CENTRAL FISCAL DECISIONS, IN THEORY
The preceding two chapters deal entirely with purely fiscal decisions of state
elected officials. These are decisions from the world of state budget offices and
governors, legislative fiscal staffs and legislators, and voters occasionally acting
directly on tax and spending measures by initiative and referendum. These decision-makers
are treated as though they dealt only with relatively pure fiscal decisions, including:
- The level of taxes and thus spending,
- The allocation of spending among higher education and other major functions,
- The mechanisms for adjusting spending to unexpected changes in fiscal circumstances.
The major players in these decisions are chairs of appropriating committees, House
speakers and Senate presidents, governors, budget directors, legislative fiscal officers,
and those interest groups with major effects on overall spending and tax policies.
They do not normally have any closer association with higher education than with
health care, elementary and secondary education, or other functions.
Of course, fiscal decisions themselves are policy decisions. Furthermore, decisions
about budget levels often push detailed policy decisions in particular directions.
For example, new programs are more likely to be established in higher education institutions
when appropriations exceed costs of maintaining current services. But in the purest
view of budgeting, the central fiscal authorities do not:
- Determine how the spending totals they set will be allocated within a function,
such as by determining divisions between community and institutional mental health,
formulas for allocating school aid among school districts, and allocations of higher
education funds among levels of instruction, individual institutions, or between
scholarships and institutional support.
- Establish policies affecting individual functions except as government-wide policies
applicable to all functions, such as civil service pay schedules, contributions to
employee retirement plans, and charges levied by central service units such as state
These limited roles of central fiscal authorities are reflected in the normal
assignments of responsibilities in executive branches and legislatures. Within the
executive branch, state budget offices play the fiscal role, while departments and
independent agencies administer functions and are expected to have dominant influence
over questions of policy -- so long as they operate within fiscal constraints. In
the legislatures, appropriating committees have jurisdiction over budgets. But substantive
legislation dealing with policies is assigned to other committees such as those dealing
with education and health care.
CENTRAL FISCAL DECISIONS IN REALITY
As a practical matter, the divisions between central fiscal authorities and those
setting policy for individual state functions is never clear and always controversial.
Ambiguity in roles is inherent in the work of elected officials because their
responsibilities include both policies within individual governmental functions and
central fiscal decisions. They are under no major pressure to separate their roles
and often do not do so; therefore, governors frequently use the process for the development
of budgets as their primary mechanism for reviewing and making decisions on major
policy initiatives. Many legislatures include substantive legislation in their budget
bills. It is quite common for legislators and governors to hold many major decisions
of a legislative session for final determination as part of grand compromises that
include tax policy, the budget, issues with fiscal impacts such as employee pay raises,
money issues within functions such as allocation of school aid among school districts,
and issues unrelated to money such as those associated with regulatory policy.
Many state budget staffs, both legislative and executive, and legislators serving
on appropriating committees see themselves as having more responsibility for policy
than the theory summarized above suggests they should have. They feel responsibility
for decisions embodied in "their" products, such as their executive budget
and their appropriations bills. Some believe that they cannot separate decisions
on how much to spend on particular functions from decisions on how it will be spent.
For example, they may support additional spending if used for Activity A but not
for Activity B. In that situation, to achieve their objectives, they must control
sub-allocations of appropriations when Activities A and B are within the same function
-- as when, for example, both involve higher education spending. Moreover, those
in central positions may choose to exercise power simply because they believe they
know the right policies and are in a position to use their fiscal power to ensure
implementation of the policies they like.
Rightly or wrongly, central fiscal decision-makers have more impact on policy
than theory might suggest they should have. That impact varies from state to state
and from year to year based on many different factors, including institutional traditions,
statutory frameworks, the impact of dominating personalities, and the preferences
of current governors and legislative leaders.
FISCAL DECISION-MAKERS AFFECTING HIGHER EDUCATION POLICY
Some impacts of fiscal decision-makers on higher education policy are nearly random.
For example, a powerful appropriations committee chairperson may use his or her position
of power to favor appropriations for a particular higher education institution in
his or her district. Or the position of power may lead to larger appropriations for
some activity, such as medical education, and lesser ones for others. A powerful
budget analyst in an executive or legislative position may influence a variety of
policies of interest to him or her, but random events may lead to someone else holding
such a position with less or more power to implement policy preferences. This paper
has nothing to contribute to the understanding of such situations.
