Executive Summary
The Outlook for State Finances
Prospects for Funding Higher Education
Fiscal Impacts on Higher Education Policy
Increasing Spending Outside of Higher Education
Cutting Spending Outside of Higher Education
Raising Taxes
Sensitivity Analyses
Participants, Symposium on Emerging State Policy Issues
About the Author
About the National Center

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State Spending for Higher Education
Page 12 of 14


1 For more details on assumptions underlying the baseline forecasts, see The Outlook for State and Local Finances (Washington, D.C.: National Education Association, 1998). Some of the workload assumptions are interactive with policies assumed in current policy projections. For example, higher education enrollment is not independent of tuition and access policies. The current service projections presume no change in the percentage of public higher education costs defrayed by tuition payments.

2 A long line of academic studies shows state tax and spending levels, overall and for individual programs, to be insensitive to political variables such as party control of governors' offices and legislatures.

3 See for example, Financing State Government in the 1990s (Denver: National Conference of State Legislatures, 1993) and Is the New Global Economy Leaving State-Local Tax Structures Behind? (Washington, D.C.: National League of Cities, 1998). Both of these studies were endorsed by large numbers of organizations of state and local officials.

4 Because of productivity gains in the economy, private sector wages and salaries rise in real terms. That is, the purchasing power of workers increases, as it historically has. To maintain the alignment of public and private compensation, public sector compensation also must rise somewhat faster than inflation. Specifically, in the projections inflation occurs at about 2.5% and all wages, private and public, rise just over 3.5% annually, providing a real purchasing power increase of about 1%. The real world implication of this is that simply matching inflation and workload increases is not a tenable long-term policy for governments. Good examples of why this is not good policy can be found in Colorado and Washington, both of which have limits on state spending growth tied to the sum of inflation and population growth. Those limits, approved as a result of voter-initiated measures on state ballots, have forced these states into tight budgets and ultimately to return to voters with requests for waivers of the limits. Such requests were on the November 1998 ballots in both states.

5 These projections obviously depend on the validity of the underlying demo-graphic forecasts, both for higher education enrollment and the other drivers of workloads in government programs. These projections are most reliable for states with large populations and diversified economic bases, and least reliable for states with the reverse, such as Hawaii, Idaho, Vermont, and Wyoming.

6 Higher education is not unique as a balance wheel. Other institutions with similar characteristics, such as state arts agencies and Medicaid providers, also serve this function. In the case of Medicaid providers, the cuts often take the form of shifting billing cycles, for example, creating large one-time savings by moving from payment within 15 days to payment within 60 days.

7 To the author, who works daily with data on the budgets of 50 states, this is an empirically based statement. However, because the adjustments associated with (1) the use of higher education as a balance wheel, (2) federal mandates, (3) workload growth, and (4) uncontrollable cost changes are all difficult to make and controversial, the extent to which higher education's relative unpopularity has been a factor in declining budget shares cannot be easily demonstrated empirically.

8 This conclusion implies that public K12 education spending will continue to command strong support among elected officials. This support was strongly in evidence in 1998 in congressional actions on education funding in 1998 and in campaign positions of candidates for state office, despite ample criticism of "throwing money at the problem" aimed at elected officials supporting major spending increases.

9 The default is that queues form which in and of themselves impose a cost in waiting times. National health services in Canada and Europe are illustrations. Free operations are available to all, but waiting periods for non-emergency procedures are months and sometimes years. Another type of queue arises when insufficient quantities of services are provided to meet demand in particular geographic areas. Many state highway programs have this characteristic.

10 One of the likely solutions to financing Social Security will come from mandatory coverage of all state and local workers. In a practice dating from the beginnings of Social Security, some states and local governments are exempt from Social Security coverage. Including them will raise their payroll costs by roughly 15% with sizeable fiscal impacts on the affected states and local governments.

11 The discussion of individual spending categories uses shares of general fund budgets as compiled by the National Association of State Budget Officers in their annual series called State Expenditure Report. In most states, the general fund is the primary component of the state budget and the one usually containing all major outlays for higher education, except capital outlays supported by bond issues. The concept typically excludes from total spending and revenues: (1) trust funds such as those for unemployment compensation; (2) revenues earmarked for particular purposes, such as highways, and the spending of those revenues; and often, (3) large categories of spending not financed by taxes, such as spending financed by university tuition and federal aid.


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