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National CrossTalk Fall 2001
News Editorial Other Voices Interview

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Uncertain Times
State Funding for higher education shrinks and tuitions rise

By Donald E. Heller

The most recent news about the national economy and the status of state budgets is a grim reminder of the state of affairs higher education experienced a decade ago. Projections of slowdowns in state revenue growth, which are expected to lead to cuts in spending, may be a harbinger of things to come for public higher education. Or in the words of New York Yankees catcher and worldly philosopher Yogi Berra, "It's déjà vu all over again."

In the early 1990s, colleges and universities saw cuts in state spending on higher education. Data gathered by the Grapevine project at Illinois State University indicate that state budget expenditures on higher education nationally decreased at an annual rate of 2.1 percent in real (inflation-adjusted) dollars from 1991 to 1994. After the national economy recovered in the mid-1990s, however, state appropriations on higher education saw large gains. From fiscal year 1994 to 2001, state spending in support of colleges, universities, and student aid increased at a rate in excess of three percent annually in constant dollars.

Over the last two decades, higher education's share of state spending has declined. Other priorities-especially Medicaid, corrections, and K-12 education-have gained at the expense of higher education. Since the mid-1990s this trend has accelerated, and observers see little change in higher education's status in the future. Since 1980, the share of the total current fund revenues for public institutions provided by state appropriations has decreased from 44 percent to 33 percent (in fiscal year 1997, the most recent figures available from the Department of Education).

A recent report by the American Association of State Colleges and Universities, "AASCU Special Report: State Fiscal Conditions," warned that:

A number of indicators reveal that while residents are more affluent than ever before and state governments are spending more than ever before, the portion of state funds allocated to colleges and universities has not recovered the levels posted before the recession of 1990-92.The question of fiscal priority is an increasingly important one, given that institutions in many states will face unprecedented demands for higher education access at the same time that demands in other areas, especially those related to health care, are likely to grow. As the competition for state resources intensifies, the pressure on institutions to raise revenues via tuition and other means will undoubtedly mount, raising a number of difficult questions for state policymakers.

A recent survey conducted by the National Governors Association and National Association of State Budget Officers found that the budgets proposed by governors nationwide for the 2001-'02 fiscal year included increases in spending of only 3.6 percent, less than half of the increase proposed the previous year. Another survey conducted by the National Conference of State Legislatures found that a third of the states had budget deficits in 2001, and appropriations in the 2002 fiscal year are expected to grow only 2.3 percent, less than the expected rate of inflation.

The National Governors Association report also indicated that eleven states were forced to enact mid-year budget cuts in fiscal 2001 (only one state had done so the previous year).These cuts had a direct impact on higher education in at least two states. Governor Ronnie Musgrove of Mississippi announced in February that he was reducing the state's spending on higher education by five percent, or $35 million, through the end of the state's fiscal year in June. Governor Don Siegelman of Alabama announced a cut of 6.2 percent in state spending for all levels of education.

While it is impossible to predict with certainty the state of the economy and how it will affect state budgets and expenditures in the next few years, the outlook is certainly bleak. The late Hal Hovey, in a 1999 report for the National Center, predicted:

Based on national averages, state spending for higher education will have to increase faster than state spending in other areas-just to maintain current services...Since the percentage of the state budget dedicated to higher education has actually declined over the past decade, continuing to fund current service levels for higher education would represent a significant shift in state budget trends.

These fiscal trends-uncertainty in the growth in state revenues, and higher education's shrinking share of the state budget-will occur in the face of another troubling trend in higher education: Enrollment is expected to accelerate at a faster pace in the next decade. A National Center for Education Statistics report, "Projection of Education Statistics to 2010," estimates that public college enrollments will increase at a rate of 1.3 to 1.8 percent annually. This compares with enrollment growth of 1.1 percent annually in public institutions over the most recent ten years. Most of this projected growth is due to the "baby boom echo," the children of baby boomers who will be reaching the traditional college ages of 18 to 24 years.

