The Fall of the Flagships

Think of the flagships in the Lone Star State -- the University of Texas at Austin and Texas A&M University at College Station -- and images of

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great wealth spring to mind. The details are fuzzy, but they have something do with extensive land holdings and oil wells, producing an endowment of Ivy League proportions.

Today, the Permanent University Fund for the University of Texas and Texas A&M Systems is worth more than $7-billion, which seems like the kind of money that can make money no object.

The provost at the Austin campus works in an office so large it echoes -- the wood paneling and 20-foot ceilings give it the feel of a library reading room, which it once was. The recreational athletics complex at Texas A&M sprawls over nearly 17 acres, has a weight room the size of a small supermarket, and cost $30-million to build.

"It looks like we must be filthy rich," says Ray Bowen, College Station's president. "You need to see all of that and look through it."

A deeper look reveals that the two institutions are downright poor compared with other elite public and private institutions. The permanent fund is now split so many ways -- 17 campuses in the University of Texas and Texas A&M Systems get a cut -- that it produces for Austin and College Station less than a tenth of the income, on a per-student basis, that Rice University's endowment generates.

But many state legislators continue to think the fund has made College Station and Austin rich, and that's just one of several factors that have left the two institutions wanting for state funds. They are also being hurt by the biennial free-for-all at the Capitol, where there is no comprehensive higher-education plan to ensure that their costly form of education receives special consideration; by the perception that their students are wealthy and don't adequately reflect the racial diversity of the state; and by having no room on their cramped campuses to accommodate the state's expected surge in college enrollment over the next 15 years. Appropriations to the Texas flagships during the 1990s -- a decade when the economy boomed -- lagged behind other colleges in the state and declined on an inflation-adjusted basis, according to university officials.

The meager state appropriations have led to controversial new fees at both institutions, and to high student-faculty ratios. The two institutions barely squeezed into the first tier of the U.S. News & World Report rankings this year, tying at No. 49.

To varying degrees, flagship institutions in other states are facing the same pressures, and tuitions are surging as a result. Indeed, the Austin and College Station campuses offer a case study of two of the most-vexing questions in academe: Are the states frittering away their public-university jewels by failing to adequately invest in them? And as state appropriations make up an ever smaller proportion of flagship budgets, would the elite institutions be better off with greater control over their own affairs, even if that meant less state money?

The first question has led to a flurry of cautionary opinion pieces and speeches by public-university presidents. The University of Iowa has seen the proportion of state funds in its budget drop from 75 percent in 1914 to just under 19 percent today. Mary Sue Coleman, who is leaving the Iowa presidency for the top job at the University of Michigan, warned in a recent speech about "the dangers of privatizing public higher education and bringing about a radical change in our character." Mark G. Yudof, who is leaving the University of Minnesota to become chancellor of the nine-campus University of Texas System, recently bemoaned the decline in state support in an opinion article for The Chronicle, titled "Is the Public Research University Dead?"

But others believe that many top flagships could continue to thrive even without state funds -- by continuing to build endowments through private gifts, by bankrolling new companies derived from university research, and by gaining state approval to raise tuition to market rates.

"It sounds like heresy," says James J. Duderstadt, a former president of the University of Michigan, "but it may be that the flagships trade off state support for more autonomy to support their mission."

Having a Plan

California and Michigan are two states held up as models for enabling flagships to flourish -- but their experiences have been quite different. California is renowned for having the foresight 40 years ago to develop a master plan that put the University of California in charge of research and doctoral degrees. The plan ensures a steady stream of funds for the more-costly education at UC campuses, keeps the California State University system focused on its teaching mission, and prevents vote-seeking state legislators from developing pipe dreams about turning California State campuses in their districts into research universities.

"The master plan has been really good for California -- I know what I'm supposed to do," says Charles B. Reed, chancellor of the 23-campus California State system. "In Florida" -- where Mr. Reed once headed the public-university system -- "I spent 14 years saying no to all the wannabes. They all wanted to be the University of Florida."

Michigan is at the opposite end of the scale. Each Michigan state university has its own governing board, and none are required to report to a central planning agency -- a situation that Mr. Duderstadt describes as "total anarchy." But the disarray means that the University of Michigan at Ann Arbor has had the leeway to seek excellence on its own.

The university has aggressively raised tuition, now at $6,935 for state residents and $21,645 for out-of-state students, while funneling a large share of the proceeds back into financial aid, to maximize revenues without turning away needy students. It now takes in $541-million per year from tuition revenue -- far exceeding its annual state appropriation ($364-million). The university also got serious about fund raising before many of its peers -- its endowment, now at nearly $3.6-billion, exceeds that of any other stand-alone public university.

