I. HIGHER EDUCATION FUNDING PRIOR TO THE FORMULA
II. THE NEW MEXICO FUNDING FORMULA
A. THE RATIONALE FOR FORMULA FUNDING
B. FORMULA DEVELOPMENT
C. FORMULA MODIFICATIONS SINCE 1977-78
D. THE CURRENT FUNDING FORMULAS
1. FUNDING FOR INSTRUCTION & GENERAL
2. INSTRUCTION
3. ACADEMIC SUPPORT
4. STUDENT SERVICES
5. INSTITUTIONAL SUPPORT
6. PLANT OPERATIONS & MAINTENANCE
7. REVENUE CREDITS AND TRANSFERS
a. TUITION
b. LAND & PERMANENT FUND INCOME
c. INTEREST INCOME & OTHER CREDITS
d. BUILDING RENEWAL & REPLACEMENT
e. EQUIPMENTREPLACEMENT
f. STATE (3 %) SCHOLARSHIPS
III. DEVELOPMENT OF THE FORMULA TUITION CREDIT
A. THE FORMULA CREDIT PRIOR TO 1986
B. THE CURRENT PROCESS
IV. POLICY IMPLICATIONS OF THE FORMULA
A. INCENTIVES IN THE FORMULA
B. STRENGTHS OF THE CURRENT FORMULA
C. WEAKNESSES OF THE CURRENT FORMULA
D. THE SYSTEM DEVELOPMENT FUND
E. OTHER STATES' INITIATIVES FOR INCENTIVE FUNDING
V. FUNDING DATA
A. 1 0-YEAR HISTORY OF HIGHER EDUCATION FUNDING
B. 5-YEAR HISTORY OF FORMULA WORKLOAD
I. HIGHER EDUCATION FUNDING PRIOR TO THE FORMULAPrior to the creation of the Board of Educational Finance (BEF) in 1951, legislative funding deliberations have been described as chaotic, emotional and without knowledge of the true financial needs of the institutions. The BEF was created with a charge of dealing with the problems of finance of the institutions, and carried out that charge for some 25 years without a funding formula.
During this period, the institutions submitted "Legislative Budget Requests" to the BEF, much like a state agency submits a request today. The BEF staff analyzed these requests and made recommendations based upon calculations such as the student-faculty r atio and library expenditures per FTE student. Tuition and fee revenue, federal grants and some miscellaneous revenue sources were deducted from the recommended expenditure level in order to determine the final appropriation.
II. THE NEW MEXICO FUNDING FORMULA
A. THE RATIONALE FOR FORMULA FUNDING
During the early 1970s, both the Legislative Finance Committee (LFC) and the Legislative University Study Committee steadily urged the BEF to develop a formula for funding the universities. The calculations described above were different for each institution, and were viewed as not being objective. The committees were seeking a more objective, non-political means of determining the differential needs of each of the universities. They were concerned that they had no clear sense of the results of their decisions in terms of their impact on higher education students and programs. At the same time, enrollment-driven formulas were gaining acceptance nationwide, and by 1972-73 twenty-five states were found to be using some type of funding formula.
B. FORMULA DEVELOPMENT
In 1975, the Legislature enacted a law requiring the development of a funding formula. After the first version was rejected by the 1976 Legislature, the instructional formula proposed by the BEF in the Fall of 1976 (for 1977-78 funding) was the first appearance of what is basically New Mexico's current instructional, or "I", formula. The formula was based on a 1975-76 cost study of each of the institutions and produced costs per student credit hour (SCH) differentiated by school size, discipline type and level of instruction. For one year, funding was based on projected SCH, then was changed to the most recent actual Spring and Fall terms. The General, or "G", portion of the budget, which includes Academic Support, Student Services, Institutional Support and Plant Operation and Maintenance ( All discussed in detail under "Current Funding Formulas"), was based on historical expenditure levels and was set at 80 percent of "I" for the two larger institutions and 84 percent of "I" for the other four universities.
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In the almost twenty years since the original formula was accepted by the Legislature, many modifications have been adopted. In an attempt to make the formula dynamic and relevant, the Commission frequently proposes changes in its basic structure to the Legislative Finance Committee. The Legislature then determines whether or not to fund these proposals, and indeed has adopted several significant changes that have had a major impact on higher education funding in New Mexico.
} Beginning in 1982-83, the current "G" formulas for the four major activity areas were put in place, each with its own appropriate measure of workload. While some of the mechanics have been modified, these are the components that are now used by the Commission to determine "G" funding.
} The enrollment base used for calculating the "I" formula was also changed in 1982-83. Instead of using the actual SCH's generated in the most recent year, a three-year "rolling average" was adopted. This involves the use of actual enrollment data from the previous three years and averaging them to produce a composite academic-year credit total. This average provides a more stable funding base in light of year-to -year enrollment fluctuations.
} In 1980-81 a formula for "I" was implemented for the state's two-year institutions. By 1984-85, "G" formulas were fully developed. Like the four-year formulas, both "I" and "G" two-year formulas were based on cost-model analyses. Although the workload measures are different, they also function essentially the same as their four-year counterparts.