On some subjects, the impacts of those who draw power from state fiscal processes
is not random. It stems from one of two factors, or both:
- There is a substantial rationale for involvement of central fiscal perspectives
in the decision.
- Central fiscal decision-makers bring a unique perspective to the policy under
There are many examples where there is a substantial rationale for involvement
of central fiscal decision-makers in higher education policy. Each one is controversial,
but these are some common ones:
- Policies involving collecting money from the public (e.g., tuition), particularly
if state rules allow the collecting agency to supplement spending through using the
- Policies involving duplication of functions or potential duplication of missions
of other agencies, such as providing remedial instruction in higher education.
- Policies with rationales outside of the budgeted function, such as justification
of higher education spending based on perceived economic development benefits.
The unique perspectives of those in central fiscal decision-making involve such
topics as government-wide approaches to performance measurement and attitudes toward
contracting out government functions.
The discussion of individual policies in higher education that constitutes the
remainder of this chapter examines the unique policy perspectives commonly found
among those dealing primarily with fiscal matters affecting multiple state agencies.
The aim is to explain the various perspectives and their impacts on higher education,
not to predict the extent to which the perspectives are likely to be implemented.
TAX EXPENDITURES VERSUS SPENDING
In economic terms, there is little difference between supporting an activity through
direct grants, which count as state spending, and tax concessions, which count as
reductions in revenues. This point is so widely understood that the federal government
and some states prepare annual reports on tax expenditures. Like outlays, tax
expenditures involve allocation of scarce state resources. The amounts and purposes
can be calculated by treating the revenue reductions as though they were outlays.
Paying some of the costs of attending higher educational institutions provides
an example. Suppose, for example, the intent is to employ additional state resources
of $600 per full-time pupil in higher education. One approach would be to give the
$600 to the institution providing the education. This would count as an outlay, taking
the form of an appropriation to the institution. Another approach would be to allow
the subsidy to follow the student by awarding $600 to each eligible student in the
form of a voucher or its equivalent, a scholarship which could only be used as partial
payment of tuition. This would also count as an outlay, but the appropriation would
be to a state scholarship commission. Another approach would be to award the student
or person paying the tuition a tax credit of $600. This would not be an outlay, but
instead would be a reduction in revenue.
Choices between expenditures and tax expenditures are only theoretically unrelated
to other policy choices. As a practical matter, whether the decision is made in a
tax context or a spending context also influences other important policies. For example,
it is relatively easy to defend distributing institutional subsidies only to public
institutions. It is much harder to defend confining tuition tax credits only to those
attending public institutions.
Central state decision-makers have recently shown a strong bias toward using
tax expenditures rather than spending. For reasons described in Appendix
C, many decision-makers wish to make records of reducing taxes. This alone could
account for the recent popularity of using tax expenditures in higher education,
both at the federal level and in some states.
The impact of both federal and state fiscal conditions on this bias is probably
not well understood. When a government is collecting more money than is required
to maintain current services, the excess is available for either tax reduction or
increased spending. In this situation, but only in this situation, tax expenditures
appear to perform double service in public perceptions. On the one hand, they are
a reduction in taxes. On the other, they represent added support for the function
for which they are provided.
However, when a government is unable or barely able to cover current service spending
with current revenues, there are no extra resources available either for added spending
or for tax reductions. In such a context, the use of resources for either a tax expenditure
or a regular expenditure will require difficult decisions to increase taxes or cut
spending in existing programs. No double duty can be performed by a tax expenditure
because any tax cut will have to be accompanied by an equal and offsetting tax increase.
In such a context, a different principle of central fiscal authorities applies.
Public opinion surveys and the experience of state elected officials suggests that
revenue-neutral tax changes are perceived as tax increases. The public clearly sees,
and journalists widely publicize, the portion of the revenue-neutral changes that
increases revenue. The corresponding reductions are often less clearly perceived
and, when perceived, tend to be viewed as promises of politicians to cut taxes that
may not be fulfilled.
It follows that the recent emphasis on tax expenditures for higher education may
SUBSIDIZING CONSUMERS, NOT PROVIDERS
Over the past several decades fiscal decision-makers have become increasingly convinced
that it is better to provide government support of consumption of any good or service
by allocating subsidies to consumers rather than to providers. This approach substitutes
decisions by consumers for decisions by government on such topics as which providers
prosper and grow, which suffer, and which are eliminated. Adoption of the approach
causes massive changes in any field affected by it. Fields most recently affected
include the provision of acute medical care (a function most hospitals perform),
mental health, and housing.
