EXPLAINED: What oil money is UT dipping into to give low-income students free tuition?


Austin (KXAN) — The University of Texas at Austin made headlines Tuesday when they announced that starting in the fall of 2020, they would be able to cover the cost of tuition of any students whose families have an annual household income of less than $65,000.

Any in-state, undergraduate students who apply would qualify for this aid.

UT Austin President Greg Fenves explained Tuesday that this funding became available after several years of efforts to make higher education more affordable on the Forty Acres.

Back in 2016, Fenves committed $7.5 million a year to increase financial aid for middle-income students and in 2018 committed an additional $5 million. He explained that the more than 12 million dollars UT Austin generated for financial aid through those efforts were not meeting the need of students, so he turned to the UT System for help.

UT System Board of Regents vote of approval

The aid was made possible when the University of Texas System Board of Regents voted Tuesday to set aside more than $160 million for the system’s flagship University UT Austin, to help middle and low-income students afford tuition.

This move will also unlock dollars to offer tuition support for students from families with annual household incomes of under $125,000. 

Under these changes, UT expects that 8,600 of its current undergraduate students would qualify to have their tuition and fees completely covered and that an additional 5,700 students would qualify for partial tuition support through this endowment.

The money for this new financial aid is made possible by the management of oil and gas royalties.

This new endowment will generate financial aid dollars for UT Austin by drawing from the state’s Permanent University Fund (PUF) which comes from longstanding management of state-owned land in West Texas which is leased out to oil and gas companies.

The endowment for UT Austin was part of a larger distribution the regents approved Tuesday of $250 million dollars for the 2020 Fiscal Year from the PUF into the Available University Fund (AUF).

There’s a history to these funds and how they benefit the University of Texas at Austin which dates back more than 100 years.

What is the Permanent University Fund?

The PUF was formed in 1876 when the Texas Constitution set aside 1.7 million acres of land in West Texas to support the University of Texas System and the Texas A&M system.

“I don’t know that it was envisioned at the time, but obviously we had the great fortune of discovering oil and gas on that property, and as such, that oil and gas has produced revenue the last century plus,” said Scott Kelley, the Executive Vice Chancellor for Business Affairs at the University of Texas System.

Those lands have now grown to 2.1 million acres and are among the largest university endowments in the United States.

A map of the 2.1 million acres of land across nineteen counties in West Texas that help generate dollars for the Permanent University Fund. Image Courtesy University Lands.

That land is used by many different people, mineral income from the land is generated by oil and gas companies who use it, and income from the surface land is generated from things like wind farms, grazing, and vineyards. The UT System Board of Regents is given authority by the Texas Constitution to manage these lands and does so through a branch called University Lands.

The growth of the PUF is driven by revenues from oil and gas production as well as the investment of those profits by the University of Texas Investment Management Company (UTIMCO).

Each year a distribution from the PUF investments plus the PUF income from the surface of the lands are pooled together.

What can PUF money be used for?

The Texas Constitution stipulates that two-thirds of that amount go to the UT System and one-third of that amount go to the Texas A&M System. Each system can only use those funds for certain things depending on what the Texas Constitution dictates

For example, other UT System institutions can only use this money for construction or facilities improvement, but UT Austin, as the system’s flagship school, is allowed to use the funds for a wide range of things.

There are three major things the PUF money can be used for under the Texas Constitution:

  • UT System and Texas A&M System administration activities
  • Buildings and facilities: All UT System and Texas A&M System campuses are eligible to issue debt to build buildings, then use the fund to pay that debt service.
  • UT Austin, Texas A&M University, Prairie View A&M University: Only these campuses have special exemptions to use distributions from the PUF for operational purposes. The board gets to set how much goes to those flagship schools.

Scott Kelley said of these flagship schools, “they get the money to fund excellence, to make it a university of the first class, and they can use it for whatever purpose they would like.”

In recent years, PUF money has been used for things like rebuilding the UT Austin Marine Science Institute at Port Aransas after Hurricane Harvey and allocating dollars to UT System campuses impacted by reductions in full-time UT System employees

The Texas Constitution also states that no more than 7% of the PUF can be distributed in one year.

The PUF has been growing, it’s current market value is $22.3 billion.

A graphic by the University of Texas System explaining the Permanent University Fund.

Is this new endowment sustainable?

Kelley explained that the $250 million in PUF money the system recently set aside is a “unique situation” and a one-time distribution of funds.

This new action by the regents will create an endowment that will generate around eight million dollars a year to go to UT Austin’s financial aid.

Kelley said that when you combine the normal distribution amount the UT System made earlier this year with the new distribution they approved Tuesday, it still doesn’t go above the constitutionally required 7% cap.

Kelley said he is confident this distribution won’t hurt the PUF in the long term, in part because the PUF has been managed well and in part because oil markets in the Permian Basin have generated a lot of money for the fund in the last decade.

“We’ve been growing in the Permanent University Fund –net real growth — of about eight percent per year,” Kelley said.

An image of state-owned land in West Texas that is used to generate revenue for the Permanent University Fund through oil and gas royalties. Image Courtesy The University of Texas System.

“The fact that you’re growing that much is great, ” Kelley said. “We do recognize that it still may be cyclical and that we may see downturns in the future.”

“But 250 million which is less than– it’s about one percent of 22 billion dollars,” Kelley continued, “it really is not going to impact negatively in any way the ability, the capacity of the university fund to continue to support the other activities that have been planned.”

(For those of you doing the math, $250 million is about 1.12% of the current market value of the PUF, which is $22.3 billion.)

You can see the growth of the PUF in press releases from UT System and UTIMCO throughout the last two years:

  • June 16, 2017, PUF was valued at $19.5 billion
  • January 10, 2018, PUF was valued at $20.7 billion
  • April 13, 2019 PUF was valued at $21.4 billion 

The new endowment the UT System approved this week aims to channel some of that growth into making higher education more attainable for the low and middle-income Texans attending UT Austin — or for those who hope to attend in the future.

“I applaud any initiative that improves affordability and access to Texas public higher education because an estimated 60 percent of Texas high school students are poor,” said Texas Commissioner of Higher Education Raymund A. Paredes, adding that efforts like this endowment will help achieve statewide goals.

“I challenge all of our institutions to create innovative, effective pathways for students to achieve their higher education dreams,” Paredes said.

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