Besides, projections like those presented above are dry as dust when compared
with the appealing realities of any government function, such as higher education.
Compared with such inviting concepts as broadening access and improving quality in
higher education, funding current service budgets for health care or law enforcement
sounds like a trade-off that somehow should be made in favor of the more attractive
alternative.
A Native American saying asserts that you cannot know a person until you have
walked in his moccasins. Most readers of this paper have lifelong careers in higher
education, without the experience of having served in major elected offices, with
no burning desire to do so, and with limited prospects for doing so even if they
choose to do so. They haven't and will not walk in the moccasins of elected officials.
For a short time, they must settle for a few written words that attempt to convey
the perspective of elected officials.
Higher Education Funding Options
Three appendices to this report attempt to convey the perspective of elected officials
by examining substantive and political arguments about tax increases and, program-by-program,
arguments against cutting and for expanding major programs other than higher education.
(Readers are presumed to be familiar with those arguments in relation to higher education.)
The gist of the arguments in each appendix and the basic conclusions flowing from
them are summarized below. Chapter One, in projecting mild
structural deficits in most states, indicates that there will be a widespread inability
to fund current state and local services with current taxes. If higher education
were to share proportionally in adjusting to this problem, it would:
This conclusion could be avoided by two alternatives, both of which the appendices
suggest are unlikely. First, state officials might raise taxes, but Appendix
C provides many reasons that make this improbable. Second, state officials might
favor higher education spending over other areas of spending by providing disproportionate
budget cuts in other programs, but Appendix B indicates
that this is unlikely.
State officials might, in fact, make the pain suffered by higher education proportionally
greater than that of other programs. This would happen if they opted for the new
initiatives in other programs described in Appendix A.
Or higher education might suffer more than required to close the structural deficits
because state officials insist on additional tax cuts.
The environment described in the appendices will make it difficult, particularly
in some states, to achieve funding of current services for higher education.
With a struggle just to maintain current service spending, increases above that level
appear unlikely over any decade-long horizon. Specifically, it is likely that the
fiscal environment for higher education in most states in the early 2000s will be
significantly worse than it was in the late 1990s.
FUNDING CURRENT SERVICES
Amounts Needed
The baseline projections on which the discussion in Chapter
One is based presume that state governments will continue to provide the same
level of support for higher education as they have in the past. Specifically, this
is defined as increasing funding enough to cover the expected increases in higher
education enrollment with constant real (inflation-adjusted) support for full-time
equivalent (FTE) students. To do this, state funding would have to cover per-FTE
cost increases associated with general inflation and additional cost increases associated
with presumed increases in higher education salaries equivalent to increases being
experienced in the private sector.4 The net effect
of these factors is that total state support needs to increase by nearly 6% a year
in the baseline projections.
Implications of the Baseline for Higher Education Funding
If 6% increases are, in fact, achieved, state support of higher education would closely
resemble the patterns now in existence. This, of course, is the intent of current
service or baseline budgets.
Specifically, the total costs of higher education would rise about 4% per FTE
student. The share of total costs currently paid by the federal government, state
and local governments, and tuition would remain as it is today. Higher education
tuition would thus be rising slightly faster than inflation, along with the funding
from other sources of support for higher education.
SHIFTING SPENDING PRIORITIES TOWARD HIGHER EDUCATION?
National Situation
Over the past decade, the percentage increases in state support for higher education
have been smaller than the percentage increases in total state budgets. The baseline
projections imply that this situation will need to be reversed. Specifically, annual
increases in state appropriations of about 6% would contrast with annual total budget
increases of about 5%. They would exceed annual increases in elementary and secondary
budgets of just under 5%. To fund the baseline, state elected officials would be
in the position of having to defend an apparent priority for higher education spending
-- as well as defending the apparent other priority implied by the baseline, Medicaid.
