But amidst great uncertainty, public college leaders must be agile and innovative in closing the large gap between revenues and expenses
The coronavirus crisis raises the real prospect that public colleges and universities will face major upheavals, mergers, and closings in the coming year and beyond. To deal with this challenge, it is critical to know how big the gap between revenues and expenses may be now and in the future. And what steps government and college officials take now to fill the gap will determine the future accessibility and quality of public higher education.
The pandemic also has amplified long-standing concerns that the states and local governments have been dis-investing in public higher education for decades. While a careful look at the data indicates these concerns about dis-investment have been overstated, that still leaves the important question of how the federal government and the states can best respond to the immediate crisis caused by the pandemic. It is also critical that whatever is done now to respond to the immediate crisis should not make it more difficult to achieve much-needed longer-term reforms in how we pay for college in this country.
The release this month of the most recent edition of the State Higher Education Finance (SHEF) report is the immediate predicate for re-igniting concerns about the adequacy of state and local funding. The SHEF report annually presents data from all of the states. This year’s report focuses on the fact that state and local funding for higher education when adjusted for inflation has still not fully recovered from the decline that occurred after the Great Recession. While the report does note that state and local funding for public higher education exceeded $100 billion for the first time in 2019, the report’s summary emphasizes the amount of public resources when adjusted for inflation is less than what was provided before the Great Recession.
This emphasis on the lack of catch-up has led to a raft of articles decrying the historical lack of support for public higher education in advance of what are sure to be large declines in response to the current crisis. Some have opined that public colleges may no longer be ‘public’ because of these decreases in public funding. Others predict the future collapse of public higher education because government funding has not recovered fully over the past decade and things will only get worse in the coming decade.
What these reports and articles ignore or downplay is the fact that tuition revenues have grown more in the past decade than public funding has declined. The SHEF report lays out this reality. It shows that total educational resources — the combination of public funding and net tuition revenues — grew in real terms by 12 percent per student over the past decade. As a result, total resources per student exceeded $15000, an all time high.
To be sure, there are many legitimate concerns about the explosive growth of tuition over an extended period of time. But we need to be accurate in how these data are presented so that real issues can be dealt with effectively and fairly. Looking at state and local funding for public higher education as the sole measure of its financial support is like worrying about a retail store chain because its in-store sales dropped by 25 percent while ignoring that total sales overall increased because online sales doubled over a period of time.
The basic story over a number of decades told by successive issues of the SHEF reports is that state and local funding for higher education typically has increased in real terms but sometimes not as fast as enrollment growth. This is especially true during recessions when enrollments tend to grow the fastest, particularly in community colleges and graduate school.
One result is that per student funding for public higher education from government sources has declined over an extended time while revenues from student charges net of financial aid grew from one-quarter of total revenues in the 1980s to half now. Given the unevenness among states, the student share now exceeds 50 percent in more than half the states so that states and local governments have become the minority funder of public higher education.
This trend is even more troubling when one realizes that the explosive growth in college charges is a principal reason that students have become so dependent on loans to pay for the growing costs of college. A key reason that outstanding student debt tripled over the past decade is that tuition increases in both the public and private sectors more than doubled the rate of inflation.
The excessive reliance on borrowing is a trend that must be reversed if we are to have a sustainable system of public higher education in the future. But to reduce the reliance on debt in the future, we need to understand what happened in the past in order to achieve a more future sustainable system.
Has public higher education been privatized? Many argue that public higher education has been privatized as reflected by the growing student share of finances. But this concern should be tempered by at least two considerations.
First, out-of-state and international students represent a growing share of students in public institutions, especially flagship universities. To the extent these students typically pay the full costs, the 50 percent student share overstates the charges faced by state residents. Firm data are not available, but it is reasonable to assume that these non-resident students represent at least 10 percentage points of the student share so that state residents on average now pay closer to 40 percent of the bill. This also means the likely loss of international students in the future will make a bid dent in these finances.
The other consideration is that when enrollments grow during a recession and state funding is constant or declining, then the student share of the bill would grow even if tuition rates did not increase. Thus, even if public sector tuition had grown more reasonably over time — say to one-third of costs - then the student share of total costs still would have increased. Indeed, under this scenario it would have been foolish for states to maintain or increase their past level of funding even if tuition had increased more reasonably.
How Big is the Possible Gap? Regardless of past trends, we must recognize that public colleges and universities and their students will struggle greatly as a result of the pandemic. In this context, it’s important to ask how big a deficit is public higher education facing in the next year or two without further government intervention and before institutional adjustments.
