e-Texas e-Texassmaller smarter faster governmentDecember, 2000
Carole Keeton Rylander
Texas Comptroller of Public Accounts

Recommendations of the Texas Comptroller

Chapter 6: Education

Examine Giving Public Universities Greater Flexibility and Increasing Accountability


Unlike other state agencies, public universities generate much of their financial support from sources other than tax dollars. In addition, they face competition from private providers as well as out-of-state universities. These circumstances require them to be able to respond quickly to changes in the educational marketplace, yet they remain subject to a good deal of state regulation. To meet the challenges of the next century, state universities should be given greater control over their operations. Greater operational freedom coupled with improved accountability systems would allow Texas’ universities to flourish in an age of increased competition.


Texas has a long and proud history of state support of higher education. Beginning with the constitutional directive to create “a university of the first class,” state leaders have committed considerable resources to create and fund higher education institutions throughout the state. As a result, almost 90 percent of Texas’ college students attend a public institution of higher education, and close to 90 percent of Texas high school graduates who go on to college remain in the state to receive their higher education.[1] Texas operates the nation's second-largest system of public colleges and universities.

Public higher education in Texas and in the nation is governed by a combination of state and local governmental control and market forces. The state’s governance structure represents an attempt to balance institutional autonomy with state authority. Typically, institutions have been concerned with “input” factors such as staffing ratios, funding levels, construction budgets, and support for research and graduate programs. The public, on the other hand, is often more concerned with the “outputs” of higher education—the education its institutions deliver and whether or not their graduates succeed in society. State policy, then, can be viewed as an attempt to balance institutional interests with broader public concerns.

Market forces play a unique role in higher education. Unlike other state entities, public colleges and universities operate in a highly competitive market. Their customers—students, parents, and employers—can and will go elsewhere if they are dissatisfied with the programs at a particular institution, or their cost. Texas students can choose among 35 state universities, three lower-division institutions offering freshman- and sophomore-level courses, 50 community college districts, four technical college campuses, and 38 private colleges and universities. In addition, they can also choose to attend one of the thousands of colleges and universities operating elsewhere in the nation.

A major strength of American higher education is its decentralization. In contrast with other countries that have centralized and bureaucratic systems of higher education, the federal government’s role in US higher education has been to encourage market forces. Colleges and universities must compete to attract students and research support. The creation of need-based financial assistance programs for students helps them select institutions that best meet their needs. Competitive research funding also has helped make the system more market-oriented.

State governments, however, have been less market-oriented in their approach to higher education. Most states use regulatory statutes and a centralized governance structure to maintain control over their systems of higher education. In Texas, financial assistance largely has taken the form of institutional subsidies aimed at controlling tuition costs rather than providing student grants, a pattern that inhibits student choice. Similarly, a large portion of state research funding is not distributed on a competitive basis.

In the 1990s, market forces affected higher education in Texas in some significant ways. The state reduced its support for higher education, shifting more of the cost to students. The development and growth of distance learning and Internet-based higher education provided Texas students with more choice, combined with the ability to take courses without moving to another location. Federal tax legislation also has helped to provide students with greater choices by subsidizing the cost of tuition for many students and their families.

The higher education landscape is likely to continue to change in the 21st century. Indeed, driven by powerful technological forces and demographic shifts, the pace of change can be expected to accelerate. In this context, policymakers must reevaluate the state’s governing role in higher education.

Higher Education Accountability

Performance accountability systems are designed to ensure that public universities remain accountable to the citizens they serve, by providing policymakers and the public with useful information on student performance and institutions’ use of resources. Moreover, such systems can be used to identify poorly performing institutions and allow the state or the university system to target their efforts on programs or institutions that are not performing well, while leaving successful programs free of excessive micro-management.

In 1998, South Dakota became one of the first states to require standardized testing of its students to determine what value they have received from the general education courses offered during the first two years of college. These sophomore proficiency tests consist of a nationally standardized test in writing, reading, math, and scientific reasoning. Students who don’t pass the test are given a second chance, but if they fail a second time, they cannot continue at the college or university they attend.

