5. The Financial Outlook
University decision makers must always take a realistic view of the financial resources likely to be available in the years ahead.
Selected Cost Factors
In 2004-2005, UALR’s operating budget exceeded $109 million. (Figure 5-1 shows the sources of revenue and the percentage of the budget each contributes. Figure 5-2 shows expenditure categories and their respective shares of the budget.)
During recent years, health insurance costs have risen significantly, by $2 million over the last three years.
During the last decade (although not captured in a single slice of the expenditure pie in Figure 5-2), information technology costs have escalated as dependency on IT has increased. Between fiscal years 2000 and 2005, the maintenance budget for information technology in the central IT unit, including Internet2, rose 59 percent, while staffing costs rose 42 percent. These central figures, however, do not capture the increase in IT costs that have occurred across the campus. In the colleges, the libraries, and other organizational units, technology support staff positions have been funded, additional hardware and software have been purchased, and maintenance expenditures have increased.
Utility cost increases have been modest for the campus in recent years; but looking ahead, utility costs are a matter of concern because of the potentially broad effects on energy costs of the rapid growth in the national demand for natural gas and the worldwide demand for oil.
Annual debt service costs were 3.03 percent of expenditures in 2004-2005,
which is below the median for public colleges and universities according to
Moody’s Investors Services, Public Colleges and University Medians 2004-2005.
Expenditure categories and the amounts they represent remain reasonably stable and predictable. Compensation and benefit costs accounted for 70 percent of expenditures in 2004-2005. Keeping salaries reasonably competitive, given better state funding in other states, is a constant challenge, particularly in disciplines in which demand for faculty exceeds supply—and there are always some such disciplines.
Relatively few organizations in Arkansas recruit and hire large numbers of key employees in a national market, but universities must do so. Arkansas universities do not produce enough doctoral graduates across the academic disciplines to fill faculty positions with in-state doctoral graduates; and even if they did, the need to avoid intellectual in-breeding and to provide students a broadly-prepared faculty from a variety of outstanding universities would still dictate competing for faculty talent in the national market.
In 2004-2005, the state appropriation for operations amounted to 49 percent of the operating budget. Given that these state dollars are a major share of operating funds, even slight percentage variations up or down from year to year make a very large difference to the university.
Generally speaking, when Arkansas prospers and state revenues increase, Arkansas public colleges and universities prosper; and when the state suffers an economic downturn, particularly a sustained one, the colleges and universities must cut their budgets. It is therefore enlightened self-interest for UALR to be an active partner in the state government’s efforts to strengthen the Arkansas economy.
Figure 5-3, showing the trend line for state appropriations to UALR over the last 20 years, is one of the tell-tale charts in this report. It shows that, while there have been ups and downs, state appropriations for UALR have risen an average of 4.4 percent in current dollars each year compared with the preceding year. However, when adjusted for inflation, the purchasing power of those dollars has remained almost level throughout the last two decades. Specifically, in constant dollars the average increases have been only 1.3 percent over the previous year when adjusted for inflation as reflected in the Consumer Price Index (CPI) or only 0.45 percent when adjusted for inflation as reflected in the Higher Education Price Index (HEPI). Thus the university has made its improvements and advances with a very thin margin of increased state dollars each year.
The level of state funding for UALR and each public university depends on decisions made in biennial sessions by 100 representatives and 35 senators in the Arkansas General Assembly who begin with a recommendation from the governor. The governor in turn begins with a recommendation from the Arkansas Higher Education Coordinating Board (AHECB). The AHECB bases its recommendations on the work of the director and staff of the Arkansas Department of Higher Education who conduct hearings with the campus presidents and chancellors and prepare a set of consolidated funding recommendations for all public colleges and universities in Arkansas.
The biennial legislative decisions are influenced heavily by circumstances at the time of the legislative session—by the health of the national and state economies, the strength of state tax collections, and the urgency of the needs of competing interests such as public schools, prisons, Medicaid, and other health and human service programs. One new circumstance which could adversely affect the amount of state dollars available to UALR and other public colleges and universities is the recent Lake View decision in which the Arkansas Supreme Court found the state’s public school system unconstitutional, with the necessary changes in the system requiring additional state funds for K-12.
