Options for Funding Arizona Higher Education

M E M O R A N D U M TO: Getting AHEAD Members & Stakeholders FROM: Karen Nicodemus, Project Director RE: Higher Education Finance Committee Report DATE: September 1, 2010 The Getting AHEAD project is a multi-year collaborative effort, partially funded by the Lumina Foundation, to increase post-secondary degree production by Arizona s public community colleges and universities. As you will recall, in order to achieve the outcome of more students completing degrees in a more efficient manner, Getting AHEAD has five Committees working collaboratively on core elements of higher education improvement: New Institutional Structures, exploring new partnerships between community colleges and universities. Governance and Coordination, a Joint Council of Presidents representing all community colleges and universities. The formation of this Council was proposed as part of the Lumina grant, and it now oversees the state s transfer and articulation partnerships and Getting AHEAD s legislative strategies. Student-Centered Advising and Career Planning, to promote and enhance online tools that help students move from high school through college to degree completion. Higher Education Finance Model, exploring ways to incent colleges and universities to increase degree completion rates by linking elements of state funding to approved performance measures. Strategic Engagement and Communications, raising awareness and involvement among internal and external stakeholders in this project. As one part of this comprehensive, multi-faceted effort, Getting AHEAD s Higher Education Finance Committee has an overall goal of recommending - for decision-makers discussion - possible modifications to Arizona s public higher education finance model that will support improvements in degree completion in our state. To accomplish this, the Committee has used grant funding to retain MGT of America, a national consulting firm with expertise in higher education finance, to pursue a comprehensive review of how public higher education is funded in Arizona and around the country, with special focus on other state models that allocate funding based on performance in achieving completion and degree production outcomes.

In the Phase I report by MGT, an initial scan of the higher education funding environment provides an overview of how community colleges and universities in Arizona are currently funded. It also details the history, current methods, and best practices for higher education finance across America, including states efforts to adopt performance funding models and approaches taken to implement these incentive models. This information will be reviewed and discussed by the Committee, and will be distributed to internal and external stakeholders to inform them about this important issue and to engage them in deliberation about potential performance funding options in Arizona. Over the next 5-6 months, the Higher Education Finance Committee will work with MGT and the leadership of Arizona s community colleges, universities and Board of Regents to review the funding options outlined in the Phase I report, and begin narrowing down the preferred options for inclusion in a Phase II report, to be presented in February 2011. The report will indicate which of the Phase I options are deemed most important for Arizona, and why they are recommended for inclusion in a new funding formula. The objective of Phase II will be to focus policymaker and stakeholder discussions around a short-list of potential higher education finance reform options that would fund greater productivity and completion in Arizona. The final report, targeted to be issued in June 2011, will summarize the work done in Phases I and II and will make final recommendations on a new funding model for higher education in Arizona. Considering reforms to the state s higher education finance system is a significant task that must be built on a foundation of information and molded with the strong input of community colleges, universities, the Board of Regents, the Governor and the State Legislature, as well as all essential stakeholders. These reports will be a critical component in the policy development process and will help to guide the committee s discussions and related stakeholder processes throughout the coming months. There will be extensive engagement with stakeholders between the Phase I report and when the final report is issued in June 2011. Any recommendations flowing from the Committee will be done with the concurrence of the leadership of Arizona s community colleges, the universities and the Board of Regents, and respectful of the state s fiscal situation. The recommendations will also reflect the significant differences in how community colleges and universities are funded in Arizona and the Getting AHEAD agenda. It is also important to consider throughout this entire process the numerous external factors at play that will impact the timing of any potential changes in public funding models. We recognize that policymakers are dealing with significant budget issues and a number of other high priority issues, which may have bearing on when any changes to a higher education funding formula may be considered or come to fruition. Nevertheless, we have made the decision that a need to move from the status quo requires us to examine potential incentive-based funding formulas that could help Arizona increase degree completion and production and this report is the first phase of that work. We continue to believe that the work being done under Getting AHEAD can help us respond to the state s desire to maintain the quality of education offered our students while also increasing degree attainment, and making higher education more affordable and accessible to Arizonans. This is not a sentiment Arizona holds alone. There is a growing demand from the White House to local elected officials to business, civic and education leaders around the country - to dramatically increase graduation rates more efficiently and, in turn, to improve Arizona s and our country s standing in the global marketplace. We continue to welcome your comments and thoughts as we undertake this endeavor, and appreciate your participation.

Options for Funding Arizona Higher Education Phase I Report Higher Education Finance Committee Getting AHEAD Access to Higher Education and Degrees Supported by the Making Opportunity Affordable Initiative of the Lumina Foundation for Education Table of Contents EXECUTIVE SUMMARY CHAPTER 1 Introduction 1.0 Introduction... 1-1 1.1 Arizona constitutional Provisions, Funding Statues and Funding Formulas... 1-2 1.1.1 Community Colleges... 1-2 1.1.2 Universities... 1-4 1.2 Current Funding... 1-5 1.2.1 Community Colleges... 1-5 1.2.2 University Funding... 1-13 1.3 Summary... 1-18 CHAPTER 2 Funding Formula Use In Higher Education 2.0 Introduction and Overview... 2-1 2.1 Development of Funding Formulas... 2-5 2.2 Economies of Scale and Scope... 2-9 2.3 Guiding Principles in Formula/Guideline Usage... 2-14 2.4 Other States' or Systems' Funding Formulas... 2-16 2.4.1 Funding Formulas for Two-Year Colleges... 2-20 2.4.2 Formulas by NACUBO Classification... 2-20 2.4.2.1. Instruction... 2-21 2.4.2.2. Research... 2-22 2.4.2.3. Public Service... 2-22 2.4.2.4. Academic Support... 2-22 2.4.2.5. Student Services... 2-23 2.4.2.6. Institutional Support... 2-24 2.4.2.7. Operation and Maintenance of Physical Plant... 2-24 2.4.2.8. Scholarships and Fellowships... 2-26 2.4.2.9. Revenue Deduction Components... 2-26 2.5 Emerging Trends in Formula Design and Usage... 2-27 2.6 The New Wave of Funding Formulas in 2010... 2-28

