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State Shortfalls Projected
Despite Current Fiscal Prosperity
Higher Education Budgets Likely
to Feel the Squeeze
The National Center for Public Policy and Higher
This Policy Alert summarizes the outlook for state finances and, in the context
of the needs of other major state services, for state support of higher education.
It is based on State Spending for Higher Education in the Next Decade: The Battle
to Sustain Current Support, by Harold Hovey of State Policy Research, Inc. A version
of this article appeared in State Government News (January 2000), a publication of
the Council of State Governments.
Stringent budget conditions lie ahead for states and particularly for higher
- Projected state revenues over the next eight years will not be sufficient to
maintain current state services.
- Even as state revenues have increased overall during the past decade, the share
of state revenues devoted to higher education has decreased.
- Just to maintain current services, state spending for higher education would
have to increase faster than state spending in other areas.
State government leaders, particularly governors, legislators, executive and
legislative staff, state fiscal and budget analysts, and state higher education officials;
business and civic leaders; federal policy makers, both executive and legislative;
and the higher -education community.
Downloading the Full Report
State Spending for Higher Education in the Next Decade can be downloaded from
the web site of the National Center for Public Policy and Higher Education at: www.highereducation.org.
Single copies can be ordered by faxing requests to 408-271-2697.
This report uses economic assumptions and empirical methods that are widely accepted
in the public and private sectors. For a description of this methodology, please
refer to the full report.
Although many states -- and their higher education systems -- are now enjoying
prosperous times, these conditions are not likely to last, according to recent projections
prepared by Harold Hovey of State Policy Research, Inc. Even if states experience
normal economic growth over the next eight years, the vast majority of states will
find it impossible to maintain current public services within their existing tax
Maintaining funding for the wide range of existing state services will place enormous
pressure on state legislators to reduce higher education budgets. Recently, colleges
and universities have done disproportionately well during prosperous times and disproportionately
poorly in tight budgetary times. In addition, demographic and economic factors in
most states will require that higher education actually do better than other public
sector activities just to maintain current service levels in the future. Directing
a greater share of state budgets to higher education would mean reversing trends
of the past decade.
If economic growth is slower than "normal," if states reduce taxes, or
if states increase spending in areas outside of higher education, then the outlook
for support of public higher education will be even less favorable.
||Impact on Higher Education
- Fiscal Outlook for States
To maintain current service levels, state and local governments will need to
increase spending by slightly more than the percentage increase in the total personal
income of all Americans. This increase in spending will allow for inflation, for
population growth, and for maintaining constant services per unit, such as teacher/
The Problem: State revenues will not increase as fast as personal income.
Under current tax policies, state and local revenues will not grow as quickly
as total personal income. This is a well-known -problem that is largely the result
of states' reliance on sales taxes and fees. "Every growth of 10% in personal
income," Hovey writes in the full report, "is associated with growth of
about 9.5% in state and local tax revenues."
The Result: Projected state revenues will not be sufficient to maintain current
"With revenues growing more slowly than personal income and outlays growing
faster," Hovey reports, "state and local governments will have a structural
deficit in funding current services. This mismatch between what would be needed to
continue current programs and revenues from current taxes is about 0.5% a year. That
is, to maintain current services, state and local governments nationwide would have
to increase taxes by about 0.5%. Alternatively, they could maintain current tax systems
and keep budgets balanced by holding spending growth to about 4.5% annually rather
than the 5% needed to maintain current services."
By year eight, the structural deficit will average just less than 4% nationwide,
but will vary depending upon the state (see Table 1). Even without a major economic
downturn, 39 states will experience gaps between the cost of maintaining public services
now in place and the revenues they can expect under current tax policy. Largely due
to the robust national economy, this problem has not been obvious recently, but will
become more evident in the next few years.
The Trend: Even as overall state revenues have increased, the share of state revenues
devoted to higher education has decreased.
"Over the past decade," Hovey reports, "the percentage increases
in state support for higher education have been smaller than the percentage increases
in total state budgets.... In other words, higher education isn't competing successfully
with the attractions of other forms of state spending."
The Projection: In order to maintain current services, state spending for higher
education would have to increase faster than state spending in other areas.
Whereas total state funding for all services will need to increase by about 5%
annually to maintain current service levels, state funding for higher education will
need to increase by about 6% to maintain its current service levels 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 would need to increase annually in order for higher education
just to maintain current services. Table 2 provides a breakdown of the "annual
advantage" needed for each state to maintain services for higher education.
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 recessions. During recessions,
states often are caught with their budgets hugely out of balance.
When that happens, states tend to cut higher education spending more severely
than they decrease spending for other programs, since higher education typically
represents the largest discretionary spending item in state budgets. For the past
quarter century, the pattern the states have followed in times of economic hardship
has been to cut higher education budgets and raise tuition sharply (or allow colleges
to raise tuition).
Moreover, in the current environment of generous appropriations for higher education,
governors and legislators have exerted little pressure for efficiencies or cost containment
in public colleges and universities. As a result, the recent increases in state support
of higher education reflect only the standard responses to extraordinarily strong
fiscal conditions. These increases "will disappear," Hovey concludes, when
the "fiscal conditions disappear. Both will disappear soon."
|Table 2 projects the percentage increase in
state spending needed to maintain current services.
The right two columns show the projected increases in state and local spending needed
for all programs and for higher education over the next eight years.
The "Annual Average Advantage for Higher Education" shows the "extra"
percentage growth needed for higher education annually. Positive numbers in this
middle column mean that in order to maintain current services, these states will
need to increase spending faster for higher education than for other programs.
States with negative numbers will be able to maintain current services by increasing
spending more slowly for higher education than for other programs.
||About the Author
- Harold A. Hovey, who passed away in late 1999, published extensively on issues
relating to local, state, and federal fiscal policy and management. He was president
of State Policy Research, Inc., and editor of State Policy Reports and State Budget
& Tax News. His previous positions include director of finance for the State
of Ohio, budget director for the State of Illinois, senior fellow for public finance
at the National Governors' Association, and head of the Public Policy Economics Division
at the Battle Memorial Institute.
For over two decades Mr. Hovey consulted with the National Conference of State
Legislatures and/or the National Governors' Association. His federal clients included
the U.S. House Budget Committee, the General Accounting Office, the Office of Management
and Budget, the Congressional Budget Office, and the Departments of Education, Health
and Human Services, Housing and Urban Development, Transportation, and Treasury.
© 2000 The National Center for Public Policy and Higher Education