Volatility in State Spending for Higher Education

The severity of cuts and the unpredictability in state funding for higher education have garnered headlines across the nation since the turn of the present century. In this context, the authors in this new groundbreaking volume argue that too little attention is paid to the consequences of volatility in funding, as most discussions focus on levels of funding. Their research addresses an important blind spot in the academic literature since predictability matters—to institutions, students, families, and states. In addition, the risks of operating in an uncertain financial environment have led to behaviors that are not always in the best interests of states, institutions, faculty, students, or the public good.

• Language: English
• Publisher: American Educational Research Association
• Release date: Oct 30, 2023
• ISBN: 9781960348982

Book preview

I

NTRODUCTION

Volatility in State Spending for Higher Education

J

ENNIFER

A. D

ELANEY

University of Illinois Urbana-Champaign

Most discussions of public higher education finance focus on levels of funding. While these discussions are undoubtedly important, too little attention is paid to the consequences of volatility in funding. Predictability matters—to institutions, students, families, and states. In addition, the risks of operating in an uncertain financial environment can lead to behaviors that are not always in the best interests of states, institutions, or students. Therefore, it is useful to reflect on the relationship between higher education and states and to explicitly consider volatility in state appropriations.

The nation has seen staggering moments of volatility in state support for higher education. Recently, unprecedented breakdowns in the relationships between state governments and institutions of higher education have occurred. Since 2015, volatility has been starkly observed in two main areas. First, there is more uncertainty regarding when states will finalize funding decisions for higher education, which yields both institutional planning problems and revenue constraints when funding is delayed beyond typical timelines. Second, even when funding is set, states can make changes postallocation and ask institutions to return funds after they have been appropriated. For example, the state of Illinois was not able to pass a budget for FY 2016, 2017, and part of 2018, and consequently provided almost no funding for postsecondary institutions throughout the 793-day state budget impasse crisis (Carlson, 2019; O’Connor & Tareen, 2017). During the 2015–2016 academic year, in Pennsylvania, a state budget was not passed on schedule. While some institutions received low-level funding through a stopgap budget, institutions in Pennsylvania lived through eight and a half months of uncertainty (Langley, 2016). In that same academic year in Louisiana, a budget was passed, but a state revenue shortfall resulted in large midyear cuts for institutions. This was not the first time in Louisiana that institutions faced mid-year recessions, and many students encountered tuition increases between the fall and spring semesters (Guidry, 2016). Beginning in 2020, the COVID-19 pandemic and related economic recession have destabilized state budgets, increased institutional costs to provide safe learning environments for students, and increased unpredictability in state support for higher education (Nguyen et al., 2021). The severity of cuts and the level of unpredictability in state funding for higher education have drawn attention to higher education funding across the nation. Especially in this environment, reflecting on volatility in state appropriations for higher education is useful.

This book provides new knowledge to improve the research base for better understanding volatility in state support for higher education and its consequences. It presents new, original, theoretically grounded, methodologically rigorous research on volatility in state support for higher education. This research draws from a broad set of disciplines, including education, economics, business, political science, and public policy. The coherent set of chapters collected in this book use a range of research methodologies from empiric quantitative work to qualitative studies. Specifically, chapters in this book address questions such as: Has there been an increase in the time required to recover from prior cuts to higher education? Which characteristics of states are associated with shorter or longer durations for recovery? What is the role of state economic performance and the business cycle in state spending for higher education? To what degree does volatility in spending for higher education vary across states? In what ways do politics shape volatility for higher education support, particularly in relation to political volatility, political and organizational state characteristics, political party control, and elected representative demographics? What mechanisms are available for addressing volatility, and how effective are these mechanisms? For instance, are there relationships between tuition-setting authority, performance funding, state merit-based student aid programs, lottery earmarks, or state free college programs, and volatility? How does volatility in state funding for higher education institutions relate to state funding for student aid? What are the consequences of volatility in state support for students (e.g., for enrollment and completion, by institution type and race), institutions (e.g., for staffing and research expenditures), and pricing (e.g., for student fees)?

Volatility was specifically chosen for the title of this book, since it is important to think about volatility as both increases and decreases in state funding for higher education. This is different from the traditional frame of higher education finance articulated in Bowen’s Revenue Theory of Costs, which views cuts as problematic and increases as positive (Bowen, 1980). Importantly, this traditional framing underemphasizes the underlying structures of the systems that higher education relies on for public support. More attention needs to be paid to these underlying structures; as argued below, it is unrealistic to expect volatility not to be an ongoing challenge for the sector. While not generally perceived as such, volatility causes problems through both increases and decreases in funding. If increases are assumed to be shifts in base funding, and not bonus or temporary funding, these dollars are not frequently treated in ways that could smooth volatility. Instead, increases often enhance volatility in the system, and their intended purpose and use by the sector is often not well articulated by policy makers. Notwithstanding the argument about the importance of all aspects of volatility, there is a bias for considering cuts to be more problematic than increases in funding—a bias found in this book and elsewhere in the scholarly literature. This is an understandable feature of how volatility in state support for higher education is perceived and acted upon in the sector. However, this book additionally sets forth the argument that all facets of volatility need to be considered and better understood.

