10/5/2004

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

Text of Chancellor Hemenway's Legislative budget committee testimony on Oct. 4

Testimony by Robert E. Hemenway, Chancellor, The University of Kansas

Joint Committee on Legislative Budget 123 South, State Capitol Monday, October 4, 2004, 1:30 p.m.


Chair: Senator Steve Morris (R-Hugoton)
Vice-Chair: Representative Melvin Neufeld (R-Ingalls)
Members: Senator Henry Helgerson, Jr. (D-Wichita)
Senator Dave Kerr (R-Hutchinson)
Representative Clark Shultz (R-Lindsborg)
Representative Bill Feuerborn (D-Garnett)
Representative Dean Newton (R-Prairie Village)

CHANCELLOR HEMENWAY: I want to thank the Committee for the opportunity to appear before you today. In particular, I thank Senator Morris and Chairman Neufeld for their continuing interest in this very important topic.

Marv Burris' testimony summarizes the history of the "operating grant/tuition ownership model" adopted in FY 2002, going back to the Regents' and the Budget Director's decision in 2000 to approve this model. I would like to talk briefly about this block grant or operating grant model, because it is very important to the continued accountability that you expect from Regents institutions.

As Marv indicated, under the rejected General Use Model, tuition was tied to appropriation. If enrollment went up, State General Fund appropriation went down.

The net effect of this rejected model was to (1) penalize large institutions because they received more tuition dollars, and (2) impede creativity in management because the rewards for entrepreneurship‹recruiting additional students‹were to receive less state funding.

This model was part of a larger model that was built around costs for universities as state agencies through costly regulations, which destroyed the incentives for good management practices.

At KU we particularly realized this when we converted, with your help, especially Senator Kerr's help, the KU teaching hospital to a public authority and forced it to live by market principles. As you know, the hospital is a living example that free markets work. Since it has been free of the costs of doing business as a state agency it has gone from being a $175 million a year hospital to almost a $400 million a year hospital that is seeing 6,000 more patients per year than it did previously.

The current "block grant," or "operating grant/tuition ownership model" was designed by the Regents and the State Budget Director, Duane Goosen, to simplify the needlessly complex way that Regents institutions established their budget, and to impose greater accountability on to the institution.

The idea was simple. Rather than play around with formulas and off-sets and an incredibly complex budget process, simply place the annual university appropriation (whether for salaries, fringe benefits, building maintenance, etc.) into one block or operating grant appropriation. The sum of this block grant and the university's tuition revenues would be the annual budget each university works with. If the amount went up, the universities could do more. If it went down, the universities would have to adjust. How the money would be distributed within the university was the responsibility of the university administration, and they would have to answer first to the Regents, and then to the legislature for the decisions that were made.

This was and is a good system, and it has had a number of good effects. It has forced the universities to secure their students' support when tuition increases have been necessary to maintain educational quality in the face of the declines in state revenues. It has also made universities more accountable for good and tight management, because the leaner the administration the more funds are available for the classroom.

Block grant funding
The problem is, as Marvin pointed out, that just as the block grant was established, the state's budget crisis descended. As a result, Governor Graves, who authorized the change to the block or operating grant model, was never able to fund it.

Faced with the same budget crisis, Governor Sebelius did not fund the block grant in 2004. She did so in 2005, but only for $5 million, which did not even pay for the cost of employees' health insurance. Nevertheless, this was a positive development because it was the first time it had been funded. Still, salaries were not included in the block grant and were calculated separately in a formula that used restricted funds to achieve a 3 percent increase.

Our hope would be that the block grant could be funded as originally intended, because it will inevitably result in better management, just as with the hospital.

When the block grant/operating grant/tuition ownership model was adopted, it was understood that the system may need tweaking, or adjustments to become fair to all parts of the Regents system. This was one reason that the Regents recommended that KUMC and KSU's ESARP not be included.

Having now had three years to analyze it, the Regents have recognized the special status of institutions like KUMC and K-State's ESARP (the Extension Service) and how they could be hurt by the model being applied to them since tuition plays little or no role in their funding. Since FY2003, KUMC and ESARP have been under the operating grant, because it was considered easiest to put all units under the new model.

These campuses need to be focused on because each special-purpose campus occupies a unique and important niche in the Kansas system of public higher education. (Another example is the Kansas Geological Survey, a unit of KU that has similar issues under the operating grant model.)

The special status of the KU Medical Center and ESARP was reflected in the Regents' budget request of an additional 2 percent a year ago. The Legislature responded by providing each with $500,000 in additional funding, over and above the block grant. We are grateful for this recognition that the Medical Center and ESARP have special funding needs.

Medical center needs
I would now like to focus on those needs as they affect the Medical Center. KU operates the state's only academic medical center. Its programs are disproportionately dependent on the State General Fund (SGF) to support its education, research and service programs. Unlike the rest of KU, or other universities, it has a limited enrollment and limited tuition revenue. Further, embedded in its budget are numerous one-of-a-kind programs that serve the entire state and make effective health care possible in Kansas.

