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Executive Summary
The Context: State Budgeting and Higher Education's Vulnerability
The Continuing Battle to Sustain Current Support for Higher Education
Recent Experience: The Recession of the Early 1990s
What's Different?
Unprecedented Enrollment Growth
The Tuition Conundrum
Student Support
Concluding Observation
About the National Center for Public Policy and Higher Education

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The Context: State Budgeting and Higher Education Vulnerability

The great variety of state budgetary and higher education structures may prevent us from finding broadly applicable methods to cope with recession, but we can generalize about policy initiatives, past and prospective. A principal story of American higher education has been one of growth: growth in enrollments, in the number of public institutions of higher education, and in state support for these institutions. Such growth would not have occurred without positive federal and state public policy initiatives. The results justify the policies--for example, the percentage of people in the United States 25 years of age and older who have at least a bachelor's degree has increased from just over 20% to just over 25% during the past decade.1 But we must not forget that in the early 1990s, during the recession, higher education was sometimes in severe competition with other state services for financial support.2

In this part of the essay, I will describe the state financing structures and policies that support public higher education, then I will discuss economic projections that suggest these structures can cause financial stress for higher education in the near future, and finally I will touch on major aspects of the recession of the early 1990s.

The Structure of State Revenues

Under our federal system, responsibility for education is with the 50 states. (In many other countries, education is under national control.) Federal initiatives--in particular, the Land Grant legislation and the G.I. Bill--were seminal policy actions. It was the individual states, however, that implemented the historic expansions of opportunity. Each state responded based on its own unique political and social conditions--for example, Land Grant status may be with the state's major public research university, as in California and Illinois; with a separate public university, as in Iowa and Michigan; or with an independent university, as in New York.

This diversity of state higher education structures is mirrored by the diversity of state revenue structures. These revenue structures are distinguished from that of the federal government by their low elasticity--that is, state and local revenues from existing taxes do not grow as rapidly as personal income, while federal revenues grow more rapidly. The major reason for the difference is the heavy reliance of many states on sales taxes—taxes on goods sold. During the period of prosperity from 1992 to 1997, the increase in state revenue from state and local taxes soared, rising on average by 31%. In 1997 sales taxes represented 40.9% of state and local revenue, and property taxes 34.2%; income taxes accounted for only 24.8% of state revenues.3

These national averages tell a story about state revenues, but they also obscure important differences that have implications for managing state budgets and determining state policy. For instance, New Hampshire derives 78% of its state and local revenue from property taxes, while Alabama derives only 15% from that source. Nevada, on the other hand, derives 75% of its state revenue from sales taxes, but in Oregon only 13% comes from that source. Delaware relies on income tax to provide 54% of state revenues and South Dakota and Texas have no income tax at all.4 These differences determine how states are affected by, respond to, and ultimately recover from recessions.

Public higher education--including funding for student financial aid--must compete with other state services for its share of available funds. Because all the states but one are required to have a balanced budget, a gain for one legitimate, worthy state service--say, Medicaid--means less for another--say, higher education. National data, for example, show that in 1987 Medicaid received slightly over 10% of state spending, and higher education received slightly over 12%. By 1990, however, spending for Medicaid slightly exceeded that for higher education, and by 1995 Medicaid's share was more than 19% and higher education's share just over 10%. For fiscal 2002 state governors have recommended an increase of some $25.1 billion for prescription drugs under Medicaid--almost double the amount spent in fiscal 1998.5 This example is not an isolated one.

Higher education's declining share of state expenditures does not represent any deliberate policy decision to substantially curtail state funding. Indeed, state support for higher education has often increased in absolute dollars, even as its share declined. The reasons for the decline in share can be found in the nature of the competition for state funds, the growth of other state services, political priorities, and the perceptions of key state officials. In his detailed assessment of the competitors for state funds, Harold Hovey looked at the public schools, which receive the largest share--roughly one-third of state expenditures--and noted that:

    This group is politically formidable because it does many things that public higher education does very little of or not at all: (1) active lobbying from the grass roots while legislators are in session; (2) endorsement of candidates; (3) support of endorsed candidates with campaign workers and campaign contributions; and (4) retaliation against perceived opponents by such devices as supporting opponents in primary challenges and general elections.6
He might have added that public school leaders are often less reluctant than higher education leaders to publicly oppose tax cuts that threaten their state appropriations.

The impact of Medicaid on other state services is well known. As the National Governors Association notes, "Because of the large percentage of state budgets that Medicaid commands, Medicaid spending increases are felt throughout state government, affecting resources allocated for other key services, such as education."7

Like the public schools, Medicaid enjoys a political edge over higher education. Hovey explains how changing Medicaid eligibility standards to reduce state expenditures would mean risking the publicity of throwing elderly nursing home residents "out on the street."8

Higher education's competitive position is also weakened by the perceptions of governors, legislators, and key executive and legislative staff members. Relative to other state services and agencies, colleges and universities are seen as having fiscal and programmatic flexibility. Unlike other state agencies, many higher education institutions have separate budgets and reserves of their own. Campuses are also assumed to be able to absorb temporary fiscal adversity by translating budget cuts into payroll cuts, since many campuses are not bound by collective bargaining agreements. Unlike state agencies whose programs have relatively fixed spending levels (some set in statute, others mandated by court decisions and federal requirements), colleges and universities can save money by increasing class sizes and changing course offerings--and even by reducing enrollments. Higher education can also shift costs to students and their families by raising tuition.9 Ironically, the fairly recent tendency on the part of some colleges and universities to characterize themselves as "state related" and "state affiliated," in hopes of attracting private support, may also undermine the perception of state responsibility for their support.

Although higher education is vulnerable in the competition for state resources, it nevertheless entered the new millennium with several years of historically unprecedented increases in state appropriations.10 It is still uncertain whether these recent gains are now threatened, but it is clear that 2001 may mark the end of higher education's very best of financial times.11 Some 17 states faced budget shortfalls in fiscal 2001.12 I do not know all the causes of these current difficulties, nor will I speculate on whether they indicate just a blip, a short-term recession, the beginning of a long-term economic downturn, or a new plateau. I do believe, however, that regardless of the effects of the current recession, the medium-term fiscal prospects of higher education--public higher education, particularly--are quite problematic.

1 U.S. Bureau of the Census, as reported in "Economic Focus: Educational Attainment," The Wall Street Journal, Aug. 22, 2001, p. B8.
2 Harold A. Hovey, State Spending for Higher Education in the Next Decade: The Battle to Sustain Current Support (San Jose: National Center for Public Policy and Higher Education, July 1999), p. 8.
3Kendra A. Hovey and Harold A. Hovey, CQ's State Fact Finder 2001 (Washington, D.C.: CQ Press, 2001).
4 Ibid.
5 National Governors Association and National Association of State Budget Officers, The Fiscal Survey of the States (Washington, D.C.: June 2001), pp. vii and 14.
6 Hovey, State Spending for Higher Education, p. 42.
7 National Governors Association, Fiscal Survey of the States, p. 13.
8 Hovey, State Spending for Higher Education, p. 44.
9 Ibid., p. 20.
10 Corina Eckl and Arturo Pérez, "State Budget & Tax Actions 2001--Preliminary Report," NCSL News (Denver: National Conference of State Legislators, Aug. 1, 2001), p. 4; National Governors Association, Fiscal Survey of the States, p. 1.
11 "Colleges Brace for the Economic Downturn," a Special Report in The Chronicle of Higher Education, Apr. 20, 2001, pp. A10–18.
12 Eckl and Pérez, "State Budget & Tax Actions 2001," p. 1.


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