Debunking the Myth of State Disinvestment in Public Higher Education

It has become commonplace to hear higher education officials and observers of all stripes say that states have been disinvesting in public colleges and universities for many decades and that is why students and their parents are now paying more than half of the bill for public higher education. While elements of this story are indeed accurate, much of it is either incorrect or at best misleading and requires a retelling.

The disinvestment argument has three basic parts. First, many observers assert that state appropriations for higher education, when adjusted for inflation, have been declining for decades. Second, as a result of these state cutbacks, students are now picking up half or more of the bill for public higher education in the tuition and fees that they pay. A related concern is that this increase in cost sharing is doubly unfair because it is the parents of these students who pay much of the state taxes that support public colleges and universities. The third part of the argument is that the total resources available to public institutions through the combination of tuition and public appropriations has diminished sharply over time as the declines in state and local higher education funds have been larger than the increase in tuition revenues received from tuition and fees paid by students. Each of these three arguments needs to be examined if we are to have an informed debate on the future of public higher education.

Regarding state disinvestment, despite the many expressions of concern, the fact is that sustained state funding for higher education has been the key factor in fueling the tremendous growth in public colleges and universities over more than a half century. According to the State Higher Education Executive Officers (SHHEO) organization which tracks these figures over time, aggregate funding for public higher education over the past quarter century grew by 15 percent, adjusted for inflation, but it peaked before the Great Recession put a big dent in state and local coffers. The recession led to reduced appropriations for most state functions including for higher education where funding levels declined, when adjusted for inflation, by 20 percent between 2008 and 2013. Since 2013, state funding has recovered some and in 2018 was about 10 percent less in real terms than ten years earlier.

State funding per full time equivalent (FTE) student peaked around the turn of the century, less than two decades ago, and has fallen and grown since then. In 2018, state funding per FTE in was about $7800, down about 10 percent from 2000 and down 20 percent from 2008. But when discussing funding per FTE, it’s important to recognize that trends in per student funding are very much affected by the rapid growth of enrollments that occur during recessions when increased numbers of students enter higher education as the job market becomes more restricted. In this regard, the reality is that from 2008 to 2013, roughly half of the 30 percent decline in state and local funding per FTE was a function of the rapid recession-induced growth in enrollments.

Interestingly, local government funding for community colleges has been much more stable and robust than state higher education funding. It has maintained its real value for an extended period of time and in 2018 was 64 percent larger when adjusted for inflation than 25 years before. In terms of funding per FTE in community colleges, local government funding per FTE in community colleges grew steadily by 45 percent over 25 years.

With regard to the student share of the bill for public higher education, for most of our nation’s history, tuition and fees represented 10 percent or less of spending per student at public institutions as state officials viewed low prices as an essential part of keeping public higher education affordable and accessible. Key to making this equation work in earlier times was that given much lower participation rates, states were able to provide enough funding to keep this promise for all those state residents enrolling in their public higher education.

But two developments after World War II changed this basic equation. One was the tremendous growth in the number of students enrolling in public higher education. The return of veterans from three wars, baby boomers reaching college age and other demographic factors led to a tripling in the number of college students between 1950 and 1975, with most of these new students enrolled in public institutions. The other development was heightened competition for state funds beginning in the 1960s for health care, elementary and secondary education, and other responsibilities, much of it growing out of the Great Society. The combination of much higher enrollment levels and heightened competition for state funds significantly altered the ability of states to fund higher education adequately without significant tuition revenues.

In the early 1970s, two national commissions called for gradually increasing the student share of educational spending to one-third to reflect better the enhanced incomes that accrue to public college graduates. Most states were slow at first to adopt these recommendations, but beginning in the late 1970s increasingly tight fiscal conditions spurred most states to adopt this philosophy of greater cost-sharing. As a result, the student share of educational spending at public institutions in the form of tuition and fee revenues net of student aid discounts grew to around one-quarter in the mid-1980s and to roughly one-half today. As this share is just an average, that means that in many states the student share of educational-related costs now exceeds 50 percent.

To a significant extent, however, these oft-quoted figures overstate the growth in the student cost share as they include tuition paid by out-of-state, international, and graduate students which typically exceed what in-state undergraduates pay. Systematic data are not available, but if the tuition paid by non-state residents and graduate students were excluded from the calculation, in-state undergraduates pay 40 percent or less than what is spent on them, instead of the much more highly publicized rate of 50 percent or more. Nonetheless, it is clear that the student share has gone up over time for all students enrolling in public higher education, including state residents.

Another oft-repeated statement is that the only way public colleges and universities can react to cutbacks in state support during recessions is by hiking the tuitions they charge to state residents. While raising tuition is certainly one response, it is not the only way public officials have dealt with tight budgets over time, although they tend not to talk so much about the alternatives. These other responses include increasing enrollments of state residents without raising their prices, cutting costs, or enrolling more out-of-state and international students, as discussed above.

In this context, it is also important to understand that tuition revenues as a share of costs can rise over time even when sticker prices are not increased. This occurs when enrollments increase faster than state and local funding. The underlying arithmetic is that increasing enrollments by 10 percent without any price increase nets the same increase in tuition revenues as a 10 percent increase in prices for current number of students. This means that several of the percentage points in the increase in the student share over time was fueled by the increase in tuition revenues paid by the recession-induced increase in students rather than the increase in prices.

It would seem that in the face of reduced state revenues, increasing the number of students enrolled is much more politically attractive than the alternative of raising prices. This raises an important question: Why do public institutions seem to rely so much more on increasing prices when state funds are cut back instead of taking the politically more popular step of increasing enrollments? A primary reason may be that institutional officials, especially faculty, view themselves as the protectors of quality and believe that increasing prices is the best way to protect quality whereas increasing enrollments would ultimately lead to declines in quality.

The third part of the disinvestment argument is that the overall resources available to public institutions have declined over time, as the increase in tuition revenues were insufficient to outweigh the loss in public resources. But that is not the case. SHEEO tracks education resources over time — the combination of state and local funding and the tuition revenues net of student aid discounts provided by institutions. According to the SHEEO data, total educational resources have consistently increased in real terms over an extended period of time. Between 1993 and 2018, educational resources grew by 64 percent after adjusting for inflation. A slightly different story emerges for educational resources per FTE which in real terms hit mini-peaks in 2000 and 2008 and now are $14,500 per FTE, 23 percent more than 1993.

In sum, the story of trends in state and local funding in higher education is much different from the normal rendition of disinvestment. State and local government funding for higher education has generally grown over an extended period of time, taking hits of various dimensions primarily during recessions. State residents now do pay a bigger share of the public higher education bill but some of this increase is a function of many more out-of-state and international students paying much higher prices than state residents. And the total educational resources available to public colleges and universities have grown in real terms over time as increases in tuition revenues have more than offset the reduction in state and local resources, in total and per FTE. As a result, discussions of disinvestment should be tempered to recognize the continuing high contribution of states and localities to the funding and the future of public higher education.

Art Hauptman has been a public policy consultant specializing in domestic and international higher ed finance issues for nearly a half century.

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