State General Appropriations Trends

According to data from the State Higher Education Executive Officers (SHEEO), total state spending on public higher education in the United States in 2019 was $92 billion (SHEEO, 2019). Although it has been the third largest budget category of spending by states, nationwide higher education support has shrunk from 12.9% of total state budgets in 1995 to 9.6% in 2019 (National Association of State Budget Officers [NASBO], 2019). Higher education appropriations per full-time equivalent (FTE) student in 2019 were 8.7% below the prerecession high point in 2008 in constant adjusted dollars (SHEEO, 2019). This rapid change in spending levels over a short period has resulted in an extremely unpredictable environment for state support for higher education.

The destabilization of state support for colleges has also been evident over a longer period. Between 1980 and 2019, an increase in total FTE enrollments occurred. In 1980, approximately 6.9 million students enrolled in postsecondary education nationwide. In 2011, this number increased to a high-water mark of nearly 11.7 million, an increase of nearly 4.8 million students. A dip in FTE enrollments has ensued since 2011; in 2019, 10.9 million students enrolled across the 50 states (SHEEO, 2019).

State appropriations per FTE have remained fairly steady over time at around $8,000 per FTE in constant dollars since 1985 with year-to-year variations and a noticeable drop during the Great Recession. In 1980, average state appropriations per FTE were $7,305 in constant 2019 dollars; in 2019, this figure was only slightly higher at $8,196 per FTE or an increase of $891 (approximately 12%) (SHEEO, 2019). However, the story has not been one of consistency. Instead, the pattern of funding has been volatile. Over these 39 years, the high-water mark was reached in 2001 with a funding level of $9,324 per FTE, and 2012 was the low point with funding levels at $6,602 per FTE. Between 2001 and 2012, there was a $2,722, or nearly 32%, decrease in spending per FTE (SHEEO, 2019). Volatility in state support for higher education, combined with uneven increases in enrollments, has resulted in an unpredictable long-term trend in state spending per student.

The cuts and unpredictability also seem to have impacted institutional reliance on tuition across the nation. In 1980, institutions collected $1,931 per FTE in net tuition, which represents the total amount of tuition dollars collected by public institutions nationwide each year scaled by FTE. This represented approximately 21% of total spending. In 2019, net tuition revenue per FTE was $6,902—a $4,971 increase, more than tripling the level in 1980. In 2012, net tuition represented a much larger share of total spending at 47% (SHEEO, 2019). The growth in the share of funding from net tuition has also shown that institutions may be viewing students and families as a more reliable funding stream than the state.

Taken together, state appropriations and net tuition revenue per FTE has resulted in a general increasing trend for total higher education revenues. In 1980, total support was $9,236 per FTE in constant dollars. By 2019, this number had grown to $15,098—an increase of $5,862 per FTE (SHEEO, 2019).

In this context, it is important to consider not only levels of funding but volatility in state support for higher education, the temporal nature of state budgeting, and how university revenue streams relate to each other. In addition, the literature has not agreed upon—or even discussed to any great extent—measures that can be used to track volatility. This book directly contributes to both of these areas by collecting new, original research on the topic of volatility and by highlighting a variety of measures of volatility for possible use in future research.

Prior Research on State Appropriations Levels and Determinants

Most studies of higher education appropriations are focused on the levels and determinants of funding, which is consistent with media coverage of the topic. There is a long history of such empirical studies. One line of scholarship has considered determinants and levels of funding derived from the business cycle or enrollment patterns. Income and wages along with enrollment levels and outmigration have been significant predictors of state spending for higher education (Clotfelter, 1976; Humphreys, 2000; Toutkoushian & Hillman, 2012). Personal income and enrollment levels have been correlated with spending for higher education (Peterson, 1976). Real per capita income by state had a positive and significant effect on appropriations to higher education from 1969 to 1994 (Humphreys, 2000). A link between enrollments and appropriations was found in Leslie and Ramey’s (1986) work. Likewise, shifting demographic patterns have been associated with lower funding for higher education (Rizzo, 2003).

A second line of scholarship considers competition within state budgets for resources. Medicaid spending has been negatively related to higher education spending per capita (Kane et al., 2003). Okunade (2001) showed that Medicaid competes with higher education, but corrections spending augments higher education appropriations.

