ED 24
Increase the Flexibility of Higher Education Funding
Summary
The Higher Education Fund (HEF) benefits colleges and universities that do not participate in the Permanent University Fund (PUF). It supports capital improvements and certain excellence programs through annual financial assistance to institutions, as well as through a permanent endowment fund, the Permanent Higher Education Fund (PHEF). The PHEF is intended to replace the direct annual assistance provided by the HEF after it accumulates $2 billion in assets. The Legislature should not make annual deposits to the PHEF in years when doing so would slight other, more critical state needs.
Background
The Texas Constitution earmarks the first $100 million coming into the state Treasury each year, and not otherwise appropriated by the Constitution, to higher education institutions that are not part of the University of Texas and Texas A&M University systems and thus are ineligible for funding from the Permanent University Fund (PUF).[1] (These funds also benefit six UT or A&M institutions recently added to the systems that do not draw PUF funding.)These appropriations are allocated to participating institutions by formula, and must be used for capital needs and “excellence” programs.[2] The 1993 Legislature increased the amount of this annual appropriation, generally called the Higher Education Fund (HEF), to $175 million beginning in 1995.
The 1993 Legislature also established a second program within HEF, the Permanent Higher Education Fund (PHEF), to benefit the same institutions. The law specifies that PHEF should receive $50 million each fiscal year, but the actual amount is slightly less than $49.4 million because of an across-the-board cut to state spending in the 1990s. The Texas Constitution establishes the PHEF as a dedicated fund, and the principal of the PHEF may not be expended. The PHEF had an unaudited balance of almost $357 million on February 1, 2003.[3]
When the PHEF reaches $2 billion, 90 percent of the interest, dividends and other income from its investments will be used for capital needs and excellence programs at eligible state institutions of higher education. At that time, the annual HEF allocations will cease and be replaced by income from the PHEF.
TEF and URF
In 2001, the Legislature created two new funds, the Texas Excellence Fund (TEF) and the University Research Fund (URF), to improve research capacity at universities other than the University of Texas at Austin, Texas A&M University at College Station and Prairie View A&M University.The URF is funded with direct appropriations of general revenue. TEF funding is based on the earnings of the Permanent Higher Education Fund, using a complex formula linked to the total return on all investment assets of the Permanent Fund for Tobacco Education and Enforcement. Funding for the TEF comes out of the annual $49.4 million deposit of general revenue to the PHEF. The TEF’s share of PHEF funding changes each year and amounted to $18.4 million in fiscal 2003.
The statutory provisions related to administering both funds will expire at the end of the 2004-05 biennium. The legislation that created the funds stipulates that the URF must receive the same amount of funds provided to TEF; if not, the Comptroller cannot make a deposit to the TEF. For the 2002-03 biennium, the state will deposit a little more than $33 million into each fund.
Recommendation
The Legislature should amend the Texas Education Code to state that annual deposits to the Permanent Higher Education Fund other than the amount needed to cover the deposit to the Texas Excellence Fund are not required when the state’s revenues are expected to decline from biennium to biennium, or when the Legislature, by a two-thirds vote of both houses, determines that the deposit should not be made because of the state’s fiscal situation.State law should state that the annual deposits are subject to legislative authority, and should give lawmakers explicit authority to skip deposits in situations similar to those that govern the use of the state’s Economic Stabilization (“Rainy Day”) Fund.
Fiscal Impact
Savings to the General Revenue Fund would result from annual deposits not made to the Permanent Higher Education Fund. The deposit would be limited to the amount needed to fund the Texas Excellence Fund.Annual deposits to the PHEF are $49,365,000; URF/TEF amounts are determined by formula and change each year. The Comptroller’s office has determined that, under current law, both funds should receive $10,894,765 in fiscal 2004 and $11,633,294 in fiscal 2005.
Because this recommendation would allow the Texas Legislature to resume payments to the HEF in the future if the state’s fiscal condition allows it, no savings are assumed for the years after the 2004-05 biennium.
Fiscal Year Savings to General Revenue 2004 $38,470,000 2005 $37,731,000 2006 0 2007 0 2008 0
Endnotes
[1] Tex. Const. art. VII §17(a).
[2] Texas Educ. Code Ann. §62.021(a).
[3] Texas Comptroller of Public Accounts, State Treasury Division, February 2003 Bond Appendix (Austin, Texas, February 2003), p. A-51.
