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 8 of 14

Appendix B: Cutting Spending Outside of Higher Education


This is one of two appendices designed to turn the unappealing category of "other programs" (those that compete with higher education for state funds) into the appealing realities seen by state elected officials. Whereas Appendix A focuses on proposals to increase spending on other programs above the baseline levels (defined in the text of the report), this appendix deals with the difficulties of cutting baseline spending in other programs. Reading these two appendices is not necessary for those who believe that, for political or substantive reasons or both, higher education will have a difficult time competing for funds with other programs.

Those who believe that maintaining baseline spending in higher education without tax increases is simply a matter of making easy cuts in other programs should consider the details found in this appendix. Those who believe that proposals to increase baseline spending in higher education can, or should, compete successfully with similar proposal in other fields should read Appendix A.


Those concerned with maintaining particular programs, such as higher education, have little interest in having "their" program associated with tax increases. For example, higher education proponents will rarely put themselves in a position of advocating that lawmakers increase taxes to fund higher education. Instead, they, like advocates of competing priorities for uses of state dollars, find it much more comfortable to suggest that "their" program be funded by giving it an appropriate priority in spending decisions. This posture is comfortable because it means that they do not have to advocate tax increases or large cuts in any specific other program that might represent a lower priority.

This posture is so comfortable for advocates of particular programs that all advocates of all categories of state spending assume the same posture. This puts elected officials in the position of having little support for tax increases but also no support for cuts in particular programs. That is, those concerned about health care cannot be counted upon to defend low funding for education. Likewise, those concerned with education will not back attacks on health care spending.


While interest groups can "sit out" battles over budget priorities, lawmakers cannot. In order to fund even current service spending for higher education without tax increases, lawmakers must find ways to fund less-than-current services in other programs.

For purposes of presentation, these reductions from current service spending needs are called budget cuts in this paper. This follows the federal usage, which isn't followed in all states. That is, if a 4% increase in state school aid would be required to cover inflation and enrollment increases, this discussion considers a 3% increase to be a 1% budget cut. Obviously, this is not a cut in the sense of reducing spending below the level of the prior year.

The discussion that follows asks readers to put themselves in the position of state elected officials who are seeking to fund higher education without raising taxes by examining other portions of state budgets for such cuts. While considering these options is probably not what readers want to do, and isn't recommended as what they should do as part of public budget debates, it is what they must do to get a feel for how state elected officials will likely respond to desires to make room in state budgets for increases in higher education.


Support of K12 education is the largest single category of state spending, accounting for about a third of all state general fund outlays.11 Nearly all state spending for K12 education takes the form of state payments to school districts under a variety of programs. The largest and most expensive of these state spending mechanisms involves aid not earmarked to particular local spending, which is provided under formulas that reflect proxies for school spending needs (e.g., pupil counts) and that reflect the portion of those needs that should be met with local funding, which is a function of the wealth (tax base per pupil) of the districts. Other aid is provided to districts under categorical programs for such purposes as pupil transportation, school construction, special education, and teacher training.

The starting points for discussion of annual budgets for elementary and secondary education reflect several concepts. The most common is that state aid should increase by an amount sufficient to adjust the prior year allocation for enrollment changes and inflation. This is one of the standards guaranteed for elementary and secondary education (and community colleges) under California's constitution. It was made a constitutional requirement under a voter-initiated measure known as Proposition 98. School funding does not enjoy similar constitutional protections in other states, but the concept is widely accepted.

From a tax policy perspective, the concept is appropriate because it maintains spending per pupil, at a minimum, at the amount required to cover inflation. The concept provides that the increases in total costs (to cover inflation and enrollment changes) be split between state governments and individual school districts in the same proportion that the base costs are being split.

If states provide less aid than this, the consequence must be one of two widely disliked alternatives. The first is that total education spending per pupil rises with inflation, but local property taxes pay for a larger share of the increase than of the previous spending level. The second is that spending per pupil does not increase by the inflation rate.

