The Ninth Annual State Higher Education Finance Report

Lynn Russo Whylly's picture
Thursday, January 17, 2013

State and local government financial commitment to higher education has increased substantially over the past twenty-five years. In 1986, state and local governments combined provided $31.4 billion in direct support for general operating expenses of public and independent higher education institutions. This investment increased to $47.8 billion in 1996, $77 billion in 2006, and $88.8 billion by 2008.

A recession beginning in 2008 dramatically reduced state revenue and ended the growth in state and local support achieved between 2004 and 2008. In response, the American Recovery and Reinvestment Act approved February 17, 2009 provided funding to stabilize state support for education among other interventions to achieve economic recovery. With the approval of the Secretary of Education, funds allocated to the states by Congress could be used to supplement state and local funding for education in 2009, 2010, and 2011.

In 2011, 31 states provided ARRA funding to their higher education systems totaling $2.8 billion, helping to offset reductions in state and local support since 2008. State and local support in 2011 including ARRA funds totaled $87.5 billion, actually showing a 2.5 percent increase in funding for higher education over 2010 (although still below 2008 and 2009). The stability in support for higher education is an indicator that ARRA funding has served its purpose in minimizing the negative effects of the economic recession on higher education.1

In addition to state and local revenue, public institutions collected net tuition revenue of $56.3 billion in 2011, for a total of about $143.8 billion available to support the general operating expenses of higher education (see Figures 1 and 2).

The share of total revenue for general operating expenses for higher education originating from net tuition revenue showed an increase from 32.2 percent in 2008 to 39.0 percent in 2011. Tuition revenue collected by independent (private, not-for-profit) and for-profit institutions is not included in this total.

Of the $87.5 billion in state and local support during 2011, about 78 percent was allocated to the general operating expenses of public higher education. Special purpose or restricted state appropriations for research, agricultural extension, and medical education accounted for another 12 percent of the total. The percent of total support allocated for financial aid to students attending public institutions increased to 7.1 percent in 2011. This is up from 5.6 percent in 2006. The remaining three percent supported students attending independent institutions and independent institutions’ operating expenses.

Analysis of the data indicates that constant (adjusted for the impact of inflation over time) dollar per student state and local funding for public colleges and universities continued to decrease between 2010 and 2011. State and local support (excluding appropriations for research, agricultural extension, and medical education) per full-time-equivalent student was $6,532 in 2010, a $500 constant dollar (or 7 percent) decrease from 2009, and the lowest in the last 25 years. This trend continued in 2011 with state and local support per FTE at $6,290, an additional 3.7 percent decrease. This decrease in per student support, despite relatively stable state support, was driven by an increase in enrollment of more than 8 percent in the two years between 2009 and 2011.

Higher education has historically experienced large increases in enrollment during times of economic recession, and this tendency has been accentuated by the growing economic importance of postsecondary education. Nationally, FTE enrollment grew 5.4 percent between 2009 and 2010, 2.4 percent between 2010 and 2011, and 33 percent between 2001 and 2011.

Long-Term Revenue and Enrollment Patterns

  • Since 1986, FTE enrollment at public institutions of higher education has increased from 7.2 million to 11.8 million.
  • Educational appropriations per FTE (defined to include state and local support for general higher education operations) fell to $6,532 in 2010, a 25-year low in inflation-adjusted terms, and fell further to $6,290 in 2011. Annual educational appropriations from 1986 through 2011 are displayed in Figure 3.
  • Tuition charges are the other primary source of revenue used to support public higher education (excluding research grants and revenues from independent operations). Net tuition revenue typically grows faster when state and local revenue fails to keep pace with enrollment growth and inflation, both because more students pay tuition and the institutions tend to charge more to compensate for declining public revenues per student.
  • Partially offsetting decreased state and local support, constant (adjusted) dollar net tuition per FTE increased annually at 5.0 percent between 2009 and 2011.
  • Constant dollar total educational revenue (as displayed in Figure 3, which includes tuition revenue used for capital or debt service) per FTE declined from the late 1980s to the early 1990s from $10,690 in 1988 to $10,199 in 1993. Thereafter, total educational revenue per FTE grew steadily from 1994 to 2001, reaching $11,767, or about 10 percent higher than it was in 1988. Total revenue per FTE then fell sharply (about 10 percent) from 2001 to 2004 (to $10,630), rebounded to $11,733 by 2008, and then dropped to $11,064 in 2011. Rapid enrollment growth is the most significant factor driving these trends.
  • The student share of total educational revenue to support public higher education operations has grown steadily since the early 1980s (see Figure 4). By FY 2011, net tuition made up over 43 percent of total educational revenue.

