April 16, 2009

TO: Arizona Board of Regents Council of Presidents

FROM: Michael M. Crow

2009 Spring Tuition Setting

At a critical time in its institutional development, ASU has been hit particularly hard by the reductions of the revised state budget.

Budget Impact at ASU

State appropriations in FY2009 are nearly $90 million less than they were in FY2008. That loss to the university represents a decline of almost 20 percent of the university's total funding from the state in a single fiscal year. Extensive measures are already in place at ASU in order to meet these cuts:

• More than 550 staff positions eliminated, including four dean's positions and at least two dozen academic department chair positions
• More than 200 faculty associate positions eliminated
• Ten- to 15-day furloughs for all employees, including the entire senior administration, deans, varsity coaches and faculty.
• The consolidation of nearly a half dozen schools and of almost two dozen academic departments.
• A reduction in the number of nursing students the university can admit
• A wide variety of cost-saving measures from the reduction of purchases, to energy conservation to a hiring freeze.
• Elimination of almost all flexibility to support acquisition of supplies, repair or replacement of aged equipment, and support for faculty travel.

Almost $40 million of the budget reductions achieved in FY2009, from actions such as furloughs, are one time in nature. To make these reductions permanent in FY2010, many additional layoffs will be needed and program closures may be required. It is certain that such reductions would impact the ability to provide courses and support needed to assure student's ability to make timely progress to degrees. Beyond these actions, there are real possibilities of additional reductions for FY2009 and/or FY2010 to close the continuing state budget gap.

As a result of the reductions already in place, ASU's per-student funding from the state general fund has been reduced to what it was 10 years ago and amounts to 30,000 of the 67,000 students being left with no state investment whatsoever. At the same time, demand for higher education increases in this state and elsewhere: At ASU alone, FTE increased 7.56% from Spring 2008 to Spring 2009. Yet, the probability of additional extensive reductions in 2010 looms large over the future of higher education in this state.

Result of Extensive Budget Reduction

The federal stimulus funding will not be sufficient to offset the budget reductions that ASU has suffered in the 2009 budget. ASU is more than prepared and willing to live with less state funding than it has in the past, and has taken and is continuing to take actions to accomplish this. But the reductions go beyond what is possible without dramatically altering the nature, size, scope and quality of its programs. Funding from the stimulus can be used to mitigate the amount of additional revenue needed for two (or perhaps) three years, but some increases in revenue have to be considered to keep the institution on track. Without a tuition increase, these state budget reductions will become permanent for this institution. Based on the legislature's actions for 2009, additional drastic reductions are anticipated and will require dramatic changes at ASU. It is now critical to the continued progress of ASU and to the timely opening of the 2009 fall semester that we conduct a spring tuition setting process. Without additional revenue, the institution can expect within six months to lose trajectory beyond simple budget adjustments.

Revenue Proposal

Due to the need to replace the revenue lost and in order to position the institution for the 2010 financial situation as it develops, ASU submits the following proposal for consideration. The following are factored into revenue recovery planning:

• An economic recovery surcharge to cover the gap during the financial crisis.
• Financial aid maximization for students in need, including an additional set aside for those most in need.
• A Health and Wellness fee to continue providing support to students without any state investment.

Economic Recovery Surcharge

The economic recovery surcharge is designed to recover a portion of the base budget funds lost as a result of General Fund budget reductions in FY09 and FY10. The following principles underlie the surcharge design:

• A surcharge is added to the base tuition levels, which will continue to be increased according to the model approved in FY09 in which incoming student tuition is set at the top of the bottom third of flagship universities from the prior year survey and continuing student tuition is increased by 5%.
• The surcharge will apply equally to all resident and non-resident undergraduate and graduate students.
• Financial aid will be set aside at the 17% FASA level and an additional amount will be retained to assure that accessibility is maintained for students with need.
• No merit aid award will be increased as a result of the surcharges.

The economic recovery surcharge is to help maintain quality classroom instruction and course availability. It is assumed that federal stimulus funds will be part of the funding provided in FY10 which helps limit the size of the surcharge.