To most readers, providing state aid to cover inflation and enrollment increases probably looks like a reasonable decision on the merits, just as it does to most legislators. Readers not of this view can consider the political implications of not providing at least this level of assistance. Such a cut from current services puts legislators at odds with the strongest group of program advocates in state policy. They represent the combined forces of teachers, parents organized through parent-teacher associations, school administrators, school board members (often major political movers and shakers in their local area), and large numbers of well organized school employees such as janitors, bus drivers, and food service employees.

This group is politically formidable because it does many things that public higher education does very little of or not at all: (1) active lobbying from the grass roots while legislatures are in session; (2) endorsement of candidates; (3) support of endorsed candidates with campaign workers and campaign contributions; and (4) retaliation against perceived opponents by such devices as supporting opponents in primary challenges and general elections.


On first blush, Medicaid doesn't sound like an awesome competitor for a share of state spending, particularly in competition with education. While education is an investment for the future, Medicaid is basically a dull operating cost. While education fits nicely with the popular theme of prevention, Medicaid is basically treatment. While education has substantial support in public opinion, Medicaid doesn't fare nearly as well in public opinion polls. While elected officials almost always campaign by saying they will spend more on education, few brag that they will spend more on Medicaid.

Yet Medicaid is a proven successful competitor against higher education in state budget priorities. The share of state budgets going to support higher education declined over the 1990s to make room for rapid increases in state spending on Medicaid. During the mid-1990s, Medicaid displaced higher education as the second most expensive state program, trailing only elementary and secondary education.

Medicaid is a strange competitor for state resources. It shares with another strong competitor, corrections, an almost total lack of interest in expanding the program because it is valuable per se, making it much different from state support of local schools, universities, transportation, and other functions in which, other things being equal, more spending is viewed by nearly everyone as socially beneficial. So Medicaid isn't a serious competitor for increases above budget levels defined as continuation, baseline, or current services.

Finding room for higher education spending does not, however, depend upon a decision as to whether or not to expand Medicaid programs. Rather, the choice concerns: (1) providing the funds to continue the existing Medicaid programs, or (2) cutting Medicaid. Implementing cuts in Medicaid is a much different proposition than resisting increases beyond those required to maintain current programs.

To consider the consequences of cuts in Medicaid, it is important to understand how the money is spent. With variation from state to state, a large portion of the outlays for Medicaid pays for health care for a population that is either over 65 or disabled. A significant portion of Medicaid spending for this group pays for residential care in nursing homes and for home health services that are designed to prevent the higher costs of nursing home stays. The rest of the outlays for this group are directed toward those who meet a means (poverty) test and provide for supplements to federal Medicare, supplements that cover about the same things that private "Medigap" insurance covers for most of the over-65 population (i.e., co-payments for services, drugs, and certain other omissions from Medicare coverage).

An important federal rule significantly affects states' ability to cut spending for Medicaid for the aged and disabled. The means tests applied to persons applying for Medicaid must be the same as those for persons already on Medicaid. As a practical matter, this means that to make eligibility more difficult for the aged and the disabled seeking to obtain Medicaid coverage, states would have to define as ineligible some aged and disabled persons now in nursing homes under Medicaid. In plain English -- and as the issue would be covered in the media -- this means "throwing them out in the street."

The rest of the Medicaid dollar goes to an under 65, not disabled population composed of both adults and children meeting poverty tests that account both for low incomes and few assets. There is essentially no interest in restricting Medicaid access for children. There is widespread public support for the notion that poverty should not stand in the way of adequate medical care. State policies don't always conform to this view on the grounds that able-bodied adults should rely on their own incomes to provide this care, or at least should only have public care in the direst of circumstances.

But this argument obviously doesn't apply to children. So expansion of Medicaid programs for children was the subject of a new federal-state program established by the U.S. Congress in 1997 and is a priority of many elected officials. Cutting back health care for children is extremely difficult for elected officials.

