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The “Great Recession” of 2009 has brought an unprecedented level of financial chaos to public higher education in America. Programs are being reduced, furloughs and layoffs are widespread, class sizes are increasing, sections are being cut, and students can't get into classes needed for graduation. Enrollment losses upwards of several hundred thousand are being reported—and only time will tell whether the situation is even worse. Reports of budget cuts in public institutions in the neighborhood of 15 to 20 percent (Pennsylvania, Virginia, New York, Florida, and California) are becoming common. Halfway through the 2009–2010 fiscal year, 48 states were projecting deficits for 2011 and 2012 (NASBO, 2009).
Although states are reluctant to raise taxes, they evidently have less of a problem letting tuitions go up. And up they are going—California, Oregon, Washington, New York, Wisconsin, and Florida announced increases ranging from 10 to 33 percent. The normally tuition-resistant Florida legislature has authorized annual increases in undergraduate tuitions of 15 percent per year until they reach national averages for public four-year institutions. Around the country, the increases are setting off student protests reminiscent of the 1960's, variously directed at campuses, system boards, legislatures, and governors—complete with reports of violence and arrests.
The New Normal
Higher education has been through tough times before. The pattern of the last two decades has been a zigzag of reductions in state funds for higher education during times of recession, followed by a return to revenue growth about two years after the state coffers refill. But resources have not returned to pre-recession levels. So the overall pattern has been a modest but continuous decline in state revenues.
Caption: Percent Change in Appropriations for Higher Education, 1960–2006
Both state governments and institutions have managed largely by muddling through, employing a combination of tuition increases and budget cuts to bring revenues and expenditures temporarily back into balance. Enrollments have been sliced, sometimes dramatically and primarily in the community colleges, although growing demand for higher education has meant that aggregate enrollments have rebounded within a year or two. But those students denied access in tough economic times don't simply postpone college entrance; most forego it. They join the ranks of citizens who don't acquire the skills the country needs in a competitive twenty-first-century workforce.
Successions of budget cuts and subsequent recoveries have also taken their toll on how money is distributed. Spending levels per student have been reduced in most community colleges and, in many states, in the comprehensive institutions. Meanwhile, as state resources have gone down, the share of revenues coming from student tuitions has increased substantially. And everywhere the proportion of spending going to the instructional function is down, as institutions have resorted to a greater use of part-time faculty to insulate themselves from budget instability.
So the net consequence of the “muddling-through” fiscal strategy has been an incremental disinvestment of state funds in higher education, growing tuition dependency, reductions in access that fall most heavily on low-income and first-generation students, and budget cuts that fall most heavily on the instructional function.
This recession is different, and it looks like muddling through will no longer be enough. Economic declines have yet to bottom out in most states—the 2011 and 2012 budgets are likely to deteriorate even further. The National Conference of State Legislatures currently projects over $60 billion in shortfalls for 2011, with another $50 billion in 2012 (NCSL, 2009). By 2011, the federal stimulus funds that have cushioned higher education against even deeper cuts or higher tuition increases will be spent down or in some states will be entirely gone. The National Association of State Budget Officers projects that, for the first time ever, state spending will decline overall by more than 4 percent for two years in a row, despite the billions in federal stimulus funds that have gone into higher education.
Ray Sheppach, executive director of the National Governors' Association, says that states are in a mode of “permanent retrenchment.” Even if the national recession eases or ends in 2011, state revenues will likely take at least another two years to recover because of the double-whammy of increased spending demands for Medicaid and social services on the one hand and sluggish revenue growth and continued high unemployment on the other. Most forecasters predict the trough will last at least another three to five years and may extend up to a decade in some states (NASBO, 2009).
The budget cuts are not falling just on higher education. In this recession, nothing is being spared, including K-12 education, services to the disabled, the state share of Medicaid spending, and environmental protections. Even corrections spending, heretofore politically untouchable, is being cut through reductions in sentences, cuts of prison guards, and early-release programs (Stateline, 2009). Every position is being examined for its potential to be eliminated without adversely harming revenues, essential services, or public safety.
Comprehensive reevaluations of everything from personnel policies to purchasing are underway. A close look is being given to the basic structure of government, including consolidation of departments and elimination of boards and commissions wherever possible. At least seven states (Oregon, Michigan, Virginia, Louisiana, Iowa, Utah, and Washington) have free-standing commissions looking at the future of state government and considering whether serious restructuring is needed.
