March 4, 2004

Contact: Lynn Bretz, University Relations, (785) 864-8866.

Chancellor's prepared testimony for House Education Budget Committee

TOPEKA-- University of Kansas Chancellor Robert Hemenway gave the following testimony to the Kansas House Education Budget Committee today in Topeka: Thank you for this opportunity to appear before you on behalf of the students, faculty, staff and alumni of the University of Kansas.

Joining me, and available to respond to questions, are:

 • David Shulenburger, executive vice chancellor and provost of the Lawrence campus, including the KU-Edwards Campus in Overland Park; and

 • Don Hagen, executive vice chancellor of the Medical Center, including the School of Medicine-Wichita.

Let me begin by saying again that we support the governor's budget recommendation. It appears to be a good faith effort to recognize some of higher education's needs.

We have concerns about the budget, which I will cite, but we also recognize the positive spirit of the effort.

We also ask for special consideration for two items not addressed in that budget proposal, but which are consistent with the Board of Regents' unified request submitted to the governor last summer:

 • First, we ask for recognition of the funding challenges facing the KU Medical Center, which relies heavily on state tax dollars and which is embarked on a major effort to create an NCI-designated cancer care and research center at KU. As the only medical school and medical research center in the state, the KU Medical Center is critical to the Bioscience Authority created in the Kansas Economic Growth Act (HB 2647), which passed the House last week.

 • Second, we are concerned about the unfunded costs of increased, mandated employee health care, an increase that this year totals $6.4 million at all KU campuses and which is not covered in the governor's budget.

The environment for KU this year is very different than it was when I addressed you in 2002 and 2003. The economy of the state has stabilized. The outlook for business is improving. And the spirit of the people of Kansas is more optimistic than it has been in quite some time.

All of this is positive for the state and positive for the University of Kansas. At KU, we watch the rise and fall of the state economy with considerable interest, because we are such strong partners with state government and the people of Kansas.

It takes state appropriations, student tuition, and private giving to create a great university such as KU. We are all part of a partnership to serve the students of Kansas.

We are also partners in sustaining and enhancing the state's economy, as you have heard from Citizens for Higher Education. We view serving the state and strengthening its economy as a major component of our mission.

The improving economy is reflected in the governor's budget proposal, which contains much that is positive for KU and other universities.

For example, we appreciate the 1 percent operating grant increase of $5 million for the regents system the governor is recommending. While less than the amount asked for by the Board of Regents, it would provide KU with about $2.2 million at Lawrence and the Medical Center. Significantly, it marks the first time in three years a governor has recommended any block grant increase for the universities.

Unfortunately, mandated employer costs, such as health insurance increases, meant to be covered by the block grant, total $4.2 million more. I will comment on this in a moment.

The governor's proposal also recognizes the importance of the people who make our university what it is: the faculty and other staff who teach, conduct research, and serve the institution so well.

This budget proposal provides a portion of the third year of faculty salary increases promised by the state under SB 345. This represents about $1.4 million for KU faculty members. SB 345 was a promise broken; now it is a promise being fulfilled.

I am also grateful that the governor has proposed a general 3 percent salary increase for KU employees. Such an increase is a welcome signal to all faculty and staff -- after a couple of very lean years -- that their efforts are appreciated by the people of Kansas.

These recommendations all help the university as we work to fulfill our mission as efficiently and effectively as we can. Overall, the governor's budget proposal underscores the central value of education in Kansas, from kindergarten through graduate and professional degrees.

While it's never easy to fund this commitment adequately, it's important to remember that education is the best investment this state can make. As a key component of any workforce development strategy, it's the foundation for tomorrow's economy. Whatever helps education at any level helps education at all levels.

If we truly want safe streets, moderate taxation, a vibrant democracy and a secure retirement, we must support and educate the generation of students who will take our places.

So, I believe this budget proposal is a significant improvement over the past two, and a solid starting point for legislative action.

Nonetheless, there are provisions in the plan that affect KU negatively and which represent a serious problem for us as we try to manage the largest institution in the state, one that enrolls more Kansans than any other university. You expect me to be honest with you, and I will be.

The most serious challenge we face, financially, is the one that I cited earlier, and is not fully addressed in the budget. Unlike other state agencies, the universities would not receive any new funding to cover such fixed employer costs as the increase in health insurance premiums and other fringe benefits.

