1. 2015-16 Finance Background & Budget Recommendations Tennessee Higher Education Commission November 20, 2014

2. Longitudinal Finance Trends Tennessee Higher Education Commission

3. 3 Cost Effectiveness:

4. 4 Cost Effectiveness

5. 5 Increasing Efficiency - Higher education revenues have shifted dramatically over the last 27 years away from taxpayer support and towards student tuition revenue. - Total revenues per graduate, though, have fallen substantially as institutions are spending less money to graduate a student. Inflation Adjusted

6. Outcomes-Based Formula & Operating Appropriations Tennessee Higher Education Commission

7. TN Outcomes-Based Formula Complete College Tennessee Act (2010). Drive to 55 (current effort). Both reform agendas centered around increasing the educational attainment of TN residents and better workforce preparation. 7

8. TN Outcomes-Based Formula Fundamental question for state government: How should taxpayer dollars be distributed to public higher education institutions? For decades, the answer was some combination of enrollment, politics or inertia. Basic disconnect between TN policy goal (completion) and finance policy (enrollment). 8

9. 9 Developing a New Formula Model

10. 10 Developing a New Formula Model

11. 11 TN Outcomes-Based Formula History of Performance Funding taught TN the limits of small (5%) programs. Outcomes model first used in 2011-12 “Conceptual newness” All state funding in TN is distributed through the model ($825 million).

12. 12 2015-16 Operating State Appropriations $25.7M to fund outcomes formula growth – “purchasing” productivity gains; – 3.1% increase over 2014-15; $10.5M for non-formula units $29.4M for TSAA financial aid

13. 13 Operating State Appropriations Largest state appropriations increase: – University of TN at Chattanooga – Pellissippi State Community College – Northeast State Community College

14. 14 Breakdown of Component Parts

15. Outcomes-Based Formula Analysis Tennessee Higher Education Commission

16. 16 Community College Outcomes Changes

17. 17 University Outcomes Changes

18. 18 Weighted Outcomes State Appropriations Recommendation Correlation = 0.91 Productivity Drives Funding

19. 19 Cumulative Change in Appropriations at Universities Due to Formula

20. 20 Cumulative Change in Appropriations at Community Colleges Due to Formula

21. 21 Share of Outcomes-Based Formula

22. Financial Aid & Student Debt Tennessee Higher Education Commission

23. 23 Affordability Tuition Costs Financial Aid Average Debt Levels Default Rates Blind Spots in the Data

24. 24 UPDATE: TN Financial Aid Profile Merit-based lottery scholarship program = $304M Need-based grant (TSAA) = $61.4M State grant aid = $1,484/UG FTE (2 nd in US) Average debt = $24,500 (16 th lowest in US) Cohort default rate = 13.0% (nation = 13.7%) Sources: TN data, NASSGAP, Project on Student Debt, US Dept. of Education

25. 25 Student Default Rates Cohort default rate is defined as the percentage of a school's borrowers who enter loan repayment during a fiscal year and default within the next two years. CDR = Borrowers who default Borrowers who enter repayment

26. 26 TN Sector Default Rates Public Univ: 10.8% Public CC: 20.8% Private Univ: 7.7% Proprietary: 17.6%

27. 27 Student Default Analysis 10,156 Defaulters in 2014 across all sectors (2011 Cohort); Up slightly from 9,825 in 2013 (2010 Cohort); Research suggests high percentage of defaulters are non-completers with relatively low debt levels. TN specific data.

28. 28 Student Default Rates National Budget Lifetime Default Rate: anticipated default rate over 20 year life of loan. – 2 YR Public/Non-Profit: 33.8% – 2 YR Proprietary: 49.4% – 4 YR Freshman/Sophomore: 25.4% – 4 YR Junior/Senior: 13.0% No Tennessee specific data

29. 29 Student Financial Aid Sources: THEC, TSAC, US Department of Education Out of 267,000 students in public higher education, nearly 116,000 received a Pell grant and over 87,000 benefited from the lottery program.

