The4th meeting of the Subcommittee on Postsecondary Education of the Interim Joint Committee on Education was held on Tuesday, November 12, 2002, at 10:00 AM EST, in Room 129 of the Capitol Annex. Representative Mary Lou Marzian, Presiding Co-Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Jack Westwood, Co-Chair; Representative Mary Lou Marzian, Co-Chair; Senators Ray Jones II and RJ Palmer II; Representatives Hubert Collins, Tom Riner, Charles Siler, Dottie Sims, and Mark Treesh.
Guests: Jim Applegate, Council on Postsecondary Education; Clyde Caudill, Jefferson County Public Schools and Kentucky Association of School Superintendents; Scott Trimble and Cindy Owen, Kentucky Department of Education; Cindy Heine, Prichard Committee for Academic Excellence; Jane C. Lindle, University of Kentucky College of Education; Mike Carr, Kentucky Association of School Administrators and Fayette County Schools; Roland Haun, Kentucky Association of School Superintendents; Ken Hines, Kentucky Education Association; Michael Gritton, Kentuckiana Works; and John Cooper, Coca Cola Company.
LRC Staff: Jonathan Lowe, Sandra Deaton, and Lisa Moore.
Representative Marzian introduced Ms. Mary Lassiter, Deputy Executive Director, Governor’s Office for Policy Research, who gave an update on the budget for the Commonwealth. Ms. Lassiter provided history on the budget and said that there was a budget shortfall for FY 2001 of 2.68 percent, a budget shortfall in FY 2002 of 9.41 percent. There is no budget enacted for FY 2003 and 2004, but the Governor’s spending plan requires revenue growth of 6.2 percent in FY 2003, and in FY 2004, House Bill 1 requires revenue growth of 4.1 percent. Ms. Lassiter said she does not believe that revenues will rise to these levels.
Ms. Lassiter said FY 2002 is the first time since the 1950’s in which Kentucky collected less money than the year before. She emphasized this is truly a historic time for the fiscal environment. She said there were no cuts in the budget to education in FY 2001. She said the total shortfall was $185.4 million, and reductions to agencies totaled $32.7 million. Ms. Lassiter said the strategy was to minimize programmatic impacts, and this thought process was carried over into FY 2002.
Ms. Lassiter said in FY 2002 there were no cuts made to K-12 education funding, however a two percent cut was made to postsecondary education which amounted to about $17 million. She said the total shortfall was $687.1 million, and cuts to agencies equaled $231.5 million. Ms. Lassiter said Kentucky has not had the programmatic cuts that other states have had, such as closing offices and laying off employees.
Ms. Lassiter said the consequences of the budget reduction actions include depleting the budget reserve trust fund, captured funds intended for specific uses which may have long term implications, and resulted in a downgrade in Kentucky’s credit rating from Standard & Poor’s. She said Kentucky has to commit to get its recurring expenditures and recurring obligations back in balance, and this includes replenishing the budget reserve trust fund. She also said 46 other states had budget shortfalls in FY 2002.
Ms. Lassiter said in FY 2003 there has been a 6.8 percent growth over FY 2002 through October. She said 6.2 percent is needed for FY 2003 to meet spending plan expenditures, but the tax amnesty receipts of $107 million are clouding the revenue picture. She said the challenge is to figure out how much of the receipts are recurring money, but the bottom line is a revenue shortfall is expected in FY 2003.
Ms. Lassiter said the consensus forecasting group is charged with revising the revenue estimates for the Commonwealth. She said they are completing official estimates for FY 2003 and FY 2004, while compiling planning estimates for FY 2005 and FY 2006. Ms. Lassiter said the Governor’s Office of Policy and Management (GOPM) will be providing long-term estimates for expenditures as well. She said the economic assumptions include forecasting a slow recovery and guarded optimism because they have seen stabilization in manufacturing employment in Kentucky, while it is falling nationally.
Ms. Lassiter said preliminary estimates include a $198 million revenue shortfall for FY 2003, and a $203 million revenue shortfall for FY 2004. She said this translates into a $155 million budget shortfall for FY 2003, and a $393 million budget shortfall for FY 2004. Ms. Lassiter said these estimates are based on fixing the problems in education, which is estimated at $56.4 million in FY 2003 and $59.6 million in FY 2004. She said districts have made contractual obligations and would struggle with a budget cut mid-year.
