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Executive Summary

This fiscal forecast of state and local spending patterns, using the same assumptions that most state legislative bodies employ when developing budgets, finds that even with normal economic growth over the next eight years, the vast majority of states will face significant fiscal deficits. Given past state budget patterns of coping with fiscal deficits and avoiding tax increases, the report concludes that the projected shortfalls will lead to increased scrutiny of higher education in almost all states, and to curtailed spending for public higher education in many states. The bad news is that if economic growth is slower than "normal," if taxes are reduced, or if state spending increases for areas outside of higher education, then the outlook for support of public higher education will be even less favorable.

The overall forecast for state fiscal health is as follows:

• The Challenge: Maintaining Current Service Levels. To maintain current service levels, state and local governments will need to increase spending by about the same percentage as the increase in total personal income of all Americans. This increase in spending will allow for inflation and for constant per-unit services, such as teacher/student ratios.

• The Problem: Slower Growth in State and Local Revenues. Unless tax increases are enacted, state and local revenues will not grow as quickly as total personal income. This derives from a well-known problem, largely due to states' reliance on sales taxes and fees: state and local taxes are slow to react to increases in income.

• The Result: Structural Deficits. State and local governments will have a structural deficit in funding current service levels. The mismatch averages about 0.5% per year nationwide, but varies depending upon the state. Due to the robust national economy and other reasons, this problem has not been obvious in recent years, but is likely to become more obvious in the next few years.

Only ten states show structural surpluses. One state has no surplus or deficit, and the remaining 39 are projected to have structural deficits.

IMPACT ON HIGHER EDUCATION

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. Whereas total state funding for all services will need to increase by 5% annually to maintain current service levels, state funding for higher education will have to increase by 6% -- largely due to enrollment increases. This means that even if states were not facing structural deficits in reaching the 5% annual growth in revenues, the percentage of state funding devoted to higher education will need to increase annually in order for higher education 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. It would also represent a dramatic departure from near-universal statements about priorities for K-12 education in the 1998 campaigns.

Taking the positive view -- that is, assuming that higher education were merely to share equally in the fiscal pain of helping states respond to their structural deficits (rather than being singled out for additional cuts, a "balance wheel" function that higher education has served in the past) -- then, based on national averages:

• higher education would not see expansion of spending patterns for any program except as financed by reductions in other programs within total higher education spending, and

• higher education would share proportionately in spending growth rates that average annually about 0.5% below the total appropriations levels needed to maintain current services.

At the same time that states will be facing structural deficits, they will be:

• seeking to fund new initiatives in many state program areas outside of higher education (see Appendix A),

• confronting the difficulty of cutting current services in these other program areas (see Appendix B), and

• confronting the difficulty of raising taxes (see Appendix C).

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© 1999 The National Center for Public Policy and Higher Education