This development implies a significant shift in emphasis from what state officials
have been doing over the past decade and from the near-universal statements about
spending priorities in the 1998 campaigns. Many candidates talked about a priority
for spending on education. For most of them this boiled down to K–12 education.
State Situations
Individual states face dissimilar situations because of expected differences in the
budget increases needed to maintain current services. These differences are caused
by several factors, including projected increases in higher education enrollments
and in the workload factors driving other spending. The differences among states
are captured in Table 2. The right two columns of
the table show the projected increases in total state and local spending needed to
maintain current services over eight years, and the spending increases needed for
higher education to maintain its current services over the same time frame. The "Annual
Average Advantage for Higher Education" is derived by subtracting the growth
in all programs from the growth in higher education, and then dividing by eight to
give readers a feel for the annual difference.
Based on the national average, spending for higher education would have to increase
1% faster than total state and local spending (the higher education "advantage")
if current services are to be maintained for all programs. As Table
2 shows, eleven states can cover current services by providing smaller increases
to higher education than to their total budgets. These are primarily southern states
that saw rapid growth in the 1960s and 1970s, resulting in enrollment bulges for
higher education in the 1990s. In the next decade, higher education enrollments will
be stable or declining while other portions of the population, particularly those
over age 45, expand rapidly.
In a third of the states, current service spending implies providing for annual
growth in higher education funding that exceeds by 2% or more the growth rates in
total annual spending. This occurs primarily because those states, particularly those
in the Southwest, are now feeling the impacts of higher education enrollment of their
rapid growth in the late 1970s and 1980s.5
BASELINE IMPLIES TAX INCREASES IN MOST STATES
The Magnitude of the Fiscal Problem
To provide the level of funding for higher education described above, state officials
will need to put themselves, in conjunction with local governments, in a position
to fully fund their current service budgets. Nationwide this implies tax increases
of about 0.5% a year. A few states would not require tax increases at all, while
some others would require tax increases approximating 1% a year.
The baseline projections do not include the impacts of decreases in revenues because
of recently legislated tax cuts. Many states have already enacted tax cuts that are
being phased in over a period of years. These future cuts will cause budget shortfalls
in these states to be larger than the shortfalls presented in the baseline projections.
Nor do the baseline projections include the impacts of the many commitments made
by individual state elected officials in support of tax cuts that have not yet been
enacted.
In combination, these factors suggest that funding the baseline budgets of higher
education and other programs implies substantial tax increases. The amounts vary
by state. Each state will have somewhat different: (1) baseline budget shortfalls
or surpluses, (2) already enacted tax cuts taking effect in future years, and (3)
likelihood of enacting additional tax cuts in 1999. Summing these would imply tax
increases by state and/or local governments during the early 1990s of as much as
1% a year in many states.
Obviously, state officials are unlikely suddenly to announce that they see a need
to start raising taxes just because projections indicate future fiscal problems.
Instead, the cyclical patterns that historically have brought about state tax changes
reveal that tax increases must appear to be absolutely essential at the time. This
dynamic is particularly germane because extraordinary economic circumstances can
make state fiscal positions look artificially strong in good times, such as those
of the late 1990s. In such an environment, state legislatures tend to expand state
spending and cut taxes, while still producing balanced budgets -- but only so long
as the unusually strong economic circumstances continue.
Fiscal Crises
If extraordinarily good times were followed by normal times, it might be possible
for states to make fiscal adjustments in less than a crisis environment. However,
extraordinarily good times are usually followed by corrections in the private economy
called recessions. When these occur, states are usually caught in a situation where
their budgets are grossly out of balance. Often state officials are slow to recognize
the onset of recession. Because of the timing of legislative sessions and controversy
over appropriate solutions, state legislatures are often slow to enact corrective
measures once the problem has been recognized. As a result, the magnitude of corrections
to maintain balanced budgets is often 5% or more. That is, the corrections imply
a combination of spending cuts and tax increases amounting to 5% or more of total
spending, often to be continued in effect for several years.
