Texas ban on public university DEI offices carries financial penalty

Texas lawmakers held a marathon hearing last week to grill public university leaders on their compliance with a 2023 state law banning diversity, equity, and inclusion (DEI) offices at their schools or face financial consequences. 

Ahead of the hearing, Republican State Sen. Brandon Creighton, who chairs the chamber's Subcommittee on Higher Education, warned higher education leaders in a March letter that he was "concerned with the possibility that many institutions may choose to merely rename their offices or employee titles" and that doing so was unacceptable. He pointed to enforcement provisions in Senate Bill 17 that include the potential freezing of state funding.

If an institution fails to cure a violation within a certain time period, it would be "ineligible to receive formula funding increases, institutional enhancements, or exceptional items during the state fiscal biennium immediately following the state fiscal biennium in which the determination is made," according to a legislative analysis of the bill.

Texas A&M University System

Texas is not alone in targeting DEI in higher education. Since 2023, 85 bills prohibiting DEI offices or practices were introduced in state legislatures and the U.S. Congress with 14 enacted into law in 12 states, according to The Chronicle of Higher Education, which traced their proscriptions to model legislation offered last year by the conservative Goldwater Institute and Manhattan Institute.

"DEI advances primarily political aims rather than educational aims," the Manhattan Institute said. "Additionally, the growth of DEI bureaucracies has fueled bureaucratic bloat and rising costs, contributing to the indebtedness of students and parents."

The National Association of Diversity Officers in Higher Education, which has more than 2,200 members, pointed to the importance for institutions to develop and offer various forms of wrap-around student support services to serve increasingly diverse populations with the focus on facilitating student success and academic achievement.

The anti-DEI push comes as higher education continues to face stress.

Fitch Ratings gave the sector a deteriorating outlook for 2024.

"Fundamental credit factors will be challenging across the sector, with meaningful macroeconomic headwinds, including labor and wage pressure and elevated interest rates, along with a mild and very uneven recovery in enrollment," the rating agency said in a December report. "All of these challenges could weaken operating margins and strain financial flexibility in 2024."

S&P Global Ratings said its 2024 outlook remains mixed as competition for students intensifies, operating expenses rise, and schools face budget pressures. Moody's Ratings revised its outlook to stable from negative, citing a narrower mismatch in expense and revenue growth.

The anti-DEI laws could depress enrollment, particularly for underrepresented groups of students. They could also harm the ability of schools to obtain external grants to fund research.  

"I hope we measure the impact of doing something that is federally recognized and required in many grants has on our research dollars in Texas," Democratic Texas State Sen. Jose Menendez said at last week's hearing. 

Creighton contended recruitment and hiring numbers for minority faculty went backwards under 10 years of DEI programs. 

"We can make our institutions of higher education reflect the diversity of our state and prove that no amount of DEI trainings that are mandatory, workshops, or political oaths that have to be signed in order to apply for a job will open up opportunities for underserved students in Texas," he said. 

Under the threat of state funding losses, the heads of the state's big university systems said steps are being taken to adhere to the law, which took effect Jan. 1.

"Given the importance of the new law to the legislature and to the governor and the enormous financial consequences of violation, ensuring compliance has been a top UT System priority over the last year," University of Texas System Chancellor J.B. Milliken said. 

He said 21 DEI offices were closed, 311 full- and part-time positions were eliminated and 681 contracts, programs, and training were canceled saving the system an estimated $25 million that was reallocated to other "university mission-related purposes."

The UT system oversees nine universities and five health institutions.

At the UT's flagship Austin campus, the Faculty Council and Staff Council Leadership issued a statement saying the administration had used SB 17 as an excuse to fire more than 50 people, "most from marginalized groups."

"Not a single dismissed staff member was working in a DEI space, but rather focusing on learning a new job assignment," the statement said.

UT Austin President Jay Hartzell said in a statement that the Division of Campus and Community Engagement would be disbanded as part of its SB 17 compliance efforts.

DEI had a much smaller footprint at the Texas A&M University System with only nine DEI offices and 27 full-time employees, according to Chancellor John Sharp. 

Both chancellors said auditing was underway to demonstrate initial compliance, with processes in place to ensure it is ongoing.

"The penalties are severe so we have ongoing compliance that our auditor and his entire office are going to be working on every day," Sharp said. 

On another front in the culture war, the Biden administration's revision of Title IX regulations for schools receiving federal money, which clarifies the law prohibits discrimination based on sexual orientation or gender identity, led Texas Gov. Greg Abbott to direct public universities and community colleges not to comply and Attorney General Ken Paxton to ask a federal court for a preliminary injunction to stop its implementation.

Media reports that Texas A&M University was gearing up to comply with the changes sparked a warning from Abbott.

"If they act contrary to state policy, they are jeopardizing state funding, including money from the PUF (Permanent University Fund)," the Republican governor posted on the X social platform.

In a statement, Texas A&M said no changes have been made at this point and that the university system is reviewing the federal regulations and Paxton's legal challenge to determine the course of action going forward. 

The 1876 Texas constitution, which called for the establishment of the University of Texas and made Texas A&M a branch, allocated 1 million acres in the Permian Basin to support the schools, earmarking all sales and proceeds from the land for the PUF public endowment. An additional 1 million acres were added in 1883. Oil wasn't discovered on the land until 1923.

An annual distribution of investment returns as well as surface income from land leases for grazing, easements, and other uses go into the Available University Fund, which is used to pay debt service on bonds and notes issued by the two systems for capital projects.

A constitutional amendment passed by voters in November created a nearly  $4 billion Texas University Fund to support research at Texas State University, Texas Tech University, University of Houston, and University of North Texas.

Meanwhile, Texas public universities are heading to the municipal bond market.

A $413.23 million, triple-A-rated University of Texas System Permanent University Fund bond issue was priced last week. That followed a $412.57 million PUF deal in February, and an $801.7 million, triple-A-rated revenue financing system bond issue in April. 

Texas State University System is scheduled to sell nearly $608 million of revenue financing system revenue and refunding bonds, rated Aa2 by Moody's and AA by Fitch, this week.