Permanent University Fund

In an interview with The Daily Texan, Gregory Fenves, executive vice president and provost, discussed the goals he will have for the University when he takes office as president in June.
Photo Credit: Griffin Smith | Daily Texan Staff

On this week's episode of the Daily Texan NewsCast we discuss Gregory Fenves', the next president of UT Austin, goals as president, an update on regent Wallace Hall's records requests, proposed changes to the Permanent University Fund, and developing news to keep watching over the summer.

Photo Credit: Stephanie Tacy | Daily Texan Staff

UT’s portion of the Permanent University Fund (PUF) might be cut in half to help fund The University of Houston. 

Last week, Rep. Sylvester Turner (D-Houston) laid out a bill and constitutional amendment before the House Higher Education Committee that, if passed, would be a step toward adding UH to the PUF, an endowment that is currently designated to fund university operations at the UT and Texas A&M systems through the Available University Fund (AUF).

Chief financial officer Mary Knight said this could have a significant financial impact on the university.

“As far as the overall budget, a hundred million dollar reduction to any of our sources would be a very major reduction to the budget,” Knight said. “A lot of research and scholarships are funded from the AUF, so we would have to make reductions somewhere to be able to account for this.” 

Since the state constitution dictates that only UT and A&M receive the funds, the constitution must be amended to add UH to the short list of the fund’s recipients. Additionally, Turner’s complimentary bill must pass.   

Currently, $263 million of UT’s $2.658 billion budget comes from the PUF, according to Knight. UT receives two-thirds of the $17 billion fund, while A&M receives one-third of the money. Turner’s proposals would cut UT’s portion and transfer part of it to UH, granting each institution one-third of the fund. 

At Wednesday’s hearing, Turner said he thinks The University of Houston is underfunded compared to A&M and UT. This year The University of Houston received $143 million in general revenue state appropriations compared to about $262 million and $252 million at UT and A&M, respectively. 

The University of Houston, which is Texas’s third tier-one research institution alongside UT and A&M, should become Texas’s third flagship university, according to Turner. 

“We do need to have a major conversation, and we do need to find ways of making sure we have additional flagship universities that are funded at the same or similar levels to benefit other students as we move forward,” Turner said at the hearing Wednesday.

Shaun Theriot-Smith, civil engineering junior and University of Houston student government president, said he believes UH is deserving of the PUF funding but said it should not come at the financial expense of UT and A&M. 

“As far as the student perspective goes, any chance to increase funding for the University is always a good thing, but I don’t think any [UH] student is really interested in a situation which might compromise another University, such as UT or A&M,” Theriot-Smith said. “It would result in A&M or [UT] receiving a smaller slice of the pie, but there’s a way to apportion for [UH] in a way that would not compromise the financial stability of [UT] or A&M.” 

University spokesperson Gary Susswein declined comment on the legislation, which is pending in committee. 

Student government president Xavier Rotnofsky said he thinks legislators should consider the impact that cutting PUF funds will have on UT when engaging in a conversation around adding The University of Houston to the PUF. 

“Public institutions in Texas should be involved in the dialogue of appropriations, but we have to keep in mind the impact that cutting from PUF to UT would have considering the population size of not only UT-Austin but also the UT system as a whole,” Rotnofsky said. “We get a lot of our funding from PUF, so it’s a huge asset of ours. We have to keep in mind the impact of adding another entity.”

Decreasing international crude oil prices may affect the money available to the UT System, according to Bruce Zimmerman, CEO and CIO of the University of Texas Investment Management Company.

From June 2012 to June 2014, the market value of the Permanent University Fund, or PUF, increased from $13.1 billion to $17.2 billion, according to reports from UTIMCO, the organization that invests money for the System.

The PUF is an endowment containing 2.1 million acres in West Texas that was created by the Texas Constitution to benefit the UT and Texas A&M University systems. The proceeds from the sale of oil, gas, sulfur and water royalties are invested in the form of stocks, bonds and equity interest to establish the Available University Fund, or AUF. Two-thirds of these funds go toward the UT System, and one-third goes to the Texas A&M system.

Scott Kelley, executive vice president for business affairs at the UT System, said the PUF’s market value grew as a result of increased oil production in West Texas.

“The new technology and horizontal drilling and the ability to extract oil and gas from some of the shale that’s out there has just created a whole new wave of production,” Kelley said.

In August, United States crude oil production averaged an estimated 8.6 million barrels per day, the highest monthly production recorded since July 1986, according to a report from the U.S. Energy Information Administration. The report also said demand for oil in industrialized economies is weakening, which may be causing oil prices to drop.