Options for Funding Arizona Higher Education Phase I Report Higher Education Finance Committee Getting AHEAD Access to Higher Education and Degrees Supported by the Making Opportunity Affordable Initiative of the Lumina Foundation for Education Table of Contents 2.6.1 Indiana... 2-32 2.6.2 Louisiana... 2-32 2.6.3 Ohio... 2-33 2.6.4 Tennessee... 2-34 2.6.5 Texas... 2-34 2.6.6 Washington... 2-35 CHAPTER 3 Performance Funding in Higher Education 3.0 Introduction... 3-1 3.1 Best Practices and Guiding Principles in Developing and Implementing Systems of Institutional Performance Measurement... 3-1 3.2 Frameworks Used in Developing Performance Indicator and Performance-Based Funding Systems... 3-3 3.3 Program Design and Implementation Issues... 3-5 3.3.1 Indicators and Indicator Weights... 3-6 3.3.2 Allocation Methods... 3-6 3.3.3 Funding Levels... 3-7 3.4 Performance or Accountability in 2010... 3-7 3.5 Performance Indicators in Select Higher Education Systems... 3-9 CHAPTER 4 Options for Funding Higher Education in Arizona 4.0 Introduction... 4-1 4.1 Results of Interviews... 4-3 4.2 Guiding Criteria or Principles... 4-4 4.3 Evaluation of the Current Arizona Funding Models... 4-5 4.3.1 Community College Funding... 4-6 4.3.1.1 Capital Outlay Aid... 4-6 4.3.1.2 Operating Aid... 4-7 4.3.1.3 Equalization Aid... 4-8 4.3.1.4 Total Operating Support... 4-10 4.3.1.5 Evaluation of Community College Funding Against the Funding Model Criteria... 4-11 4.3.2 University Funding... 4-12

Options for Funding Arizona Higher Education Phase I Report Higher Education Finance Committee Getting AHEAD Access to Higher Education and Degrees Supported by the Making Opportunity Affordable Initiative of the Lumina Foundation for Education Table of Contents 4.4 Options for A New Funding Model... 4-14 4.4.1 Community College Funding Options... 4-15 4.4.1.1 Retain the Current Formulas... 4-15 4.4.1.2 Revise the Current Base Plus/Formula Model... 4-17 4.4.1.3 Develop a Set of Funding Formulas Based on NACUBO Classifications... 4-19 4.4.1.4 Develop a Benchmark Model... 4-22 4.4.1.5 Incorporate Performance Funding Components... 4-24 4.4.1.6 Evaluation of the Community College Options Against the Criteria... 4-25 4.4.2 University Funding Options... 4-25 4.4.2.1 Retain the Current Formulas... 4-26 4.4.2.2 Revise the Current Funding Model... 4-28 4.4.2.3 Develop a Set of Funding Formulas Based on NACUBO Classifications... 4-29 4.4.2.4 Develop a Benchmark Model... 4-32 4.4.2.5 Incorporate Performance Funding Model... 4-34 4.4.2.6 Evaluation of the University Options Against the Model Criteria... 4-35 APPENDIX A Funding Statues APPENDIX B Individuals Interviewed

Executive Summary EXECUTIVE SUMMARY In April 2010, Getting AHEAD leadership (Making Opportunity Affordable [MOA] Arizona) engaged MGT of America, Inc. to develop a new higher education funding model for the State of Arizona. The project was divided into three phases, and this report for Phase 1 provides several preliminary funding model options for stakeholder discussion. MGT interviewed members of community college Governing Boards and the Arizona Board of Regents (ABOR), college and university presidents and staff, State legislative leadership, gubernatorial and legislative staff, members of the business community, and other key higher education stakeholders. In addition to gathering input from stakeholders, MGT reviewed other states models related to funding formulas and incentive or performance funding leading to increased numbers of college and university completers. MGT reviewed ABOR s articulated 2020 Vision goals, community college strategic plans and mission statements, relevant statutes, and Constitutional provisions related to the colleges and universities. MGT consultants regularly met with members of the Getting AHEAD Higher Education Finance Committee. The preliminary options identified here articulate the inherent differences between the community colleges and the universities and identify key criteria for an effective higher education funding model. Community colleges are designated as political subdivisions of the state, similar to counties, cities, towns, and school districts. Community colleges are governed by an elected board and have certain independent taxing powers, as established by law and the State Constitution. ABOR is the constitutionally created board responsible for the effective governance of Arizona s public universities. Community colleges in Arizona are funded primarily through a combination of locally determined property taxes, state appropriations, and locally determined tuition and fees. The community colleges primary property tax levies are established by their elected governing boards within constitutional and statutory constraints. State law provides for annual financial assistance to community colleges, subject to the annual appropriations process. Universities in Arizona are funded through a combination of state general fund appropriations and tuition and fees established by the Board of Regents. State law does not provide a specific formula for annual financial assistance to universities. Both the community colleges and the universities receive other revenues that are targeted for specific purposes. Examples include research funding, gifts, grants, fees, and charges for materials, supplies, activities, or services. Current Funding State funding for the community colleges varies significantly from district to district, in part due to the size of the districts which range from 1,050 FTSE for Gila (a provisional community college district) to 84,995 for Maricopa Community Colleges. The number of students attending Arizona s community colleges has increased over 52 percent since FY 2001. State appropriations for the community colleges totaled $132.4 million in FY 2010 and FY 2011, $2 million less than total state appropriations in FY 2001; funding per student has decreased from $1,376 in FY 2001 to $892 per student in FY 2011. In FY 2011, community colleges also received $615.4 million from local property tax revenues. Arizona community colleges are subject to specific constitutional constraints on their property tax levies. From the combination of state appropriations and local property tax revenues, community colleges received $749.8 million, or $5,037 per student. The third major source of funding for the community colleges is tuition and fee revenues. These three main sources of revenue are what each college has available to provide services to students. In FY 2011, community colleges received $297.2 million in student tuition and fees, and a total of $1.045 billion from the three main sources of revenue, or an average of $7,038 per student. Arizona s three universities - Arizona State University, Northern Arizona University and the University of Arizonareceive funding from the state general fund and from tuition and fee revenues. In FY 2011 and FY 2010, the three universities received $873.1 million in state appropriations, or $6,907 per student in FY 2011, compared to $758.2 million in FY 2002, or $7,849 per student. From tuition and fees in FY 2011, the universities are projected to receive $1.258 billion, or $9,953 per student. From the two main sources of revenue for the universities, in FY 2011, the universities are projected to receive $2.131 billion, or $16,860 per student. Page i

