Policy Alert - Higher Education

1 STAT ESH O RT FALLS PROJECTED DE S P I T ECU R R E N TFI S C A LPR O S P E R I T YHigher Education Budgets Likely to Feel the SqueezeIN BRIEF..Key IssuesThis Policy Alert summarizes the outlook forstate finances and, in the context of theneeds of other major state services, for statesupport of Higher Education . It is based onState Spending for Higher Education in theNext Decade: The Battle to Sustain CurrentSupport, by Harold Hovey of State PolicyResearch, Inc. A version of this articleappeared in State Government News(January 2000), a publication of the Councilof State r i m a ry FindingStringent budget conditions lie ahead forstates and particularly for Higher Education . Key Findings HProjected state revenues over the nexteight years will not be sufficient to main-tain current state services.

2 HEven as state revenues have increasedoverall during the past decade, the shareof state revenues devoted to Higher edu-cation has decreased. HJust to maintain current services, statespending for Higher Education would haveto increase faster than state spending inother rget AudienceState government leaders, particularly gover-nors, legislators, executive and legislativestaff, state fiscal and budget analysts, andstate Higher Education officials; business andcivic leaders; federal Policy makers, bothexecutive and legislative; and the highereducation on page 3T H E N A T I O N A L C E N T E R F O RPUBLIC Policy AND Higher EDUCAT I O NAlthough many states a n dtheir Higher Education sys-t e ms a re now enjoying pro s p e r-ous times, these conditions are notlikely to last,a c c o rding to re c e n tp rojections pre p a red by Haro l dH ov ey of State Po l i cy Researc h ,I n c.

3 Even if states experience nor-mal economic growth over thenext eight ye a r s ,the vast majorityof states will find it impossible tomaintain current public serv i c e swithin their existing tax structure s .Maintaining funding for thewide range of existing state ser-vices will place enormous pre s s u reon state legislators to reduce highereducation e c e n t l y,c o l-leges and universities have doned i s p roportionately well duringp ro s p e rous times and dispro p o r-tionately poorly in tight budgetaryt i m e s .In addition,d e m o g ra p h i cand economic factors in moststates will re q u i re that Higher edu-cation actually do b e t t e rthan otherpublic sector activities just tomaintain current service levels inthe future.

4 D i recting a gre a t e rs h a re of state budgets to highereducation would mean rev e r s i n gt rends of the past economic growth is slowert h an n o r m a l , if states re d u c et a x e s ,or if states increase spendingin areas outside of Higher educa-t i o n ,then the outlook for supportof public Higher Education will beeven less f av o ra b l e .FI S C A LOU T L O O KF O RSTAT E STo maintain current service lev e l s ,state and local governments willneed to increase spending byslightly more than the perc e n t a g ei n c rease in the total personalincome of all A m e r i c a n s .T h i si n c rease in spending will allow fori n f l a t i o n ,for population gro w t h ,and for maintaining constant serv-ices per unit, such as teacher/student ra t i o s.

5 TH EPR O B L E M: S t a t erevenues will not incre a s eas fast as personal current tax policies,s t a t eand local revenues will not grow asquickly as total personal is a well-known problem thatis largely the result of states reliance on sales taxes and 2000 Policy AlertTH ETR E N D: Even as over-all state revenues havei n c reased, the share of staterevenues devoted to highereducation has decre a s e d . Over the past decade, H ov eyre p o r t s , the percentage incre a s e sin state support for Higher educa-tion have been smaller than thep e rcentage increases in total stateb u d g e t s ..In other wo rd s ,h i g h e reducation isn t competing success-fully with the attractions of otherforms of state spending.

6 E v e ry growth of 10% in personali n c o m e , H ov ey writes in the fullre p o r t , is associated with gro w t hof about in state and local taxrev e n u e s . TH ERE S U LT: P ro j e c t e dstate revenues will not bes u fficient to maintainc u r rent service levels. With revenues growing moreslowly than personal income ando u t l ays growing faster, H ov eyre p o r t s, state and local gov e r n-ments will have a s t r u c t u ral deficitin funding current serv i c e s .T h i smismatch between what would beneeded to continue current pro-g rams and revenues from curre n ttaxes is about a ye a r. That is,to maintain current serv i c e s ,s t a t eand local governments nation-wide would have to increase taxesby about l t e r n a t i v e l y,t h eycould maintain current tax sys-tems and keep budgets balancedby holding spending growth toabout annually rather thanthe 5% needed to maintain cur-rent serv i c e s.