Changes Over the Past Five Years in the States

Total public higher education enrollment has increased substantially in recent years. Following dramatic increases nationally from 2002 through 2005, FTE enrollment at public institutions of higher education slowed somewhat, only to increase sharply again between 2007 and 2011. These enrollment trends significantly affected the per student revenue available to support higher education. Across states both enrollment and appropriations growth varied widely from the national average.

  • Nationally, FTE enrollment grew 17 percent in the past five years. All fifty states have experienced increases in FTE enrollment since 2006, and total public FTE enrollment increased by 33 percent from 2001 to 2011. This trend continued in the most recent year, with a national increase of 275,000 students, or 2.4 percent above 2010. In California, however, enrollments fell by 50,000, or 2.8 percent between 2010 and 2011. The enrollment decline in California likely reflects the effects of both higher fees and enrollment caps due to decreases in state appropriations.
  • Per FTE constant dollar educational appropriations increased in seven states between 2006 and 2011. Across all 50 states, the change in educational appropriations per FTE varied from -32 percent to +18 percent.
  • Even after adding revenue from tuition increases, constant dollar educational revenue per FTE (excluding net tuition revenue used for capital or debt service) decreased 2.3 percent on average between 2006 and 2011, with 26 of the states experiencing declines in this measure.
  • Ten states (Alabama, Delaware, Maine, Michigan, Minnesota, North Dakota, Pennsylvania, Rhode Island, Vermont, and Virginia) had above average total educational revenue despite below average educational appropriations, the result of above average net tuition in 2011. The reverse was true in California, Georgia, Hawaii, Idaho, Louisiana, Nebraska, Nevada, and New Mexico. As a result of below average net tuition revenue, these states had below average total educational revenue despite having above average educational appropriations.

Wealth, Taxes, and Allocations for Higher Education

Each state’s unique combination of policy choices and fiscal and environmental conditions provides the context within which higher education funding occurs. The national trends outlined below give a sense of general conditions, but individual state contexts vary widely. The available data are from 1999 to 2009, lagging two years behind appropriations data reported elsewhere in this report. The effects of the recession beginning in 2008 on state and local revenues are evident in these data.

  • Total taxable resources per capita, a statistic that captures state income and wealth, decreased from $53,071 to $50,014 in current (not adjusted for inflation) dollars between 2008 and 2009, a one-year decrease of 5.8 percent. Meanwhile, per capita state and local tax revenue decreased $229, or 5.25 percent.
  • Over the ten-year period 1999 to 2009, total taxable resources per capita increased 33.3 percent, while the effective tax rate increased by 6.3 percent.
  • The proportion of state and local tax revenue allocated to higher education declined slightly over the decade from 7.1 percent in 1999 to 6.9 percent in 2009.

Economic Recessions and Higher Education

During periods of economic recession, enrollment demand tends to grow more rapidly at a time when state revenue falls or fails to grow. This tendency exacerbates the effects of a parallel tendency (as noted by Harold Hovey in 1999) for higher education funding to become the "balance wheel" for state finance, declining faster than the rest of the state budget in recessions, and then growing faster when state revenues recover.

  • Over the past 25 years, state and local support for higher education has twice recovered following major economic recessions to levels that exceeded previous support.
  • The pattern of recovery following the 2001 recession began for a third time in 2007, but this recovery was cut short by the onset of the recession that started in 2008. Constant dollar per student state support began another downturn, rather than continuing its return to the levels reached in 1999 through 2001.
  • To counter the impact of the current recession, Congress passed the American Recovery and Reinvestment Act (ARRA). States could use a portion of these funds for operating budget shortfalls in public colleges and universities in order to mitigate tuition increases and faculty and staff layoffs in fiscal years 2009, 2010, and 2011. In FY 2009, 15 states used ARRA funds to cover operational shortfalls, accounting for 3 percent of total state and local support for higher education. In 2010, over 5 percent of total state and local support was from ARRA funds, which were used by 43 states. Finally, in 2011 both the number of states using ARRA funds and the amount of ARRA funding declined from the previous year; 31 states used $2.8 billion in ARRA funds, roughly three percent of the total state and local support.

Read the full report at http://www.sheeo.org/node/245.

Read more »