Ms. Lassiter said the cutback implications include possible across the board cuts of approximately two percent in FY 2003 which amounts to $22.7 million, and approximately 5.5 percent in FY 2004 which amounts to $66.9 million. She emphasized that Governor Patton is not advocating these cuts, however this is the size of the magnitude of the problem. Ms. Lassiter said education is still a high priority for Governor Patton in all of his budget recommendations.
Ms. Lassiter concluded by stating that official revenue estimates would be available on November 15, 2002. She said Dr. James Ramsey, State Budget Director, will present the estimates and discuss future direction at the Strategic Committee on Postsecondary Education (SCOPE) meeting on November 18, 2002.
Representative Marzian asked if the Tennessee lottery and proceeds leaving the state of Kentucky were figured into the budget projections. Ms. Lassiter said this forecast did not consider the Tennessee lottery issue, but the consensus forecasting group will have to make that adjustment. She said no impact is expected in FY 2003, but the fiscal impact from the lottery on Kentucky in FY 2004 is estimated as a $8 million decrease in lottery receipts, and this figure rises to almost $20 million by FY 2006.
Representative Collins asked about additional revenue from tuition coming in to the universities due to increased enrollments. Ms. Lassiter said the funds she discussed are from the general fund while state appropriations to the institutions are viewed as a block grant. Dr. Sue Hodges Moore, President, Council on Postsecondary Education, said tuition pays for about one-third of the total revenue that goes toward educating the students. She said the state appropriation for students coming in, that institutions are not getting for that enrollment growth, is about two-thirds.
Representative Treesh asked how the $107 million in amnesty funds compares to what was projected. Ms. Lassiter said net amnesty revenues were estimated at $20 million in the first year, and $7 million in 2004. She said the consensus group estimated that $35 million is net new, and this program produced much greater revenues than expected.
Representative Treesh asked if Kentucky would achieve its goal of meeting a 6.2 percent revenue growth. Ms. Lassiter said there is some one time money in the current year receipts, which if factored out, she believes Kentucky has real revenue growth of about two percent. Representative Treesh said Kentucky has allowed its expenditures to grow faster than the economy and revenues. He feels Kentucky did not adequately prepare itself for an economic downfall. Representative Treesh would like for Kentucky to exercise some fiscal restraint in the future. He said by implementing so many new programs over the years, it has caused some serious structural problems for Kentucky’s state budget.
Senator Westwood asked about the figure for the one time monies in the tax amnesty receipts. Ms. Lassiter said $65 million is deemed as one time money, and the net proceeds from amnesty funds is $35 million while $7 million is recurring money that goes into FY 2004. Senator Westwood said there seemed to be a lot of contention with this money, and Ms. Lassiter said he should speak with Ms. Dana Mayton, Secretary, Kentucky Revenue Cabinet, for more detailed answers concerning tax amnesty funds.
Senator Westwood said corporate taxes were down and asked if Constitutional Amendment Two, passed in the last election, could improve this situation. Ms. Lassiter said the revenue cabinet studied the impact of increased revenues due to passage or nonpassage of Amendment Two, and the bottom line was no additional revenue is expected. She said this is because there are no changes to tax laws at this time. Ms. Lassiter also said some increased economic activity may occur due to the passage of Amendment Two which is supposed to provide a more favorable climate for businesses. Senator Westwood said the consensus forecasting group should study the issue. Ms. Lassiter said she does not know of any plans for them to do this at this time.
Representative Marzian said the committee would hear from Dr. Dennis Jones, President of the National Center for Higher Education Management Systems, who shared via conference call his perspective on “Budget Decisions in Times of Fiscal Constraint.” Dr. Jones gave a Power Point presentation for the committee as well.
Dr. Jones said the fiscal environment for Kentucky will be tough over the next couple of years. He said the tough times are not over, and only five of fifty states will have a balanced budget or excess revenues over current levels of expenditures in the next eight years. He said this means that 45 states have structural problems, or unbalanced budgets. Dr. Jones said that while the economy is making it tough for the states, times are tough for students too. He said this means that states should be careful about balancing education books without paying attention to student financial aid.