7 By year eight, the structura ldeficit will av e rage just less than4% nationwide, but will va rydepending upon the state (seeTable 1). Even without a majoreconomic downturn, 39 states willexperience gaps between the costof maintaining public services nowin place and the revenues they canexpect under current tax a rgely due to the robust nationale c o n o my, this problem has notbeen obvious re c e n t l y, but willbecome more evident in the nextf ew ye a r s .2 Table 1 State and Local Surplus or Shortfall as a Percent of Baseline Revenues In Year Eight of Fiscal Pro j e c t i o n sR a n kS t a t eP e rc e n tR a n kS t a t eP e rc e n tTH EPR O J E C T I O N: In orderto maintain current services,state spending for highereducation would have toi n c rease faster than statespending in other are a s.

8 W h e reas total state funding for alls e rvices will need to increase byabout 5% annually to maintain cur-rent service lev e l s ,state funding forhigher Education will need toi n c rease by about 6% to maintain itsc u r rent service lev e ls l a rgely dueto enrollment incre a s e s .This meansIM PAC TO NHI G H E RED U C AT I O N01I o w a-2 . 7 %2 7N o rth Caro l i n a- 3 . 7 %02N e b r a s k a-1 . 5 United States- 3 . 803N o rth Dakota-0 . 92 8U t a h- 4 . 34O h i o-0 . 92 9 South Caro l i n a- 4 . 65K e n t u c k y-0 . 53 0Ve rm o n t- 4 . 66C o n n e c t i c u t-0 . 43 1A l a b a m a- 4 . 807M i c h i g a n-0 . 43 2 South Dakota- 5 . 008 New Yo r k-0 . 33 3I n d i a n a- 5 . 709M a i n e-0.

9 13 4M o n t a n a- 5 . 71 0M i n n e s o t a-0 . 13 5G e o rg i a- 6 . 51 1M a s s a c h u s e t t s-0 . 03 6Wa s h i n g t o n- 6 . 71 2O re g o n- 0 . 13 7Vi rg i n i a- 6 . 81 3I l l i n o i s- 0 . 43 8C o l o r a d o- 7 . 01 4P e n n s y l v a n i a- 1 . 33 9M a ry l a n d- 7 . 11 5 West Vi rg i n i a- 1 . 44 0Te x a s- 7 . 81 6Wi s c o n s i n- 1 . 54 1 New Hampshire- 8 . 21 7M i s s o u r i- 1 . 84 2F l o r i d a- 8 . 81 8K a n s a s- 1 . 94 3Te n n e s s e e- 9 . 11 9M i s s i s s i p p i- 2 . 04 4A r i z o n a- 1 0 . 52 0O k l a h o m a- 2 . 14 5Wy o m i n g- 1 0 . 62 1A r k a n s a s- 2 . 34 6 New mexico - 1 2 . 02 2L o u i s i a n a- 2 . 54 7I d a h o- 1 3 . 22 3C a l i f o rn i a- 2.

10 84 8H a w a i i- 1 5 . 12 4 Rhode Island- 2 . 94 9A l a s k a- 1 6 . 42 5D e l a w a re- 3 . 05 0N e v a d a- 1 8 . 32 6 New S o u rce: State Policy Research, Inc., even if states were not facings t r u c t u ral deficitsin re a c hing the 5%annual growth in rev e n u e s ,the per-centage of state funding devoted tohigher Education would need toi n c rease annuallyin order for highereducation just to maintain curre n ts e r v i c e s .Table 2 provides a bre a k-down of the annual adva n t a g e needed for each state to maintains e rvices for Higher on page 43 Downloading the FullR e p o rtState Spending for Higher Education in theNext Decadecan be downloaded from the website of the National Center for Public Policyand Higher Education at: www.