State Shortfalls Projected
After almost a decade of good economic conditions and strong revenue growth, most states entered fiscal year 2003 facing sharply reduced revenues, and are now struggling to constrain expenditures. Unfortunately, this situation is unlikely to change any time soon, according to projections developed for the National Center for Higher Education Management Systems by Donald Boyd of the Rockefeller Institute on Government. Even if states experience normal economic growth over the next eight years, all but a handful of states will find it impossible, given their existing tax policies, to continue funding their current level of public services.
Maintaining funding for the wide range of existing state services will place enormous pressure on state legislatures to continue the recent practice of sharply reining in, if not reducing, their appropriations to higher education. This trend is in stark contrast to state actions during much of the 1990s, when most states substantially increased their support for higher education. This boom-and-bust cycle has become a traditional state pattern of treating colleges and universities disproportionately well during prosperous times-and disproportionately poorly in tight budgetary circumstances.
State actions during the good economic times of the nineties are likely to exacerbate the fiscal challenges that lie ahead-particularly for higher education. This is because, during the strong fiscal conditions:
If economic growth is slower than normal, if states continue to cut taxes, or if states increase spending in areas outside of higher education, then the outlook for support of public higher education will be even worse.
Fiscal Outlook for States
The analysis by the Rockefeller Institute suggests that even if state and local governments close their current budget gaps with recurring actions rather than gimmicks that provide only temporary relief, most states will continue to face difficulty financing current services through existing revenue structures; they will not have resources for real increases in spending. This would mean either:
Based on these projections, five states face a structural surplus by year eight (see table 1). Forty-four states face a structural shortfall. Twelve states face shortfalls of five percent or more. These projected shortfalls are smaller than the crisis-induced budget gaps that many states face today. They suggest, however, that state and local governments will continue to face fiscal stress even after their economies strengthen.
The primary reasons for these continuing fiscal difficulties are twofold, one concerning revenues and the other dealing with spending requirements. First, state and local tax revenues are unlikely to grow as fast as state economies because:
Impact On Higher Education
During the nineties, the share of state budgets devoted to higher education decreased, as Harold Hovey noted in State Spending for Higher Education in the Next Decade: The Battle to Sustain Current Support (1999): "Over the past decade the percentage increases in state support for higher education have been smaller than the percentage increases in total state budgets. . . . In other words, higher education isn't competing successfully with the attentions of other forms of state funding."
Stated another way, higher education's share of the overall pie continues to get smaller, both nationally and in most states. The size of the pie increased significantly in the nineties. This provided additional revenues for higher education, but it masked the reality that in most states the share continued to shrink.
These projections suggest that the fiscal prospects for higher education are not rosy. The pie is no longer expanding; in some states it is shrinking. As higher education receives a smaller share of a smaller pie-a likely short-term scenario-colleges and universities and the students who enroll in them will face particularly difficult financial positions.
What Would Happen If . . . ?
The data in table 2 reflect an assumption that services would continue at current levels (called "current services financing"). That is, tables 1 and 2 present the funding picture if no real growth in expenditures occurs for any program. However, history suggests that this kind of restraint would be most unusual. It is reasonable to assume, for example, that considerable public support exists for increasing real spending on K-12 education (for instance, to reduce class sizes, raise standards, raise requirements for teacher qualifications, and reduce social promotion).
Changing some of the key assumptions about current services funding would paint a different-and, in most cases, a gloomier-picture of the state fiscal environment. For example:
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