The State of Higher Education Finance in Fiscal 2005 Takeshi Yanagiura State Higher Education Executive Officers David Wright Tennessee Higher Education Commission 2006 SAIR Conference Arlington, Virginia October 16, 2006

Higher education funding flows: An overview Source: NCHEMS,

What is the SHEEO State Higher Education Finance (SHEF) study? SHEEO’s annual State Higher Education Finance (SHEF) study is intended to help educators and policy makers:  Understand the extent to which state resources for colleges and universities have kept pace with enrollment and cost increases;  Examine and compare how state higher education spending is allocated for different purposes;  Assess trends in how much students are paying for higher education;  Gain a perspective on the funding of their state’s higher education system in the context of other states; and  Assess the capacity of their state economy to generate revenues to support public priorities.

Why should institutional researchers care?  These data describe the fiscal environment in which we do our work.  Fiscal data not well understood or utilized.  GASB/FASB changes improved IPEDS finance data but made trend analyses more difficult.  Public higher education funding patterns are changing and could impact student attendance patterns, time-to-degree, etc.  In an environment of finite resources, policymakers are looking for ways to link inputs and outcomes.

Diverse perspectives on state higher education finance data What SHEF contributes to the national conversation:  Annual, ongoing; continuous time series from FY 1980 forward;  Captures state tax and non-tax support (lottery revenue, lease income, earnings on state endowments);  Adds revenue from local government and student sources; and  Interstate comparisons “as valid as possible.”  Accounts for inflation and enrollment growth;  Sets aside special purpose appropriations for research, agriculture, and medicine; and  Adjusts interstate comparisons for differences in state cost of living and public system enrollment mix.

Higher Education Cost Adjustment (HECA):  Attempts to reflect provider “market basket” without being self- referent.  Components federally maintained and routinely updated; transparent, accessible.  Serves as a benchmark rather than descriptive measure of higher education cost inflation.  75% of the index is based on Employment Cost Index for white- collar workers (BLS).  25% based on GDP Implicit Price Deflator (BEA).  reflects general price inflation in total U.S. economy  current $ GDP / constant $ GDP Goal: Comparisons “as valid as possible”

Enrollment Mix Index (EMI):  Average instructional expenses per student vary by institution type.  Enrollments are distributed differently across states’ public HE systems.  The EMI adjusts operating revenues to account for both factors. Average Instructional Expenses per FTE, Fiscal 2004 Goal: Comparisons “as valid as possible”

State Cost of Living Adjustment (COLA):  Driven primarily by housing costs.  Adopted index developed by Berry et al (2003).  One value per state, ranging from 0.88 to  Hawaii and Alaska were assigned the value of the next highest state (Massachusetts). Goal: Comparisons “as valid as possible”

State Cost of Living and Public Higher Education System Enrollment Mix Index Values Source: SHEEO SHEF Dollars per FTE are adjusted upward the most in states with an inexpensive enrollment mix and low cost of living (e.g., Arkansas). The reverse is true for states with a more expensive enrollment mix and high cost of living. In some states, the two factors cancel each other (e.g., Virginia). Southern states tend to have low cost of living and high system structure costs. Goal: Comparisons “as valid as possible”

SHEF’s Core Measures  Educational Appropriations = State tax and non-tax support plus local tax appropriations minus research, agricultural extension, and medical education.  Net Tuition Revenue = Gross assessments for tuition and mandatory fees minus institutional discounts & waivers and state- funded student financial aid.  Total Educational Revenues = Educational Appropriations plus Net Tuition. Definitions

61.6% 32.1% 6.3% Total: $105.9 Billion Current status Distribution of State, Local, and Net Tuition Revenue, U.S. Fiscal 2005 Net Tuition: $34.0 billion State Support (Tax & Non-Tax): $65.3 billion Source: SHEEO SHEF State and local governments provided $72 billion for public and independent higher education in An additional $34 billion in net tuition revenue brought to $105.9 billion the amount available from state, local, and student sources for higher education’s general operating expenses. Local Taxes: $6.7 billion

Total Educational Revenues per FTE for the Nation, Regions, and SREB States, Fiscal Year 2005 Source: SHEEO SHEF Total educational revenues per FTE (educational appropriations plus net tuition) averaged $9,196 in Most Western states trail the national average on this measure, while New England and Midwest states tend to exceed it. Variation in the Southern states is demonstrated by the fact that Delaware ranks 3 rd nationally, while Florida ranks 49 th. Current status