Parallel self-examinations are underway in higher education, even though the need for reductions, although severe, is somewhat softened by revenues from tuition increases. As in the past, much of the discussion is about what can be done to shift state-funded functions to other revenue sources by increasing private fund-raising, differentiating tuitions to charge more to students in high-cost programs, enrolling more out-of-state students, and getting more federal money. The Association of Public Land Grant Universities is beginning a national campaign, coinciding with the 150th anniversary of the Morrill Act, calling for a new Morrill Act to shore up federal funding for research and graduate education.
This time, however, there is a focus not just on fund-raising but on ways to reduce spending. Across the country, institutions have started efforts to reevaluate costs and to increase efficiency and effectiveness. The mantra of the moment is that the “cost model is broken” and that the “new normal” will require attention to cost management and efficiency on a continuing basis. In an academic culture that has long viewed the “productivity” word as anti-intellectual bean-counting, it's a new day.
A Necessary Collaboration
As promising as these long-overdue developments may be, the reality is that public higher education can't resolve its funding challenges simply by looking for new revenues, turning to the federal government, or cutting costs. Although each of these strategies can pay off in small ways, the fiscal challenge can't be solved by higher education acting on its own. This recession has clearly demonstrated that the financing problems affecting higher education are not short-term but structural. They are also born of bad habits and an inattention to strategic financing and resource allocation.
The mantra of the moment is that the “cost model is broken” and that the “new normal” will require attention to cost management and efficiency on a continuing basis.
Responsibility for creating the problem—and for its eventual solution—falls equally on both the state and institutions. It's a leadership and policy conversation that the two parties need to have with each other. Although no one would have wished for it to happen this way, the depth of the recession offers the opportunity for the two sides, working in tandem, to find new ways to fund the enterprise that might have been unimaginable under other circumstances.
But before we offer suggestions about some practical steps that can be taken now, we first want to identify some of the more important contributing factors within government and institutions that have brought us to this sorry state of affairs. The purpose isn't to point the finger at state governments or institutions but to forestall the possibility of focusing on “solutions” that we think are non-starters.
Conventional assumptions about finance
To begin with, both sides need to revisit unexamined assumptions about higher-education finance that are impeding new thinking about resource use. Our top candidate for the funeral pyre of old ideas is the assumption that higher education costs must increase each year in order to maintain quality. This conventional wisdom is rooted in economic theory about the non-profit “cost disease,” which holds that the costs of service sectors inevitably rise because they are driven by labor costs that go up each year and cannot be reduced without harming the service.
In higher education, this view of costs equates all spending with expenditures on faculty, which is actually less than half of that across the sector. It also ignores the potential for expanding the scope of service through technology; not all teaching and learning has to be done in a classroom.
Base-plus financing
The belief in the inevitability of cost increases is most prevalent within the academy, but it has been bought by state government and affects how institutions and states budget and plan, beginning with the assumption that there must be automatic annual increases in the “base” budget. These adjustments—for things like employee benefits, utilities, and pay increases—are typically not counted as “real” increases. But because they are first in line for funding increases, they chew up most if not all of any new revenues. They also push spending each year above the rate of growth in state revenues, thereby requiring annual increases in tuition.
This assumption about automatic spending increases contributes to a political psychology in higher education that treats anything in the “base” budget as a higher spending priority than anything that is new. This argument pervades the discussions around the bargaining table, where the first priority is to replenish cuts and to restore lost income. Hence both the institutions and the state have come to believe that any change in behavior must be accompanied by new money.
This thinking about old and new money must be tossed out, lest the next ten years be entirely occupied by debates about what the budget would have been if the cuts had not happened. In this fiscal climate, the standard of efficiency has to be met by looking at spending and performance in light of current priorities. A future financing strategy has to begin by pressing the “reset” button on the usual rules for constructing the base budget and focus on how to spend the resources that are available instead of on what might or should have been.
Debate over the public identity of institutions
Another unproductive line of thinking has to do with the public identity or ownership of the institutions, with the imaginary dividing line between “public” and “private” institutions dictated by the proportion of revenues that come from the state. To be sure, state general funds are now a minority of revenues in most research universities and even in some comprehensive institutions. But they constitute half if not more of the unrestricted funds available to most institutions; outside of tuition, they are still the single biggest revenue source for instruction and student services. And if the measure of resources goes from operating revenues to the valuation of all assets, including land and buildings, the scales tip even further toward the state.
As a consequence of this thinking, the language that is used in conversations between higher education and government is unduly oppositional. In their desire to separate themselves from state regulatory control, institutions describe themselves as “private,” “semi-private,” or “state located.” This is not a useful rhetorical strategy for an industry that is seeking increased public investments.