Dr. Jones discussed the Measuring Up 2000: State Profiles report. He said the 2002 version just came out, but most results are the same. Dr. Jones said Kentucky is low in comparison with the rest of the country in the amount of state aid that it targets at low-income families, but rate pretty highly in comparison to the rest of the country in terms of affordability, how much it takes for the poorest people in Kentucky to afford even the cheapest public institutions, which would be Kentucky Central Technical and Community College System (KCTCS). Dr. Jones said Kentucky is slightly high in the amount of loans that students have when they leave college.
Dr. Jones said fiscal constraint has to be dealt with at two levels. He said the first level is the system—methods and levels of allocation to individual institutions and to student financial aid. He said the second level is the institution—methods and levels of allocation to functions and units within institutions.
Dr. Jones said the objective at both levels is to maintain educational capacity of the higher education institutions. He said another objective is to utilize capacity to achieve stated priorities, and this is the purpose of incentive/performance funding. Dr. Jones said Kentucky’s stated priorities are addressed in House Bill 1. He said benchmark funding is the mechanism in Kentucky to achieve the first objective, and trust funds and Bucks for Brains help achieve the second objective.
Dr. Jones said across the country the pressure is always to fund the base at the expense of funding for priorities. He said two recommendations are: 1) create a budget structure that assures funding for both components, and 2) if cuts become necessary, make cuts proportionately.
Dr. Jones said financing is a means to broader objectives—the public agenda for the state. He said to always consider the impact of financing strategies on the accomplishment of those priorities.
Dr. Jones said priorities continue through good times and bad, and constrained resources should not be an excuse for abandoning the public agenda. He said there are six strategies that can be utilized to respond to stable/diminished state appropriations: 1) reduce capacity/limit access; 2) revenue enhancements; 3) productivity increases; 4) narrowing portfolio of state investment; 5) creation and utilization of educational “rainy day” funds; and 6) asset conversion—turning assets into resources for operations.
Dr. Jones said reducing capacity/limiting access is seldom overt. He said it is usually poor short-term politics, and poor long-term economics. He said many less obvious tactics are available, such as changing admissions requirements, admit students but limit course offerings, and implement advance cut-off dates for admission/student aid. Dr. Jones said the real challenge is accommodating demand—somewhere within the system and within available resources. He said this requires multiple strategies and a systems approach.
Dr. Jones said institutions look for revenue enhancements, and alternative sources of funds. This can include students, donors, employers, and other (non-higher education) branches of state government. He said higher education does not do much to receive revenues from other cabinets. He said in many states the growth in higher education revenues will not be found in the higher education cabinet, but things like corrections, social services, etc. Dr. Jones said the reality for most institutions is short-term revenue enhancement equates to increasing revenue from students: increase net revenues per student through higher tuition, increased proportion of out-of-state students and less institutional aid/price discounting. He said increasing numbers of students can be served when new revenues exceed additional costs. Dr. Jones said the state policy issue integrates policies regarding: institutional support; student aid; tuition and fees; and institution aid/waivers.
Dr. Jones said productivity increases have effects on the campus level, system level and government-wide. He recommended to give funding priority to institutions that can accommodate increased demand at the least cost, and this includes nonpublic institutions in the equation. Dr. Jones said KCTCS is seeing the highest enrollment increases in Kentucky. He also said the postsecondary institutions should develop system-wide strategies for gaining efficiencies in very large courses and look to lower divisions. Dr. Jones said we should work to decrease demand per student by: 1) advanced placement; 2) minimize “rework”—collegiate and high school, 3) reduce “credit creep” in degree requirements, and 4) limit number of credits that can be taken at in-state rates. He said other strategies to achieve system-level productivity increases include implementing autonomy with accountability, optimize balance between institutional and student aid, and utilizing technology to share resources. Dr. Jones said a government-wide increase in productivity could eliminate some the educational overlap between higher education and other branches of state government.
Dr. Jones said to focus the allocation and narrow the portfolio of state investments in higher education by: 1) program eliminations/consolidations; 2) make greater use of regional/interstate consortia; and 3) require selected programs to be operated as enterprises.
Dr. Jones said to create and utilize educational rainy day funds by building reserves in good times, and drawing on reserves in bad times. He said this requires a clear device for accumulation, a clear mechanism for utilization, and protection against raids. He said an alternative to the rainy day fund would be to use assets creatively and manage the balance sheet. He said to defer maintenance on buildings and use the resources for operating, and buildings themselves, therefore, become the rainy day fund. He said this requires a clear strategy for eliminating the deferments in good times.
