in state support.

That is why a $108 million cut to the UW System would be so damaging – it represents roughly one-eighth of our state operating budget.
What on this chart can we, as Regents, control?

We can and do encourage our chancellors, faculty and staff to pursue federal funding and gifts, grants and contracts. But these funds are earmarked for specific purposes and cannot be reallocated for other uses such as student instruction.

We encourage our campuses to run their auxiliary enterprises in an efficient manor to keep fees down while meeting student needs, safety and other requirements. But these funds also are earmarked for specific purposes and cannot be reallocated for other uses such as student instruction.

By the way, the money we bring in from federal, private and auxiliary sources has a very positive effect on Wisconsin’s economy. Those funds provide for good jobs in our campus communities. Using traditional business measures, the economic impact of these UW activities, alone, amounts to about $4 billion annually.

The Regents do control fees to a degree. The Regents set tuition for some categories of students but resident undergraduate tuition – the bulk of our fee budget – must be approved by state legislators and the Governor.

At the same time, the governor and state legislators also ultimately determine the university’s GPR budget. That is why we are so concerned by the present budget situation.

Given these budget realities, we have to run the university more and more like a business with its complex sources of revenue serving different and complex markets.

Another reminder about our budget – people comprise about 83% of our expenses. We are a people-intensive business. So when our budget is cut significantly, we can’t make ends meet without cutting faculty and staff. And when we cut “people,” we reduce our instructional capacity to serve students.

That is why enrollment is critical to this overall funding equation. The one thing the Regents can and do control is how many students we let in the door.

We could let quality slide and continue to take all the students who want to enroll. We did that in the late 1980s and no one liked the results. At that time, we had students who couldn’t get the classes they needed and who had to stay in school an extra semester or more just to get their degrees. We don’t want that to happen again.

That brings us to the decision we made a month ago. It was a fiscally prudent action by this board to pause and assess the enrollment commitments we had already made to make sure that we can provide a quality education to the students who are coming to our campuses this fall.

And we have taken a prudent risk in lifting the freeze in the belief that our final budget cut for next year will not exceed $51 million. This is more than a budget issue for the state of Wisconsin. This is an issue of state priorities.

The reality is that the quality of the UW System, which has taken generations to achieve, will suffer if state support continues to decline. And Wisconsin will suffer for it because it is well documented that a strong public university system is critical to economic development.

This budget process is about state priorities. Wisconsin has progressed far as a state because in the past, higher education was a top priority. With Wisconsin’s economy at the crossroads, it is time for our state to recommit itself to public higher education and make it a priority again.