30. 30 *University Tuition Revenue is an estimate of undergraduate students only. Sources: THEC, TSAC, US Department of Education Student Financial Aid In 2012-13, public higher education collected $1.25 billion in gross tuition revenue, which was offset by $705 million in federal and state grants.

31. Tuition Tennessee Higher Education Commission

32. 32 Tuition & Mandatory Fees Annual rate for full time attendance Average University: $8,335 Average CC: $3,992 TCATs: $3,425

33. 33 Tuition & Fees Comparison

34. 34 Tuition & Mandatory Fees Avg. Annual Increase over 5 years: University: 7% CC: 6% TCATs: 7% State Funding Change: 1.4%

35. 35 Tuition/State Funding Interplay

36. 36 Tuition/State Funding Interplay

37. 37 2015-16 Tuition Recommendation Undergraduate maintenance fee. 0-4% (all sectors). Accompanies $25.7M operating increase. Tuition model guidance has macro inflation factor of 3% that includes salary COLA.

38. 38 Tuition Rates In-state undergraduate fee revenue is approximately 60-70% of all tuition revenue. Fee policy for out of state students and graduate students is important.

39. 39 Tuition Rates Avg university undergraduate out of state tuition: $24,300. – UM: $14,829 Avg university resident graduate tuition/fees: $10,100. Avg university out of state graduate tuition/fees: $24,100.

40. 40 Out of State Tuition Policy Out of State Tuition (OST) or Non-resident tuition OST philosophy – Subsidize taxpayers/residents – Public institution mission of serving state residents first. – Generate revenue – Recruit non-residents

41. 41 Out of State Tuition Policy OST generally 2-3 times in-state rates. Widespread use of reciprocity agreements (i.e. waiving OST). – More common at regional institutions – Institutions near state borders Student demand and ability to pay are key factors in OST

42. 42 Out of State Tuition Policy Typically there is a minimum floor for OST rates. Establishing residency, thus avoiding OST, usually requires evidence of “connections with the state.” – Payment of taxes – Various legal documents (e.g. driver’s license) – financial independence

43. Capital Projects Tennessee Higher Education Commission

44. 44 Higher Education Infrastructure 51.3 million gross square feet of space 31.5 million E&G space 1,622 buildings Average year of construction: 1974

45. 45 Capital Outlay Projects Background Projects initiated by the institution UT and TBR establish system priorities Institutional match component THEC merges those priorities into a unified list – Respect priority order within system – Renovations over new space – CCTA/D55 links

46. 46 Capital Outlay Funding History

47. 47 Capital Maintenance Funding History

48. 48 $184M for 6 projects Each project has a matching component – Match began in 2012-13 – 5-25% match depending on sector – Private gifts, grants and other resources Capital Outlay Recommendation

49. 49 Capital Outlay Life Cycle The 2015-16 Capital Outlay recommended projects were generally first identified by the respective system years ago. The first year the project emerged as a UT or TBR priority…

50. 50 Capital Maintenance Recommendation $133M for 80 projects; $79.8M at TBR for 69 projects; $53.2M at UT for 11 projects; This 60%/40% split mirrors the TBR/UT infrastructure footprints.

51. 51 Final Observations State funding request to “purchase” outcome increases; Moderate tuition growth; Enhanced affordability; Policy focus on student debt and out of state tuition.

52. 52 Outcomes Formula Review 2015-2020 Outcomes Formula Iteration Formula Review Committee Early to mid 2015 Basic structure of weights and mission distinctiveness Reexamination of outcomes and priorities

53. 53 Outcomes Formula Review Additional policy issues to address…. – Role of out of state students and associated revenues – Institutional infrastructure – Model volatility and stability – Student subpopulations

54. 2015-16 Finance Background & Budget Recommendations Tennessee Higher Education Commission November 20, 2014