Dr. Jones concluded that changing ways of doing business will not occur unless the policy environment/resource allocation tools create incentives for change. He said the role of the Council on Postsecondary Education (CPE) is to create a policy environment that: 1) encourages attention to creation and maintenance of educational assets aligned with state needs; and 2) ensures that state priorities are addressed.
Representative Siler discussed utilizing private resources as a solution to the budgetary problems in Kentucky. Dr. Jones said the reality is that tuition is rising across the country, and the institutions will look increasingly to the student to pay the tab. He said to pay particular attention to the need-based student financial aid portion of Kentucky’s allocations. Representative Siler said another savings is for students to live at home versus bearing the living expense at the institution.
Senator Westwood introduced Dr. Sue Hodges Moore, Interim President, CPE, who introduced Mr. Sherman Jackson, Interim Vice-President for Finance. She discussed the goals of the CPE in times of fiscal constraint.
Dr. Moore thanked the committee for their vision in 1997 that guided the belief that a college education was a pathway to economic success for individual citizens and to provide better lives to them and their families, and a better future for Kentucky. She said postsecondary reform is working in Kentucky, and referred to a report compiled of results of the reform by Dr. Aimes McGuinness prepared for the Prichard Committee on Academic Excellence. She said he noted that “Kentucky’s Postsecondary Reform Initiative is widely recognized as one of the most far-reaching, significant, state level higher education reforms of the past quarter century in the United States.” He added that “Kentucky’s progress since the 1997 assessment has been nothing short of remarkable.” Dr. McGuinness said the clear, and long-term goals for the Commonwealth was the most important work completed thus far. Dr. Moore said CPE’s logo captures their mission in the two simple words ‘better lives’. She said this is significant because CPE is creating a system that is focusing on improving individual lives, not individual institutions. Dr. Moore said when CPE thinks externally about how to make Kentucky a better place to live and work, less is thought about competing with one another, and more about how to make Kentucky more competitive.
Dr. Moore said CPE’s mission is further defined by five key questions: 1) Are more Kentuckians ready for postsecondary education?; 2) Are more students enrolling?; 3) Are more students advancing through the system?; 4) Are we preparing Kentuckians for life and work?; and 5) Are Kentucky’s communities and economy benefiting? Dr. Moore said CPE regularly measures themselves by asking the above questions.
Dr. Moore referred the committee to the Key Indicators of Progress toward Postsecondary Reform in Kentucky—November 2002 – Progress Report. She explained that the accountability system designates progress through a traffic light system, in which a green light means Kentucky is on-track to meet goals, a yellow light means Kentucky is making progress, and a red light means Kentucky is not making progress toward reaching the goal. She said Kentucky has 14 green lights, 5 yellow lights, and 2 red lights, and said she would not review the entire report in detail at this time.
Dr. Moore said Kentucky has increased its national ranking from 32nd in 1994 to 17th in 2000 in percent of high school graduates going to college. She said Kentucky’s enrollment has increased by 32,000 students in the public sector since 1998. She said the student retention and graduation rates are up across the system. Dr. Moore credited the Bucks for Brains Program which brought internationally known research faculty to Kentucky to help fight disease, help improve the quality of life for Kentucky citizens, generate new businesses, help make existing businesses more competitive, and help to strengthen the education that Kentucky students receive. Dr. Moore said Kentucky has seen over a 50 percent increase in the research and development per capita since the beginning of postsecondary education reform. She said adult education programs have seen a 67 percent enrollment increase between 2000 and 2002. She said Kentucky moved from 46th place in the nation to 35th in the percentage of 24-35 year olds without a high school diploma. She also said in 2001, Kentucky ranked 10th in the number of General Education Diplomas (GED’s) awarded.
Dr. Moore said Kentucky’s progress is also reflected on a national report card on postsecondary education that was released last month. Kentucky was one of only two states in the nation that showed progress in all five categories in “Measuring Up 2000” produced by the National Center for Public Policy and Higher Education.
Dr. Moore said many of Kentucky’s colleges and universities are already doing the things that Dr. Jones discussed earlier in the meeting. She said Kentucky has kept postsecondary education relatively affordable by keeping tuition reasonably priced, and maintaining strong programs for financial aid.
