Executive Funding Base

Dave Lewis
Budget Director
Governor's Office

The Executive budget uses the FY92 level of expenditures as the base for FY94 and FY95 budgets. This essentially treats these programs the same as most other agencies of state government. Inflation and pay increases are added to the FY92 actual expenditures and budget modifications are added for the increased workloads in the instruction program which were financed with budget amendments in FY92. This change from the use of peer based formulas for student faculty ratios, faculty salaries, and support expenditures was initially made to properly recognize the changes made during special legislative sessions. The Legislative Fiscal Analyst (LFA) approach uses peer based data which was used in the FY90-91 budgets and continued into FY92-93 with adjustment for inflation, pay plan, and program changes.

A comparison of FY92 expenditure based amounts used in the executive budget with the LFA peer based formula amounts is attached [first table].

Allocations Made by University System

This table illustrates the allocations made by the 1991 legislature and the changes made by the University System through their allocation of the pay plan, budget amendments, special session reductions, and program transfers. The net effect of the U-system discretionary changes was to significantly expand the support programs. The instruction program, in spite of the increased enrollments, was allocated less than provided in the legislative appropriation and an equitable allocation of pay plan funds.

Validity of peer data

The use of currently available peer data may not provide the best indicator of Montana university system needs. The allocation of formula generated appropriations by the university units has not been in consort with the formulas which generate these funds, the revenues included in peer school funding levels may not be comparable to those of the Montana peer, and the mix of students among the lower, upper, and graduate levels may not be comparable to peers. These factors make use of peer data questionable. Heavy reliance on peer data may require more extensive study and information gathering to assure true comparability.

University units do not use funds as generated by formula

The amounts generated by the formula for instruction and support have been reallocated by the units from instruction to support, raising questions about the formula's validity. As indicated in Table 1, in FY92 the six units collectively spent less on instruction than generated by the formula and pay plan while experiencing an increase in enrollment of approximately 5 percent. At the same time support expenditures were increased over 12 percent above the level generated by the formula and pay plan. Does this indicate that the current formula adequately funds instruction but inadequately funds support?

Revenues included in the peer comparisons

When comparing units of the Montana university system to peers we compare appropriated expenditures from the current unrestricted fund. However, fees which are not reported in the current unrestricted fund can lead to distortions in peer comparisons if peers are including these in their expenditures levels. In a recent survey the Legislative Auditor found only one of 26 peer schools use the "designated" fund which is used extensively by Montana units (in FY91 designated fund revenues exceeded $22 million). Though the commissioner's office made adjustments to peer comparisons for many expenditures which the comparable peer made from current unrestricted funds, the auditor was not able to determine the full extent of comparability.

The Legislative Auditor also found computer and equipment fees charged by Montana schools and deposited into "plant" funds are typically reported in the current unrestricted funds of peers. The deposit and expenditure of these funds outside the current unrestricted fund tends to understate the level of Montana expenditure relative to the peers as well as the student effort relative to students at peer schools. Though the Commissioner's office and the Legislative Auditor stated the omission of these fees was not material, it should be noted that the computer and equipment fees alone generate approximately $5 million in the biennium.

Differentials in student mix

The cost of educating students rises as students progress through school to smaller more specialized classes. The 1981 formula study found that based on the enrollment at the University of Montana the peer student-faculty ratio fell from 26:1 for lower division (freshman and sophomore) classes to 15:1 at upper division and 10:1 for graduate level classes. The lack of an extensive 2-year college system as found in several of the peers may result in the Montana units showing a mix more dominated by low cost lower division enrollments. In telephone calls to two of our peers we found the percentage of undergraduate students in upper division to be significantly higher than in the Montana units.

The 1987 peer study did not gather data on undergraduate division-level enrollments; however, it did include graduate level vs. undergraduate enrollment breakouts. Again the peers appear to have had a relatively higher percentage of their enrollments in the high-cost graduate level.

The effect of the student mix on the student-faculty ratio of the peers is not uniform, though the lower ratios roughly parallel increased percentages of graduate enrollment. The ratio for North Dakota State University is the highest at 19.08:1 and that for the University of Wyoming is the lowest at 13.6:1.

The charts following indicate the mix of student enrollments in Montana compared to the national average. These charts show a significantly higher proportion of students enrolled in 4-year institutions in Montana.

Formula Study recommendation regarding use of peer comparisons

In its report to the 1989 legislature the university funding study committee recommended that peer data not be relied upon for formula factors and that instead specific values for formula elements be left to the legislature. The report cited that among other items the committee consider taxpayer ability to pay and availability of funds in setting values for formula items.

Montana's higher education expenditure relative to income

Montana's expenditure for higher education, although not outstanding, is above average when consideration is given to the state's ability to pay. Although Montana has a relatively low income and Tax Capacity it allocates 24% (8.4% versus 6.8%) more of the budget to higher education than the national average. In 1991-92, Montana allocated 95% of the National average per higher education student with 83% of the tax capacity of the national average.

To more vividly demonstrate this, please turn to the graphs. [Editor's note: these graphs were omitted from the printed MP. They are lost.]

Each of the graphs contains the U.S. average, the Montana number, and my "Peer States" calculation. This Peer states figure is not a scientific calculation, but rather a yard stick comparison. It does, however, yield a general indication of Montana's relation to these peer states. The peer states are defined herein as any state that has a university that one of the 6 units considered to be a peer. The numbers presented are straight averages of these states. No attempt has been made to weight these averages. The Peer states are: North Dakota, South Dakota, Wyoming, Colorado, Arizona, New Mexico, Nevada, Utah, Idaho, Washington and Oregon.

Summary points

*Tax Capacity in Montana was $1,707 or 83% of the National average of $2,059 per capita. The peer Tax Capacity is 94%.

*Beyond Tax Capacity, Montana has a higher Tax Effort than the average of the country. The ratio of our actual taxes to our tax capacity (Tax Effort) is 101.5% compared to the national average of 99.9% and a peer effort of 98.6%.

*Despite this above average effort, our average tax revenue per student is $47,931 or 77% of the National average. The peer states average 81% of the national average.

With all of this against Montana, we attempt to make up some of the difference by funding higher education to the fullest of our ability. The State Profiles Effort Index attempts to measure this effort in relation to other states. Montana's effort is 13% higher than the national average, which is not quite up to the peer average of 35% higher than the national average.

Therefore, although Montana's tax base makes it difficult to fund its University system, Montana does fund the system higher than the national average, relative to its income.

Executive budget including $25 million general fund savings

The table below illustrates the executive budget for the six units based on updated tuition revenue estimates, the implementation of the tuition rates proposed to the Board of Regents with the tuition indexing proposal, and an assumed allocation of the $25 million general fund reduction to the six units of $21.78 million. This latter figure is based on the additional tuition generated by the proposed rates and a proportional allocation of the remainder of the general fund reduction among all general fund appropriations in the system. The table indicates that total expenditures for the six units will remain relatively constant between biennia. If the legislature approves the requested budget amendment for FY93 of $5.3 million, there will be a small drop between biennia. These amounts exclude any pay plan funding which would be provided by the legislature.

Comparison of Formula Base Differences