Thank you.

It is a great pleasure to have this opportunity to meet with members of the Executive Committee, although I am sure all of us could think of more pleasurable topics than the current funding crisis in Texas higher education.

Before I take up that topic, however, I want to thank Kern Wildenthal and his outstanding staff for the magnificent presentations yesterday afternoon and this morning regarding a few of the distinguished programs at UT Southwestern.

The more we learn about the achievements of UT Southwestern the more we realize the extraordinary contributions that this institution is making to Texas and the nation.

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The Texas Budget Crisis

I turn now to a somewhat less ennobling and edifying subject than the Human Genome Project and the treatment of cancer and heart disease, but a subject that we must come to grips with if we are to ensure the financial health of institutions such as UT Southwestern.

The financing of higher education, from community colleges and universities to great health science institutions, is in crisis this year - and not only in Texas. According to the National Conference of State Legislatures, at least 38 states are facing budget gaps and revenue shortfalls this year - with ominous implications for college and university operations and the delivery of services to students and communities.

By the way, you may have noticed that the language of budget crisis is the language of winter and bad weather.

Budget shortfalls are "dark clouds on the horizon." They are likely to bring hiring or enrollment "freezes," and the prospect of deep budget cuts has "chilling effects" - on faculty recruitment and the like. Rumors of mid-year budget recisions travel through higher education institutions "like an icy wind." All of us go to the Legislature hoping not to be "left out in the cold." Yet every new budget forecast and committee pronouncement only tends to "dampen our expectations."

Texas has certainly been getting its share of the budget shivers. As you know, the budget shortfall for the next two years is now estimated at almost $10 billion - a staggering figure, and one that is difficult to grasp in human terms. This may account for some confusion in the news media. A recent headline in a newspaper at one end of the state said, "Lawmakers horrified over budget," while a headline at the other end of the state proclaimed, "Lawmakers undaunted by deficit." If you can be horrified but undaunted, that's us.

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The Most Recent Budget Developments

Despite the uncertain contributions of headline writers to public understanding, all of you are familiar with at least the outline of recent developments with regard to higher education budgets.

All state agencies and universities were asked about 10 days ago by the governor, the lieutenant governor and the House speaker to make 7 percent cuts in spending from state appropriations for the rest of this fiscal year, which ends August 31.

We are working closely with all UT System institutions to develop a plan by Feb. 6 that details what can be done by the System to contribute to the state's fiscal recovery. In addition, I directed all campus presidents earlier this week to implement a flexible hiring freeze for all current and future vacant positions.

I believe it is appropriate to give component presidents the flexibility locally to determine what positions are critical for immediate and future hiring to maintain the teaching, research, health, and patient care services provided by the institution. The System will not dictate to them what positions to fill or leave vacant, but will require that all hiring decisions be carefully scrutinized.

The flexible hiring freeze is just the first measure in the overall effort to meet the directive for a 7 percent cut this year. We estimate that a 7 percent cut of the UT System's general revenue appropriations for the current year would be $104.3 million. Reductions of this magnitude are extraordinary measures for extraordinary times, and they are exacerbated by the fact that so much of our funding is obligated by the second semester of the academic year. Nevertheless, the UT System is committed to doing its part to identify savings that contribute to the solution to these economic challenges.

Our first priority is to maintain the academic and health care programs already in place and serving Texas students and patients at each of our institutions. Beyond that, we will look at every opportunity to achieve additional efficiencies in operations, cut expenditures, defer costs, and implement other options available to us.

It is natural during fiscal crises for all employees to be apprehensive about the possible implications of budget cuts. I know many are wondering about whether layoffs or pay cuts might be forthcoming. I have sought to assure all employees that we will be working very hard on developing an equitable approach that emphasizes the need to maintain services to the people of Texas. In all candor, however, it is just too early to predict the full range of actions that will be necessary before we reach the end of this crisis.

I have discussed these developments at some length because I know you are deeply concerned about the welfare of the institutions in the UT System and their ability to serve the people of Texas with high-quality educational, research, and patient care programs.

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UT System Planning and Legislative Initiatives

The immediate budget challenges for this year and the next biennium are certainly daunting. But our long-term plans, as well as near-term legislative initiatives, acknowledge that the fundamental question regarding the vitality of Texas higher education - not just for this year's legislative session, but for the foreseeable future - is four-fold: That is, how to achieve and maintain the closely inter-related goals of access, affordability, quality, and accountability at public institutions.

