July 11-12, 2002

DATE:  June 25, 2002

TO:  Board of Regents of Higher Education

FROM:  Rod Sundsted, Associate Commissioner for Fiscal Affairs

SUBJECT:  FY04-05 Base Budget Reduction

As part of the preparation of the executive budget, the budget director has authority under 17-7-111(f), MCA to require agency plans to reduce the proposed base budget (general fund and state special revenue) for the general appropriations act and the proposed state play plan to 95% of the current base budget. For the Montana University System, this amounts to annual reductions of $6,920,181 (general fund) and $641,612 (state special revenue) for an annual total of $7,561,793. The 5% reduction to the lump sum (educational units and OCHE/student assistance) accounts for $6,339,434 of the total amount.

Responding to this request in a manner that includes specific details is difficult for a number of reasons. One is the magnitude of the reduction. The proposed reduction of $7,56,793 is larger that the entire state fund budget of FCES ($919,661), Bureau of Mines ($1,570,646), HCOT ($2,433,998), GFCOT ($3,039,104), UM-Western ($4,436,578), Extension Service ($4,331,544), or MSU-Northern ($6,671,086). The 2001 Legislature provided the MUS $1,914 for each additional resident FTE based upon the marginal cost of educating a student. This marginal cost is based upon a calculation of the variable cost and an assumption that fixed costs (plant, academic support, institutional support, etc.) do not increase or decrease on the margin as enrollments changes. Based upon this amount a 5% reduction would require a forced reduction of 3,312 resident FTE to generate the savings required from the lump sum alone. This is neither practical nor in the best interest of the state. Another option would be to look at tuition increases. Because state support is only used to support resident students, it is logical that a tuition increase to backfill state support should come predominantly from resident tuition increases. Backfilling the entire lump sum reduction amount would require a resident tuition increase of over 10% or over 5% if applied to all students.

Another difficulty is the uncertainty surrounding the FY04-05 budget. Will we receive funding for the 600+ resident FTE that are currently being educated without any state funding? Will the 3.5% FY03 reductions be built into the FY04-05 executive budget? Will inflationary increases in utilities, libraries, and other expenditure categories be included in the executive budget? These are just a few of the uncertainties that make specific planning difficult.

Probably most important, the campuses and agencies are very reluctant to identify specific programs for elimination in a planning exercise. Once you publicly identify specific eliminations (even if only in a planning document), you face problems associated with morale and retention of staff and faculty. Any program identified (and in some cases the entire unit) also faces problems with recruiting and retaining students when these plans become public.

For the reasons mentioned above, I would recommend we respond to this request in a manner that focuses on process rather than specific programs for reduction. My recommendation for the Montana University System plan to reduce the base budget for the FY04-05 biennium would be as follows:

1.       Institute a systematic review of externally imposed costs, obligations, and mandates. This review would look at costs and benefits and make recommendation to reduce expenditures where appropriate. Some examples would be:

         SABHRS interface

         SummitNet & IT

         Flexibility to competitively contract for audit, insurance, investment, and other services

         Telephone and communication services

2.       Initiate a system wide study of the services provided on the campuses and agencies of the MUS. This study would include institutional support, academic support, student services, and physical plant with a goal of improving efficiency by identifying and implementing consolidations, better business practices, and sharing of resources while maintaining support of students and the campus community.

3.       Conduct a system wide review of academic administration and academic programs of the Montana University System. This review would focus on administrative and program consolidations and eliminations that improve efficiency or have minimal impact on student access.

4.       Evaluated the current commitment to student assistance including WICHE, WWAMI, work study, and Baker Grants, and fee waivers and recommend changes based upon students served, market needs, and effectiveness of the assistance delivered.

5.       Evaluate tuition increases to offset state support reductions considering impacts on enrollment levels of resident and non-resident students, program costs, and student access.

I think it is unrealistic to expect that the system could implement a reduction of approximately $7.5 million without significantly impacting access, cost to students, quality of academic, and services provided. Rather, I think any plan should try to minimize the impacts and balance these factors.