Note that, in FY 2001, the Medical Center received 87.4 percent of its General Use (GU) funding from SGF. By contrast, the range for other Regents institutions was roughly 60 percent to 77 percent. By FY 2004, the Medical Center still received 84 percent of its GU from SGF, while the range for the rest of the system fell to roughly 51 percent to 73 percent. This continuing dependence on the SGF makes the Medical Center highly vulnerable when the state has budget problems, as it has recently.

The Medical Center's limited enrollment makes tuition an inadequate alternative source of additional funding. In the fall of 2004, enrollment reached 2,610. Of this number, 682 – or more than one student in four -- were resident physicians enrolled in Graduate Medical Education. These physicians have graduated from Medical School. They have passed license exams. They do not pay tuition and, in fact, are themselves paid for the health services they provide to sick patients.

The good news for Kansas is that we have 50 more residents now than we had a year ago, reflecting the high quality of our medical programs. The bad news is that this increase raised the cost of Graduate Medical Education by approximately $1.7 million (in an $18.1 million program), reflecting the 34,000/per year Resident physicians are paid, on average.

Since 2001, tuition-paying enrollment at the Medical Center has averaged 1,797 students. Between FY 2001 and FY 2004, tuition revenue increased by 32.4 percent, but overall GU funding only increased by 3.1 percent. At the other Regents institutions during this period, GU funding increased by double to six times that percentage, because of tuition increases.

Clearly, tuition alone cannot make up this kind of funding gap. State support of the Medical Center is critical.

Medical programs are inherently more expensive than academic programs at other Regents institutions. In FY 2003, for example, the average annual cost per FTE student in the Kansas system was $7,168. At the Medical Center, including students enrolled in Graduate Medical Education, the average cost per FTE student was $48,000, reflecting again the salaries Resident physicians are paid.

That figure may shock you, but that's what it takes to properly educate the next generation of healthcare professionals.

The Medical Center's budget is further complicated by service programs that fall outside its core educational responsibility. In FY 2005, the $23.4 million spent on these programs amounts to 19 percent of KUMC's GU funding.

One example of a service program is one I've already mentioned -- Graduate Medical Education. It is the only such program in Kansas, and our residents are the state's primary source of trained specialists.

While the residents pay no tuition, their services are essential to the health delivery systems in Kansas City, Wichita, and Salina. During the state's budget problems of the past few years, this program was protected, as you would expect, a decision that placed an even heavier financial burden on other programs at the Medical Center.

Another example of a service program is our Developmental Disabilities Center. It is the state's only source of a complex and expensive multi-disciplinary assessment for autistic children. This service, whose clients are often un-served or under-served Kansans, is subsidized by $529,000 from our GU budget – even though GU is designed primarily to fund instructional services.

Other similar service programs provided by the Medical Center include the Area Health Education Centers in Hays, Pittsburg, and Garden City; the Bridging Program and Locum Tenens program for rural practitioners; Telemedicine, Continuing Education and the Kansas Cancer Institute.

Without the KU Medical Center, none of these services would exist in Kansas.

'An appropriate level'
The point of my remarks is this: The Regents and the Legislature must find a way to fund this unique and critical Kansas institution at an appropriate level.

The existing operating grant/tuition ownership system, works very well for our regular undergraduate and graduate programs, but it does not work well for special purpose campuses like the Medical Center. I encourage the Legislature to work with the Regents to find answers and implement solutions to this ongoing problem that can affect the health of every Kansan.

At a minimum, special funding -- such as the additional two percent requested by the Regents for FY 2006 or the $500,000 provided this year by the Legislature --must be provided in the future to fund medical education at the same level intended for non-medical education.

Our School of Medicine celebrates its Centennial in 2005. For the past 100 years, the faculty and staff of the Medical Center have proven themselves to be good stewards of the state's investment. About half of the doctors practicing in Kansas are KU Medical Center graduates.

What we need now, however, is more than a Band-Aid. We must take a hard look at the central role the Medical Center plays in the state's health care system, and then provide funding as though our lives depended on it.

Doing more with less
I want to close by endorsing Marv's earlier comments about "doing more with less."

The Regents business officers and the campuses have actively sought and implemented many administrative efficiencies in recent years, in conjunction with the Department of Administration. The Legislature has graciously adopted several useful statutory changes toward this end, but more can be done.

One example is last year's SB 490, which would credit interest earnings to non-state general funds. We think SB 490 makes sense, and is consistent with a full implementation of an operating grant/tuition ownership model. When parents write checks for tuition, shouldn't the university benefit from the interest that payment earns? What business would bank its revenues at a bank that never gave it any of the interest the money earns? Yet that is exactly what happens to tuition that the university collects.

Parents write tuition checks to pay for the education of their child. They don't expect that tuition money to be used for other parts of state government.

SB490 would fix this and enable the university to ensure students and their parents that their tuition dollars are being used for the purpose they were intended.

We and the other Regents institutions work hard to be good stewards of our resources. We need to be empowered to invest in best practices and use resources in ways that serve our customers – students, first, but all Kansans ultimately – with the same kind of freedom enjoyed by Washburn University and the state's community colleges. When they receive state funds they put the money in the bank and earn interest on it. Why should we not be able to do so with tuition checks written to the University of Kansas?

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