But institutional leaders see the states as intent on micromanaging their affairs and willing to let tuitions go up so that they can provide subsidies to things like corrections and Medicaid. Meanwhile state officials see higher education leadership as arrogant, dismissive of the legitimate role of the states and exempt from the types of controls—including transparency about costs—that other areas of state government submit to.
This discussion isn't getting us anywhere and needs to start over, with a focus on the future public needs for higher education and the sustainable strategies needed to fund them. All public institutions are chartered to serve public purposes, whether state funds are 10 percent or 90 percent of their revenue streams. The same is true of private non-profit institutions, which enjoy their favorable tax status because they provide a charitable function that the state would otherwise have to pay for.
The federal-revenue-displacement fantasy
The tendency to avoid cost management by seeking new sources of revenue is not confined to higher education; state governments are quite adept at doing everything they can to take the pressure off state revenues, in particular by leveraging federal resources or by shifting costs back to local governments. In higher education, this has historically meant looking to the federal government to pay for need-based aid and for the bulk of funded research.
In the current environment, the potential to shift to greater reliance on federal funds has been accelerated by the Obama administration's generosity with ARRA stimulus funds. States are scrambling to figure out how to take advantage of promised resources for student aid in order to take some of the sting out of tuition increases.
While we would be the first to agree that the federal government has a big role to play in future financing for higher education, we don't think it extends to basic operating support for public institutions. Political and policy traditions aside, the federal funding and policy agenda is already very crowded. The prospects of higher education's being elevated to a higher national priority—ahead of the existing domestic spending priorities of health care, Social Security, the environment, transportation, deficit reduction, and national defense—are slim to none.
Even if institutions and states are successful in getting the federal government to increase its investments in research and development, if past is prologue these funds will not take pressure off tuition and state revenues to pay for basic operations, including research overhead. While there are many reasons for institutions to pursue federal research funds, supplementing unrestricted revenues isn't one of them.
Moreover, research grants almost never cover their full costs. The federal government has limited reimbursements for the indirect costs of research administration for years, requiring institutions to bear part of the expense. Increasingly that means that student tuitions are being raised to pay for research.
And this direct support of the unreimbursed costs of sponsored research is a small fraction of the amount of state and tuition funds siphoned away from instructional expenditures to pay for unsponsored “departmental” research. Institutions generally aspire to join the cadre of prestigious research universities, but they, as well as states and students, pay for this: costs per student increase as the amount of faculty time available for teaching goes down. Institutional leaders and policymakers share responsibility for supporting this “mission creep.”
An Actionable Agenda for the Future
The next few years are likely to be a time of great uncertainty. State policy makers and institutional leaders are going to be working under terrible pressures, and it will be hard to carve out time for a focused discussion about future funding for public higher education.
But there is truly no time like the present: Our country badly needs to have an actionable plan and a funding strategy for higher education in order to reach the President's goal of increased educational attainment. The country's access and attainment ambitions will be realized (or not) by public institutions. To get on with the work ahead, states and institutions have to stop working at cross purposes and converge on a common strategy. This will require people in leadership positions to show they can find solutions.
We conclude this essay with our suggestions about the four areas that would benefit from collaborative policy attention from state government and higher education. Acting on them now won't solve immediate funding and attainment problems, but it will create the necessary conditions for moving forward on that agenda.
Set the attainment agenda
The future policy agenda needs to be anchored in hard-edged goals for degree attainment. These in turn can become the basis for decisions about the roles and responsibilities of different sectors of postsecondary education and about the financing strategies needed to reach those goals. Aggregate state-level targets for degree attainment will not substitute for work on hitting them, which needs to be done by individual institutions in ways appropriate to their missions.
President Obama has set the tone for this discussion by calling for the US to increase postsecondary attainment—typically measured as a proportion of the population with some postsecondary degree (AA/AS and above)—by 2020. At a national level, meeting the President's objective for the 24–35 year old population alone will require an additional 15 million degrees beyond those expected to be produced at current rates, an increase of around 5 percent per year—a figure that varies considerably for different states.
The President's goal has been adopted by several of the major foundations, led by Gates and Lumina, which have used it as a platform for their program initiatives. But despite broad consensus about the need for increased degree attainment, there is considerable disagreement about what the numerical objective should be and how to measure it. We shouldn't shy away from having that debate, and it needs to happen with the full participation of both states and institutions.
There are number of states that have started this discussion, but almost none have set objectives for attainment that are as ambitious as those articulated by the President, nor have they translated the ones they have set into targets that can be the basis for institutional and financial planning. Without clarity about goals, the second-level work to achieve them will be scattered, loosely coordinated, not strategic, and probably doomed to failure.