} In order to improve the maintenance of physical plants in all institutions, a Building Renewal and Replacement formula was developed in 1983-84 at the urging of the LFC. Calculating the percent of eligible space in facilities and taking into account their age, this formula would provide sufficient funds to completely renew and replace a facility over its usable life if it were fully funded.
}A separate component for the funding of libraries was introduced in 1990-91. Utilizing national standards for the numbers of volumes based on enrollments and the level and number of degree programs, this formula component provides funds for library acquisitions.
}Again at the urging of the LFC, the Commission developed an inventory-based equipment replacement formula which was partially implemented in 1995-96. Based on unrestricted equipment inventories in I & G, this formula uses an Internal Revenue Service depreciation schedule which categorizes all equipment into five- and twelve-year cycles. If fully funded this formula would provide funds for the timely replacement of obsolete equipment.
As a component of the formula process, the Commission annually conducts enrollment verification site visits at the institutions. On a four-year cycle, CHE staff verifies that formula credit hours reported to the Commission are accurate, as well as checking other enrollment-based information in the Commission's data base.
D. THE CURRENT FUNDING FORMULAS
( See "THE INSTRUCTION AND GENERAL FUNDING FORMULA")
III. DEVELOPMENT OF THE FORMULA TUITION CREDIT
A. THE FORMULA CREDIT PRIOR TO 1986-87
Until the mid-1980s, the Legislature established tuition rates for the state's post-secondary institutions in the General Appropriations Act. An estimate of total collections from tuition and fees was built into the funding process as a revenue credit. Following a gubernatorial veto of that rate schedule and a subsequent Attorney General's opinion regarding the governing boards' responsibilities for setting tuition, this procedure was changed.
B. THE CURRENT PROCESS
For 1986-87, the CHE recommended that tuition rates be held at 1984-85 levels, and that future tuition credits only reflect changes in enrollment. Increases in revenue resulting from tuition increases were to remain in each institution's budget to allow enhancements to the I & G budgets beyond the level of state funding. However, faced with limited resources, the Legislature soon began a policy of not appropriating compensation increases for higher education, putting the institutions in the position of raising tuition in order to provide increases in compensation.
As tuition was increased over a period of years, the amount of tuition "outside" the formula grew to $ 13.5 million, with most of this in the four-year institutions. This caused two problems for the institutions. First of all, to the extent that these funds were used for faculty and staff compensation, being "outside" the formula, no increases were provided when the Legislature did appropriate funds for compensation increases. Secondly, because tuition monies could only be used in I & G, all the special line-item programs received no compensation funding. However, the employees of these programs are institutional employees just like the employees in I & G. This created a situation called "backward funding" where the institutions requested funds the following year to make up for no compensation funding the previous year in the special programs.
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IV. POLICY IMPLICATIONS OF THE FORMULA
A. INCENTIVES IN THE FORMULA
Like all credit-hour driven formulas, the overriding incentive in New Mexico's formula is growth. As shown in the following table, the focus is enrollment growth, but incentives are created in other areas as well.
Formula Category Primary Variables Incentive
Instruction Student Credit Hours Enrollment Growth
Academic Support FTE Students Enrollment Growth
Number of Majors Development of New Majors
Student Services Student Headcounts Enrollment Growth
Institutional Support Growth in Expenditures for Growth in Expenditures
Instruction, Academic Support,
Student Services, and Operation
& Maintenance of Plant
Plant Operation Allowable Building Square Growth in Allowable
& Maintenance Footage Square Footage
FTE Students Enrollment Growth
Utilities Allowable Building Square Energy Conservation
Footage Funded at a Constant Growth in Allowable
Base Cost per Square Foot Square Footage
Equipment Renewals & Equipment Inventory Increased Investment in
Replacements Equipment and
Technology
Building Renewals Allowable Building Square Growth in Allowable
& Replacements Footage Square Footage
Revenue Credits Student Credit Hours for Enrollment Growth for
Resident Students Resident Students
Local Revenue based on Assessment of Local
Statutorily Required Minimum Taxes Beyond the
Mills Minimum Millage
The funding formula assists the CHE in the process of balancing competing resource demands across the state, addressing the Commission's statutory charge of determining adequate funding levels and an equitable distribution of those resources. It does this by estimating comparable resource needs for comparable programs and by addressing any unique cost factors at institutions which must be taken into account in order to provide adequate program support. The formula provides some assurance to the Legislature and the Executive that differing institutional resource requirements and competing resource desires have been addressed and resolved and that the product represents a statewide balance of higher education priorities and resource needs. Through this proc ess, it also provides predictability for the institutions, with only gradual revisions in annual funding levels.
C. WEAKNESSES OF THE CURRENT FORMULA
The formula's primary incentive - growth - is also its single greatest weakness. Linking funding to growth can lead to "formula chasing", or simply enrolling more students at any cost. It can also hurt institutions in times of enrollment decline, by remov ing resources at a greater rate than can reasonably be accommodated. Of greater concern, however, is the lack of any tie to performance. In times of enrollment growth, more funds are provided to institutions with no discussion of how those funds could be used to forward any identified state-level priorities. Also, as currently structured, the formula provides a disincentive for institutions to deliver instruction to students at remote sites away from the main campuses.
