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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
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The Continuing Battle to Sustain Current Support for Higher Education

In 1999 Harold Hovey, one of the nation's leading analysts of public finance, examined the consequences of the inelasticity of state revenue structures.13 As personal incomes rise, people spend incrementally less on taxed goods and more for nontaxed services, and thus increases in state revenues do not keep pace with increases in personal income. At the same time, however, the costs of maintaining state services increase--owing to demography, workload formulas, inflation, and other factors--and they increase at a faster rate than the revenues available to support them. The result is that for every increase of 10% in personal income--the cost of current services in the base year--state and local tax revenues rise only by about 9.5%.14

Hovey projected that, based on maintaining current services over eight years from 1998, the cost of state programmatic financial commitments would exceed state revenues in 39 states and that in the eighth year the average "structural deficit" for the 50 states would be 3.8% (see Table 1). In other words, the data from 1998 indicated that most states were living above their long-term means. (Some states have since enacted tax cuts.)

Hovey's projections were made during the high point of economic prosperity. These projections did not assume, I must emphasize, a major recession, but rather only an end to the economic boom and an eventual return to the normal growth patterns of the previous quarter century. Hovey's projections were not embraced enthusiastically by either political or higher education leaders. The clear implication was that a day of reckoning for most states would come--a day when either taxes would have to be increased or budgets would have to be cut in order to maintain current services. Like most of us, elected officials tend to ignore bad news about the future.

Hovey also predicted that state higher education budgets would be uniquely vulnerable when the day of reckoning arrived, even if the country experienced a return to normal growth rates and no significant downturn or recession. If state budgetmakers asked higher education to absorb only its proportional share of reduced revenue growth, college appropriations would fall, on the average, approximately 0.5% short of the amount needed to maintain current services. New initiatives could not be supported without commensurate reductions in base budgets. Maintaining higher education's current share would call for a major reversal of trends over the last quarter century. States would have to increase their appropriations for higher education, on the average, at a rate 1 percentage point above appropriations for other state and local spending over the eight-year period. In a third of the states, the annual growth of state higher education spending would have to exceed growth in other state programs by 2 percentage points or more (see Table 2).

In other words, the rates of expenditure growth in the mid and late 1990s were not sustainable, even in normal economic times. Between 1993 and 1998, a period that Hovey characterized as "about as good as it gets in state funding of higher education," college and university appropriations increased at rates that exceeded enrollment growth or inflation.15 The structure of state finance, as well as historical and political patterns, suggest higher education's vulnerability to economic slowdown or recession.

13 Harold A. Hovey, State Spending for Higher Education. My discussion also relies heavily on Steven D. Gold, ed., The Fiscal Crisis of the States: Lessons for the Future (Washington, D.C.: Georgetown University Press, 1995).
14 Hovey, State Spending for Higher Education, p. 6.
15Hovey, State Spending for Higher Education, p. 8.


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