We have developed a comprehensive series of proposals to ensure that the sons and daughters of the people of Texas are able to achieve their dreams of higher education, rewarding careers, and personal fulfillment.

I gave this group a preview of these proposals early last fall, and in December we presented a more detailed set of plans to the Board of Regents. The Board will review more details when it meets in Austin in two weeks.

I would like to present to you now an update on this planning process and the proposals as they currently stand.

Access

With regard to the first issue of access, the UT System is committed to helping the state achieve its goals of increased higher education enrollment under the "Closing the Gaps" campaign. All of our academic institutions except UT Austin are planning for significantly higher enrollments over the next decade and beyond.

We continue our long-standing commitment to helping the state's elementary and secondary schools better prepare their students. This includes the extensive outreach programs at every UT System component; the Every Child/Every Advantage initiative to improve teacher education and professional development; and the new UT Charter School that will open in Austin next fall.

Consistent with these plans, the state's first priority for higher education must continue to be funding through the statewide formulas for hiring additional faculty and staff and for competitive salaries and benefits. Despite the state's immediate budget problems, we must not lose sight of this continuing long-term need.

Affordability

We approach the issue of affordability from several perspectives. The need for increased financial resources for universities could be partially met by giving boards of regents local control over tuition rates, but we must ensure that any tuition increases do not place a university education beyond the reach of those with financial needs.

The plan that we are calling the Texas Compact would ensure affordability by linking tuition deregulation with a guarantee of free tuition and fees for any students from a family whose income is below the Texas median (currently about $41,000).

We believe that marketing this assistance as a guarantee will persuade more students to consider enrolling at a university. A recent poll by the Harris organization found that students who have the most financial need, and therefore have the best chance of getting grants and scholarships, are the least likely to know how to find assistance. Two-thirds of African-American and Hispanic parents say that they don't have enough information about how to pay for college. The Texas Compact eliminates any doubt about whether a student would qualify or whether they would receive enough aid to make going to a university affordable.

Local control of tuition would allow for flexible rates that are in accord with varying market conditions. The more competitive and more nationally prestigious universities could charge generally higher rates than regional and predominantly undergraduate institutions. At the same time, some high-demand programs, those that are relatively expensive to operate, or those leading to highly lucrative career paths could cost more. It might make sense to the Board of Regents to set tuition for electrical engineering higher than for social work.

The increased flexibility, however, would not always just drive prices up. An institution with a problem of over-crowding in morning classes could offer discounted tuition for classes taken at unpopular times, such as late in the afternoon or at night. This would lead to better classroom utilization. And, of course, institutions that kept tuition well below the rate charged at research universities would have a powerful new marketing tool to attract good students.

Quality

As you can see from my discussion of access and affordability, these cannot be easily separated from the issue of quality. The development and maintenance of high-quality academic programs make access and affordability meaningful. Low tuition, low state support (28 percent of our academic budget), excessive regulation, and incapacity to effectively compete for national research dollars will erode quality.

Thus, the UT System must develop long-range plans to strengthen the research mission at both our academic and health science institutions.

We have tremendous opportunities for leveraging the research expertise in the System by creating new partnerships between academic and health science institutions. The biological sciences are going to be a major focus for the advancement of knowledge - and for economic development - in the 21st century. UT System institutions are well-positioned to contribute to the revolutions in biomedicine and biotechnology - particularly if we find new ways to unite the strengths of various institutions.

We envision a broad new series of collaborative research initiatives in the Dallas-Fort Worth Metroplex involving UT Dallas, UT Southwestern, and UT Arlington. In San Antonio, we want to continue and accelerate the collaborations between UT SA and the UT Health Science Center in that city. And in El Paso, we see numerous opportunities for fruitful collaboration between UT EP and the four-year medical school that Texas Tech wants to develop in that city.

A key element in these and other initiatives for the enhancement of the quality programs is the series of deregulation proposals that have been set forth to create greater efficiencies.

The research initiatives that I have described would benefit enormously from the System's proposal to allow academic institutions to retain 100 percent of the indirect cost reimbursements, or overhead payments, that accompany federal research grants. Under current regulations, the state takes half of these overhead payments, rather than allowing institutions to re-invest them in the research enterprise. No other major state has seen fit to penalize universities in this way for attracting research money from outside the state. This policy amounts to a state tax on creativity and innovation.

Accountability

This discussion brings us naturally to the fourth great issue facing higher education - that of accountability. The state's policy on research overhead payments is only one example of an onerous regulatory environment that saps the strength of the state's colleges and universities. It would make much more sense, and would be more efficient and cost-effective, to deregulate higher education, while instituting new accountability systems to assure policy makers and the public that their institutions are acting responsibly.