More recently, South Dakota’s Board of Regents has added senior exams to complement the sophomore proficiency tests. These exit tests measure graduating seniors’ acquired knowledge in their major field of study. Individual departments develop the exit assessments, which are not limited to written examinations. For example, engineering students work together in a design group during their senior year and create a functional design that is judged by faculty teams and engineering professionals. Music students hold a recital and undergo a faculty assessment. The regents have instructed the state’s universities to develop ways to benchmark departmental assessments against national standards.[2]

Massachusetts’ accountability system includes standardized tests, but also evaluates other areas of university operations. The Performance Measurement System was created by the Massachusetts Legislature in 1997 and is being phased in, with the first portion of the program becoming operational in 1999. The system, used by the state’s 15 community colleges, nine colleges and the University of Massachusetts, began with five accountability measurements in 1999. It reflects the Massachusetts Board of Higher Education’s goals for public higher education, including higher admission standards, a reduced need for remedial programs, controls on capital spending, lower administrative costs, and increased private fund-raising.

Under the Massachusetts system, colleges that fail to meet their goals are considered “under-performing.” An under-performing school’s board of trustees must implement an improvement plan based on a timetable set by the Board of Higher Education. If the college still fails to achieve its goals, its funding can be taken over by the board.[3] Massachusetts also is considering an exit exam that students must pass before graduating. Students could start taking the exam in their sophomore year and retake it until they pass. The test would measure critical thinking, college-level reading and writing, and computer literacy.[4]

The University of Texas (UT) System is considering a proposal to create an accountability system for its nine universities. The system is considering assessments of student performance in core subjects such as math, science, writing and social studies, as well as measuring performance in other areas, such as student retention, graduation rates, and faculty research. Some indicators that would be used already exist, while others would have to be developed. These indicators might include the percent of students who receive degrees; assessments of student competencies in the core curriculum and in each major or group of majors; research expenditures and faculty engagement in research; and the percent of faculty involved in public service activities. Ultimately, the system hopes to hold institutions accountable to the UT Board of Regents for the basic missions of teaching and learning, research, and public service.[5]

Tuition-Setting Authority

Texas public colleges and universities charge students both tuition and mandatory fees. There are two types of tuition: statutory tuition and “board-designated” tuition. As the name implies, statutory tuition is set by law, and for the 2000-01 academic year and beyond is set at $40 per semester credit hour for undergraduate students. Board-designated tuition, which prior to 1997 was called the “general use fee,” is set by university governing boards at an amount not to exceed the statutory rate. Prior to its redesignation as tuition in 1997, the general use fee was capped at $12 per semester credit hour for undergraduate students. Today, the maximum total tuition charge is $80 per semester credit hour. Several Texas public universities, including the University of Texas at Austin and Texas A&M University at College Station, charge the maximum rate.

In addition to tuition, students pay a variety of mandatory student fees. These fees are set by the governing boards of colleges and universities within limits established by the Legislature in the statute authorizing each fee. These fees include student union fees, student health center fees, and library fees. In general, mandatory fees fall into two categories, academic and nonacademic. Academic fees include, for example, the undergraduate writing lab fee at the University of Texas at Austin. Nonacademic fees are those that support auxiliary enterprises providing services for students, such as the student union fee or the student health center fee.

Texas is one of only a few states in which the Legislature determines tuition. According to an August 1999 survey of the states by the State Higher Education Executive Officers, 29 states grant primary authority for setting tuition to the university or the governing board of a university system. In five states, a state governing board or commission for higher education has primary authority. In three states, authority is shared between or among the governor, legislature, and institutional governing boards. The legislature sets tuition in just three states—Florida, Texas, and Washington—among the 40 that responded to the survey.[6]

