Here is the complete text of the chancellor’s remarks to the House Education Budget Committee at 1:30 p.m. today in Room 514-S, State Capitol.

On behalf of the University of Kansas, I appreciate this opportunity to discuss the budget outlook for FY2004.

When I spoke to this committee a year ago, all of us were bracing for what we knew would be a difficult session. Our fears were well founded. KU has been seriously harmed. During FY2003, KU lost $18.8 million through reductions and unfunded costs, or about 8 percent of our budget.

I want you to know: we are hurting. We are not “whining,” but we are hurting. Last month, Governor Sebelius announced her proposed budget for the coming year. In general, her proposal is helpful to the universities and the rest of public higher education.

I appreciate especially her recommendation of a 1.5 percent salary increase for state employees. Our faculty, unclassified employees and classified staff have gone without any increase this year, so that’s a step in the right direction. If enacted, we would expect the state to fully fund that increase.

It is true, as she stated, that her proposal “does not reduce current higher education funding.” That is not the same, however, as being held harmless. Public higher education in Kansas has been seriously harmed during the past year, and the Governor’s new budget proposal does not repair any of that damage.

I will give you some specific examples in a moment, but it’s important that you recognize that harm has been done, and will continue to be done, even under the scenario put forward by the Governor. Why is that?

For the second year in a row, the budget makes no provision for funding health insurance cost increases or the additional costs resulting from other fringe benefit rates increases at its universities.

These unfunded costs must be paid. We can’t cancel health insurance. We have to pay it.

When we add these costs up, they have the effect of cutting the budget at KU by an additional $3.7 million in FY2004.

So, even a “stand pat” budget means a cut of at least $3.7 million. The impact of these unfunded costs is especially severe at the Medical Center, and could easily result in further staff layoffs there during FY2004.

Over a three-year span (FY2002 through FY2004) — adding in all the actual and potential budget reductions and unfunded cost increases — KU’s resources have been diminished by about $27.2 million. That’s an unsettling total.

How will these past cuts — and the prospect of additional cuts in the new year — affect the university’s capacity to help lift Kansas out of its existing budget crisis?

KU receives about $230 million in state funds, but its total expenditures exceed $710 million. We use state appropriations to leverage three times as much money, including tuition, room and board, private gifts, research grants, and other revenue.

If you factor in the hospital revenues earned by KU Med, the direct economic impact of this university enterprise easily exceeds a billion dollars. The indirect impact is even greater. But it all begins with the state’s original investment.

No other arm of state government generates this kind of immediate return on investment. We are committed to that economic development mission, but our ability to deliver is being undermined. The financial consequences of these three years may be with us for a long time to come.

Here’s a partial damage report for KU as a whole. We have laid off 44 people, eliminated 159 positions (some of them vacant), and made selective, strategic reductions in programs.

We eliminated the distance learning physical therapy program in Pittsburg, a neonatal nursing program at the Medical Center, the mathematical geology section at the Kansas Geological Survey, and public access to our Museum of Anthropology.

We followed nine principles in making these decisions:

1. Students come first.
2. Academic programs take priority.
3. Cuts will not be across the board.
4. Research remains critical.
5. Grants, private funding, and new revenue sources will be pursued.
6. Tuition increases should enhance students’ education.
7. Administration will be cut.
8. Elimination and consolidation of programs will preserve quality.
9. All those affected will be consulted when cuts occur.

What I’ve just described is one way to respond to the present crisis. Budget cuts are necessary in such a crisis. We understand that. But there are other things we can do. One of them is to cut costly, bureaucratic regulations imposed by the state on its universities to no good purpose.

What we learned from the recent re-creation of the KU Hospital as a public-private hospital authority should embolden us. KU Med is no longer a state agency, and it has enjoyed considerable growth and success as a result. We should follow that example to explore new and creative ways of doing state business.

The administrative procedures of the State of Kansas have changed little during the past 50 years. Yet there have been major improvements in technology and communications during that time that would enable the universities to function more economically, freeing up state dollars to be leveraged further by the university.

I regard this initiative as a continuation of the reform of public higher education in Kansas that began in 1999. We can change the way that universities interact with the state, trimming the cost of doing business as a state agency.

We want to operate in the same way as Washburn University and the 19 community colleges, all of which receive State General Funds but without onerous regulations that eat up staff time and take money away from the education function.

The business practices I’m proposing are how most other public universities operate nationwide (not to mention all private businesses).

If these reforms are enacted, effective in FY2006, we would remain a state agency, subject to open records and meeting laws, Legislative Post Audit, and other forms of accountability.

The biggest difference would be a marked increase in our efficiency and effectiveness, despite the staffing and funding reductions mentioned earlier.

Toward that end, the Board of Regents and KU are pursuing legislation that would make specific statutory changes or grant exemptions in five selected categories for the six universities.

The categories — with remedies for each — were identified and described in a report presented to the Regents in December by the Council of Business Officers.

In a year where you cannot give the universities much money, you could give us the ability to manage the taxpayer’s money better, and leverage it further.

The five categories for reform are:

1. Purchasing: manage all purchasing and contracting activities at the campus level;
2. Financial Management: deposit, invest and administer all funds locally, and administer all accounts payable locally;
3. Facilities Management and Architectural Services: redefine policies to exclude unnecessary fee assessments;
4. Printing: permit optional use of the State Printer; and
5. Surplus Property: permit exemption from labor-intensive regulations for the disposition of surplus property.

Let me underscore that KU is in full agreement with the principal legislative goals of the Kansas Board of Regents concerning the FY2004 budget.