A comprehensive effort to free higher education institutions from excessive regulation would remove impediments to productivity and quality. The current system of over-regulation drives costs up, directly and indirectly, in many ways. Higher costs derive from the unintended consequences of regulation, unfunded mandates, excessive and redundant reporting requirements, and, perhaps most serious of all, from lack of innovation and risk taking.

Over-regulation discourages change simply by tending to slow things down to the rate at which a piece of paper can move from one desk to another. Innovative people are likely to grow impatient and to move on to more friendly environments, rather than wait while their ideas sit in somebody's in-box.

Here is just one example of how minutely the state regulates higher education: When our graduate students, who make major contributions to a university's research and teaching missions, receive stipends from federal grants, we are prohibited from using state funds to provide the students with health insurance.

Our message to state policy makers is this: set us free from such micromanagement and allow us to conduct our business flexibly, and we will return your trust with more efficient and more productive institutions that are better able to serve the people of Texas.

As part of the quid pro quo for deregulation, we are developing a new accountability system, which will contribute to cost-savings efforts as well as customer satisfaction. (I know many people resist thinking of students and parents and our other constituencies as "customers," but that is what they are.) An accountability system that relates to institutional performance will help administrators and the Board of Regents make significant improvements in productivity and quality, and it will serve as a new tool for public transparency in our operations.

It is obvious from this overview that the issues of access, affordability, quality, and accountability are intertwined. We have to separate the strands to talk about them with clarity, but ultimately we must put them together again and see them as one fabric.

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Lessons from the World of Baseball

I would like to discuss further the matter of state regulation of higher education because it has such a pervasive influence on the operation of all our institutions. My purpose is to illuminate conceptually why the present system of finance and governance is deeply flawed. In thinking about regulation and its effects, there may be some lessons for us from the world of Major League baseball, as strange as that may sound. Sometimes, as a recent author has observed, we may need to think about things in a strange way to make them more understandable; our daily reality is so familiar, we are so immersed in things as they are, that we lack perspective.

So imagine, if you will, a baseball team that is owned by a state government and is regulated at every turn by the state. This imaginary state government demands a fully competitive team, but it insists on setting ticket prices at an artificially low level (that is, well below what the market would allow), while also being reluctant to build and maintain a modern stadium at public expense. It also resists paying competitive salaries to its players, except perhaps for a few stars, but expects a Major League performance from all of them.

The state does provide this team with some direct financing of its operations, but this comes to only about 22 percent of the team's total yearly needs. It turns out that this subsidy plus the revenue from ticket prices are almost 27 percent below the average for the team's major out-of-state competition. (To clarify: General revenue appropriations provide the UT System with 22 percent of its annual operating budget. Revenue from tuition, fees, and appropriations for baccalaureate programs at Texas universities are almost 27 percent below the average in the 10 largest states.)

Every year the management of the state-owned team that I have described would go the state and plead for an increase in ticket prices so they would have more money for operations and to make improvements. The management would pledge to give out free tickets to fans who couldn't afford the new prices, but the state would remain reluctant to allow the market to operate.

While withholding sufficient resources to field a first-class team in first-class facilities, this imaginary state owner would also be very "active," as they say, in the team's day-to-day operations. Like a George Steinbrenner twin, the state would dictate each day's line-up, call the manager in the middle of an inning to make hitting and base-running decisions, second guess the umpires on close plays at the plate, and perhaps even determine the songs to be played during the 7th-inning stretch. At the end of every game, the manager and his coaching staff would be required to submit extensive narrative reports and statistical analyses justifying all the decisions during that day's play.

Where would such a team find regulatory relief? How could it concentrate on the job at hand, which is to play the game at a high professional standard? How would such a team be able to attract the best talent and to nurture new generations of players?

It is widely agreed that Major League baseball suffers from a shortage of pitchers who are truly of traditional Major League quality. With 30 Major League teams, there just isn't enough top-quality pitching talent to go around. Competition is intense, and it is clear that the problem is not that salaries are too low or that the job doesn't carry enough prestige.

We find similar competition for the best talent in the university world, whether among faculty or students. And we have far more than 30 universities competing for Major League status.

There is just not enough talent - or money - to place top-quality people in all the universities that aspire to field a "team" of the first quality.

Even without a university being burdened with over-regulation, the competition is unrelenting. Consider the added disadvantages of over-regulated universities. It would be as if baseball salary caps applied to some teams but not to others or as if only selected teams could use a designated hitter.