Executive Summary Other States Funding and Performance Models States have used funding formulas for over 60 years to distribute available resources equitably and rationally to colleges and universities. Formulas can be based on enrollments, benchmarks or peer institutions, a base plus adjustments, or performance. In 2006, 38 states were using funding formulas to distribute funds to colleges and universities. Some use a formula like that for the Arizona community colleges, which is a base plus enrollmentdriven model. Others use a separate formula for each functional category (instruction, academic support, student services, institutional support, plant operations, etc.) and several states use benchmarks or peers to develop their funding allocations. The national focus on performance, as well as the need to increase the number of college completers, has led to a shift of focus to allocation methods that are based on measures of success. This new wave of funding formulas includes performance components and bases funding on measures that reflect the needs of the state and its citizens. Students are counted at course completions, not at course enrollment, and a small proportion of the overall budget is allocated based on performance or incentives to achieve state goals. Some states include funding for increased numbers of degrees, or completions of specific courses. Funding Model Options The Higher Education Finance Committee of Getting AHEAD identified nine key criteria for an effective higher education funding model: equity, predictability, responsiveness, simplicity, quality, goal- and incentive- based, balanced, and based on valid data. Neither the current funding model for the universities nor the current funding model for the community colleges meets all these criteria. The respective governance structures of the community colleges and universities have led to differences in funding. Given this, the funding models for the community colleges and the universities are considered separately. However, the same five general funding model options for the community colleges and universities are considered: retaining the current formulas; revising the current formulas or model to conform to the funding model criteria listed above; developing a set of funding formulas for each functional category; benchmarking funding against institutions in other states; and incorporating performance funding provisions. Each of these five options have strengths and include a number of the key criteria the Committee has identified as necessary to create an effective higher education funding model. Any of the other options could incorporate weighting the count of students by differences in costs, counting credits at course completion, or recognizing the differential missions of the institutions. Appropriate performance measures could be included, such as the number of completers or completion of remedial classes at the community colleges; or time to degree, research funding, and degrees in nursing, science, technology, engineering, or mathematics at the universities. During the next six months, the Higher Education Finance Committee will work with the leadership of the community colleges, universities, and ABOR to review these options and begin narrowing down the preferred options for inclusion in a Phase II report. Extensive engagement with stakeholders, including the Legislature and the Governor, is planned. Page ii

Chapter 1 Introduction CHAPTER 1 INTRODUCTION 1.0 Background In April 2010, the Arizona Board of Regents (ABOR), acting for Making Opportunity Affordable (MOA) Arizona, engaged MGT of America, Inc. to develop a new performance-based higher education funding model for the state of Arizona. MGT was directed to interview the members of the Arizona Board of Regents and representative members of the trustees of the community college districts, the President of the ABOR and his key senior staff, president of the universities and campus senior staff, community college leadership including district chief executive officers and senior staff, the Governor and her staff, State legislative leadership including committee chairs and ranking minority members, and the leadership of the MOA team and its Higher Education Finance Committee. Interviews gathered input from stakeholders as well as reviewed other states models related to incentive or performance funding leading to increased numbers of college and university completers. MGT reviewed the materials developed by ABOR s former chief financial officer, including the tuition policy framework approved by ABOR in the spring of 2010. This policy differentiated the three universities and new bachelor s degree options, in the context of the Board s articulated Vision 2020 goals. The review also included community college strategic plans and mission statements, relevant statutes, and Constitutional provisions related to the colleges and universities. The project was divided into three phases. In Phase 1, by September 1, 2010, MGT was to develop several preliminary funding formula options that were based on work already completed by ABOR, the universities, and the community colleges; as well as the goals for Arizona s MOA project and the ABOR Vision 2020 goals. The preliminary options were to clearly articulate the inherent differences among the community colleges and the universities and identify key criteria for an effective higher education funding model, as well as the models used by other states. In Phase 2, by February 15, 2011 MGT is to produce a preliminary report of the preferred funding formula options that will serve as the framework for a new funding model for higher education in Arizona. The Phase 2 report will indicate which of the options developed during Phase 1 were deemed the most important for incorporation into a new Arizona funding model, the criteria that is considered to be most important for Arizona, and why they are recommended for inclusion in a new funding formula. In Phase 2 MGT will identify the elements of the preferred funding formula(s) to be incorporated into legislation for consideration in the 2011 regular session as legislation or as part of the FY 2012 budget process and would provide a transition toward the fundamental principles of the new funding formula(s). These elements may include suggestions for performance funding based upon progress toward increased completion and Vision 2020 and Getting AHEAD goals. Recommendations for community colleges may reflect statutory and constitutional provisions that impact funding and spending. In Phase 3, MGT will prepare and deliver its final report no later than June 30, 2011. The final report will include a summary of the information gathered in Phase 1, including other states funding formulas; a list of the individuals and organizations that were interviewed and from whom information was gathered; a listing of funding formula criteria developed during Phase 1 and deemed critical in the development of a new funding model for the State of Arizona. In addition, the final report will include a summary of the Phase 2 interim report and the criteria that were established that led to the recommendations of Phase 2, Page 1-1