This cost is $6.4 million at Lawrence and the Medical Center.

Ideally, the university's annual operating grant increase would cover these costs. That's part of what the block grant is for.

But I would remind you the regents requested a 7 percent grant increase, whereas the governor is proposing 1 percent. Between the $2.2 million provided by the block grant and the $6.4 million we need to cover these costs is a $4.2 million gap for KU that will have to be absorbed or funded in some other way.

I highlight this as an issue for the Legislature to consider as you review the governor's budget proposal. Failure to fund the increase in our fixed employer costs is a de facto budget cut for the universities. We will have to reallocate and cut programs to find this $4.2 million.

In addition, while we're grateful for the 3 percent salary increase, I must point out that it only covers the State General Fund (SGF) portion of our payroll. The $5.2 million we receive is $2.7 million short of the $7.9 million needed to fund the entire 3 percent General Use increase. We will have to make up that $2.7 million by reallocating and cutting programs.

Finally, be aware that the governor's proposed increase of $250,000 in the Medical Student Loan program will require us, over time, to reduce the number of awards from the 120 traditionally authorized down to 90.

We will administer this program at the funding level you allocate. To fund 120 students, however, $1.35 million would have to be added to the budget over the next several years.

Much has been said during the past month about the budget recommendations contained in the governor's proposal. KU is certainly not exempt from budget reductions. At all KU campuses, these reductions amount to $5.4 million, including:

 • A permanent SGF reduction of $1.1 million, and

 • Mandated reductions of $2 million, funded from tuition.

In addition to these reductions, KU will also have to reduce our budget in FY 2005 by more than $2 million in one-time reductions to a variety of fee-funded programs, such as housing fees or parking fees.

We appreciate the fact that universities have been given flexibility in how to absorb most of these one-time cuts. We hope these cuts are truly "one-time" and do not become a recurring feature of future budgets. But they are cuts, nonetheless.

These fee-funded reductions also raise the question of whether tuition that students pay is "owned" by the institution or the State General Use Fund.

SB 490, a bill advanced by the Board of Regents, proposes that interest earned on tuition funds deposited in the state treasury be allocated to the universities. I testified Tuesday on this bill before the Senate Ways and Means Committee and we support it strongly.

We do not believe that students pay tuition to earn interest for the state generally. They expect their tuition to pay for education.

In closing, it is important to state how this budget affects different parts of KU in different ways. Specifically, it hurts the KU Medical Center disproportionately, since that campus relies heavily on state funding and receives relatively little tuition funding.

For example, while the Lawrence campus receives 48 per cent of its general use budget from tuition, the Medical Center campus receives only 12 per cent. There are only 1,800 tuition-paying students at KUMC, most of them state residents, so tuition increases there have relatively little impact on the bottom line.

But the Medical Center has significant costs to cover, given its highly technical and specialized work. It costs more to educate nurses, allied health professionals and physicians -- most of them at the graduate level -- than it does a more general mix of students.

Those costs include -- in addition to the insurance increases already mentioned -- the cost of maintaining and repairing a campus whose facilities are 40 years old, on average. Those facilities include buildings where health care is provided to patients on a daily basis.

Unlike some other campus facilities, a major electrical or cooling problem at the Medical Center is not something you can afford to fix "next year." When peoples' lives are involved, as they are often are where KU and the Hospital intersect, an emergency is for real, life threatening, and expensive.

The original Board of Regents budget proposal recognized this reality and requested special funding of $2 million for the Medical Center in the operating grant request. The governor's budget plan, however, does not include any special funding for KUMC. One outcome will be the laying off of some staff this spring, in order to accommodate the governor's budget recommendations and address critical needs not met by the state.

In summary, the overall effect of the governor's budget proposal is a modest but welcome increase in funding, a result that is preferable to the cuts and allotment reductions we've experienced the past two years.

But it leaves in place the adverse effect on the Medical Center, and the $4.2 million gap between increases in health care costs and the operating grant. These are significant challenges for us.

Nonetheless, we do appreciate the commitment to salary increases and the hope for the future that this proposal provides. I'd be pleased to respond to any questions you have concerning the proposal and its impact on KU.


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