We urge the Governor and the Legislature to:

Maintain current levels of state funding and avoid further budget reductions;
Provide a 6 percent operating grant increase for the state universities, community colleges and technical schools; and
Fully fund the third year of faculty salary increases promised under SB 345 but delayed in 2002.

Accomplishing these goals would be difficult, but we have an obligation to tell you what we truly need.

We also ask that the state begin to address the serious salary inequities facing our classified staff.

These hardworking employees perform valuable service for the university, yet their salaries lag well behind their peers in state government and the private sector. Fixing this problem is a matter of fairness.

We have two additional concerns, both associated with programs that are specific to the KU Medical Center.

In FY2001, a special annual appropriation of $1 million for pediatric research — using tobacco settlement money — was the impetus for the $4 million private gift that built the Hoglund Brain Imaging Center. Dedication of that facility is planned for March 26, and I hope you can be there.

This, in turn, led to a $2.2 million federal appropriation, championed by Senator Pat Roberts. Our plan has been to use that federal money – along with a continued $1 million state appropriation — to begin repayment of the Center’s $9 million in equipment costs.

The Governor’s budget proposal, however, eliminates the state’s special $1 million appropriation. Without that funding, we will not be able to utilize this unique brain imaging facility to its fullest capacity.

We encourage you to continue the $1 million, knowing that it will have direct and lasting medical and research benefits for Kansas children and others of all ages.

A second KUMC issue concerns our highly successful Medical Student Loan/Scholarship Program, an outreach effort designed to provide an increased supply of primary care physicians to underserved areas of Kansas.

Under this program, educational loan amounts can be repaid or forgiven if a physician chooses to serve in rural Kansas. Traditionally, the program has funded about 120 medical students at any given time: 30 students in each of four classes.

The Governor has proposed level funding of $2.2 million from the State General Fund for this program in FY2004. Combined with the roughly $400,000 being repaid next year, that is only enough money to fund the 90 ongoing medical students.

An additional $850,000 is needed next fall if we are to fund the full complement of 120 medical students.

More State General Fund money is needed, in part, because the program has been so successful! The repayment fund has been dropping dramatically because more doctors are choosing to serve in rural areas rather than repay their loans.

I urge you to give special attention to these two specific health care related issues at the Medical Center. In both instances, relatively small amounts of money would have a dramatic impact on the quality of research and medicine being practiced in Kansas.

I realize that I have painted a somewhat dismal picture for you today. Despite the constraints and the shortfalls I’ve described, I want to assure you that KU continues to do good things for Kansas.

As was announced just a few weeks ago, KU received a record $243 million in grants to support research of all kinds (with two thirds of it in the burgeoning life sciences disciplines). This figure has nearly doubled since 1995, and our rate of increase is among the highest in the nation.

Selected programs at KU were significantly enhanced this year as a result of a tuition increase approved in June by the Board of Regents as part of a five-year plan. Decisions concerning the use of that increase were made in consultation with our students, and the compact we’ve formed with them will guide us in future tuition enhancement planning.

About 20 percent of this year’s tuition enhancement increase funded KU Tuition Grants for 3,900 lower-income students, essentially exempting them from the tuition increase. We are also using the funds to renovate classrooms, enhance technology and add faculty in key areas.

In addition, alumni and friends pushed the “KU First: Invest in Excellence” campaign of the KU Endowment Association to the $358 million level last fall. It was also announced that KUEA provided a record $68.9 million to KU students, faculty, projects and programs last year. In most instances, as you know, these gifts are restricted by the donor and are intended to supplement other sources of university revenue.

Our students continue to make us proud. For example, a recent graduate — Lt. Robert Chamberlain — received a Rhodes Scholarship. Mark Bradshaw received a Marshall scholarship, the first such “double” in one year for KU since 1965.

And a slightly older alumnus – Vernon Smith, a 1951 master’s degree recipient — shared the Nobel Prize in Economics last fall.

And on the economic development front, KU played a significant role recently in the decision of a pharmaceutical products firm, Serologicals Corporation, to build a new manufacturing plant in Kansas.

Ground was broken just last week for this $28 million project, which will initially employ about 40 people in Lawrence. As was noted in the local newspaper:

“Serologicals officials have said they chose Lawrence over 29 other Midwestern cities in large part because they believed [KU] would provide a good supply of skilled employees, who will need to have a strong education in the life sciences.”

We need more such success stories throughout the state. On January 15, the Governor announced plans for a “Prosperity Summit” this spring, an event designed to bring “together business and community leaders from across the state to meet with [her], Lt. Gov. Moore and key cabinet secretaries to explore opportunities for growing our economy and eliminating barriers that hinder the growth of Kansas companies.”

We think that is an excellent idea, and we want to be part of it. The University of Kansas and all of the public institutions governed by the Board of Regents extend an offer to the Governor to provide facilities, staffing, publicity and anything else that would contribute to the success of this endeavor.

Educated people are an asset for any state, every bit as much as its roads, water, oil or wheat. Universities convert potential into actual.

If Kansas is to be positioned for economic recovery, the state must support its universities and give them more freedom to manage their affairs as efficiently and effectively as possible.

Let me conclude with this telling observation, made in an editorial in USA Today last April. It offers a warning that we in higher education and you in state government must heed as we consider our responsibilities as wise stewards:

“States hurt themselves by reducing their investment in higher education. According to Anthony Carnevale, vice president of the Educational Testing Service, states generally spend about $24,000 to put a student through a four-year public school. Yet the return to the state’s economy is about $2 million during that student’s working life, and the return to state treasuries is about $375,000 in tax revenues.”

To quote some of our students, that sort of equation is a “no-brainer” in terms of where our priorities should lie during the coming year.

I would be happy to respond to any questions you may have about the University of Kansas, the proposals I’ve outlined, or any related issue.