Health care for indigent adults isn't easily reduced either. The expensive portions of the care are typically associated with hospital stays. Denial of treatment by hospitals in urgent care situations, the most expensive portions of the program's cost, is unthinkable to hospital administrators and is illegal under federal and some state laws. Because of fierce competition among hospitals, no individual hospital can cover the costs of that care by raising charges for all other patients.

As a result, some form of public reimbursement will be provided. The only question is who will pay for it. There are two basic choices. The first is to recover the costs of indigent care out of patient charges. This can be accomplished by such mechanisms as taxing delivery of hospital services and using the proceeds to reimburse hospitals with extraordinary charity care burdens, or mandating school-age among the hospitals themselves with the same effect -- or combinations of the two. Each of these choices involves no federal subsidies. The other alternative incorporates federal cost sharing through Medicaid. By nearly every imaginable criterion, it is preferable to have the federal cost sharing.

It is also possible to save money in the Medicaid program by reducing reimbursements to health care providers such as hospitals, nursing homes, and physicians. This alternative is, indeed, often pursued by state elected officials. Over the past few years, there has been extensive movement toward coverage of Medicaid clients by managed care to bring savings of fixed price contracting to the program. For the services in which managed care is believed to be less useful (for instance, nursing home care), many states have attempted to cut costs by cutting rates (for example, by decreasing compensation to physicians per visit and to nursing homes per day). As a result, most states now pay Medicaid providers substantially less than the reimbursements available for comparable services from private health insurers, Medicare, and federal reimbursements for care of veterans and military dependents. In many areas, most physicians in key specialties, such as obstetrics, will not accept new Medicaid patients. This puts a practical limit on how much reimbursement rates can be cut.

Besides the substantive problems associated with reductions in Medicaid, there are more substantial political obstacles than higher education readers might imagine. Because the alternative to Medicaid reimbursement is often not denial of care but cross-subsidies from others who pay for care, Medicaid enjoys substantial support from private employers who purchase health insurance, private insurance carriers, and labor unions in environments where health care benefits are part of collective bargaining agreements.

Individual health care providers often have substantial, and surprising, political bases. For example, in many states nursing home operators are major political contributors, and members of hospital boards and physicians have substantial influence with those legislators and governors who are generally viewed as conservatives -- and who thereby would not be expected to defend this program for the poor.


Like Medicaid, elected officials do not campaign on the basis of spending more than necessary for corrections. But they also are not interested in spending less than necessary in this area -- that is, less than the costs of maintaining current services.

The costs of prisons and the administration of parole programs are largely set by factors not under the effective control of state legislators -- and particularly not by those oriented to cutting budgets, for they are normally found on appropriating committees, not on those committees dealing with criminal law and sentencing. In broad overview, corrections workloads (prisoner censuses) are determined by crime levels, the success of law enforcement in catching criminals, conviction rates, and sentences. Legislatures have no direct control over crime rates, they generally seek to maximize rather than minimize the frequency with which crimes end in arrest and conviction, and they have been creating records of lengthening, not shortening, sentences. Also, elected officials, encouraged by a federal program, have been working to ensure that criminals actually serve longer portions of their sentences.

The political costs of not pursuing these policies is viewed as very high. Nearly every state has examples of someone allowed out of prison on parole or work release who has committed some widely publicized, heinous crime. Such examples always provide grounds for criticism of incumbent elected officials for being soft on crime and frequently inspire cutbacks of patterns for granting parole and pardons and for using work release.


Besides Medicaid, states pay for many programs designed to assist low-income persons who meet means tests. Cash welfare constitutes only a tiny portion of the total amounts involved. Even before the recent caseload reductions, cash welfare payments were only about 4% of total state spending. Medicaid alone costs about five times as much as cash welfare. The current service budget projections on which this paper is based already presume, as do many state budgets, that the substantial apparent success of welfare reform in reducing cash assistance caseloads will continue. Specifically, welfare costs are projected to increase at about 4% a year, versus 5% for total state budgets and 6% for higher education.

Many of the more expensive aspects of safety net programs are not what most people think of when they talk about welfare. One major example consists of the state and local programs that attempt to deal with child abuse and neglect by supporting placement in other households.