The impact can most recently be seen in the dramatic changes that have taken place
in the operations and ownership of what formerly were public hospitals. There is
a potential direct parallel to public higher educational institutions. The response
of governments in the United States to people who needed hospital care but could
not pay for it was the creation of public hospitals. These hospitals, which included
some of the best-known and respected medical facilities in the nation, were typically
funded and maintained by local governments, primarily counties.
The major changes in health care are primarily associated with the institution
of the Medicaid program, which, in effect, provides open-ended vouchers to those
eligible in the form of a Medicaid card which works roughly like a health insurance
card. Parallel changes occurred in other government programs such as the provision
of health care for veterans and for some members of the armed forces and their dependents.
Private (mostly not-for-profit) hospitals were often preferred by these subsidized
patients by reason of location, perceived better services, and other reasons. In
the many cases where government payments equaled or exceeded costs of treatment,
private hospitals aggressively marketed themselves to charity patients. As a result,
capacity utilization in public hospitals dropped, costs per patient increased, and
for a variety of reasons, the public hospitals were slow to adopt cost-saving measures
being adopted in the private sector. Faced with the resulting financial pressures,
state and local governments have largely eliminated their public hospitals -- closing
some, merging others with private institutions, and disposing of others to profit-seeking
or not-for-profit corporations.
These results have their critics, but have generally pleased elected officials
and their fiscal staffs. Competition is believed to hold costs to below what they
would otherwise be. The changes have reduced public employment. Almost by definition,
consumers are satisfied as they are experiencing the consequences of their own choices.
Advocates of subsidizing consumers rather than producers are now most publicly
apparent in the voucher movement (and pressures for tax credit equivalents of vouchers)
in elementary and secondary education. The voucher proposals draw huge controversies,
primarily because public education employees perceive the changes as threatening
their jobs, a threat those employees have recognized better than their counterparts
in public hospitals.
Subsidizing consumers rather than producers in higher education has produced much
less visible controversies. However, policy shifts have been substantial, and they
can be seen in the details of some programs -- such as in shifts of support for teaching
in university medical schools. They appear dramatically in the recent adoptions of
education saving accounts, tax deductions for tuition, tax credits for tuition, and
state-run college savings plans. Most of these programs do not distinguish between
private and public institutions as providers of higher education services.
State central decision-makers are moving consistently in many fields toward more
support of consumers and less support of providers. The concepts are reflected in
the use of tax expenditures rather than outlays for functions such as childcare,
care for the elderly, higher education, elementary and secondary education, and job
training. They are reflected in changes in financing mental health and daycare services.
They are reflected in education plans that seek to increase student choice in attending
charter schools or schools outside the district of residence.
To the extent that central decision-makers successfully bring these perspectives
to higher education, the results will be a greater emphasis on tax expenditures,
a greater emphasis on scholarships, less emphasis on institutional support, and broader
participation by private institutions in public support of education of state residents.
How far could such an approach evolve? In higher education, it could evolve to
match systems now in existence for other functions, systems in which governments
merely buy "slots" that eligible participants use, thereby providing these
participants with choice among providers, so long as space is available. Section
8 housing subsidies work this way. Most daycare programs work this way. School voucher
plans work this way. Much of job training works this way. So does provision of Medicaid-reimbursed
nursing home care.
PUBLIC SUPPORT OF QUALITY
Government typically provides its services at no cost to the consumer or with charges
that are highly subsidized with tax revenues. As a result, there is little limit
to potential consumer demand and thus to government costs. Meeting all of the resulting
demand is impossible, so governments find ways to limit consumption of what they
A common mechanism for limiting consumption is to declare only a portion of possible
consumers as eligible for the service by some test, such as through the low-income
tests required for eligibility for government-paid health care, nursing home services,
and housing. But long traditions and public policy arguments suggest that many public
services must be offered to all. Examples are services of the police, libraries,
public parks, museums, public schools, and public higher educational institutions.
Although no one likes to talk about the resulting rationing as a matter of policy,
public services in these situations normally do not meet the highest standards of
quality in their industry. This drives the portion of demand associated with more
affluent and/or highly motivated users into private sector providers.