The surcharge is set to recover State budget reductions that exceed a level established by the Regents as both necessary given the State's budget shortfall and reasonable in light of the need to maintain program viability. ASU's proposal is based on a system reduction level of $100 million below the FY08 opening base budget levels. This is a large reduction: it represents 9% of the State General Fund support in FY08 and a permanent reduction of $840 per FTE student in the system.

Targets for recovery in FY2010 and in subsequent years should be established for ASU (and for each university) at the base level of FY08 funding to the university less the university's share of the system's accepted $100 million reduction (determined as a percentage of the university's share of the overall GF allocation in FY09) plus support for enrollment growth anticipated in FY2010 at an adjusted average provided across the system (approximately $8,000 per FTE). Anticipated federal stimulus funds provided to offset state budget reductions were used in determining the target levels of funding. These will be used to mitigate the need for surcharges over the period of anticipated maximum shortfalls (FY2010 to FY2013), to avoid the need for major spikes in the surcharge calculation. It would be best if all three universities used the same methodology.

Institutional budget recovery in FY2010 is proposed to be accomplished through an economic recovery surcharge that, on a net basis after financial aid, recovers the difference. In subsequent years, we propose that the base tuition model would be applied to establish base tuition, and that a similar methodology be applied to calculate recovery targets and surcharge levels in addition to the new base tuition.

For FY2010 (Fall 2009 and Spring 2010), the ASU calculation in this methodology yields the need for a surcharge of $600 per semester. If stimulus funds are available at levels now being modeled and those stimulus funds are applied over fiscal years 2010, 2011, and 2012 the level of the surcharge can be maintained for two or three years. It should be noted that the amount of additional state reductions, if any, is not yet known and their level will influence how long stimulus funds can support this level of surcharge.

Financial Aid

Maintaining access is a critical priority in planning the surcharge and the fees.

ASU will make available not only the Regents-approved 17% set aside for financial aid but also retain an additional amount to assure that accessibility is maintained for students with need.

Another avenue to mitigate rising costs is the American Opportunity Tax Credit, which expands the Hope Scholarship. This expansion is temporary, limited to the 2009 and 2010 tax years. However, President Obama's FY2010 budget proposes making these changes permanent. The proposed changes are as follows:

• Increases the amount from $1,800 to $2,500
• The amount of the credit is 100% of the first $2,000 in qualified expenses and 25% of the second $2,000. (Previously it was 100% of the first $1,200 and 50% of the second $1,200).
• The number of years allowed was increased from 2 to 4
• The income phase outs were increased to $80,000/$90,000 (single filers) and $160,000/$180,000 (joint filers)
• Course materials added as a qualified expense in addition to tuition and fees
• 40% refundable ($1,000) to allow even low income students who have no tax liability to obtain a partial benefit
• May offset the AMT (depends on each individual tax circumstance)
• Students who qualify for higher Gulf Opportunity Zone amounts may choose that amount

Health and Wellness Fee

ABOR policy 5-206 mandates that "each university must develop campus health programs designed to help students avoid interruption of the educational process and to prevent conditions which will keep students from taking full advantage of their educational opportunities."

To meet this mandate, ASU offers health education and promotion, primary care, acute emergency care services, travel medicine services, research physicians, nutritional counseling, immunizations and high demand specialty services such as women's health, sports medicine, dermatology, ENT, and orthopedics. In 2007-2008 there were over 46,000 patient visits to ASU health centers.

Current state budget conditions require immediate elimination of all state funding for student health services. In order to maintain and modestly enhance existing services, a health and wellness fee must be implemented. Most peer institutions have health fees ranging from $98-$440 annually, with an average of $204 annually.

Arizona State University recommends approval of a $40 per semester Health and Wellness Fee for all students beginning fall 2009. This fee will be waived for students enrolled only in on-line courses.

Implementation of a health and wellness fee will:

• Provide a steady, predictable income source and enhance services for students who seek both preventive and acute care.
• Maintain Health Center operating hours to meet student demand.
• Decrease wait time for students with minor injuries or illness.
• Enhance outreach and wellness education and services.