Documenting the distribution of talent in higher education is not quite as easy as in Major League baseball. No one has statistical measures that are as highly ritualized as does baseball, with its earned run average, batting and slugging averages, and dozens of other specialized statistics. Nevertheless, there are ways to get a glimpse of the situation in higher education.

Consider, for example, the number of members of the National Academy of Sciences. The state-by-state numbers may well reflect the combined public and private investment in higher education over a sustained time, as well as, in part, the sheer size of a state. California leads with 572 academy members. Then comes Massachusetts with 286, and New York with 195. Well down the list is Texas with 48. Eight states don't have any. Clearly there is even much less balance here than in the distribution of Major League pitchers.

It is essential to realize that in baseball as well as the world of the university success is relative to the competition, and small differences are highly magnified. Both baseball and higher education are informed by chaos theory, which holds that small changes aggregate over time into gigantic differences.

A baseball team may pay a considerable premium and be competitive every year in the pennant race because of statistically small variations in talent. A .300 hitter is highly valued over a .270 hitter, even though he gets only about 10 percent more hits a year. Still, we know the decisive difference that a few of these marginally better players can make.

So, too, the financial premium for slightly better cellular biologists or computer scientists may be considerable and may trigger an institution's ability to assemble a critical mass of such people (since, if for no other reason, the marginally advantaged like to hang out with each other). These faculty also tend to have a tremendous multiplier effect in attracting external research funding and outstanding graduate students.

It seems, then, that relatively small differences in the talent pool among institutions may be decisive in terms of whether a school breaks into the small club of universities with at least $100 million in annual research spending. If that is the case, the 200th university on the list of top institutions could really be quite good and may have improved significantly over time, yet still may have its aspirations for a higher national ranking thwarted, or its ranking may even decline as other institutions move forward faster.

This is the intensely competitive environment facing any Texas university aspiring to move into the top ranks of research institutions. Those who acknowledge that Texas needs more nationally prominent research universities - and I am of the opinion that we ought to have at least four or five more - must face the reality that even though demand for such institutions is widespread, the state has historically been reluctant to provide the resources necessary to develop such institutions, or even to adequately fund the research universities that currently exist.

As many institutions all across the country aspire to an enhanced research status, we need to consider how many teams can really compete in the Nanotechnology League? Or the Molecular Biology League? Market forces will eventually help sort this out, along with the serendipitous nature of discovery and the laws of physics and mathematics - all of which contribute in their ways to the presence of a critical mass of talent or the lack thereof.

One widely accepted way of identifying the current big leagues among research universities is the invitation-only membership of the American Association of Universities. There are only 62 members. Only eight universities were admitted in the 1980s, and only five have been admitted since 1990. There are only three in Texas (Rice, Texas A&M, and UT Austin).

Remember that, as with competition in baseball, there is no fixed standard against which these institutions are measured, since education is a relative, or positional, good. Great universities never reach some static equilibrium. They are dynamic institutions engaged in a continuous process of advancement. None of them are standing still, waiting for others to catch up.

Just as with a baseball team, it is always possible for a university to find new and useful ways to spend money. As hard as we work at creating efficiencies and avoiding waste, there is always a worthy place to invest any resources that have been saved, whether by hiring more faculty, increasing graduate student stipends, strengthening the library, or attending to any of hundreds of other needs.

We should try to understand how institutions of this nature - with aspirations as unlimited as the human spirit - can make some legislators quite nervous, and how a donor must feel that there is just no end to the solicitation letters. And we must try harder to explain, to legislator and donor alike, why our institutions are the way they are - and why they cannot be effectively managed in the kind of bizarre baseball league that I have described.

Of course, universities are not baseball teams, and the analogy with baseball, like all analogies, can be carried too far. If we consider students to be the fans in the baseball analogy, they are certainly unusual fans because in higher education we want them to go on the field and take part in the game. And I have not found anything quite comparable to research funding in the world of baseball.

Nevertheless, I hope my venture into baseball has made the current reality in Texas higher education seem just strange enough to be newly understandable.

Creating a more workable and efficient reality is not a task for one season, but it is a long-term challenge that the UT System has undertaken with energy and optimism. As always, we are grateful for the deep understanding, commitment, and assistance of the Chancellor's Council in this pursuit.

Thank you very much

Remarks by Mark G. Yudof
Dallas, Texas 
UT Southwestern Medical Center
February 1, 2003