As the price of oil declines, Zimmerman said the revenue contributed to the PUF is also affected.

“Rising oil prices means more money coming into the endowment,” Zimmerman said. “Falling oil and gas prices mean less revenue.”

While the government report shows declining prices, Kelley said the market price for oil has remained steady for a number of years between $80 and $100 a barrel, allowing for an increase in production.

“If it were to drop to $50 a barrel or do something dramatic, then the drilling would likely be curtailed and even some of the production may stop,” Kelley said.

Zimmerman said even though the revenue from West Texas oil affects the PUF, UTIMCO does not invest heavily in natural gas and oil companies, making it less susceptible to the volatility of oil prices.

“We have a very diversified portfolio,” Zimmerman said. “It’s diversified globally. It’s diversified across stocks, bonds and real assets. It’s diversified across private equity and public equity [and] hedge funds. We have a relatively small amount of the endowment invested in oil and gas.”

Zimmerman said about 10 percent of PUF funds are invested in natural resources across the globe. He said UTIMCO tends to invest most heavily in stocks, since the System endowments are meant to last for an indefinite period of time.

“The biggest impact on the investment returns is whether the stock markets are going up or down,” Zimmerman said.

Recent increases in oil production in West Texas have also increased the amount of money available to the UT System, according to Scott Kelley, the System’s executive vice chancellor for business affairs.

From June 2013 to June 2014, the market value of the Permanent University Fund, or PUF, increased 19.4 percent — from $14.4 billion to $17.2 billion — according to reports from The University of Texas Investment Management Company, the organization that invests money for the UT System.

“Our revenues and the values of our assets in West Texas have grown substantially in recent years to allow for a larger endowment,” Chairman Paul Foster said after an August meeting of the Board of Regents.

PUF is an endowment containing 2.1 million acres in West Texas that was created to benefit UT and Texas A&M University systems. The proceeds from the sale of oil, gas, sulfur and water royalties are invested in the form of stocks, bonds and equity interest to establish the Available University Fund, or AUF. Two-thirds of these funds go toward the UT System and one-third goes to the Texas A&M system.

Kelley said horizontal drilling, a new oil drilling technique used to expose more surface area of oil bearing rock, can explain the increase in the value of the PUF on oil lands that were once thought to be in decline.

“Probably 20 years ago it was thought that the Permian Basin in West Texas was a mature [oil] field, and its best days were really behind it,” Kelley said. “The new technology — horizontal drilling and the ability to extract oil and gas from some of the shale that’s out there — has just created a whole new wave of production. We will probably have $1.2 billion dollars in revenue this year coming into the PUF from University lands, whereas four years ago it was maybe $200 million.”

Citing the fund’s growth, the regents decided not to increase in-state undergraduate tuition in May and approved an offset plan for the lack of increases in August. As UT-Austin is the only System institution that is legally able to directly use the AUF for academic operations, the System allocated $28.2 million in recurring revenue from the fund to the University.

“UT-Austin is very fortunate to be a beneficiary of the Permanent University Fund, especially when the fund is on such solid footing,” University spokesman Gary Susswein said in an email. “Recurring funding from the PUF and other sources is vital to our efforts to become the best public research university in the country.” 

Under the offset plan, the System decided to cover costs and activities traditionally undertaken by the other eight institutions.

In August, the growth in PUF also allowed the regents to approve an increase in PUF endowment distribution to AUF for the 2014 fiscal year, bringing the rate up to 7 percent. With the decision, academic institutions in the System will present proposals to Chancellor Francisco Cigarroa illustrating how they intend to use the additional funds.

Kelley said the policy distribution rate is 4.75 percent but can be raised higher in response to financial returns that exceed their benchmark over a three-year period.     

“With the increase in what’s happening in West Texas and with a look at the oil and gas assets, there was a determination by the board over the last couple of years to increase that distribution, not necessarily permanently, but on a one-time, year-to-year basis to 5.5 percent,” Kelley said.

From left, Provost Gregory L. Fenves, President Bill Powers, and former Senate of College Councils President Andrew Clark sit in at the UT Board of Regents meeting. Powers and Clark proposed a 2.13 percent tuition increase for in-state tuition and 2.6 percent increase for out-of-state tuition to the board on Wednesday afternoon. 

Photo Credit: Charlie Pearce | Daily Texan Staff

Two years after freezing in-state tuition for UT-Austin students, the UT System Board of Regents approved tuition increases for out-of-state undergraduate students at the University and tabled the discussion on in-state tuition on Wednesday.

