LEGISLATIVE BUDGET BOARD
                              Austin, Texas
                                     
                    FISCAL NOTE, 77th Regular Session
  
                              April 20, 2001
  
  
          TO:  Honorable Robert Junell, Chair, House Committee on
               Appropriations
  
        FROM:  John Keel, Director, Legislative Budget Board
  
       IN RE:  HB1839  by Junell (Relating to research and excellence
               funding at certain institutions of higher education.),
               Committee Report 1st House, Substituted
  
**************************************************************************
*  Estimated Two-year Net Impact to General Revenue Related Funds for    *
*  HB1839, Committee Report 1st House, Substituted:  negative impact     *
*  of $(17,598,000) through the biennium ending August 31, 2003.         *
*                                                                        *
*  The bill would make no appropriation but could provide the legal      *
*  basis for an appropriation of funds to implement the provisions of    *
*  the bill.                                                             *
**************************************************************************
  
General Revenue-Related Funds, Five-Year Net Impact:
  
          ****************************************************
          *  Fiscal Year  Probable Net Positive/(Negative)   *
          *               Impact to General Revenue Related  *
          *                             Funds                *
          *       2002                         $(8,400,000)  *
          *       2003                          (9,198,000)  *
          *       2004                         (32,411,000)  *
          *       2005                         (37,767,000)  *
          *       2006                         (43,472,000)  *
          ****************************************************
  
All Funds, Five-Year Impact:
  
***************************************************************************
*Fiscal      Probable        Probable        Probable        Probable     *
* Year       Revenue         Revenue         Revenue         Revenue      *
*          Gain/(Loss)    Gain/(Loss) to   Gain/(Loss)    Gain/(Loss) to  *
*         from Permanent    New Higher     from General        New        *
*             Higher      Education Fund   Revenue Fund     University    *
*         Education Fund outside Treasury      0001       Research Fund   *
*              0346                                                       *
*  2002      $(9,198,000)      $8,400,000    $(8,400,000)      $8,400,000 *
*  2003      (10,072,000)       9,198,000     (9,198,000)       9,198,000 *
*  2004      (35,490,000)      32,411,000    (32,411,000)      32,411,000 *
*  2005      (41,355,000)      37,767,000    (37,767,000)      37,767,000 *
*  2006      (47,602,000)      43,472,000    (43,472,000)      43,472,000 *
***************************************************************************
  
Fiscal Analysis
  
This bill would amend Chapter 62 of the Education Code to create two new
funds; the Texas Excellence Fund (TEF) and the University Research Fund
(URF).

The TEF would promote increased research capacity and develop
institutional excellence at certain comprehensive research universities,
as defined by the bill, and general academic teaching institutions
qualified to receive funding from the Permanent Higher Education Fund
0346.

The bill would create the TEF outside the State Treasury, in the custody
of the Comptroller.  The Comptroller would be responsible for
administering and investing the fund.  The Comptroller would be required
to deposit all interest, dividends and other income earned from
investment of the TEF to the credit of the fund.

The bill would require that an institution use money appropriated from
the TEF only for the support and maintenance of educational and general
activities (including research and student services) that promoted
research capacity and develop institutional excellence.

The bill would require that 80 percent of the amount appropriated go to
comprehensive research universities and that the remaining 20 percent be
appropriated to other eligible institutions.  The allocation formulas for
specific universities or institutions would not be used in the 2002-03
biennium; for that biennium, the funds would be appropriated to eligible
institutions as provided by the General Appropriations Act.

The bill would require that, each year, from the first undedicated $50
million that comes to the state, the Comptroller deposit to the credit of
the TEF an amount equal to the income earned from the investment of the
Permanent Higher Education Fund in the preceding state fiscal year.  The
remainder would be deposited to the credit of the Permanent Higher
Education Fund.

After the Permanent Higher Education Fund reached $2 billion, the bill
would require that the Comptroller continue to deposit to the credit of
the TEF each year an amount equal to the investment income earned by the
Permanent Higher Education Fund, up to a maximum of $50 million.