As noted earlier, state and local funding for public higher education reached an all-time high $100 billion in 2019. It seems reasonable to assume that these revenues could fall by as much $25 billion in the next fiscal year as a result of the pandemic slashing state and local revenues across the board. This also reflects the historical reality that higher education often gets more than its share of state budget cuts because tuition is a viable alternative revenue source, something that other functions such as K-12 education do not have.
Tuition revenues net of student aid are the other principal revenue source for public higher education. In 2019, this also roughly accounted for $100 billion in revenues for public colleges and universities. (Private universities also now collect about $100 billion in net tuition revenues every year but since they have one-third as many students, their average tuition is three times higher.)
It seems that net tuition revenues in public higher education could drop by 20 percent or more this year as many students decide not to enroll in the fall or choose less expensive public options such as community colleges. This means that net tuition revenues could fall by $20 billion this coming year for public higher education, although the reductions will vary by type of institution.
In many ways, room and board charges are the elephant in the room when it comes to the impact of this crisis on higher education. At public colleges and universities, sales from auxiliary services such as dormitories, dining rooms and parking were roughly $35 billion this past academic year. Given that most or all of the education provided this coming semester or year will be online, revenues from these on-campus activities could easily drop by 50 percent or more. So a loss of $20 billion seems a reasonable estimate.
This drop will be particularly problematic at those schools where dormitories and parking garages are funded through revenue bonds that are secured by room and board charges and parking fees. This is the revenue loss that may hurt many campuses the soonest. There is reason to worry that some public colleges will decide to raise their tuition to pay for the carrying costs of these bonds to avoid the prospect of default and its impact on credit rating. That decision, in my opinion, would be unfortunate. It would be much better if the affected schools were to choose to use the relief they receive from the federal and state governments to pay the carrying charges on their revenue bonds.
Research and hospitals are the other major sources of revenues for public universities. These two non-teaching activities generate another $100 billion in revenues annually. At this point, it is hard to know whether these activities will generate more or less revenues in the future. But it does seem clear that universities with hospitals will face additional costs of battling the effects of the virus regardless of whether more revenues follow to cover these costs.
Taken together, then, without other changes, public colleges and universities could face revenue losses of at least $65 billion in the coming year. This would represent roughly 20 percent in their total annual resources. It also seems likely at this time that the federal government will help meet some of this shortfall, either in the form of emergency appropriations to states as well as possibly direct aid to colleges and universities. Plus it is likely that millions of students will receive some additional federal aid in the form of Pell Grants or other forms of student financial assistance.
At the same time, however, it is difficult to imagine that given all the current competing demands on the federal government, public higher education will get all of what it says it needs to keep on an even keel. The more likely prospect is that the federal government in concert with the states will fill no more than half of the hole created by the pandemic which would leave a gap of $30 billion or more in the revenues on which public institutions would have depended this coming year in the absence of the pandemic.
Responding to the Challenge. Amidst great uncertainty, the responsibility will rest on the public college officials to deal with the very real pressures of losing 10–15 percent of their projected revenues in a single year. The first step is already being taken on all campuses: assessing how big the gap between revenues and spending will be under current policies and to draw up planning scenarios that take into account possible funding futures. This planning process will include what budgetary changes are needed to close or eliminate the gap between revenues and spending this coming year and into the future.
A future blog will address what specific steps make the most sense for public colleges and universities to close the gap between revenues and expenses. One general admonition is that public college leaders must be pro-active and not just wait for the federal and state governments to come to their rescue. Another rule for the road is to learn from the Great Recession experience in terms of which strategies work best in an environment of falling revenues.
Perhaps the most complicated decision that public college officials must make is setting tuition and fees as the other revenue sources are so uncertain. My hope is that state and public college officials will use the pandemic as an opportunity to reduce tuition levels to reflect the more limited ability of many students to pay for their collegiate experience but my fear is that many public institutions will seek to increase their tuition and fees to reflect higher costs.
This harkens back to one of the most important lessons from the the Great Recession experience, which is a negative one. As discussed above, most states then let public tuition rise to make up for the deficit created by state and local government revenue cutbacks. This led to a heightened dependence on loans to help students and their families pay for those higher prices, which is a key reason that the outstanding amount of student debt more than tripled over the last decade. We should do our best to avoid that mistake this time around and seek alternatives to increased tuition to get out of the fiscal hole.