Beginning in the fall 2014 semester, there will be a 2.6 percent increase for out-of-state students’ tuition. Along with that increase, President William Powers Jr. and Andrew Clark, former President of College Councils, also proposed a 2.13 percent increase for in-state undergraduate tuition in a presentation to the board at the meeting. The board decided not to vote on the increase to in-state tuition until its meeting on May 20. At that meeting, the regents will also discuss increases for the University's guaranteed tuition plan.

System Chancellor Francisco Cigarroa and board Chairman Paul Foster both said they want to find alternate sources of recurring revenue instead of raising in-state tuition. Foster said the board would try to direct money from the Permanent University Fund — a public endowment of land in West Texas — to each institution, rather than increasing in-state tuition.

“There are ways that we can work within the rules and within the law, obviously, in order to try to direct funds in the right way,” Foster said. “But, it’s complicated. We’re going to work on that over the next week and make sure everybody gets their questions answered.

After the meeting, Foster said the board’s decision was influenced by a letter Gov. Rick Perry sent to him Wednesday morning. In the letter, Perry asked the board to consider alternative options to tuition increases, such as using money from the Permanent University Fund.

Foster said finding recurring revenue streams — other than increasing in-state tuition — will help improve faculty retention and recruitment rates at the various System institutions.

“This time around, that’s one of the things that we are determined to do — make sure whatever mechanism we come up [with] for funding, that it is recurring,”  Foster said.

During his presentation to the board, Powers said the University’s tuition would still be lower compared to most peer institutions, despite proposed increases.

“Under this proposal, UT-Austin would continue to be at the low end of our university peer group,” Powers said. “We also deliver very high quality undergraduate education with very low expenditures for students.”

Clark, an international relations and global studies senior, said after the meeting he was pleased the board was focused on lowering costs, even though he said he would have liked to see a conclusion to the discussion.

“I personally think it’s a little unfortunate that everyone was there and ready and they presented their proposals — all nine academic campuses,” Clark said. “I’m hopeful [the board] will be able to identify sources of recurring revenue that would match what could be generated from tuition dollars...If we can get the same outcome or a better outcome without increasing tuition, then that’s great.”

In fall 2013, Clark and two other student officials formed a committee to develop the University's tuition proposal. According to Clark, the three-person committee was used in place of a full-sized panel of students, faculty and administrators because the board sent proposal instructions too late into the semester to accommodate it. The committee initially recommended a 3.6 percent tuition increase for out-of-state students and no increase for in-state students.

After the regents issued revised instructions to the University in February, an expanded committee of seven student leaders developed a new tuition proposal.  The committee recommended a 2.6 percent increase for all undergraduate students. Clark said the board lowered the in-state tuition increase to 2.13 percent before Wednesday’s meeting. Both proposals did not recommend any changes in graduate student tuition.

Mukund Rathi, computer science junior, addressed the regents after Powers and Clark presented the University's proposal. Rathi, who also encouraged the regents to use at the Permanent University Fund to offset the tuition increases, said the student input process at UT was not inclusive.

“UT has not made a serious attempt to get student input,” Rathi said. “Only ten students not in these legislative bodies had a chance to speak and every single one of these students spoke against the tuition hikes.”

Additional reporting by Nicole Cobler.

The UT System allocates more than one-third of the money in the Available University Fund directly to UT-Austin, and the campus is growing more dependent on these allocations as state funding shrinks. 

While the funding the University receives from the UT System only makes up about 7 percent of the University’s $2.48 billion annual budget, the campus remains the largest recipient of System funds, using the allocations for projects as far-ranging as the Dell Medical School and the Engineering Education Research Center.

Scott Kelley, the UT System executive vice chancellor for business affairs, said roughly 45 percent of the money is intended to fund “excellence,” lending UT a competitive edge, especially when the University attempts to attract faculty. 

“If we’re recruiting a biologist, they might want a lab re-fitted — we can get money to fix up a lab, buy equipment for research,” Kelley said. 

The 2.1 million acres of oil-rich land that make up the Permanent University Fund, a 137-year-old state endowment, support the UT and Texas A&M systems. Though the fund itself cannot be spent, as mandated by the Texas Constitution, profits from land lease sales and oil and gas production revenue are invested. A portion of the returns from these investments make up the Available University Fund. For the fiscal year ending in August, the AUF had almost $644 million.

Once the AUF total is determined, two-thirds of the money is allocated to the UT System for the Board of Regents to then allocate to the System’s nine academic institutions and six medical schools.

Still, Kelley said, the money from the fund is not enough to comprise an entire operating budget.

