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