D. THE SYSTEM DEVELOPMENT FUND
In 1994, at the recommendation of the LFC, the Legislature provided $350,000 for the System Development Fund. This fund provided competitive initiatives to encourage institutions to develop proposals to address four key policy areas, which included improv ing student transfer, improving student retention, expanding the use of distance education and promoting outcomes assessment programs. Nine proposals were funded out of 41 received by the Commission. This appropriation moved New Mexico in the direction of providing funds linked to performance, but for various reasons no further appropriations have been made for the fund.
E. OTHER STATES' INITIATIVES FOR INCENTIVE FUNDING
Several other states, including Tennessee, Virginia, Ohio, Colorado and Arkansas have established programs to link a portion of the recurring, operational funding of institutions to those institutions' ability to address state-level goals and priorities. Incentive funding requires clear definition and measurement of the objective to be rewarded, and it requires
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V. FUNDING DATA
The following two tables provide information on trends in higher education. Table A, showing appropriations to higher education for the past ten years, indicates that higher education funding as a percent of the total General Fund appropriations has remained fairly constant over the period, ranging from a high of about 17.4 percent in 1990-91 to this year's low of 16.2 percent, and averaging 16.8 percent.
Table B displays five years of formula workload changes by institution and summed by four-year and two-year institutions. The steady decline in four-year workload is notable, and has been discussed often in recent years. However, it is also interesting to note that two-year workload, while still showing some growth, is about one-third of what it was five years ago.
S:Finance\exhec.doc
FOUR-YEAR INSTITUTIONS
NM INST. OF MINING & TECH.
NEW MEX. STATE UNIVERSITY
UNIVERSITY OF NEW MEXICO
EASTERN NM UNIVERSITY
NM HIGHLANDS UNIVERSITY
WESTERN NM UNIVERSITY
TOTAL: 4-YEAR
TWO-YEAR INSTITUTIONS
ENMU - ROSWELL
NMSU - ALAMOGORDO
NMSU - CARLSBAD
NMSU - DONA ANA
NMSU - GRANTS
UNM - GALLUP
UNM - LOS ALAMOS
UNM - VALENCIA
ALBUQURQUE T-VI
CLOVIS COMM. COLLEGE
LUNA VO. TECH. INST.
MESA TECH. COLLEGE
NM JUNIOR COLLEGE
NO. NM COMM. COLLEGE
SAN JUAN COLLEGE
SANTA FÉ COMM. COLLEGE
TOTAL: 2.YEAR
TOTAL- ALL Institutions
NEW MEXICO COMMISSION ON HIGHER EDUCATION
SUMMARY OF FORMULA-GENERATED WORKLOAD
1993-94 TO 1997-98
1993-94 199495 1995-96 1996-97 1997-98 TOTAL
S272,829 $1,147,989 $1,037,856 $598,467
S610,525 S3.667,666
3,036,062 3,112,581 3,287,991 1,476,168
(625,538) 10,287,264
4,210,488 2,403,887 1,895,337 (501,799)
(227,035) 7,780,878
309,418 428,691 318,450 (40,097) (453,502) 662,960
939,173 1,021,065 724,844 256,160 329,538 3,270,780
295,836 667,233 689,095 327,494 (201;727) 1,m,931
S9,063,806 S8,781,446 S7,953,573 S2.116,393
(S#t7.739~ S27,347.4791
1993-94 1994-95 1996-96 1996-97 1997-98 TOTAL
S385,603 $340,483 $343,870 $748,746
($341,479) S1,477.223
274,215 376,358 349,732 (11,764) (226,63n 761,904
219,195 100,345 170,523 (48,529) (75,458) 366,076
828,698 414,509 189,607 327,327 169,947 1,930,088
123,024 67,469 (14,835) 109,623 31,842 317,123
452,465 500,722 381,929 865,233 283,330 2,483,679
(15,025) (17,525) 10,318 (5,084) (73,400) (100,716)
264,063 229,258 163,947 6,273 56,842 720,383
3,011,845 98,725 1,571,503 (365,131) 1,028,614
5,346,656
366,947 692,169 433,180 282,104 25,275 1,799,675
(468,975) (413,039) (369,288) (218,801)
(314,222) {1,784,325)
65,675 (78,762) 81,395 (20,354) (321) 47,633
N/A N/A 111,599 400,266 (15,121) 4Z,744
146,040 456,959 145,132 266,294 (67,225) 947,200
N/A N/A 794,421 213,832 990,681 1,998,934
925,880 623,761 1,162,511 652,218 755,895 4,120.265
S6,579,650 S3,391,432 S5.525.544 S3.202.253
S2.2Z8,5631 S20.927,4421
S15,643,456 $12,172,878 S13,479,117 S5,318,646
S1,660,8241 S48,274,9211