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Article: Higher Ed's Financial Rollercoaster

by Jennifer Delaney for the Chronicle of Higher Education  /   Sep 5, 2023

State support is too often caught in boom or bust cycles. That volatility destabilizes the sector. Read more from EPOL professor Jennifer Delaney in an excerpt from her article in The Chronicle of Higher Education.

Higher education is the third-largest budget category of state spending. Total state spending on public higher education in the United States reached a whopping $108.1 billion in the 2022 fiscal year. However, nationwide higher-education support has shrunk from 10.2 percent of total state budgets in the 2019 fiscal year (before the pandemic) to 8.7 percent in the 2022 fiscal year. That rapid change in spending levels over a short period has resulted in an unpredictable environment. Predictability is crucial for effective planning and budgeting, and surprises can strain an institution or state system even in times of increased funding.

As a new book I edited shows, predictability matters. The higher-ed researchers who contributed to the volume show how structural challenges in state budgets result in a funding roller coaster for higher ed. The upshot has been decades of unprecedented breakdowns in the relationships between state governments and public colleges, both during state-budget negotiations and during post-allocation rescissions of appropriated funding, when that money is unexpectedly returned to the state between budget cycles.

For example, in Illinois, almost no funding for postsecondary institutions was appropriated during a 793-day state-budget impasse, a crisis that spanned the 2016, the 2017, and part of the 2018 fiscal years. The reverberations of the impasse, when no state funds reached campuses, are still felt today. Funding has not yet recovered to pre-impasse levels. One report estimates the impasse led to enrollment losses of more than 72,000 students in Illinois’s public institutions and nearly 4,900 higher-ed job cuts. The economic hit came to nearly $1 billion during each year of the impasse.

Today, as $76 billion in federal stimulus money from the pandemic dries up, state budgets for higher education have been destabilized across the nation. In Connecticut, public institutions are facing cuts of up to one-fifth of their total budget over the next two-year budget cycle, with most of the cuts aimed at the state’s regional institutions. Volatility is also hitting West Virginia University hard, with unpredictable energy markets whipsawing state revenues, a fraught political environment in the state Legislature, and reverberations from pandemic-related instability. Not surprisingly in a people-heavy sector like ours, those cuts are spurring talk of layoffs and tuition increases. Institutions continue to worry about a “fiscal cliff,” and, in some cases, they close.

While cuts in higher-ed spending draw the most attention, unpredictable increases, too, can exacerbate volatility. Bowen’s Revenue Theory of Costs, originated by Howard R. Bowen (an economist who also served as president of Grinnell College, the University of Iowa, and the Claremont Graduate University), posits that institutions raise all the money they can and spend all the money they raise. However, an insatiable appetite for more funding is not always in the best interests of the sector. That traditional frame of straightforwardly viewing cuts as problematic and increases as positive is too simplistic: It underemphasizes the underlying structures of the systems that higher ed relies on for public support and overlooks the importance of predictability in funding. After all, colleges commit to serve students for periods that far exceed the next state budget or election cycle.

Furthermore, if funding increases are not sustainable within state budgets, increases in one year can yield deeper cuts in future years. And because the bulk of institutional budgets are expenditures on people, this boom-and-bust pattern could shift hiring practices — colleges could chase financial flexibility by hiring adjuncts instead of tenure-track faculty members. Additionally, institutions generally treat all increases as setting a new floor for funding levels, which leads to surprise and disappointment when high-funding years are not sustained in the long term.

Read more about why higher education funding is so volatile in the article from The Chronicle of Higher Education

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