One advantage of legislative control over tuition that is often cited is that it helps to hold down tuition and fee increases. However, even with legislative control, tuition and fees have risen substantially at Texas public universities. In 1992-93, the average undergraduate student taking 30 semester credit hours at a Texas public university paid $1,621 in tuition and fees. In 1998-99, that figure had risen to $2,935, an increase of more than 80 percent in just six years. These increases reflect a shift in the funding of the state’s public universities. In 1992-93, tuition and fees represented about 16 percent of total university revenue (excluding auxiliary revenue, such as revenue from student dormitories and bookstores). By 1998-99, tuition and fees represented 22 percent of university revenue.[7]

In reality, the level of state tax support provided to universities drives tuition and fee increases, whether or not a legislature sets tuition rates. States that have deregulated tuition authority still maintain a great deal of control over tuition increases. Universities know that if they increase tuition dramatically, the state legislature may reduce their state tax support. Some states have developed policies restricting increases to a certain percentage each year, and reduce state funding if universities surpass that percentage. In addition, in Texas and elsewhere, universities are accountable to the governor and legislature because regents are appointed by the governor and confirmed by the state Senate.

Market forces also play a key role in setting tuition levels. If a student feels that tuition at a state university is too high, he or she may decide to attend school elsewhere. Private colleges also play an important role. While private university tuition usually is much higher than public tuition, these institutions typically use a large portion of their tuition revenues to fund need-based financial aid. Thus, they are able to compete for bright students by offering more generous financial aid packages than those available at public institutions. As a result, students with financial aid may pay less to attend a private institution than they would at a comparable public university.

One problem with Texas’ existing tuition structure is that it does not include incentives for students to take higher course loads. Many universities in other states assess a flat rate for full-time students taking 12 or more semester credit hours per semester. Students who want to enroll for more credits than the minimum pay the same rate as students taking 12 hours, giving them an incentive to take more courses. Such policies allow universities to serve more students because they encourage students to complete their degree programs in fewer semesters.

Any change in tuition policy would require that the state also consider how tuition policy affects the affordability of a college education. To remain economically competitive, Texas must provide a college education to a larger share of its population. At the same time, the state faces the challenge of equalizing enrollment rates among racial and ethnic groups. Because many underrepresented groups are less able to afford a college education without financial assistance, any policy shift that might increase the cost of college education must include provisions to ensure that college remains affordable for all.

Texas has long followed a model for student tuition and financial aid that has been characterized as “low tuition, low student aid”; that is, the state has maintained relatively low tuition and fee rates to help provide access to college, while at the same time providing relatively modest amounts of student financial aid. This policy assumes that low tuition and fee rates will address the needs of low-income citizens adequately, and therefore that only limited amounts of student aid will be needed to ensure that a college education is affordable.

The cost of a college education, however, consists of more than tuition and fees. The Texas Higher Education Coordinating Board (THECB) has estimated that tuition and fees represent just 22 percent of the average cost of attending a Texas public university. Most of the cost consists of other expenses, primarily room and board (44 percent), personal expenses (14 percent), transportation (13 percent) and books and supplies (6 percent).[8] If the financial aid available to low-income students is limited, these other expenses will deter many from attending college.


The General Services Commission (GSC) has granted state universities the authority to directly purchase goods worth less than $25,000 and services worth less than $100,000 with their state appropriations. However, universities must follow rules established by GSC in making these purchases.

Medical and dental institutions of higher education are exempt from GSC rules, due to the unique nature of the goods and services they must acquire. Instead, they must purchase goods and services by the method that provides the “best value.” The best-value method requires institutions to consider many factors when purchasing goods and services. These include price; the reputation of the vendor and of the vendor’s goods and services; the extent to which the goods and services meet the institution’s needs; the vendor’s past relationship with the institution; any impact on the institution’s ability to comply with state laws and rules concerning historically underutilized businesses; the total long-term cost of the vendor’s goods or services; and any other relevant factor that a private business would consider in selecting a vendor.[9]