There is no reason to predict a surge in the Arkansas economy that would result in a major increase in state dollars available for higher education. Nor is there any reason to anticipate any tax increase that would significantly benefit higher education. However, the state’s record shows a steady if very modest increase in state financial support, as reflected in constant dollars (Figure 5-3) through the years; and the Arkansas General Assembly has been willing from time to time to fund new university initiatives that target state health needs or economic development goals. For example, funding for UALR’s CyberCollege was added to this institution’s state appropriation, and the state’s share of revenue from the national tobacco settlement was used to create the College of Public Health at the University of Arkansas for Medical Sciences and to provide ongoing funds for additional research facilities and programs at Arkansas State University and the University of Arkansas, Fayetteville.
New State Funding Formula
The new formula for funding the various state universities in Arkansas was helpful to all campuses in the regular legislative session in 2005. The formula was based on an extensive national study by the University of Delaware of the actual costs to universities of providing academic programs, by discipline and level. The Arkansas Department of Higher Education calculated a needed level of funding for each campus to equal the national average. UALR was calculated to be at the 75.9 percent level before the legislative session in 2005 and at 78.4 percent afterwards thanks to the increased appropriation for the new biennium.
Table 5-1, prepared by the Arkansas Department of Higher Education, displays these calculations for all formula-funded public four-year institutions in Arkansas. (UAMS is not formula-funded and therefore is not included in the table). Table 5-1 also shows the governor’s recommendations for the institutions at the start of the biennial session. If the governor’s proposal had been fully funded as submitted, UALR would have moved to 80.5 percent of need as reflected in Table 5-1. But as the legislative session progressed, the funding level was reduced to 78.4 percent of need, still a helpful step forward.
The Arkansas Higher Education Coordinating Board recommended and the governor and a number of legislative leaders agreed to work to move the funding level of Arkansas public universities to the target levels over a period of several years.
The new formula represents an approach to funding that is rational and fair and consistent with the differing missions of institutions. Therefore, it promises to be advantageous to UALR with its greater complexity and its substantial graduate offerings which previously were not appropriately reflected in funding recommendations.
Tuition and Fees
Tuition and fees paid by students are the second most substantial source of revenue, constituting 41 percent of revenue in 2004-2005. Thus two sources of revenue—the state appropriation and tuition and fees—together account for 90 percent of UALR’s annual operating budget.
Tuition income is determined by the rates charged, which is a known factor, and by student enrollment, which can only be estimated in advance. In reality, the university’s tuition and fee revenue is dependent upon the individual decisions of some 15,000 persons each year who choose to enroll and the decisions of an unknown number who consider enrolling but decide not to do so. (Although students can be viewed as “customers,” university personnel generally do not like to apply the term to students. The professional relationship is faculty-student and parallels physician-patient and lawyer-client, etc. The evaluating role—faculty sometimes give students failing grades—hardly fits the vendor-customer model.)
In any national perspective, tuition levels are low at all public universities in Arkansas. However, with family incomes also below national averages, there is limited opportunity to realize significant increases in revenue through higher charges to students. Such increases have occurred and are likely to continue to occur in small annual increments. Over the last 10 years, UALR has increased tuition an average of 4.95 percent per year.
In 2004-2005, the full-time undergraduate student at UALR who enrolled for 15 credit hours paid tuition and fees totaling $4,957 annually as calculated by the Arkansas Department of Higher Education. The cost of attendance, a federal calculation that includes tuition and fees plus books, food, lodging and other living costs, for this average undergraduate totaled $14,350. At the time of graduation, the average UALR undergraduate faces a student loan debt of approximately $24,000.
Additional Sources of Revenue
The remaining sources of university revenue account for much smaller slices of the pie.