Chapter 1 Introduction as well as a description and assessment of the elements and legislative actions that took place as a result of Phase 2. The final report also will include MGT s final recommendations for a new performance-based funding model for higher education in Arizona, a thorough explanation for the formula criteria that were developed through the course of the study, and their application for Arizona. The final report also will include recommendations for implementation of the new funding model, including any suggestions for phased implementation of key components and implications for future funding. This report is for Phase 1. The remainder of this chapter will provide information on the current Arizona funding for higher education. Chapter 2 will review other state s funding models, and will include the criteria that the MOA Funding Committee determined were the underlying principles for formula development in Arizona. Chapter 3 includes a summary of performance funding, guiding principles in performance funding, as well as lists of other states performance measures. Chapter 4 presents several preliminary options for funding models for use with Arizona colleges and universities. 1.1 Arizona Constitutional Provisions, Funding Statutes and Funding Formulas The Arizona Constitution requires the Legislature to provide for an education system that includes postsecondary institutions. The Arizona Constitution also provides that instruction shall be as nearly free as possible. Title 15 of the Arizona Revised Statutes contains the authorizing and governing laws for Arizona universities and community colleges. Chapter 12 of Title 15 (Community Colleges) provides for the establishment, governance, and operations of community colleges. Chapter 13 of Title 15 (Universities and Related Institutions) provides for the establishment, governance, and operation of universities and colleges. Chapter 14 (Provisions Relating to Both Community Colleges and Universities) also provides for operation of community colleges and universities. Community colleges are designated as political subdivisions of the state, similar to counties, cities, towns, and school districts, which includes governance by an elected board and certain independent taxing powers, as established by law. The Arizona Board of Regents is the Constitutionally created board responsible for the effective governance of the Arizona public universities it controls, as further set forth in Arizona Revised Statutes (ARS) 15-1626 et seq. Articles 4 and 5 of Chapter 12 of Title 15 contain the principal provisions controlling the financing of community colleges. Article 4 and 5 of Chapter 13 of Title 15 contain the principal provisions controlling the financing of universities. Under ARS, community college funding is separate from funding for the universities. Community colleges are funded under ARS 15-1463 and 1464, 15-1466, and 15-1468, dealing with capital state aid, operating state aid, and equalization state aid, respectively. Universities are funded under ARS 15-1661 and 15-1678 dealing with the annual appropriation and the University Research Infrastructure Facilities. While the statutes explicitly provide for funding of the community colleges, the funding mechanism for university operating expenditures is not included in the statutes. 1.1.1 Community Colleges Community colleges in Arizona are funded primarily through a combination of locally determined property taxes, state appropriations, and locally determined tuition and fees. Additionally, community colleges receive grant and aid funding and collect various fees and charges for dedicated purposes, such as student services. The community colleges property tax levies are established by their elected governing boards within constitutional and statutory constraints. State law provides for annual financial Page 1-2

Chapter 1 Introduction assistance to community colleges, subject to the annual appropriations process. Notwithstanding the existing statutory formulae for annual financial assistance, the amounts appropriated in recent years have differed substantially from the amounts computed under the statutory methodology. ARS 15-1463 provides up to $1,000,000 or 50 percent of the cost of a campus in a newly-formed district, while ARS 15-1464 provides a per capita amount for capital outlay in community college districts. Aid for those with less than 5,000 full-time student equivalents (FTSE) is approximately 30 percent more per student than aid for districts with more than 5,000 FTSE. During FY 2010 and FY 2011, capital outlay aid under ARS 15-1464 was suspended. ARS 15-1466 provides operating state aid to community college districts equal to the appropriated amount for the prior fiscal year, adjusted by an amount that reflects the increase or decrease in the actual, audited FTSE in the second and third most recent fiscal years prior to the year for which aid is being calculated. In other words, changes in enrollments impact the appropriation amount two and three years AFTER the enrollment has occurred. In addition to these amounts, the statute provides that additional appropriations may be made based on budget requests. However, for students who are dually enrolled in a high school and a community college, only one-half of the FTSE is counted in the total for state aid. No weight is given for classes that are more expensive to provide. Prior to FY 2010, districts with declining enrollments were held-harmless and state aid was not adjusted downward. However, that provision was eliminated starting in FY 2010. Proposition 301 enacted in 2000 provides a portion of the 0.6 percent sales tax increase to fund community colleges as well. ARS 15-1468 provides equalization assistance to community college districts for whom the primary assessed valuation is less than the average primary assessed valuation for counties with less than 500,000 citizens (13 of Arizona s 15 counties). At this time, only Pima and Maricopa Counties have a population in excess of 500,000. For those counties for which the assessed valuation is less than the average, each dollar of assessed valuation less than the average is multiplied by 1.37 or the lesser of the district s prior year s primary tax rate. However, this provision does not apply to provisional community college districts. Currently, four districts (Cochise, Graham, Navajo, and Yuma/LaPaz) qualify for equalization assistance. For FY 2010, tax rates for the community colleges are shown in Exhibit 1-1. Under the equalization provisions, Cochise, Graham, and Yuma/LaPaz have equalization calculated at the $1.37 rate, while Navajo s rate is $1.14. EXHIBIT 1-1 FY 2010 Community College Tax Rates District Primary Rate Secondary Rate Combined Rate Cochise $1.61 $0.00 $1.61 Coconino $0.34 $0.09 $0.43 Gila $0.53 $0.00 $0.53 Graham $1.80 $0.00 $1.80 Maricopa $0.72 $0.16 $0.88 Mohave $0.68 $0.00 $0.68 Navajo $1.14 $0.00 $1.14 Pima $0.94 $0.14 $1.08 Pinal $1.38 $0.08 $1.46 Yavapai $1.13 $0.14 $1.27 Yuma/LaPaz $1.51 $0.32 $1.83 Source: JLBC, Arizona 2011 Budget, p. 85. Page 1-3