“[The AUF], spread among institutions, makes a lot of difference at the margin, but it is not transformational,” Kelley said. “The fund doesn’t replace basic needs for appropriation, or for tuition — it helps us in those marginal areas, but it’s not going to pay for the institution.”

AUF money, gifts and endowments take on a new importance in the face of decreasing state funding for the University. In the 1984-85 school year, state general revenue represented 47 percent of UT’s operating budget. Today, it represents 13 percent.

While 45 percent of the UT System’s AUF money is already distributed to UT, the University’s portion of the fund could increase over the next few years with the creation of the Dell Medical School. 

Last year, the Board of Regents committed additional funding for the creation of the Dell Medical School. This contribution, forecast to begin in 2014, will total $25 million annually for the next several years and will eventually increase once the school is established.

Mary Knight, UT’s associate vice president for financial affairs, said the money allocated to the medical school will initially be used for start-up activities and salaries because the school is still at the beginning of the development process.

“We don’t quite have a dean yet, but [the medical school steering committee] is using it now for kind of start-up activities … there are people who are appointed to work there, some full-time, some part-time — and those people are being paid from the funds,” Knight said. 

Beyond the money directly given to UT, a portion of the UT System funds are also allocated for System-wide initiatives that also benefit the University. For the 2012 fiscal year, such projects included $50 million for the Institute of Transformational Learning, an organization created by the board to build the System’s online learning efforts. UT professors currently teach four massive open online courses — better known as MOOCs — which each cost $150,000 to develop, as part of the System’s online learning initiative.

The System also designated $10 million to purchase stock in MyEdu, an online course directory, with the intention of increasing graduation rates by facilitating course schedule planning for students.

Though some money from the AUF helps fund construction projects at all UT institutions, the money alone is not sufficient to fund new projects like the planned Engineering and Education Research Center. This leaves system institutions dependent on state funding.

The engineering building, and other planned UT construction projects, did not receive expected state funding through tuition revenue bonds earlier this year. A package of tuition bonds that would have provided more than $2.5 billion to campus construction projects statewide was not approved despite bipartisan support during the regular legislative session and the Texas Legislature’s two special sessions this year. 

Knight said the budgeting process usually depends on several variables but has been more difficult in recent years because of decreased state funding.

“We go through a legislative session and don’t know until the very end what our state general revenue is going to be, and we’re dependent on the regents for tuition, and that’s just part of what we have to deal with,” Knight said. “Uncertainty is just part of the budgeting process right now.”

Correction: Because of an editing error, the graphic on an earlier version of this story used an incorrect logo. The logo should have been from UT-Permian Basin in Odessa.

UT System endowment assets hit a new high at the halfway point of the current fiscal year with a combined worth of $21.7 billion on Feb. 28, according to documents from the University of Texas Investment Management Company’s most recent meeting.

The Permanent University Fund, a public endowment made up of 2.1 million acres of land located in West Texas, earned 8.4 percent in investment returns in the latest 12-month period ending in February. Meanwhile the General Endowment Fund, largely made up of donations from alumni and others, earned 8.5 percent in investment returns over the same period, according to UTIMCO CEO Bruce Zimmerman. UTIMCO is the nonprofit corporation that oversees the UT and Texas A&M systems’ investments. 

Zimmerman said he hopes investment returns on the endowment continue to increase, but stressed the importance of taking a long-term view when gauging the returns’ success.

“We certainly hope there will be gains, and we actually hope to make more than what gets distributed [to the System],” Zimmerman said. “Specifically with respect to investment returns, what we will expect is ups and downs, because we are in a period of volatility in capital markets.” 

According to figures Zimmerman provided, the various funds managed by UTIMCO have grown overall in the last 10 years. For the 10-year period ending Feb. 28, the Permanent University Fund’s returns hovered at an average of 9.1 percent growth annually, while the General Endowment Fund had an annual average return of 9.2 percent over the same decade. 

University Lands, operated through the UT System’s Office of Business Affairs, sold almost $70 million of oil and gas leases during its semi-annual sale Wednesday, according to preliminary figures released by the office. 

University Lands is responsible for 2.1 million acres of land that together make up the Permanent University Fund, a state endowment established in 1876. The UT System’s investment company invests lease sale profits and revenue from production, including oil and gas extraction on the fund’s land, and returns on those investments benefit the UT and A&M systems. 

Executive director Jim Benson said he was happy with the results of the sale.

“I’m very pleased, especially in the continuing interest in University Lands for drilling purposes,” Benson said. “We had many returning companies and some new companies, too — I’m generally very pleased.” 