Dr. Moore said Kentucky has already begun the process of shifting resources to higher priority academic programs. She said in 2000, the colleges and universities working with CPE, started reviewing all 1,300 academic programs that are offered and 174 were eliminated due to decreased demand for the programs, another 246 are being modified or consolidated to make them more relevant to the conditions in Kentucky, and during the same period, the institutions started 61 new programs that are targeted to the new economy, or other areas of high need in Kentucky.
Dr. Moore said over two-thirds of the 32,000 new students are in two-year colleges, where the cost to the state is lower, and the cost to the institution is lower. She said Kentucky has a benchmark funding methodology that looks at national peers and tries to estimate what Kentucky needs to be comparable to like institutions across the United States. She also said trust funds are targeted to the highest priorities coming out of House Bill 1 including additional enrollments, research endowments, technology, elementary and secondary reform, student financial aid, and adult education.
Dr. Moore said Dr. McGuiness gave Kentucky high marks for the aggressive and balanced approach taken in the funding methodology. She said CPE recently studied funding formulas in other states and are further convinced that this is the right model for Kentucky. She said the use of benchmarks is easily understood and straight-forward, and national experts tell CPE that tying trust funds to the state’s highest priorities is the key to advancing reform.
Dr. Moore said the universities have revenue enhancements such as the Bucks for Brains program, which is doubling the state’s money by receiving private matching donations to the tune of $230 million. She said CPE is working with the Kentucky Virtual University (KYVU) and the Kentucky Virtual Library (KYVL) to reduce the overlap, and Kentucky is utilizing technology as a new method for delivering instruction. She said the KYVL is a prime example of an efficient use of resources. She said there are 46 licensed statewide databases, 25 on-line catalogs, and this is a huge savings to the commonwealth. Dr. Moore said there is an average of 14,000 searches a day on the KYVU Website.
Dr. Moore said the colleges and universities are working together in collaborative programs to share costs and avoid duplication in areas such as engineering, public health, and the professional development of teachers and adult educators. She also said CPE has partnerships across the education system and with other state agencies to help promote economic development and education reform in the most efficient manner.
Dr. Moore said Kentucky should assure resources are aligned with achievement, better link together institutional funding, tuition policy, and financial aid to ensure financial access for students. She said Kentucky should continue to improve student productivity by increasing dual credit and advanced placement opportunities, by reducing the need for remediation, by encouraging smooth transfer with minimal loss of credit, and by improving academic and career advising. Dr. Moore said CPE shall continue to contain costs by sharing resources, and using technology to its greatest advantage, and by leveraging all of the resources across the system, including Kentucky’s independent institutions.
Dr. Moore said much more work needs to be done in Kentucky. She said Kentucky ranks very low with the percent of adults with a college degree. She said retention across the system from high school to college is below the national average. Dr. Moore said Kentucky is still only 42nd in the research and development funding per capita, and despite progress on the national report card, Kentucky still received all C’s in the five categories.
Senator Westwood asked if reducing the number of students who attend our universities saves money. Dr. Moore said some states cap enrollment when times are tough, but this is not appropriate for what House Bill 1 outlines for Kentucky.
Senator Westwood discussed ACT scores for high school graduates. He is assuming that the low ACT scores are an indication that students are not achieving a higher level of achievement. He asked how many remedial students fail to complete their college work, and should we not steer these students towards KCTCS where they can receive a technical approach versus the academic approach and be more successful. Dr. Moore said KCTCS is working closely with the Department for Adult Education and Literacy (DAEL) on adult education issues. She said the P-16 council is looking closely at the ACT scores, and an early math diagnostic program has been implemented in the sophomore and junior years to see if students are headed towards needing remediation upon graduation from high school. She said this program has been working well, and Kentucky is working on the American Diploma Project which looks at the alignment between the 12th and 13th years, as well as ACT scores.
Senator Westwood asked if remedial courses are cost drivers or do they actually help the four-year colleges. Dr. Moore said a study was performed on the cost of remedial education about three years ago, and because the bulk of the remedial students are at KCTCS, a state appropriation is required to pay for those students. She said most four-year institutions are self-supporting.
Senator Westwood asked why the ACT scores of average high school students are so low. Dr. Moore said she is not sure, and the P-16 council will be studying the issue to figure out where the problem is, along with Commissioner Wilhoit.
The meeting adjourned at 11:35 a.m.