Chapter 1 Introduction In addition to the provisions in statute, the community colleges are covered by Article IX, Sections 19 and 21, of the Arizona Constitution, which imposes limitations on county, city, town, and community college district property tax levies as well as expenditures of revenues. Expenditure limits for the community colleges limit the ability of a district to spend tax funds. The limitation does not include funds from tuition and fees, federal funds, bond proceeds, debt service, and state capital funding. Expenditure limits are adjusted annually to reflect changes in FTSE and in inflation. Limits are calculated using FY 1980 as the base and are calculated by taking the base expenditure limit and multiplying by the enrollment increase and inflation. Even if tax rates raised additional resources, if the amount was over the expenditure limit, the college could not spend those additional tax revenues. Maricopa, Mohave, Pima, and Yavapai have reached the expenditure limitation. 1.1.2 Universities Universities in Arizona are funded through a combination of state general fund appropriations, tuition and fees established by the Board of Regents. Additionally, universities receive grant and aid funding for research and other purposes and collect various fees and charges for dedicated purposes, such as student services.. State law does not provide a specific formula for annual financial assistance to universities. ARS 15-1678 provides that funds be appropriated to the universities for research infrastructure facilities. A total of $34.6 million was appropriated from FY 2008 through FY 2031 to finance certain research infrastructure projects entered into before 2006. All projects under this statute have been completed. ARS 15-1661 provides the first calculation (of FTE) in the universities enrollment funding formula. The total formula itself is not in statute. 15-1661 provides that student enrollment (FTE) is calculated by dividing the actual credit hours for lower division (freshmen and sophomore) classes by 15 credit hours, for upper division (junior and senior) classes by 12 credit hours, and graduate and professional classes by 10. No weight is given for classes that are more expensive to provide. In addition, Laws 2009, 3 rd Special Session, Chapter 9 requires the universities to separately report out-ofstate student enrollment. There were unsuccessful attempts to exclude these credit hours from student enrollment growth calculations. In the universities enrollment growth formula, the second step is to calculate a rolling average of the next, current, and prior year s enrollment, with the current year weighted at 50 percent. The third calculation, also not in statute, adds or subtracts one faculty member and 0.75 support position, and associated costs, to every 22 FTE student change. This is called the 22 to 1 enrollment formula. Average salaries for these positions are included in the calculation. For FY 2011, this amount was $70,100. However, enrollment growth has not been funded in recent years. As mentioned earlier, the Arizona Constitution provides that the instruction furnished shall be as nearly free as possible. The Arizona Board of Regents has interpreted this provision as keeping tuition and fees in the bottom third of the Nation. However, recent fiscal constraints have resulted in tuition above the nearly free levels. In addition, the universities may receive funds under the Technology Research Initiative Fund (TRIF) which proves funds for certain lease-purchase payments through 2021. Proposition 301 in the November 2000 General Election provides a portion of the 0.6 percent sales tax increase to fund TRIF. ASU - East Campus received funds under TRIF. Page 1-4

Chapter 1 Introduction 1.2 Current Funding Exhibits 1-2 and 1-6 display funding for the community colleges and the universities respectively, from 2001 to 2010, in total and per full-time equivalent student. Over this time period, funding for the colleges and universities reached a peak in FY 2008, and has declined since then. 1.2.1 Community Colleges State funding for the community colleges varies significantly from district to district, in part due to the size of the districts. Exhibit 1-2 also displays the actual FTSE for each of the community colleges. It is important to note that FTSE used in the funding model lags by two years current FTSE; that is, the FTSE used in the formula for FY 2011 is the actual FTSE count for FY 2009. FTSE used for the FY 2011 appropriations increased by 4.5 percent over FY 2010, and funding for this growth (had there been funds in the state budget) would not occur until two years after the actual growth. Actual FTSE enrollments in 2010 and 2011 have increased at even greater percentages, and the colleges are not receiving additional funds to meet the needs of the increased enrollment. FY 2001 FTSE varied from 0 for Gila, to 56,433 for Maricopa; the average FTSE in FY 2001 was 9,759 (excluding Gila) and the median was 3,191. By FY 2011, FTSE varied from 1,050 for Gila, to 84,995 for Maricopa; the average FTSE in FY 2011 was 13,498 and the median was 4,450. These are substantial increases in FTSE, with some colleges increasing enrollment by as much as 26 percent in one year. Exhibit 1-3 displays the FTSE in FY 2001 and FY 2011, the total enrollment change, and the percentage enrollment change. All colleges except Navajo (Northland Pioneer) had FTSE increases of at least 20 percent, with Cochise growing by 126.2 percent. Average growth in students was 52.2 percent. Page 1-5