A third line of scholarship considers political factors. Prior research has found that partisanship matters (Hearn et al., 2017; Hicklin & Meier, 2008; McLendon et al., 2009; McLendon et al., 2005; McLendon et al., 2014; Nicholson-Crotty & Meier, 2003; Weerts & Ronca, 2012) as does political ideology (Doyle, 2006; Doyle et al., 2010). Political structures and power have also mattered, such as governors’ veto power, their appointment of state higher education executive officers and boards, term limits for elected representatives, as well as politico-institutional context (Hearn & Ness, 2018; Knott & Payne, 2004; Lowry, 2007; McLendon, 2003; McLendon et al., 2009; Ness et al., 2018; Tandberg, 2013; Tandberg et al., 2017). Legislative professionalism and the presence of interest groups have also been influential (Ness et al., 2015; Tandberg, 2010a, 2010b, 2013). Finally, the demographic characteristics of elected representatives (Schiltz et al., this book) and their alumni status (Chatterji et al., 2018) have influenced appropriations levels.

There is a small emerging area of literature that considers volatility in state support. Some works have explored factors related to changes in public funding of higher education (Abbott, 2016; Delaney, 2016). Li (2017) used punctuated equilibrium as a framework for thinking about state support for higher education. This pattern of periods of level funding punctuated by sudden shocks can be thought of as volatility. Most notably Lacy et al. (2017) considered year-to-year volatility in state support for higher education using a methodological technique that relied on the Hodrick-Prescott (HP) filter (Hodrick & Prescott, 1997). They found that volatility for higher education has often been delayed, and its impact has been felt during the budget cycle after state revenues experience volatility.

Acknowledging the role of states’ economic health, the business cycle, enrollment shifts, competition for resources within state budgets, and political influences is important. However, volatility in state support for higher education along with the consequences of the risk inherent in an unpredictable funding environment is also important to study and is, at present, an understudied area. This book seeks to directly contribute to growing scholarship in this space.

Barriers to Predictability

A number of important barriers to predictability make the topic of this book a perennial issue that will continue to require academic scrutiny. The barriers include inherent components of state budgeting such as discretionary budget categories and balanced budget requirements, higher education’s historic role as a balance wheel for state budgets, the misalignment of timelines, and the countercyclical nature of higher education, especially in relation to institutional funding needs and enrollment patterns.

State Budgeting Features

Higher education is generally a discretionary part of state budgets. In addition, all states (except Vermont) face balanced budget requirements. Therefore, when cuts are needed it is almost inevitable that discretionary spending categories will be cut (Gamage, 2010; Poterba, 1995). Of discretionary spending categories, higher education will be noticed due to its size. On average across the nation, 9.6% of total state budgets are allocated to higher education, and the sector represents the third largest component of total state spending (NASBO, 2019). Thus, higher education is often one of the first budget areas on the chopping block during economic contractions (Humphreys, 2000).

Higher Education as a Balance Wheel

Prior research has shown that higher education serves as a balance wheel in state budgets (Delaney & Doyle, 2007, 2011, 2014, 2018; Hovey, 1999). In this pattern of funding, as compared to other state budget categories, states increase higher education funding at a faster rate in good budget times. In economic downturns the reverse is true, and when compared to other state budget categories, states cut higher education appropriations more severely and at a faster rate. Because higher education has an ability lacking in most other state budget areas—the ability to raise outside revenue, typically by charging students tuition—it is an attractive area for cuts during economic downturns. The inverse is also true, since higher education is an attractive area for investment during prosperous times. As the grease that keeps the wheels of democracy turning, higher education will most likely continue to see larger-than-expected increases during good budget times and larger-than-expected decreases during bad budget times. While the cuts to funding may be perceived by the sector as more problematic than increases, both cuts and increases in higher education funding contribute to the sector’s role as a balance wheel in state budgets (Delaney & Doyle, 2007, 2011, 2014, 2018; Hovey, 1999).

Compounding the impact of volatility, prior literature has shown that this balance wheel pattern is not symmetric such that increases during periods of economic growth are no longer offsetting prior cuts (Delaney & Doyle, 2007, 2011, 2018; Kelchen, in this book). Following a cut in state general appropriations, the length of time to recovery—or returning to a previous higher funding level—has been increasing. Recoveries were swift in the 1980s but slowed in the 1990s and stagnated in the 2000s (Doyle & Delaney, in this book). In addition, volatility has become both more widespread and intense over time (Doyle et al., 2021; Gamage, 2010; Webber, 2017). Increased reliance on tuition revenue means that students and families are increasingly experiencing the balance wheel pattern. Difficult economic years for a state can mean large increases in tuition for students and families. At the same moment that tuition is increasing, students and families are generally facing economic constriction of their own. The balance wheel pattern of funding highlights unpredictable state funding streams for higher education. Volatility of funding may undermine the long-term stability of institutions and college affordability.