This is work that cannot be done at the staff level. It needs to be a visible public discussion among policy and educational leaders at the highest level about the future social, economic, and cultural needs for higher education in the state and what it will take to satisfy them. Nor is it work that can be done by individual institutions acting on their own without the larger state context as a platform. Institutions can only address that portion of the agenda that fits within their scope and missions.
Furthermore, attainment rates cannot be improved simply by boosting performance within postsecondary education. They have to be tackled at the cross-sector level by increasing high school graduation rates, improving college-going rates, shoring up community-college degree production, improving transfer, beefing up baccalaureate production, and reaching out to older working adults.
Governors are in the best position to lead this discussion among postsecondary, legislative, and business leaders. There will be gubernatorial elections in 36 states in November 2010, and 2011 could see as many as 20 new governors in office. A gubernatorial debate is the perfect platform for this type of discussion. If the governors aren't ready to step up to this challenge, then the non-profit community in the state may need to create the space for government and higher education to do this work.
Address the structure and rising costs of employee benefits
Over the last twenty years, the proportion of compensation costs represented by benefits has risen more rapidly than salaries, largely because of the rising cost of health insurance but also due to increasing retirement costs. In higher education, this is one of the most important factors contributing to the rising use of part-time faculty.
These costs will only go up further in the future. The Commonwealth Fund projects that the average family premium for employer-sponsored health-insurance policies will almost double in the next decade, rising to an average of nearly $24,000 per year (Commonwealth Fund, 2009). Pension costs are going up too, because of the growing number and longer life spans of people in retirement. In addition, unfunded liabilities in pension funds have increased because of the investment losses from the recession.
There are no easy solutions to these funding problems: they can only be tackled by narrowing the eligibility for benefits of employees and their families, increasing premiums and/or co-pays, or reducing services. Pension benefits cannot be cut for current employees. The only way these costs can be tackled is by creating tiered systems with different benefit options for new hires.
Benefit reform is a perfect example of a policy area where states and institutions have to work together. In many states, colleges and universities are statutorily required to be part of the state retirement and health care system, and they have no unilateral control over these costs. Benefit reform also cannot be addressed solely by the executive branch; it will require legislative action in many states (even constitutional changes in some).
Fiscal management practices often work against any efforts to manage resources strategically
Where employees bargain collectively, it is also a topic that must be addressed through bargaining. Reaching consensus at the bargaining table on an issue this controversial requires that it be addressed at the highest state policy levels and not just left to the presidents and governing boards of the individual colleges and universities.
Re-think state budgeting processes
Most states still operate on budget procedures and assumptions that were negotiated twenty years or more ago, at a time when most still paid for more than sixty percent of the costs to educate students. Much of the process is on auto-pilot, beginning with the calculations of fixed costs that go into the “base” and formulae for enrollment-based budgeting. In recent years, these formulae have been ignored in most states; still, they remain on the books and are the symbolic basis for unproductive arguments about what the state “owes” the institutions. Fiscal management practices often work against any efforts to manage resources strategically; fund-management policies make it difficult for institutions to build reserves, for example, by including carry-forward policies that penalize institutions for prudent fiscal management.
The specific shape of budget reform needs to be negotiated by states and institutions, although everywhere it should ideally begin with agreement about attainment goals. A common aim should be to replace front-end state fiscal and regulatory control, as much as possible, with greater institutional responsibility for the management of resources, coupled with clear expectations about performance and transparency for the way that funds are used.
Of course, it's possible that states and institutions will conclude that budget reform for higher education shouldn't start unless and until the state has figured out what the long-term revenue structures will be. Doing that means addressing comprehensive tax and budget reform for all of state government; waiting for that to happen is a recipe for doing nothing.
Singling out higher education for budget reform can be justified on several bases, beginning with the fact that it has been differentially and negatively treated relative to other areas of state finance over the last twenty years. But states will surely not be ready to look at reducing front-end budget controls if there is no agreement about how the funds are to be used; they will not trust the institutions to use them to meet public goals without such agreement.
Invest strategically
As noted above, state budgeting practices are characterized by high levels of inertia, with colleges and universities receiving a generally consistent share of whatever resources the state can make available for higher education. This reflects priority being placed on “fairness” to institutions rather than on responsiveness to the needs of the state. A corollary has been that if distinctions in funding are made, the most prestigious institutions in the state are favored.
This conditioned response to institutional funding has outlived its usefulness. States cannot achieve the goals they espouse using their limited resources in the same old ways. They face a stark choice: abandon their goals—and likely consign their citizens to a less prosperous future—or start using their resources much more strategically.