Chapter 1 Introduction EXHIBIT 1-2 State Appropriations For Community College Operations, 2001 TO 2011 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY2011* Cochise Funding 9,163,700 8,833,600 8,228,800 8,430,600 10,296,200 12,235,900 13,258,700 14,131,700 14,136,500 15,330,500 15,330,500 FTSE * 3,528 3,597 4,344 6,035 6,577 6,629 6,844 7,369 7,671 8,020 7,980 Funding per FTSE 2,597 2,456 1,894 1,397 1,565 1,846 1,937 1,918 1,843 1,912 1,921 Coconino Funding 3,444,100 3,419,100 3,224,800 3,224,800 3,380,700 3,530,700 3,743,800 3,758,400 3,245,400 2,679,400 2,679,400 FTSE * 1,652 1,565 1,694 1,824 2,006 2,018 2,052 1,989 2,127 2,364 2,350 Funding per FTSE 2,085 2,185 1,904 1,768 1,685 1,750 1,824 1,890 1,526 1,133 1,140 Gila Funding 0 0 0 0 325,000 335,700 360,300 753,900 713,000 658,400 658,400 FTSE * 0 0 0 291 312 635 753 815 1,028 1,050 1,050 Funding per FTSE 0 0 0 0 1,042 529 478 925 694 627 627 Graham Funding 13,527,400 13,799,100 12,482,000 13,142,400 15,349,900 16,323,200 17,400,200 19,027,000 19,948,900 21,709,300 21,709,300 FTSE * 3,191 3,357 2,426 2,551 2,504 2,429 2,401 2,273 2,686 4,327 4,450 Funding per FTSE 4,239 4,111 5,145 5,152 6,130 6,720 7,247 8,371 7,427 5,017 4,878 Maricopa Funding 56,245,200 55,830,300 54,923,500 54,923,500 61,662,700 65,841,200 68,950,200 68,732,300 55,416,100 45,327,400 45,327,400 FTSE * 56,433 59,779 64,826 68,612 71,387 70,025 69,561 68,054 70,099 78,511 84,995 Funding per FTSE 997 934 847 800 864 940 991 1,010 791 577 533 Mohave Funding 4,531,200 4,415,600 4,070,700 4,070,700 4,202,000 4,201,000 4,794,400 4,788,100 4,063,300 3,682,900 3,682,900 FTSE * 2,279 2,257 2,343 2,338 2,845 2,815 2,866 3,143 3,518 3,800 4,200 Funding per FTSE 1,988 1,956 1,737 1,741 1,477 1,492 1,673 1,523 1,155 969 877 Navajo Funding 6,009,500 5,902,400 5,966,600 6,118,100 7,133,400 7,724,900 8,354,400 10,223,200 10,136,800 10,214,000 10,214,000 FTSE * 2,414 2,574 2,792 2,747 2,709 2,408 2,304 2,501 2,682 2,590 2,650 Funding per FTSE 2,489 2,293 2,137 2,227 2,633 3,208 3,626 4,088 3,780 3,944 3,854 Page 1-6

Chapter 1 Introduction EXHIBIT 1-2 (continued) State Appropriations For Community Colleges Operations, 2001 TO 2011 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY2011* Pima Funding 22,747,700 22,176,100 20,780,500 20,780,500 22,891,300 22,861,500 22,856,400 22,792,400 18,874,100 15,942,000 15,942,000 FTSE * 18,028 19,027 20,611 20,425 20,393 19,993 19,807 20,222 20,889 22,431 26,202 Funding per 1,262 1,166 1,008 1,017 1,123 1,143 1,154 1,127 904 711 608 FTSE Pinal Funding 6,827,700 6,713,300 6,317,900 6,317,900 6,370,200 6,684,000 9,804,500 6,849,600 5,854,300 4,935,100 4,935,100 FTSE * 3,409 3,424 3,386 3,658 3,761 3,798 3,823 3,813 4,407 4,550 5,350 Funding per 2,003 1,961 1,866 1,727 1,694 1,760 2,565 1,796 1,328 1,085 922 FTSE Yavapai Funding 5,667,600 5,501,100 5,156,600 5,156,600 5,408,300 5,425,600 5,417,200 5,524,300 4,903,400 4,196,000 4,196,000 FTSE * 2,936 3,110 3,256 3,271 3,231 3,352 3,618 3,678 3,921 4,001 4,100 Funding per 1,930 1,769 1,584 1,576 1,674 1,619 1,497 1,502 1,251 1,049 1,023 FTSE Yuma/LaPaz Funding 6,093,300 6,175,100 6,192,000 6,143,600 6,920,300 7,162,000 7,846,500 8,019,900 7,444,000 7,751,200 7,751,200 FTSE * 3,718 3,883 4,126 4,121 4,339 4,404 4,279 4,577 4,769 5,335 5,150 Funding per 1,639 1,590 1,501 1,491 1,595 1,626 1,834 1,752 1,561 1,453 1,505 FTSE Total Funding 134,257,400 132,765,700 127,343,400 128,308,700 143,940,000 152,325,700 162,786,600 164,600,800 144,735,800 132,426,200 132,426,200 FTSE * 97,588 102,573 109,804 115,873 120,064 118,506 118,308 118,434 123,797 136,979 148,477 Funding per FTSE 1,376 1,294 1,160 1,107 1,199 1,285 1,376 1,390 1,169 967 892 Source: JLBC FY 2011 Budget Book for appropriations and FTSE through FY 2009. Data reported by Jami VanEss at Coconino Community College for FTSE for 2010 and 2011. * Note that FTSE used in the exhibit is actual FTSE except FY 2011 is estimated. Page 1-7