The results are apparent in many fields. Those seeking the highest levels of security
services buy alarm systems and hire private guards. Those seeking the best mental
health care see private psychiatrists even though supposedly comparable services
are available at public expense. Most parents pay private doctors to vaccinate children,
even though vaccination is offered as a public health service. Affluent families
go to private theme parks while less affluent ones use public parks. Many people
seeking their definition of "the best" for their children send them to
private schools and universities.
In general, while aspiring to the best, governments provide most services based
on views of meeting minimum standards. In this context, widespread support for using
tax dollars to bring some state universities to standards of elite private institutions
remains an anomaly of public policy that has not escaped the notice of some central
RATIONING BY USER CHARGES
Many of the staff members populating central fiscal agencies are trained in economic
doctrines that place much more value on user charges for public services than the
providers and users of the particular services consider appropriate.
In extreme cases -- where benefits of government services accrue almost exclusively
to the users of the service -- this philosophy suggests either that government should
not provide the service at all or, if circumstances dictate that it must, the users
be charged the full cost of providing services. This approach has much to do with
why state governments, despite federal urging, have never participated with their
own tax dollars in subsidized housing, why costs of fish and game programs are covered
by license fees, why gas taxes and other user fees cover most highway costs, and
why heavy fees are charged for applications for state and local permits to conduct
This orientation to user charges helps explain why there is often more interest
in financing portions of higher education outlays with tuition among budget staffs
than among students and higher education professionals.
AVOIDING GEOGRAPHIC DISTINCTIONS
Statewide elected officials, such as governors, are elected by systems in which a
vote anywhere counts as much as a vote anywhere else. Legislators are elected in
smaller geographic constituencies but must reach decisions by majorities of representatives
of such constituencies. Both systems give elected officials strong reasons to never
appear to be anything but even-handed in dealing with different geographic areas
within a state.
The resulting pressures in allocation of support among public higher educational
institutions is well known. These pressures inherently make it difficult to single
out particular institutions, and thus particular places, as unique centers of excellence.
Instead, all of the pressures lead to one of two policies. One option is access for
nearly all high school graduates to excellent state institutions. This policy leads
to the conclusion that such institutions should exist in every population center.
The other option is concepts of tiers of excellence, with use of the excellent institutions
restricted on some basis other than geography such as the stiff admissions requirements
used by the University of California.
BUDGETING FOR "ADD-ONS" FOR MISSIONS NOT DIRECTLY RELATED TO HIGHER
The basic philosophy of budgeting suggests that appropriations should be budgeted
to agencies primarily responsible for identifiable missions. This is a bureaucratic
version of the concept of subsidizing consumers rather than providers. It is reflected
in practices such as budgeting training of employees in the agency with the employees,
rather than in appropriations for particular training providers, such as state universities.
The philosophy is incompletely implemented even in this simple case and is even less
completely implemented in other more fiscally significant cases.
The best current example is the interaction of economic development and higher
education objectives. States are pursing economic development competitively and at
great expense. Bidding wars have established the going price of luring one new manufacturing
job as a one-time outlay (in tax benefits, cash subsidies, free land, provision of
public services such as road connections, and more) in the range of $15,000 to as
much as $300,000. With this kind of money at stake, state officials concerned with
economic development are willing to exert great pressures on higher education administrators
to be responsive to real or imagined concerns of business leaders contemplating expansion
or new locations. These business leaders are looking for a higher education presence
in the fields that interest them and in close proximity to where they are considering
locating facilities. Those locations are often not the ones that would be selected
on the basis of higher education criteria alone.
Purity in budgeting spending by higher education institutions to achieve economic
development objectives will never be achieved. Economic development professionals
will always have an interest in minimizing their apparent costs by ensuring that
they appear outside their budgets and in such forms as budgets for higher education
and reductions in tax collections. Administrators in higher education (and other
fields) will always be motivated to claim benefits from their spending in contributing
to state objectives outside educating students, of which economic development is
But at least in the theory of budgeting (as imperfectly pursued by central fiscal
staffs), those portions of demands on higher education rationalized by state objectives
outside of higher education should be budgeted separately.
The likely impacts of the central fiscal perspectives considered in this chapter
are much more difficult to forecast than the likely impacts of state fiscal conditions
on state spending for higher education. About all that can be said with certainty
is that the constant tensions between perspectives of central fiscal decision-makers
and managers of state programs, including higher education, seem likely to continue
at about the same levels as in the past.