"Michigan decided in the 1970s that the state wouldn't support a first-tier university," Mr. Duderstadt says. "So it set out to build one by itself."

Without Rank or Freedom

Here in Texas, the flagships have neither the sanctioned rank of the University of California nor the freedom of Ann Arbor. In the fight for state appropriations, the two universities must compete with ambitious institutions in other systems, such as the University of Houston and Texas Tech University, as well as with fast-growing colleges in their own systems, such as UT at Brownsville. The University of Texas Board of Regents also hopes to convert at least two of its campuses in urban areas into flagships (Dallas and San Antonio are likely candidates). That plan may raise the profile of the entire system, but it could leave the Austin campus in an even worse position to lobby for state funds.

State general revenue now makes up just 22 percent of the operating budget at the Austin campus, and 32 percent at College Station. Obtaining more state funds won't get any easier in the 2003-4 biennium. The state is facing a $6-billion budget shortfall, and while state officials aren't talking about cutting higher-education appropriations -- something many other states have done -- College Station and Austin are unable to help the state carry out its No. 1 higher-education goal: getting more students into college.

The state is aiming to enroll an additional 500,000 college students by 2015. With 38,600 and 36,600 undergraduates, respectively, Austin and College Station are already at capacity. Austin is seeking appropriations increases of 1.1 percent above inflation, as part of its goal to add 300 faculty members over the next decade and lower the student-faculty ratio from 22:1 to 15:1.

"We're asking for more professors but not addressing the access problem," concedes Sheldon Ekland-Olson, the university's provost. "The question is, how does the Legislature most effectively work the tension between access and excellence? There's no region of the country that is economically prosperous without a first-class institution."

Some other public research universities are embracing the quasi-privatization model embodied by Ann Arbor. For example, the University of Colorado System recently offered to reduce the proportion of its budget that is financed by the state, in exchange for more administrative leeway, including the authority to enact bigger tuition increases.

In Texas, there is little opportunity or incentive to be that entrepreneurial. Tuition is tightly controlled by the state, and legislators are eager to get their hands on any excess revenues. Unlike the University of Michigan at Ann Arbor, the Texas flagships have little financial incentive to enroll high-paying out-of-state students, since the state takes back 85 percent of the revenue generated by their tuition. As a result, only 7 percent of Austin's students, and 4 percent of College Station's, are from out of state. Texas institutions also must turn over to the state 50 percent of the money they receive in federal grants for the "indirect" costs of research, including the construction and maintenance of facilities. That policy, followed by very few other states, costs the Austin campus $19-million per year.

"The chances of any privatization happening in this state over the next 20 to 30 years are slim to none," Mr. Bowen says.

"Most legislatures have a very good deal right now," adds Texas A&M's provost, Ronald G. Douglas. "They pay 20 percent and control 100 percent. Why would they want to give that up?"

The flagships have been forced this year to adopt hefty fees to generate revenue -- an "academic-enhancement" fee at College Station will cost students $400 per year, and an "infrastructure" fee at Austin starts at $300 and will rise to $860 per year by 2006-7. Tuition for in-state students at College Station will be $4,608 in 2002-3, and students at Austin will pay $5,340. Those costs are lower than at many other well-regarded public-university systems, but they have risen sharply in recent years, angering many legislators and parents in this populist state.

The fee option may be drying up -- a legislator has challenged the Austin fee on grounds that it violates state control over tuition. The Texas attorney general will decide this month whether the fee is legal.

Mr. Bowen has been pushing the legislature for the last three sessions to allow university governing boards to set tuition on their own and keep all of the revenue they generate -- to no avail. He thinks College Station's reputation is strong enough that it could net $1,000 more in revenue per student, on average.

In addition to augmenting the university's revenue, higher tuition might also be the right thing to do for the state's taxpayers. More than 20 percent of students at both institutions come from families that earn more than $100,000 a year, and a 1999 report by the National Association of Independent Colleges and Universities pegged the median family income at the Austin campus at $80,000. Critics call the relatively cheap tuition a middle- and upper-middle class handout, and argue that higher tuition, with generous financial aid, would make for a more equitable system.

"All of the evidence we have indicates that there are plenty of students who could pay more," Mr. Bowen says.

Raising Their Own Money

Even Texas allows its colleges to keep money from donors, and like other flagship universities, College Station and Austin have demonstrated an extraordinary ability to raise money. College Station's own endowment, including its two foundations, has grown from $212-million in 1990 to more than $725-million. The Austin campus blew past the $1-billion goal for its current capital campaign in just four and a half years. The university's president, Larry R. Faulkner, now hopes to increase the university's own endowment to more than $2.4-billion, which would match the university's share of the permanent fund.