The bill would also create the University Research Fund (URF) for certain
Permanent University Fund institutions to provide funding to promote
increased research capacity and to develop institutional excellence at
general academic teaching institutions that participate in the Permanent
University Fund and are components of the University of Texas System or
the Texas A&M University System, other than the University of Texas at
Austin, Texas A&M University, or Prairie View A&M University.

The URF would be a fund outside the State Treasury in the custody of the
Comptroller.  The bill would require that in each fiscal year the
Legislature appropriate or provide for the transfer to the credit of the
URF an amount equal to the amount deposited in the Texas Excellence Fund
in that fiscal year.  The bill would prohibit the Comptroller from making
the annual deposit to the TEF and the Legislature from appropriating
funding for the TEF unless an equal amount was deposited at the same time
to the URF.  The Comptroller would have to deposit all interest,
dividends, and other income earned from investment of the URF to the
credit of the URF.  An institution could use money appropriated from the
URF only for the support and maintenance of educational and general
activities (including research and student services) that promoted
research capacity and develop institutional excellence.

The bill would require that, after the 2002-2003 biennium, the
Comptroller distribute each year the total assets in the URF, with $1
million distributed to general academic teaching institutions that are
not eligible doctoral and research universities or emerging doctoral and
research universities as defined by the bill, with each of these
universities receiving an equal amount.  The remaining assets of the URF
would be distributed to eligible doctoral and research universities and
emerging doctoral and research universities, with 50 percent to be
apportioned among those institutions based on the average amount of
restricted research funds expended per year by each institution in the
three preceding state fiscal years.  Of the remaining funds, 75 percent
would be apportioned among the institutions based on the number of doctor
of philosophy degrees awarded by each institution in the preceding
fiscal year and 25 percent would be apportioned based on the number of
master's degrees awarded by each institution in the preceding fiscal
year.

The bill would require that for the 2002-03 biennium, $1 million be
apportioned in equal amounts to general academic teaching institutions
other than the eligible or emerging doctoral and research universities;
$500,000 be distributed to eligible doctoral and research universities
and be apportioned among those institutions in equal amounts; and
$500,000 be distributed to eligible emerging doctoral and research
universities and be apportioned in equal amounts.  After the
aforementioned distributions, the remainder would be distributed to
eligible doctoral and research universities and emerging doctoral and
research universities, with 50 percent apportioned among those
institutions based on the average amount of restricted research funds
expended per year by each institution in the preceding fiscal year.  Of
the remainder, 75 percent would be apportioned among the institutions
based on the number of doctor of philosophy degrees awarded by each
institution in the preceding fiscal year and 25 percent would be
apportioned based on the number of master's degrees awarded by each
institution in the preceding fiscal year.
  
  
Methodology
  
This estimate is based on projections by the Comptroller's office which
assumes an investment strategy realizing total returns of the Permanent
Higher Education Fund over the next five years, with a change in asset
allocation beginning in 2003.  An allowance was made for the annual
deposit to the TEF that would be required by the bill.  It was assumed
that the entire amount in the TEF would be appropriated each year.  No
increases due to gifts or grants into the newly-created funds is
included.

The Comptroller estimates losses to the Permanent Higher Education Fund
would be greater than the gains to the TEF because the anticipated shift
in asset allocation away from equities and toward fixed-income securities
would result in lower overall returns to state funds.

The anticipated cost to the General Revenue Fund for the University
Research Fund would be equal to the amount appropriated from the Texas
Excellence Fund.  It was assumed that the entire amount in the URF would
be appropriated each year.

The annual gain to the Texas Excellence Fund and the University Research
Fund is expected to level out at $50 million in fiscal 2008.  The rate
of increase in losses to the Permanent Higher Education Fund, relative
to current law, would begin to level out at the same time.
  
  
Local Government Impact
  
No fiscal implication to units of local government is anticipated.
  
  
Source Agencies:   304   Comptroller of Public Accounts, 781   Texas
                   Higher Education Coordinating Board
LBB Staff:         JK, SD, DB, DC