The crisis environment created by unexpected large budget gaps provides the political
environment most conducive to state tax increases. Increases are presented as an
alternative to such measures as laying off large numbers of state employees, mid-year
cuts in school funding that would cause actions like ending extracurricular activities
in public schools, mid-year increases in university and community college tuition,
and the like.
Even in such a crisis environment, it isn't obvious that state elected officials
will act to avoid these results. Their primary objections are likely to be: (1) concern
over rising taxes, and (2) concern over the apparent priority being given to higher
education over other competitors for funds.
LOOKING HARD AT HIGHER EDUCATION SPENDING
In the early 2000s, state elected officials will be facing structural deficits yet
seeking to fund new initiatives in many programs (Appendix
A). They will be confronted with difficulties in raising taxes (Appendix
C) and cutting current services in other programs (Appendix
B). In this context, at an absolute minimum, they and their budget staffs will
be subjecting higher education to more scrutiny than in the recent past.
The underlying question about spending will be whether, at the margin, higher
education spending is contributing more than spending at the margin in other programs.
This question will be raised in a political dimension with the adverse electoral
consequences of cuts in higher education compared with cuts affecting public schools,
health care providers, and others active in state politics. The question will be
raised in a substantive dimension with the values of improvements in higher education
compared with the values of improvements in job training, preschool education, preventive
health, and other programs.
One underlying question about financing will be whether raising revenues in the
form of budgets that encourage university officials to raise tuition (or cut spending)
are less painful than raising revenues in the form of tax increases.
CROSS CUTTING APPROACHES
Historically, elected officials have often found comfort in applying a logic equally
to all program budgets. Critics can argue that such approaches ignore the relative
merits of spending increases and the costs of spending cuts in each program and thus
beg the issues elected officials are supposed to decide. A more positive view of
the result is to say that elected officials often simply assume that the relative
merits of increases and adverse consequences of cuts are about equal across programs,
so adjustments associated with changes in state fiscal circumstances should be in
roughly equal proportions.
The across-the-board approaches are particularly likely to be employed in situations
where the complete state budget process cannot be used to set new priorities based
on changed fiscal circumstances. Those situations arise when governors and/or legislative
budget committees are charged with adjusting already enacted budgets to deal with
unexpected fiscal difficulties.
Historically, the first signs that state budgets are unbalanced usually come during
a period for which the current budget has been set, and thus needs to be trimmed
in mid-year or in the midst of a biennium. Some of the across-the-board measures
adopted in such circumstances have included:
- Uniform holdbacks of appropriations, called pro-ration in some states, by which
spending for each function is constrained to 1% to 5% below amounts appropriated;
- Freezes on new hires and promotions;
- Freezes on purchases of new equipment and renovation projects;
- Elimination or curtailment of hiring of seasonal or temporary workers; and
- Restrictions on travel.
As fiscal difficulties persist, the need to formulate new budgets with less total
spending than required to maintain current services appears. Across-the-board approaches
are often applied in this situation also. Some examples are:
- Freezing spending by holding appropriations in the new budget to the dollar totals
provided in the old;
- Adjusting budgets only for changes in workloads (e.g., FTE student counts), thereby
requiring state agencies and grantees to absorb costs of employee pay raises and
inflation in costs of utilities and purchases; and
- Across-the-board percentage reductions in total spending from a base of either
the costs of maintaining current services or the previous year's budget.
While subject to the criticism that these across-the-board efforts are arbitrary,
many elected officials are more comfortable with them than with more policy-oriented
and less uniform sharing of fiscal pain among program clients and interest groups
advocating various forms of spending. Public higher education in most states has
seen these across-the-board policies at work in past periods of fiscal adversity
and is likely to see them again in the early 2000s.