If the university hits $5-billion between the endowment and its share of the permanent fund, and increases its spending rate to 5 percent, a change Mr. Faulkner hopes to adopt, the university would eventually receive $250-million per year in endowment payouts alone (some of the university's own endowment money has been pledged in estates, but is not yet in hand). That's just $30-million less than its appropriation from the state this year.

Indeed, big endowments could eventually free flagships from some of the vagaries of state politics. The University of California at Berkeley and the University of Virginia have each garnered more than $1.3-billion in recent capital campaigns, and the University of California at Los Angeles is on the verge of exceeding $2-billion in its current campaign. Tuition at the University of North Carolina at Chapel Hill is rising more than 20 percent this year following steep state budget cuts, but James C. Moeser, the university's chancellor, says he is bullish on the university's long-term prospects because of wealth generated through gifts. The university, currently in the quiet phase of its capital campaign, has already received commitments for 80 of the 200 endowed professorships it aims to create.

"The source of my optimism lies not in state support but in private support," Mr. Moeser says.

David Ward, president of the American Council on Education and former chancellor of the University of Wisconsin at Madison, notes that the fund raising accomplished by many top flagships has in short order allowed them to surpass all but the wealthiest private institutions in endowment size.

"It may be that we're creating a superleague of very-well-endowed private institutions, and then a second level of public universities that will work out some partnership with the states, using endowment and federal money to create a firmer compact," he says.

Some experts warn that dangers lurk for public universities that travel too far down the path toward privatization. By trading appropriations for the ability to set tuition at a higher level, will flagship institutions lose focus on serving students from low-income families? If universities turn to corporations for greater financial support of research, will some scientists feel pressure to shift their focus from basic research to applied research? Will the considerable salary gap between professors in the humanities and those in the sciences grow even larger? And, lastly, how much influence will major donors wield over university affairs?

Many donors now view their philanthropic activities as a nonprofit form of venture capital, Mr. Yudof notes.

"They look upon a contribution as a stock-market investment, and they want to know if you're Microsoft or Enron," he says. "They want to know who's doing what. 'If I give you $5-million to form a new center, what can I expect in five years?'"

Travis Reindl, director of state-policy analysis at the American Association of State Colleges and Universities, says the privatization trend has left states as a minor stakeholder, raising questions about who the universities are accountable to. "You have the federal money. You have private donors who have significant stake. You have tuition-paying students who have needs and wants and interests. The Board of Regents says, Who do we listen to when?"

Outbid by MIT

Privatization talk remains minimal in Texas, perhaps in part because leaders of the flagships aren't interested in giving up the state money. Austin officials say they need an additional $150-million per year -- to be raised through appropriations, new student fees, and cost-cutting -- to restore aging buildings and remain competitive with other elite public institutions.

In testimony before a legislative committee in February, Mr. Faulkner spoke frankly about some of the university's failings. He noted that it had been six years since the university had had any faculty members elected to the National Academy of Sciences, and that for the past 11 years the university had been shut out of competitions for science and technology centers sponsored by the National Science Foundation. He also mentioned that one of the university's prize young researchers, an assistant professor named Angela Belcher, was being wooed by the Massachusetts Institute of Technology.

"The point I wanted to make is that the environment out there is tough," Mr. Faulkner says. "They needed to know what playing in that arena means."

Ms. Belcher, who specializes in nanoscience, the manipulation of matter at the atomic scale, ultimately accepted MIT's offer, despite a counteroffer from Texas that included $1.5-million for start-up research costs, on top of salary and benefits (The Chronicle, June 28).

The high price of recruiting and retaining academic superstars is a difficult topic to broach with legislators, particularly at a time of tight budgets. Mr. Faulkner argues that Austin's salaries have been lagging other top colleges, but a full professor there made an average of nearly $99,000 in 2001-2 -- hardly chump change. Now more than ever, to compete for top talent, public research universities are writing big checks.

"We have not tried to explain that argument [to legislators] because we have not wanted to draw attention to it," concedes Mr. Ward of ACE.

In other areas, the Texas flagships insist they are doing their best to cut costs. Austin's new chief financial officer, Kevin P. Hegarty, a former executive at Dell Computer, has never worked in academe before, and he is looking to shake things up. He thinks he can cut the university's paper costs in half by looking for areas that the Internet has made obsolete, such as campus telephone directories. He may consolidate all 670 campus vehicles in a central location, and require employees to check them out in order to use them, or simply sell off the cars and strike a deal with a rental-car company on an as-needed basis. All told, the university is aiming to save $25-million per year through greater operating efficiency.