The primary demands on state baseline budgets -- other than higher education -- are set by the programs previously described in this appendix. Other programs are smaller in their impacts, but have similar problems associated with cuts in current services. The following paragraphs feature the highlights.

Mental Health and Developmentally Disabled
States continue to maintain residential institutions for a portion of these populations. However, over three decades, states have been responding to the huge expense of institutionalization as well as to changes in thinking about appropriate treatment by de-institutionalization. Large portions of clients in both programs are now found in sheltered workshops, halfway houses, group homes, foster care arrangements, and in private homes with state funding of their unique needs for drugs (often very expensive) and medical care. In community settings like these and in state institutions, cutting current services is largely tantamount to eliminating these services for those now receiving them or rejecting new patients with circumstances comparable to those now being provided care at state expense.

Child Welfare Spending
States pay for substantial child welfare costs over and above those covered by the safety net programs described above. These programs, often run by local agencies at mostly state expense, include investigating child abuse and neglect, collecting child support, and serving in loco parentus to thousands of children who are literally wards of the state. These children are found primarily in foster homes and subsidized adoption settings, but a few of the most difficult and expensive cases are in state-run and private institutions. As with mental health, cutting current services is largely tantamount to eliminating these services for those now receiving them or rejecting new children with circumstances comparable to those now being provided care at state expense.

Parks and Recreation
Net state outlays for state parks, museums, and historical sites have declined as a percentage of total state spending even more than have higher education outlays. While the portion of total higher education spending that is defrayed by the users of public institutions (i.e., tuition in the case of higher education) has risen slightly, there has been a much larger increase in the portion of spending for parks and recreation that is defrayed by users (e.g., fees). As would be expected, increasing fees for users has cut the demand for use of state facilities and discouraged construction of additional facilities. The higher user charges have also encouraged private competitors for campgrounds and scenic recreational opportunities.

Regulatory Functions
State governments maintain a variety of regulatory functions dealing with such subjects as air and water pollution, consumer protection laws, licensing of professionals, granting corporate charters, building codes, and the like. While unglamorous, these activities are surprisingly difficult to use as a source of savings by curtailing current services. Because changes in long-standing regulatory frameworks are difficult to accomplish and usually opposed by the regulated professions and industries , budget cuts often simply delay the regulatory processes. Such delays usually create more negative feedback than the small savings seem worth.

Overhead Functions
Most state overhead functions -- maintaining personnel systems, building operations, tax collecting, financial processing, auditing, and the offices of the governor and legislative operations -- are relatively stable operations that present little pressure for major increases in spending but that are also relatively difficult to cut. Current service spending for these operations are typically cut only in connection with across-the-board spending rollbacks that affect all programs. Such cuts, though dramatic when announced, are often rescinded in part by exceptions and are usually rescinded entirely when the fiscal crises that trigger them are resolved.

This discussion of the difficulties of cutting current services in many programs may strike some readers as unduly pessimistic and a rationalization of the status quo. It is certainly subject to that interpretation, but it should be understood as a distillation of how elected officials have reacted to cutting current services, not a statement of how either the author or readers feel those officials should react.

The actual experiences have appeared in many different states in many different forms, yet have led to virtually the same conclusions. For a broad audience, it is best understood by an example of cutting current services at the federal level. As a result of the elections of 1994, Republicans in Congress viewed themselves as having a "Contract with America" that featured downsizing the federal government in general and downsizing domestic social programs in particular, especially some of the vestiges of anti-poverty programs established in the 1960s. President Clinton, while having a different perspective of these programs, enjoyed relatively clear sailing in seeking to reduce national outlays on defense. The national security threats had been greatly diminished, allowing the United States simultaneously to reduce defense spending and maintain a more dominant military position in the world than anytime in several decades.

The political history of the years from 1994 to the present appear to have taught federal elected officials that there is little payoff in cutting current service spending. Both defense and domestic discretionary budgets were expanded in 1998, reflecting decisions by both the President and the Republicans in Congress that the losses of cutting exceeded the gains.



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