Misalignment of Timelines and the Countercyclical Nature of Higher Education

Two additional features of the higher education sector make funding volatility seem nearly inevitable. First is the misalignment between university timelines, which are often derived from missions of generating, transmitting, and preserving knowledge in perpetuity, and political and business cycles. Most politicians work on short-term time horizons between election cycles of two, four, or six years (Ballotpedia, n.d.; U.S. Senate, n.d.). Business cycles also tend to have short time horizons with a full business cycle lasting, on average, 4.7 years (Keng, 2018; NBER, 2020). Thirty-three business cycles occurred in the United States between 1854 and 2009, and the average recession lasted for 1.5 years (NBER, 2020). Within these short time horizons, prior research has confirmed that state budgeting for higher education is strongly influenced by the business cycle (Gamage, 2010; Kane et al., 2003). The misalignment of timing between university time horizons and both political and business cycles inevitably leads to unstable funding and unpredictable future support.

The second feature of the higher education sector that makes funding volatility seem nearly inevitable is the countercyclical nature of higher education needs and enrollment patterns. At the same time that states face economic contractions, both student and institutional needs increase. During economic downturns, students are more likely to have lower incomes thereby placing greater demands on state student aid systems. Of the students who qualify for need-based aid, more of them will qualify for larger award amounts due to family income declines. Institutions face the need to provide greater supports when they have more students facing these financial challenges. Enrollment is also strongly countercyclical, especially in the two-year sector (Barr & Turner, 2013; Betts & McFarland, 1995). One of the best decisions that an individual can make during an economic downturn, especially when facing a job loss, is to return to higher education for retraining and upskilling. Thus, enrollments tend to increase during recessionary periods—exactly the moment when most states are cutting higher education budgets. Prior research has confirmed this relationship showing how unemployment rates are related to increasing enrollments in postsecondary institutions (Barr & Turner, 2013; Betts & McFarland, 1995). In addition, Doyle et al. (2021) found that community colleges experience more volatility in state support than their four-year counterparts. This confluence results in institutions being expected to do more with less, which raises related concerns about how these countercyclical trends have the potential to degrade institutional and educational quality (Dynarski, 2020; Orphan, 2020).

Given higher education’s position as a large discretionary spending category, balanced-budget constraints in U.S. states, higher education’s historic role as a balance wheel for state budgets, the misalignment of timelines between higher education missions and political and business cycles, and the countercyclical nature of higher education needs and enrollment, volatility in state support for higher education seems all but inevitable. This book argues that it is time to think not only about levels and patterns of funding but also about structural challenges and the temporal nature of higher education funding.

Consequences of Volatility

Unpredictability is concerning not only for its own sake but also because of related behaviors that may undermine the public purposes of higher education or make the sector less sustainable over time. While higher education institutions have increasingly turned to students and families as an alternative revenue stream, thereby stabilizing total revenues per FTE, the consequences of volatility in state support, and state support covering a smaller share of institutional expenses, have intersecting implications for institutions, students and families, and the public good. The impact of volatility is felt directly by institutions, and most of the discussion that follows focuses on institutional effects. Importantly, there are also indirect effects of volatility in state support for higher education, which are discussed below as well. These are typically mitigated through institutions and are derived from institutional effects, but there are nonetheless important indirect effects that are felt by students and families and that impact the public good.

Institutions

Volatility in state support inevitably influences institutional behavior. In addition, the risks of operating in an uncertain financial environment lead to institutional behaviors that are not always in the best interests of institutions, students, and society. Fundamentally, postsecondary institutions are risk adverse. Institutions understandably shape their behaviors to minimize risk and unpredictability caused by their external environments, and to mirror their internal spending on their external context (Pfeffer & Salancik, 1978; Slaughter & Leslie, 1997; Slaughter & Rhoades, 2009; Tolbert, 1985). Seeking more predictable funding streams when state funding becomes increasingly volatile is a rational response but one that can lead to higher tuition rates, more reliance on student fees, and insufficient and inequitable college access (Cheslock & Gianneschi, 2008; Kim & Ikegwuonu, this book; McMahon & Delaney, 2021). Tuition increases directly impact affordability and student access to higher education. In addition, this cycle has the potential to impact important educational outcomes such as enrollment (Charles et al., 2015) and completion (Long, 2016). Volatility may also have accelerated the increase in college prices over the last several decades (Lacy et al.,