An Opaque Budget?

Mr. Hegarty admits it has been a challenge to simply wrap his mind around the campus's budget. Standing in his office late in the spring semester, he slaps his hand down on a pile of university financial reports for the past month. The papers are stacked seven inches high. "And that's just the summary," he says.

Such complexity makes the flagships' budgets seem inscrutable to legislators. State Sen. Steve Ogden, a Republican from Bryan, Tex., wonders how Austin can be hurting when it just spent $15-million for athletics practice fields and gave Mack Brown, the football coach, a $250,000 raise. "The general rule at universities is, they never cut anything," Mr. Ogden told the Austin American-Statesman. "They just blame us for not giving them a lot of money. They spend an enormous amount of time trying to convince us there's no other solution, but I'm not convinced."

Even the amount of money that the university receives from the Legislature is a matter of contention. Officials at the Austin campus use figures that show their appropriations lagged the inflation rate during the 1990s, but the Texas Higher Education Coordinating Board says its own data indicate an inflation-adjusted increase of some 25 percent. Don Brown, the board's commissioner, says Austin officials may not be counting payments for health insurance and other fringe benefits, as well as separately administered research programs that float back to the Austin campus.

Mr. Hegarty stands by the university's numbers, and says they include the payments cited by Mr. Brown. "I'm disappointed that we haven't had the opportunity to sit down and explain it to him," Mr. Hegarty says.

"We try very hard to make sense of it," Mr. Brown says. "It's very challenging for all of us."

He adds that he can understand the frustration of legislators, given that total spending on higher education increased 9.9 percent in the 2001-2 biennium, to $15.5-billion.

"That seems like a generous increase, and then they find that a lot of institutional representatives are saying that they're starving," he says. "It makes it hard to have a calm conversation."

The Demographic Challenge

Long term, the greatest challenge facing flagships around the country, and especially here in Texas, may be demographics. By 2026, the majority of the state's population is expected to be Hispanic, a group whose youth drop out of high school at the rate of 35 to 40 percent. The state is trying feverishly to keep those students in school, and get them on to college; it calculates that per-capita income would drop sharply if such a large share of the state's population were poorly educated.

Such concerns, far removed from Austin angst about competing with Ann Arbor, help explain why state spending on the less-selective institutions is rising at a faster rate. Austin and College Station have no room for the anticipated onslaught of students, but even if they did, legislators would likely favor four-year colleges and community colleges that can offer an education at a cheaper price.

"The democratization of higher education bodes well for participation rates," says Mr. Yudof, the incoming University of Texas chancellor, "but not for flagships."

Even more worrisome questions center on how the burgeoning Hispanic population views the flagships. Currently, only 13.6 percent of the students at the Austin campus, and 9 percent of those at Texas A&M, are Hispanic, compared with 32 percent of the state as a whole. "These two universities have to know that they are public institutions and that every single person from the east to the west to the south to the north are providing tax monies," says state Rep. Irma Rangel, a Democrat from Kingsville who chairs the House of Representatives Committee on Higher Education. "They should not be operated as private universities."

Steve Murdock, the state demographer and a professor at College Station, says that if the two universities don't get in line with the demographics, their share of state support is likely to slip further. "To the most harsh critics, the charge is that the quest for excellence is a smoke screen for de facto segregation."

Those perceptions help explain, in part, why the two flagships have embraced a law that requires them to automatically admit all students who graduate in the top 10 percent of their high-school class, even though the law has a modest negative effect on some measures of quality, such as average SAT scores. The law was passed in the wake of the 1996 Hopwood ruling, which banned the use of affirmative action in admissions.

Late last year, the Texas A&M System briefly floated a plan to go even further, admitting the top 20 percent of each graduating class from 250 high schools that rarely send students to College Station. The plan was withdrawn when critics questioned whether it was a violation of Hopwood. University officials say the students admitted through the 10-percent law have outperformed their classmates, and that they would have expected similar high levels of achievement by those in the top 20 percent. They deny that crass political realities had anything to do with the proposal.

"As the demographics of the state of Texas change, we need to look more like the state," says Joseph Estrada, College Station's associate provost for enrollment and the architect of the 20-percent plan.

Even so, some black humor is circulating among those who want to see the state's flagships remain politically relevant. The scene is 2030, amid yet another tight budget picture, and the state's political leaders are trying to determine where to squeeze. The Hispanic governor turns to the Hispanic lieutenant governor and says: "I didn't go to A&M or UT -- did you?"