Auxiliary Income. Figure 5-1 shows that auxiliary income was 8.5 percent of the budget in 2004-2005. Auxiliary income at UALR is generated by the print shop and athletics. Bookstores and food service have been auxiliary enterprises at many colleges and universities, but in recent years a number of campuses, including UALR, have contracted with private providers for such services. An auxiliary enterprise is expected to generate income to defray the costs of the auxiliary activities. For example, the intercollegiate athletics program, an auxiliary enterprise, generates income for the athletic program through ticket sales for athletic events. An auxiliary enterprise may or may not generate excess income to benefit the general operating budget of the university.
Grants and Contracts. Grants and contracts constitute a source of outside income that is not included as part of the general operating budget of UALR (or other universities). These funds come as awards for specific programs and activities that will likely be greatly reduced or eliminated when the funds received have been spent. These dollars awarded by government agencies, foundations, and various private organizations have extended and strengthened the services provided by the university, enriched the academic experiences of students and faculty, and added luster and prestige to the university. However, money from grants and contracts does not fund the basic operating costs of a university, costs which continue with or without such money.
As reported earlier in Chapter 3 (Figure 3-4), UALR faculty and staff have an impressive record in securing funding through grants and contracts—more than $20 million a year during each of the last four years
Private Support. Private giving is a small but promising source of institutional revenue. Excluding gifts at $1 million and above, annual giving has averaged $6 million over the last five years. The campus has recently received a number of major gifts including the following:
- $22.4 million from Mr. Jack Stephens for a new events
- $13.3 million from the Donald W. Reynolds
Foundation for a new building for the College of
Business and its major outreach units
- $6 million from the Trinity Foundation to endow the
mechanical engineering program in the DonagheyCollege of Information Science and Systems
- $5 million from the Donaghey Foundation to help
fund the new building for the CyberCollege
- $2.5 million endowment for the William H. Bowen
School of Law
- $2.2 million from PepsiAmericas for broad-baseduniversity support
- $1.6 million from an anonymous donor to renovate
the baseball facility, renamed Gary Hogan Field, in
Curran Conway Park
- $1 million from the Entergy Corporation to endow
the Jerry L. Maulden Chair of Information Science
- $1 million from the Alltel Corporation to endow theJoe T. Ford Chair of Finance
Private giving plays a crucial role in adding a margin of excellence to the programs of the university and to the education provided the university’s students.
Congressional Earmarks. Specific appropriations by the U. S. Congress for UALR—secured by the state’s senators and representatives—have supported outreach to small business, research and technology initiatives, and K-12 education initiatives. Over the last five years, UALR has received $2 million in Congressional earmarks. Although they have been extremely helpful, they are not consistent and predictable from year to year. Success in requests for congressional support typically requires an initiative that targets a problem or opportunity of potential national significance.
Local Tax Support—Potential New Source. There is one other potential source of revenue for the university—local tax support. A number of state universities across the nation enjoy such local support. In light of UALR’s extensive involvement and ongoing efforts to assist and advance the community, the community could choose to provide local support in order to increase the benefits the community receives from the university.
Selected Planning Implications
The most significant broad statement that can be made about all of the existing sources of income noted above is that they have all been increasing and have potential for further growth. They provide a basis for cautious optimism that the university can achieve growth in available resources that will enable it to make steady progress in achieving the goals that have emerged in this strategic plan. To this end the university will frame and pursue a vigorous funding strategy that will maximize each of these sources of revenue.
Here are planning implications of this chapter:
- Controlling expenditures is the first requirement in maximizing resources.
- The critical role universities play in economic development could become a basis
for securing increased state appropriations.
- New ways should be formulated to provide incentives for faculty and staff who are
the primary initiators of successful grant proposals.
- In light of the constraints of state funding when the university is seeking to hire
faculty in the competitive national market, the university needs to secure other
sources to pay moving expenses and start-up equipment costs for new faculty.
- Campus infrastructure in development and alumni operations should be up-sized
in order to maximize the potential for private support.
- Given legislative term limits, and given that the two major sources of university
revenue—state appropriation, tuition and fees—are dependent upon the good
will and understanding of others, UALR needs to follow a carefully constructed communication plan.