Source: SHEEO SHEF The national average educational appropriation per FTE was $5,825 in Regional averages cluster more tightly around the U.S. average on this measure than on net tuition. North Carolina is the leading SREB state in the level of state & local support per student, ranking 4 th nationally. West Virginia ranks 43 rd. Current status Educational Appropriations per FTE for the Nation, Regions, and SREB States, Fiscal Year 2005

Source: SHEEO SHEF The national average net tuition revenue per FTE was $3,371 in Western states tend to trail the U.S. average on this measure, while New England and Midwestern states tend to exceed it. There is a great deal of variability in the South: Delaware ranks 2 nd nationally while Georgia ranks 48 th. Current status Net Tuition Revenue per FTE for the Nation, Regions, and SREB States, Fiscal Year 2005

Net Tuition as a Percentage of Total Educational Revenues for the Nation, Regions, and SREB States, Fiscal 2005 Source: SHEEO SHEF Nationally, the average share of educational revenues represented by net tuition in 2005 was 36.7%. Among SREB states, reliance on tuition as a major source of operating revenue ranged from 57% in Delaware to 17% in Georgia. Current status

Net Tuition Increase Needed to Offset a 1% Decrease in State Government Support for Public Higher Education, by State, Fiscal 2005 Source: SHEEO SHEF Notes: State dollars include Research-Ag-Med. Net tuition revenues are from all levels (undergraduate, graduate, first professional) except medical schools. Higher education systems that rely heavily on state support are more vulnerable to decreases in appropriations. Nationally, net tuition revenues would have needed to increase 3.0% on average to offset a one percent decrease in state support (based on 2005 SHEF data). In the South, this ranged from 1.8% in Delaware to 6.4% in Georgia. Current status

From fiscal 2001 to 2005: “The fiscal 2005 SHEF study documents a 5-year period when state funding for higher education failed to keep pace with normal inflation and extraordinary enrollment growth in the U.S., leaving per student state & local funding at their lowest levels nationally in 25 years.” Recent trends  State & local appropriations for general educational expenses in public colleges and universities increased nominally but:  enrollments grew by 14.4% and  higher education costs grew by 13.9% as estimated by HECA.  In inflation-adjusted terms,  Educational appropriations per FTE decreased 18.2%, from $7,124 to $5,825;  Net tuition revenue per FTE increased 11.1%, from $2,983 to $3,371; and  Total educational revenues per FTE decreased 8.4%, from $10,106 to $9,196.

Future outlook  According to Grapevine, state tax appropriations for higher education, unadjusted for enrollment or inflation, were flat in fiscal 2004 but up 3.5% in 2005 and 6.0% in  Generally speaking, a nominal dollar increase of 5% to 6% is necessary to achieve a real-dollar increase (after adjustment for inflation and enrollment). The FY 2006 outlook appears promising…  State tax revenue increased 9.9% in the Apr-June quarter of 2006 compared to the same quarter the year before. Although this is the strongest nominal growth in the past year, it is below growth rates recorded in the same quarter of 2005 and (Rockefeller Inst., 9/2006)  Tax cuts, along with actions to increase spending and replenish reserve funds, enjoyed broad support. At the same time, cost pressures continue in Medicaid, elementary & secondary education, and other areas. Were states too aggressive in spending the tax collections windfall? …but higher education the most discretionary aspect of state budgeting:

The chart illustrates a recurring national pattern of recession, retrenchment, and recovery. The divergence of the red and blue lines indicates an increasing reliance on tuition as a revenue source for operating expenses. The latest “wave” of state and local government support peaked in 2001, and we are currently in the bottom of a trough. Long-term U.S. trends + 6.2% + 8.5% Educational Appropriations and Net Tuition Revenue per FTE Fiscal , in Constant 2005 Dollars % Note: State and local government support excludes research, agricultural, and medical. Source: SHEEO SHEF FTE enrollment in public institutions has grown by 44% since Enrollment growth since 2001 has already outstripped that of each of the previous two decades.