The impact of changes in the level of state appropriations on public higher education institutions is indisputable. Besides affecting the level of services that colleges provide, appropriations have an effect on tuition levels. There is a very strong relationship between states' willingness to appropriate funds for higher education and the rate at which public colleges and universities increase their tuition rates. From 1991 to 1994, when states cut real spending on higher education during the last recession, the average annual increase in tuition averaged more than eight percent nationally (adjusted for inflation) in both public four-year institutions and community colleges. Since 1994, when state expenditures have recovered, tuition increases in both sectors have averaged less than 2.5 percent annually. Over the last decade, there is a very strong negative correlation between these two measures-the higher the rate of increase in appropriations for higher education each year, the lower is the average tuition increase.

The budget cuts in 2001 and slower growth of 2002 state budgets have forced higher education institutions to respond in a predictable manner. Tuition increases for the 2001- '02 academic year at many institutions have returned to the double-digit levels last experienced in the early 1990s. Institutions such as the University of Illinois (Urbana- Champaign), University of Minnesota (Twin Cities) and University of Mississippi all implemented increases in excess of ten percent this year. Clemson University increased tuition 25 percent this year; trustees defended the decision in part by citing tuition levels that historically had been lower than those in neighboring states.

Michigan presents one interesting case study. The state has a tuition tax credit which allows parents or independent students to claim a credit against state income taxes of eight percent of tuition and fees, up to a maximum of $375. However, to be eligible for the credit, students have to attend a public or private institution in the state that agrees to increase tuition the next year at no more than the rate of inflation. In 1996, students at ten of the state's 15 public four-year institutions were eligible for the tuition tax credits; by 2000, only one of these institutions met the maximum tuition increase requirement.

Michigan State University, the state's largest institution, implemented a well-publicized "tuition guarantee" in 1994 to hold the annual tuition increase to the rate of inflation or less. Since then, tuition increases at Michigan State averaged 2.8 percent annually, compared to 4.6 percent at the other four-year institutions in the state. This year, however, Michigan State's guarantee was abandoned, as tuition increased nine percent. Other tuition increases in the state this year included 18 percent at Eastern Michigan University, 20 percent at Michigan Technological University, and 6.5 percent at the University of Michigan, Ann Arbor. Overall, the average tuition increase in the state among its four-year institutions was in excess of ten percent.

The major explanation for the large increases provided by the colleges and universities was the small expected increase in Michigan's higher education appropriation for the year (as of the early fall, the higher education budget had not yet been set for the fiscal year beginning October 1). Indications were that the higher education budget would be only 1.5 percent above the previous year's level, down from an average increase of approximately five percent annually over the previous three years. Michigan State Trustee Donald Nugent said, "Raising tuition is the only way to make up for low increases from the state." Paul Courant, associate provost at the University of Michigan, said, "We have worked hard to restrain our tuition increase despite the difficult state funding environment and rapidly rising costs in areas such as utilities, employee benefits and information technology."

While Michigan and other states have implemented large tuition increases, there are some silver linings. In California, which has the country's largest public higher education system, spending on higher education will increase six percent this year (following a 12 percent boost last year). Included in this amount is an increase of almost 28 percent in student aid spending in support of last year's large expansion of the CalGrant program. The state's commitment to higher education is especially noteworthy given that total state expenditures are expected to increase only 1.7 percent this fiscal year.

California's commitment to continue to increase funding for the state's systems of higher education, which suffered unprecedented cuts in the recession of the early 1990s, has allowed the University of California and California State University systems to keep student fees the same, or cut them, every year since 1994.

Are the trends in Michigan and other states an indication that we are returning to conditions we experienced a decade ago? Or is the good news out of California this year an indication that there may be at least some parts of the country that will weather an economic downturn? Only time will tell for sure. But Mr. Berra provides sage advice in the form of the title of his recent book: "When You Come to a Fork in the Road, Take it!" State policymakers face such a fork, and have a choice to make. One option is to slash state support for higher education, leading us back to an era of large tuition increases, cuts in services, and constraints on enrollment at a time when demand for higher education will be increasing. The other option is to maintain the state's commitment to public colleges and universities, recognizing the potential for higher education to contribute to economic growth and recovery. It is up to those policymakers-governors and legislators alike-to choose the right path.

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