The sale netted slightly fewer dollars per acre than University Lands’ last sale in September. On Wednesday, University Lands offered 60,844 acres for lease, averaging roughly $1,144 per acre. In contrast, the September 2012 sale averaged $1,329 per acre. The March 2012 University Lands sale averaged $644 per acre. University Lands made record lease profits in 2011, when both lease sales averaged more than $2,000 per acre for a total of $560 million combined. 

Beyond the regular lease sale, University Lands also leased 134,000 acres in Hudspeth county in West Texas. Benson said while historically the land has not been a viable source for significant oil production, new advancements in technology might make the land more attractive to buyers. 

“It’s kind of exciting to have someone actually looking at the area,” Benson said. “The last time we leased it was back in the 1990s, and things have progressed quite a bit since then, so I’m sure the people who are interested think they might be able to find a reservoir that makes the land more economically profitable.”

Benson cited developments in horizontal drilling and hydraulic fracturing as examples of techniques that increase the odds a leaseholder will strike oil.

Printed on Thursday, April 11, 2013 as UT profits $70 million from sale of land leases 

The Texas House of Representatives unanimously passed a bill Tuesday to establish a new UT System university in the Rio Grande Valley.

Lawmakers voted 149-0 to combine UT-Brownsville, UT-Pan American and the Regional Academic Health Center in Harlingen into one institution and allow that institution to access the Permanent University Fund, a $1.3 billion state endowment that funds the UT and Texas A&M systems. The Regional Academic Health Center, which currently offers residency programs, would gain a medical school that offers medical degrees under the proposal.

Tearing up after the vote, UT-Pan American President Robert Nelsen said the university would provide new educational opportunities to students in the Valley and allow them to attend what may become a tier-one research university.

“When you live in the Valley and you see the need and you see how education changes lives, you can’t help but be emotional,” Nelsen said. “Every child we educate takes one more family out of poverty.”

UT-Brownsville and UT-Pan American are the only UT System institutions that do not currently have access to the Permanent University Fund.

Speaking on the House floor before the vote, Rep. Rene Oliveira, D-Brownsville, said the new “super university” would improve the Valley’s economy, allow students to stay in the region to attend college and help address the statewide doctor shortage.

“The passage of this bill isn’t just good for South Texas, it’s good for all of our state,” Oliveira said.

Oliveira said there are 33 medical residency positions available in the region but an additional 115 slots are expected to be available by 2016 when the medical school is projected to open its doors.

Rep. Sarah Davis, R-West University Place, said she wanted to emphasize that adding new slots in the Valley would not completely solve the statewide doctor shortage.

“My concern is that I don’t want anyone in this House chamber to think that because of this new medical school, we’re in any way going to solve the doctor or physician shortage that we have in this state,” Davis said.

Upon its establishment, the university would have about 28,000 students, research expenditures of more than $11 million and an endowment of $70.5 million, according to a report by the House Research Organization.

The institutions involved in the consolidation could save $6 million in administrative costs, according to the report.

The new university would automatically admit students who currently attend the institutions involved in the consolidation.

The UT System is currently committing $100 million over 10 years for the prospective Valley medical school and will seek $10 million in annual state funds for the consolidation.

The bill now moves to the Senate, which approved a similar bill last week by a vote of 30-1. Each house must approve the measure by a two-thirds vote for it to take effect.

State Sen. Eddie Lucio Jr., D-Brownsville, said legislation establishing the new university may be on Gov. Rick Perry’s desk within the next few weeks.

During his State of the State address in January, Perry said he supported allowing UT System schools in the Valley to access the Permanent University Fund.

Lucio said 70 to 75 percent of medical students will seek employment in South Texas if they complete their residencies there.

“Ultimately, that is our goal — for them to stay in the Valley,” Lucio said.

Published on March 20, 2013 as "Texas House votes for new UT school". 

Texas lawmakers will consider consolidating UT System institutions in South Texas after two legislative committees unanimously approved it Wednesday.

The bills, approved separately by the House and Senate Higher Education Committees on Wednesday, would combine UT-Brownsville, UT-Pan American and the Regional Academic Health Center in Harlingen into one institution and allow that institution to access the Permanent University Fund, a $1.3 billion state endowment for institutions in the UT and Texas A&M systems. The Regional Academic Health Center would become a medical school under the proposal. 

“We’re very pleased with the support legislators have shown toward this transformational plan for South Texas,” UT System spokesperson Jenny LaCoste-Caputo said.

The UT System is currently committing $100 million over 10 years for the prospective medical school and will seek $10 million in annual state funds for the consolidation.