Sipping From the Well: Understanding the Permanent University Fund

By Andrew Roush in 40 Acres, Promote & Protect on March 23, 2017 at 2:00 pm | 1 Comment

This week, Texas senators have been getting down to business determining how they’ll fund state universities for the next two years. With rising tuition costs and no clear plan to get them under control, along with the possibility of cuts to shore up a tight budget, legislators are struggling to fund higher education. And they’re considering major cuts to so-called “special items” that help fund projects not normally covered by regular appropriations or endowments. Last session, the state funded special items to the tune of $1.1 billion, according to the Texas Tribune. This year’s draft budget cut the items entirely.

Why, you might wonder, does this matter to UT? After all, the University of Texas has a $25 billion dollar endowment—bigger than Yale’s. Like so many things in life and politics, it’s just not that simple. The mechanics of such an endowment, and how much actually makes it to the Forty Acres, is complex. It’s not simply a checking account. Many projects at a big, top-tier university like UT aren’t funded from endowments. And that’s why the legislature matters. We don’t know how the budget lines for the state’s public colleges and universities will shake out, but they may face cuts of 10 percent, meaning the university may have to pull from other funding sources to keep some programs running—robbing Peter to pay Paul. That means a squeeze in research, the McDonald Observatory, the Bureau of Economic Geology, museums, and all the other knowledge-creation machines that define an institution like UT.

Funding UT boils down, unsurprisingly, to oil. But let’s go back to the very beginning. In 1876, Texas voters overwhelmingly approved a new state constitution. It proved to be one of the longest and most restrictive in American history. Among its provisions, tucked into Article 7, was the mandate to establish and maintain a “university of the first class” to be called the University of Texas. It was to have an agricultural and mechanical branch, too, which eventually mutated into Texas A&M, a thankfully separate university system in its own right. The subsequent sections of Article 7 went on to clarify the funding mechanism for such a university: the Permanent University Fund. The constitution spends about 900 words on this topic, but it can be distilled rather simply. The state would set aside its most abundant resource at the time, land, for the university. Money made from leasing that land to say, ranchers, would be invested. In 1901, oil was discovered in soggy East Texas at Spindletop, and eventually the university’s 2 million acres in West Texas became a wellspring for oil and gas leasing. The pumpjack that sits at MLK and Trinity, a popular spot for tailgating, is the Santa Rita No. 1, the first to hit oil on university lands. Today, Permanent University Fund (PUF) investments are managed by a nonprofit corporation called UTIMCO.

It’s simple enough, until it comes time to actually spend that money. While the UT System may make headlines for the massive size of the PUF—it’s been very lucrative—what often goes unsaid is the important fact that all that money isn’t just for UT-Austin. In fact, it’s a source of funding for 19 different institutions in the UT and Texas A&M systems. Remember how the constitution mentioned that “agricultural and mechanical department”? That’s why the Aggies end up with a third of PUF disbursements, the UT System gets two-thirds, and of that, UT-Austin gets no more than 45 percent. There are countless representations of how the PUF works, byzantine diagrams tucked into university reports and legislative requests, snaking across PowerPoint slides around the capitol and the Forty Acres.

Here’s a simpler way to think of it. Let’s say, instead of funding for higher education, you needed a nice margarita. Those 2 million acres of university land? Those are the ingredients—agave, triple sec, lime, ice, possibly some kind of industrial goo—used to make your sweet, smoky reward. All of it is constantly swirling around in the margarita machine that is the PUF. Of course, the bartender, buzz-killer that they are, will not let you slurp straight from the machine to your heart’s content. So we have to order one pitcher at a time. The pitcher is your payout from the investment, the Available University Fund, or AUF. You are required to pour a third of it for your Aggie friends at the next table. Then you have to pour a very tall one for your chaperone, the UT System. The System will use its share to support the 14 other institutions and its own administrative costs. Finally, you’ve got a drink for yourself, watered-down and listless, perhaps, but bigger than your friends’. Still, you’re gonna have to find money for another round if you’re really going to enjoy yourself. AUF disbursements, by the way, can only be used for what are called academic enhancements, and not for things like, say, constructing new buildings.

That’s why universities, even the ones that benefit from the PUF, still rely on the legislature for funding. UT is, after all, a public university—one mandated to be “of the first class” no less—and therefore relies on public support to keep tuition down and construct and renovate campus facilities. A few talkative interlopers at the bar may tell you that you don’t need a cocktail when you can have your tequila neat (and I feel this analogy slipping, because that is not wrong), but consider this: AUF funding only accounts for nine percent of UT’s budget, and when you adjust for inflation, state appropriations for the university have dropped by 40 percent since the mid ’80s, and now account for only 12 percent of the university’s total budget. For a long time, we’ve been foraging for agave and collecting lime wedges from our iced teas to make our margaritas. Complicating the matter is the fact that state appropriations, called formula funding here in Texas, has been on the decline across the nation. In Louisiana, budget-slashing nearly tanked Louisiana State University last year, and repeated cuts over a decade—nine in all—lead to the exodus of nearly 500 faculty members. In Texas, formula funding took a sizable hit in 2011 and hasn’t rebounded.

You may still be bobbing your head in feigned agreement. You may be even more confused. And, indeed, there is much more minutiae not included here, like the complicated process of using bonds to pay for things. Besides that, the 2017 edition of the Texas Legislature put forth a number of bills that aim to create constitutional amendments that divide the PUF to other university systems, funnel future revenues to other schools, or limit the disbursements from the PUF to the AUF, moves that could have obvious ramifications for UT-Austin. It’s a complicated business. But when you slide up to the bar, knowing at least a little about how your drink is made, you’re much more likely to get what you ordered.

Tags: Permanent University Fund, PUF, texas lege, txlege, ut system