The latter course will likely lead to investments in access institutions (those that must significantly increase degree production if attainment goals are to be met) and in specific programs closely tied to workforce needs. Where investments are made in research, they will have to be much more targeted than has heretofore been the case.
The shift from equal treatment of institutions to differential treatments determined by state priorities represents a substantial challenge to both states and institutions. Both will have to make wrenching changes to their old—and comfortable—ways of doing business.
Address academic cost structures within colleges and universities
Colleges and universities need to reduce the costs of their academic programs by eliminating or consolidating high-cost/low-demand programs and improving teaching and learning productivity. This is different than just cutting budgets; restructuring academic costs will lead to permanent reductions in the core costs required to maintain the institution. Academic cost restructuring by itself won't solve all of the long-term funding problems facing higher education, but it is a necessary if not sufficient place to start.
In research universities, this will require looking at graduate and doctoral programs, usually the highest-cost and often the lowest-performing programs in the university. In many comprehensive institutions, it will also mean a look at the academic masters' programs. At the baccalaureate level, it will require a willingness to look at the structure and delivery of core curricula and a selective pruning of the course catalogue.
Cost restructuring frequently does not yield budget savings in the short term, and for this reason it is something that many institutions neglect to do in times of crisis, when the first imperative is to find budget savings. But restructuring takes the pressure off costs over the long haul and allows institutions to direct resources toward increasing degree attainment.
Cost restructuring also is not synonymous with cost reduction in all areas. For years, most institutions have used lower-division education as a source of revenues to pay for the higher cost of upper-division and graduate education. But in order to increase degree attainment and maintain quality, it may be necessary to spend more, rather than less, on lower-division students.
Responsibility for academic cost restructuring rests predominantly with the institutions, led by their governing boards. But the state needs to support the work by setting expectations for savings and asking institutions for evidence about their costs and their goals for restructuring them. In the past, institutions and state policymakers have often conducted this conversation through rituals whereby the institutions would offer up the most politically popular programs as candidates for budget cuts, knowing that the legislature or governor would ultimately protect them. This strategy no longer suffices.
We realize that these suggestions may be viewed in some quarters as a bad use of time for busy people who have other things to do. State government is in gridlock in many states, and higher education governance isn't far behind. The levels of trust and respect necessary to have a coherent discussion about the future may be hard to come by. But while this isn't going to be an easy discussion to have, delaying it only forestalls the inevitable.
In fact there is never a good time to talk about fundamental changes in higher education. In the worst of times, nobody has time for conversation about long-term solutions; all energy is devoted to keeping the enterprise afloat. In the best of times, the pressure for change is relieved, and the participants necessary to the conversation don't want to contemplate the (inevitable) recurrence of bad times.
But this conversation is too important to postpone. Even in the worst circumstances, people of good will can get together to craft recommendations for the future, recognizing that it may be some time before it's possible to move forward on them. Previous generations found the wisdom and political will to forge such solutions, based on their view that higher education had something to offer that society needed. Times have changed, but not that much—and there's no time like the present to get on with the business of creating a better future.
Resources
1. Commonwealth Fund (2009) Paying the price: How health insurance premiums are eating up middle class incomes, Available at: http://www.commonwealthfund.org/Content/Publications/Data-Briefs/2009/Aug/Paying-the-Price-How-Health-Insurance-Premiums-Are-Eating-Up-Middle-Class-Incomes.aspx
2. National Association of State Budget Officers (NASBO) Fiscal survey of the states, 2009, Available at: http://www.nasbo.org/Publications/FiscalSurvey/tabid/65/Default.aspx
3. (December 2, 2009) Stateline, Available at: http://www.stateline.org/live/printable/story?contentId=440784)
4. Yudof, M. Exploring a new role for the federal government in higher education, Discussion paper available at http://www.aplu.org/NetCommunity/Document.Doc?id=1932
A member of the National Center for Higher Education Management Systems (NCHEMS) staff since 1969, Dennis Jones has been president there since 1986. He has guided state higher education policy-making; developed financing, budgeting, and resource-allocation methodologies for use at both state and institutional levels; linked higher education with states' workforce and economic development needs; and developed and used information to inform policy-making. He has also served as an advisor to the US Secretary of Education, the Lumina Foundation for Education, the National Center for Public Policy and Higher Education, and numerous other associations, policy organizations, and state agencies.
Jane Wellman is the executive director of the Delta Project on Postsecondary Costs, Productivity and Accountability. Previously she served as a senior associate at the Institute for Higher Education Policy in Washington, D.C., vice president for government relations with the National Association of Independent Colleges and Universities, deputy director of the California Postsecondary Education Commission, and staff director of the California Ways and Means Committee.
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