Exempting state universities from GSC procurement rules makes sense for a number of reasons. Universities receive more of their funding from tuition, grants, contracts, fees, endowments, and other locally generated income than from state taxes. State general revenue now accounts for well under half of all university revenue. More-over, universities have a solid track record of making purchases in an efficient and competitive manner. Over the past 10 years, no Texas state university has incurred a post-audit review by GSC that resulted in the loss of its delegated purchasing authority. Similarly, there have been no significant criticisms of university purchasing in audits by other outside entities, such as the State Auditor’s Office or the Comptroller’s office, or in internal audits conducted by the institutions themselves.[10]

State law ensures that universities conduct their purchases in a competitive manner. The law requires that all procurements greater than $25,000, regardless of how they are funded, be listed on the Internet for a specific period of time. This means that private firms seeking state business have access to the information that they need to compete for that business. Also, Texas law requires that the Governor’s office approve all efforts to seek major consulting contracts and that requests for proposals for consulting contracts be published in the Texas Register.

Indirect Cost Recovery

“Indirect cost recovery” refers to the recovery of costs incurred whenever a college or university participates in sponsored research or other sponsored programs. Sponsored research projects at colleges and universities are funded through grants covering both direct and indirect costs.

Direct costs are items directly associated with a project, such as salaries for faculty members and researchers and the cost of equipment purchased to conduct the research project. Indirect costs, commonly called “overhead,” represent such items as building utilities, security, maintenance, custodial services, and the many other expenses associated with project administration and implementation. These expenses would be too costly or otherwise impractical for individual laboratories or investigators to track. Instead, formulas are used to estimate how much of these costs should be assigned to specific projects. The college or university and the sponsoring entity negotiate to arrive at an acceptable formula.

The treatment of indirect cost recovery varies from state to state. Nearly all universities use at least a portion of their indirect cost recovery as “venture capital” to build research capacity and attract additional research projects to their campuses. The largest states, such as California, Florida, and Michigan, allow universities to retain all or nearly all of the funds in order to support additional research activities.

Texas law provides that funds received to pay for the institution’s indirect costs are to be retained by the institution conducting the research, and used to support additional research activities.[11] However, the law also provides that the Legislature can respond by reducing the amount of general revenue appropriated to that college or university by up to 50 percent of the indirect costs recovered.[12] The Legislature has chosen to take advantage of this option, offsetting the general revenue that colleges or universities receive by the full 50 percent.[13] Only the state’s medical and dental institutions are allowed to retain the full amount received for indirect cost recovery.[14]

The rationale behind this is that these funds are collected to cover costs already accounted for in the appropriations process. However, some evidence suggests that this may not be the case, and that allowing universities to retain all of the income may yield greater benefits to the state.

A recent RAND Corporation study found that while universities in the United States recover almost all of the direct costs of conducting sponsored research projects, only 70 percent to 90 percent of associated faculty and administrative expenses are regained through indirect cost recovery. The study estimates that universities are shortchanged by between $750 million and $1.5 billion in overhead costs associated with federal research. The study did not produce state estimates, but based on Texas’ share of federally-sponsored research in 1997, the faculty and administrative cost loss in the state would be approximately $40 million to $80 million annually.

Texas might receive a greater return on its federal indirect cost recoveries by devoting more of these funds to additional research projects. According to the Comptroller’s economic input-output model, every dollar invested in research produces $3.32 in economic output. Therefore, if the state redirected to research purposes the $33 million in indirect cost recoveries currently used to offset state support for higher education, the overall state economy would gain almost $110 million per year.[15]

In the most recent draft of its planning document for Texas higher education, THECB has recommended that universities be allowed to retain all of their income from indirect cost recovery. The report, Texas Higher Education: Closing the Gaps, sets a state goal of increasing the level of federal science and engineering research funding at Texas universities by 50 percent, to $1.3 billion, by 2015. The report notes that Texas ranks sixth nationally in federal research and development funding and that at least 10 institutions in other states individually receive more intellectual property income than is received by all Texas higher education institutions combined.[16] THECB believes that allowing universities to retain all of their indirect cost recovery income would increase their research capabilities.


A. A study of the relationship between state government and public universities and university systems should be conducted and presented to the 2003 Texas Legislature.