Chapter 1 Introduction EXHIBIT 1-3 Community College Full-Time Equivalent Student Enrollments (FTSE) 2001 And 2011 College FY 2001 FY2011 Change % Change Cochise 3,528 7,980 4,452 126.19% Coconino 1,652 2,350 698 42.25% Gila 0 1,050 1,050 n/a Graham 3,191 4,450 1,259 39.45% Maricopa 56,433 84,995 28,562 50.61% Mohave 2,279 4,200 1,921 84.29% Navajo 2,414 2,650 236 9.78% Pima 18,028 26,202 8,174 45.34% Pinal 3,409 5,350 1,941 56.94% Yavapai 2,936 4,100 1,164 39.65% Yuma/La Paz 3,718 5,150 1,432 38.52% Total 97,588 148,477 50,889 52.15% Arizona community college districts receive funds from a combination of state aid, property taxes (local revenues), tuition and fees, and other sources such as grants and contracts or investment income. In FY 2010, JLBC estimated that operating revenues of the community colleges from all sources would be $1,678,004,700, a 17 percent increase over FY 2009 revenues. Community colleges received about 10 percent of their revenues from state aid. Property taxes are the largest single revenue source for community colleges, about 43 percent of all revenues in FY 2010, according to JLBC. There are two types of property taxes, primary and secondary. Primary property taxes are levied for operations and secondary property taxes are levied for capital expenses. Each community college district determines its tax rates. When analyzing community college funding, it is useful to consider both local property taxes and state financial assistance. Arizona community college districts are subject to specific constitutional constraints on their property tax levies. The result of these constraints, enacted by voters in 1980, is substantially different levels of property tax collections among districts. The equalization formula in state law is a partial attempt to compensate for these differences. Each year Jami VanEss of Coconino College provides data on the budget for each community college; the data related to property tax revenues and tuition and fees in the next three exhibits are taken from her report to the Community College Presidents Council. State appropriations information is from the JLBC report to the Legislature. Exhibit 1-4 provides information on community college operating budget state appropriations and property tax revenues for FY 2005 through 2011, as well as amounts per FTSE. Exhibit 1-5 provides similar information for the combination of state appropriations, primary rate tax revenues, and tuition and fees. It is important to consider these three main sources of funding for the community colleges to understand what resources each college has available to provide services to students.. Page 1-8

College State Appropriations Local Property Tax Revenues Total per FTSE State Appropriations Local Property Tax Revenues Total per FTSE State Appropriations Local Property Tax Revenues Total per FTSE Chapter 1 Introduction EXHIBIT 1-4 Community College State Appropriations and Property Tax Revenues Per FTSE, FY 2008 FY 2011 FY 2008 FY 2009 FY 2010 Cochise 14,131,700 14,165,750 28,297,450 3,840 14,136,500 15,002,076 29,138,576 3,799 15,330,500 15,860,846 31,191,346 3,889 Coconino 3,758,400 5,628,497 9,386,897 4,719 3,245,400 5,954,221 9,199,621 4,325 2,679,400 6,201,571 8,880,971 3,757 Gila 753,900 0 753,900 925 713,000 0 713,000 694 658,400 0 658,400 627 Graham 19,027,000 2,706,811 21,733,811 9,562 19,948,900 3,295,467 23,244,367 8,654 21,709,300 3,987,087 25,696,387 5,939 Maricopa 68,732,300 321,018,986 389,751,286 5,727 55,416,100 347,905,170 403,321,270 5,754 45,327,400 359,942,153 405,269,553 5,162 Mohave 4,788,100 15,543,352 20,331,452 6,469 4,063,300 16,355,145 20,418,445 5,804 3,682,900 17,206,296 20,889,196 5,497 Navajo 10,223,200 9,956,536 20,179,736 8,069 10,136,800 10,645,044 20,781,844 7,749 10,214,000 11,344,683 21,558,683 8,324 Pima 22,792,400 74,937,000 97,729,400 4,833 18,874,100 80,642,000 99,516,100 4,764 15,942,000 84,070,320 100,012,320 4,459 Pinal 6,849,600 34,358,431 41,208,031 10,807 5,854,300 31,737,475 37,591,775 8,530 4,935,100 39,751,619 44,686,719 9,821 Yavapai 5,524,300 33,094,152 38,618,452 10,500 4,903,400 30,595,440 35,498,840 9,054 4,196,000 36,833,381 41,029,381 10,255 Yuma/La Paz 8,019,900 19,225,034 27,244,934 5,953 7,444,000 20,554,258 27,998,258 5,871 7,751,200 21,697,918 29,449,118 5,520 TOTAL 164,600,800 530,634,549 695,235,349 5,870 144,735,800 562,686,296 707,422,096 5,714 132,426,200 596,895,874 729,322,074 5,324 Source: JLBC and Community College Budget Comparison completed by Jami Van Ess for local appropriations. Page 1-9

Chapter 1 Introduction EXHIBIT 1-4 (continued) Community College State Appropriations and Property Tax Revenues Per FTSE, FY 2008 FY 2011 FY 2011 College State Local Property Tax Appropriations Revenues Total per FTSE Cochise 15,330,500 16,655,987 31,986,487 4,008 Coconino 2,679,400 6,436,010 9,115,410 3,879 Gila 658,400 0 658,400 627 Graham 21,709,300 4,647,670 26,356,970 5,923 Maricopa 45,327,400 371,276,183 416,603,583 4,902 Mohave 3,682,900 18,260,641 21,943,541 5,225 Navajo 10,214,000 11,975,227 22,189,227 8,373 Pima 15,942,100 87,206,000 103,148,100 3,937 Pinal 4,935,100 37,665,018 42,600,118 7,963 Yavapai 4,196,000 38,397,561 42,593,561 10,389 Yuma/La Paz 7,751,200 22,903,329 30,654,529 5,952 TOTAL 132,426,300 615,423,626 747,849,926 5,037 Source: JLBC and Community College Budget Comparison completed by Jami Van Ess for local appropriations.. Page 1-10