SINGLING OUT HIGHER EDUCATION FOR DISPARATE SPENDING CUTS
Over the past several decades, state budgets for higher education have reflected
two major characteristics. First, the percentage of state spending devoted to higher
education has been declining. Second, there have been fluctuations in higher education
spending, changes that are linked to state fiscal circumstances.
The Balance Wheel Concept
The fluctuations in higher education spending stem from use of higher education as
a "balance wheel in state finance."6 Typically,
when state finances are strong, appropriations for higher education have risen disproportionately
to appropriations for other functions. But current service budgets in higher educa-tion
have been cut disproportionately when state fiscal circumstances are weak.
Selection as a balance wheel results from some perceived characteristics of higher
education relative to other objects of state spending. First, higher education institutions
have separate budgets with reserves of their own and perceived fiscal flexibility
to absorb temporary fiscal adversity, unlike state agencies which do not have these
features. Second, higher education is perceived as having more flexibility to translate
budget changes into employee pay than state agencies, which are bound by statewide
pay scales, and local education agencies, which are subject to collective bargaining
and multi-year employee contracts. Third, higher education is seen as having more
flexibility to vary spending levels (e.g., through changes in courses offered and
class sizes) than most programs, which have spending levels that are more fixed.
Fourth, in most states, higher education has the ability to maintain and increase
spending levels by shifting larger proportions of costs to users by tuition and fee
increases.
Temporary Cuts and Permanent Loss of Budget Share
Use of higher education as a balance wheel has probably been an independent factor
leading to the reduction in higher education spending as a share of state budgets.
Because the starting point for budgeting is the prior year, dispro-portionate spending
constraints on higher education tend to be perpetuated as state financial circumstances
improve.
However, there are other reasons why the higher education share of state spending
has been declining. One major reason is totally independent of higher education or
of current perceptions of higher education. Through the late 1980s and early 1990s
factors unique to Medicaid and corrections were causing rapid annual increases in
spending for those programs. Because "shares of the budget" is a zero-sum
game, their gains had to come at the expense of shares of other programs. Viewing
the same phenomenon another way, the baseline costs of those programs rose rapidly
because of changes in federal mandates, workload (e.g., prisoners to be confined,
parolees to be supervised, and Medicaid clients, particularly those in nursing homes),
and cost factors (e.g., increasing complexity and cost of medical procedures). There
were no comparable changes in higher education in most states.
Even with these explanations, it appears that higher education is doing worse
in capturing growth in state spending that would be expected based on changes in
objective circumstances alone.7 In other words,
higher education isn't competing successfully with the attractions of other forms
of state spending.
The critical question for many readers is undoubtedly whether these factors will
continue to impact state support of higher education in the next decade.
The answer to this question cannot be known with certainty. The author's answer
is YES. Absent any evidence of change, the author assumes that elected officials'
attitudes toward the substantive and political merits of spending on various programs
remains as in the past. With attitudes and decision-making procedures unchanged,
and with the impacts of strong and weak state fiscal circumstances on higher education
spending well known, forecasting state approaches to higher education spending becomes
simply a matter of forecasting the state fiscal circumstances likely to prevail in
the next decade.
Given the fiscal environment predicted in this paper for the next decade, the
fiscal outlook for state support of higher education is not good from the perspective
of advocates of increased state spending for higher education. Use of higher education
as a balance wheel will continue. Higher education will likely share disproportionately
in the adverse consequences of the structural deficits likely to become increasingly
apparent in most states.
Put another way, the current relatively generous increases in state support of
higher education do not reflect changes in patterns and practices in state budgeting.
They only reflect the standard response to extraordinarily strong fiscal conditions.
They will disappear when those fiscal conditions disappear.8
Both will disappear soon.
COULD THESE CONCLUSIONS BE WRONG?
The predictions of widespread structural deficits in state and local government throughout
the next decade are the cornerstone of the conclusions in this chapter. Those conclusions
are based on many factors, some more predictable than others. Appendix
D discusses the sensitivity of the conclusions to various predictions and assumptions.