The Legislature should create a special committee to consider what laws and regulations should be changed to give universities and university systems greater flexibility in governing their day-to-day operations. The committee also should develop proposals to enhance accountability for performance. Finally, the committee should address tuition policies and develop ways to provide enough student financial aid to ensure that a college education remains accessible to all Texans.

B. The Texas Education Code should be amended to exempt state universities and university systems from laws and regulations governing the procurement of goods and services. The “best value” standard required of medical and dental institutions of higher education should be extended to universities.

Allowing universities to purchase goods and services without being subject to GCS rules would eliminate the need for GSC employees to maintain expertise in areas unique to the university environment. It also should result in more efficient purchasing and lead to savings. Universities would be subject to the State Auditor’s oversight to ensure that they use best-value standards in purchasing goods and services.

C. The next General Appropriations Act should provide that 100 percent of indirect cost recovery funds be retained by and appropriated to colleges and universities that conduct sponsored research projects.

By increasing the amount of indirect cost recovery funds retained at colleges and universities conducting sponsored research, the Legislature would provide higher education institutions with additional funding to enhance their research missions and attract additional research dollars to Texas, producing significant economic benefits for the state.

Fiscal Impact

A special committee to examine deregulation and accountability would require an appropriation to pay members’ expenses and per diem. The cost for this proposal is estimated at $100,000 annually in 2002 and 2003.

Deregulating the procurement function at state universities should result in savings to institutions. The amount of these savings cannot be estimated, and any savings that result would be retained by the institutions, resulting in no fiscal impact to the state.

Allowing universities to retain 100 percent of their indirect cost recovery income would result in a cost to the General Revenue Fund.

Savings/(Cost) to the
General Revenue Fund


[1] North Carolina Center for Public Policy Research, Governance and Coordination of Public Higher Education in All 50 States (Raleigh, North Carolina, 2000), p. 79, and “2000-2001 Almanac of Higher Education,” Chronicle of Higher Education, September 1, 2000.

[2] Telephone interview with Marge Hegge, South Dakota State University, Academic Evaluation and Assessment Office, Brookings, South Dakota, September 21, 2000.

[3] Commonwealth of Massachusetts, “Fiscal Year 1998 Budget, Section 294,” Boston, Massachusetts (http://www.magnet.state.ma.us/legis/senate/98budget/pt16subg.htm). (Internet document.)

[4] Patrick Healy, “Massachusetts May Require Public-College Students to Pass Exit Exams to Graduate,” Chronicle of Higher Education, September 17, 1998.

[5] Memorandum from Edwin R. Sharpe, executive vice-chancellor for Academic Affairs, the University of Texas System, to the presidents of the UT System universities, September 6, 2000.

[6] State Higher Education Executive Officers, “1999-2000 Four-year Tuition Survey Summary,” Denver, Colorado, August 1999, Section A.

[7] Testimony by Dr. Don Brown, commissioner, Texas Higher Education Coordinating Board, before the House Higher Education Committee, Austin, Texas, September 19, 2000.

[8] Texas Higher Education Coordinating Board, “Cost of Higher Education in Texas (1999-2000)” (http://www.thecb.state.tx.us/divisions/student/budgets.htm). (Internet document.)

[9] V.T.C.A. Education Code §51.9335 (b).

[10] Fax communication from Lewis Wright, assistant vice-chancellor for Governmental Relations, University of Texas System, March 28, 2000.

[11] V.T.C.A. Education Code §145.001 (b).

[12] V.T.C.A. Education Code §145.001 (c).

[13] Texas H. B. 1, 76th Leg., Reg. Sess. (1999).

[14] Texas H. B. 1, 76th Leg., Reg. Sess. (1999).

[15] Texas Comptroller of Public Accounts, The Impact of the State Higher Education System on the Texas Economy (Austin, Texas, November, 2000), p. 9.

[16] Texas Higher Education Coordinating Board, Texas Higher Education: Closing the Gaps (Austin, Texas, July 2000), p. 14. (Draft report.)

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

Privacy Policy