College Appropriations and Property Taxes Tuition and Fees Total per FTSE Appropriations and Property Taxes Tuition and Fees Total per FTSE Appropriations and Property Taxes s Tuition and Fees Total per FTSE Chapter 1 Introduction EXHIBIT 1-5 Community College Tax Revenues and Tuition Revenues Per FTSE, FY 2008 FY 2011 FY 2008 FY 2009 FY 2010 Cochise 28,297,450 5,919,036 34,216,486 4,643 29,138,576 6,369,583 35,508,159 4,629 31,191,346 7,136,427 38,327,773 4,779 Coconino 9,386,897 4,912,188 14,299,085 7,189 9,199,621 5,496,573 14,696,194 6,909 8,880,971 5,802,245 14,683,216 6,211 Gila 753,900 0 753,900 925 713,000 0 713,000 694 658,400 0 658,400 627 Graham 21,733,811 4,851,800 26,585,611 11,696 23,244,367 5,340,690 28,585,057 10,642 25,696,387 5,904,062 31,600,449 7,303 Maricopa 389,751,286 133,756,855 523,508,141 7,693 403,321,270 151,305,732 554,627,002 7,912 405,269,553 178,484,397 583,753,950 7,435 Mohave 20,331,452 7,067,080 27,398,532 8,717 20,418,445 8,897,810 29,316,255 8,333 20,889,196 9,567,968 30,457,164 8,015 Navajo 20,179,736 3,550,000 23,729,736 9,488 20,781,844 3,800,000 24,581,844 9,165 21,558,683 4,335,000 25,893,683 9,998 Pima 97,729,400 36,572,000 134,301,400 6,641 99,516,100 39,171,000 138,687,100 6,639 100,012,320 40,510,800 140,523,120 6,265 Pinal 41,208,031 4,318,440 45,526,471 11,940 37,591,775 4,622,000 42,213,775 9,579 44,686,719 4,809,000 49,495,719 10,878 Yavapai 38,618,452 6,429,580 45,048,032 12,248 35,498,840 6,927,300 42,426,140 10,820 41,029,381 8,215,800 49,245,181 12,308 Yuma/La Paz 27,244,934 4,743,330 31,988,264 6,989 27,998,258 6,166,950 34,165,208 7,164 29,449,118 7,014,212 36,463,330 6,835 TOTAL 695,235,349 212,120,309 907,355,658 7,661 707,422,096 238,097,638 945,519,734 7,638 732,499,174 271,779,911 1,004,279,085 7,332 Source: JLBC and Community College Budget Comparison completed by Jami Van Ess for local appropriations and tuition and fees.. Page 1-11

Chapter 1 Introduction EXHIBIT 1-5 (continued) Community College Tax Revenues and Tuition Revenues Per FTSE, FY 2008 FY 2011 FY 2011 College Appropriations and Property Taxes Tuition and Fees Total per FTSE Cochise 31,986,487 7,456,752 39,443,239 4,943 Coconino 9,115,410 7,095,755 16,211,165 6,898 Gila 658,400 0 658,400 627 Graham 26,356,970 7,173,567 33,530,537 7,535 Maricopa 416,603,583 190,000,064 606,603,647 7,137 Mohave 21,943,541 10,971,790 32,915,331 7,837 Navajo 22,189,227 4,635,000 26,824,227 10,122 Pima 103,148,100 48,338,000 151,486,100 5,781 Pinal 42,600,118 5,544,000 48,144,118 8,999 Yavapai 42,593,561 8,390,970 50,984,531 12,435 Yuma/La Paz 30,654,529 7,579,000 38,233,529 7,424 TOTAL 747,849,926 297,184,898 1,045,034,824 7,038 Source: JLBC and Community College Budget Comparison completed by Jami Van Ess for local appropriations. Page 1-12

Chapter 1 Introduction In FY 2011, colleges were budgeted to receive over $615.4 million from local property taxes for operating expenditures. The total resources available from state appropriations and local tax revenues were over $747 million, or $5,037 per FTSE. Among the colleges, the amounts per FTSE varied from a low of $4,170 for Cochise College to $10,863 per FTSE for Yavapai. Between 2008 and 2011, amounts from state appropriations and local tax revenues per FTSE actually declined for all the districts. This may be due to reductions in state appropriations combined with local taxing limits, and increases in the number of students. Because local college districts determine their own tuition and fees, as well as local tax levies, Exhibit 1-5 displays the total from state appropriations, local tax levies, and from tuition and fee revenues. In FY 2008, the total from appropriations and tuition and fees was $907.4 million, or an average of $7,661 per FTSE. Omitting Gila, the revenues per FTSE varied from a low of $4,643 at Cochise College to a high of $12,248 at Yavapai, a $7,605 or a 164 percent difference. In FY 2011, budgeted revenues from state appropriations, local tax levies, and from tuition and fee revenues increased to $1.045 billion, a 15.2 percent increase. Total per FTSE averaged $7,038 and varied among the colleges from a low of $4,943 at Cochise to a high of $12,435 per FTSE for Yavapai. 1.2.2 University Funding The three Arizona universities, Arizona State University, Northern Arizona University and the University of Arizona receive funding from the state general fund and from tuition and fee revenues, but do not receive local appropriations like the community colleges do. The Arizona Board of Regents does not have taxing authority like the local community college Boards of Trustees do. The universities state appropriations from the general fund generally are determined by adjusting the base budget for changes in enrollment and changes due to inflation or other factors. The enrollment change formula was discussed in Section 1.1; for the last two years, the universities have not received any enrollment growth funding. In addition, $100,000,000 of the universities FY 2009 appropriation was deferred until the first quarter of FY 2010. (The universities were allowed to accrue the delayed payment as an account receivable, so the major negative impact of the rollover was on cash flow.) The rollover was continued in the FY 2010 budget by rolling another $100 million into FY 2011, and $200 million will be deferred from the FY 2011 budget until FY 2012. In addition, because of the federal maintenance of effort (MOE) provisions related to ARRA funding, appropriations remained the same in FY 2011 as they were in FY 2010. As a possible significant change to funding, the FY 2010 higher education budget required the institutions to separately report out-of-state students; efforts to eliminate out-of-state students from the enrollment growth calculations were not successful. In addition, prior to FY 2010, enrollment counts were made on the 21 st day of the fall semester; beginning in FY 2010, the enrollment counts were made on the 45 th day, although university FTE enrollment continues to be reported as of the 21 st day. Page 1-13