Long-term regional trends In the SREB states, FTE enrollment in public institutions has grown by 64% since The South exhibits the same pattern of economic recession, retrenchment, and recovery that is observed nationally. +9.0% % Educational Appropriations per FTE for the SREB States Fiscal , Constant 2005 Dollars % Note: State and local government support, excluding research, agricultural, and medical. Source: SHEEO SHEF

Long-term regional trends Each region generally mirrors the national trend in per student operating appropriations from state and local governments. Educational Appropriations per FTE, by Region Fiscal , Constant 2005 Dollars Source: SHEEO SHEF

Long-term regional trends Total Educational Revenues per FTE, by Region Fiscal , Constant 2005 Dollars Source: SHEEO SHEF When net tuition is added to state and local government support, New England and Midwestern states historically have exceeded the U.S. average total educational revenues per FTE, while Western states have operated with less.

Net Tuition as a Percentage of Total Educational Revenues, by Region, Fiscal Source: SHEEO SHEF Long-term regional trends Nationally, the average share of educational revenues represented by net tuition in 2005 was 36.7%, approximately a 10 point increase since New England and Midwestern states tended to exceed the national average on this measure, while Western states were beneath it.

Full-Time Equivalent Enrollment, Percent Change by State, Fiscal Source: SHEEO SHEF Nationally, enrollments in public institutions increased 13.6% from 2001 to Within the SREB region, these increases ranged from 26.2% growth in Florida to 5.5% growth in Delaware. Shorter-term regional trends: Enrollment Note: G eorgia, SREB, and US data does not include GA Department of Technical & Adult Education institutions

Educational Appropriations per FTE, Percent Change by State, Fiscal , Constant 2005 Dollars Source: SHEEO SHEF Nationally, educational appropriations per FTE in public institutions declined by an average of 18.0% from 2001 to Regionally, these changes ranged from 6.5% growth in Tennessee to a 29.3% decrease in Maryland. Note: G eorgia, SREB, and US data does not include GA Department of Technical & Adult Education institutions Shorter-term regional trends: Ed approps

Net Tuition Revenue per FTE, Percent Change by State, Fiscal , Constant 2005 Dollars Source: SHEEO SHEF Nationally, net tuition per FTE increased by an average of 13.5% from 2001 to 2005, and in the South, all but three states experienced increases. Decreases in net tuition revenue may be associated with institutional discounting, increases in the state financial aid program, or student migration to lower-cost institutions. Shorter-term regional trends: Net tuition

Total Educational Revenues per FTE, Percent Change by State, Fiscal Source: SHEEO SHEF When aggregated nationally, total educational revenues per FTE have decreased by 8.7% since 2005, ranging in the South from a 15% increase in Tennessee to a 22% decrease in Georgia. Note: GA 's data does not include Department of Technical & Adult Education institutions Shorter-term regional trends: Total ed revenues

Percent Change by State in Enrollment and in Educational Appropriations per FTE, Fiscal Source: SHEEO SHEF Plotting the SHEF data along two dimensions can bring state fiscal policy findings and trends into sharper relief. Here, data points on the vertical axis represent public higher education enrollment growth from The horizontal axis shows each state’s percent change in educational appropriations per student over the same period. Putting the pieces together Of the 9 SREB states with above average enrollment growth from 1991 to 2005, only Georgia and Louisiana maintained educational appropriations per student on a constant dollar basis for the period. Both states implemented statewide, lottery- funded merit scholarship programs in the 1990s. Note: G eorgia's data included Department of Technical & Adult Education institutions for the first time in FY05 US WICHE NEBHE MHEC SREB WV VA TX TN SC OK NC MS MD LA KY GA FL DE AR AL 0% 10% 20% 30% 40% 50% 60% 70% -30%-20%-10%0%10% Percent Change in Educational Appropriations per FTE, FY Percent Change in FTE Enrollment, FY Notes: 1) Figures are adjusted for inflation, public system enrollment mix, and state cost of living. 2) Funding and FTE data are for public non-medical students only. % CHANGE: above avg CURRENT: below avg % CHANGE: below avg CURRENT: below avg % CHANGE: below avg CURRENT: above avg % CHANGE: above avg CURRENT: above avg

Total Educational Revenues per FTE by State: Percent Change and Current Standing Relative to U.S. Average Source: SHEEO SHEF The next two- dimensional analysis allows states to assess total educational revenues per FTE relative to the national average currently (on the horizontal axis) and over time (on the vertical). The three states in the upper left quadrant lag the U.S. average but have been catching up. The three states in the lower right quadrant, exceed the national average but have lost ground. Note: G eorgia's data included Department of Technical & Adult Education institutions for the first time in FY05 Putting the pieces together

Percent Change by State in Educational Appropriations and Net Tuition Revenues per FTE, Fiscal Source: SHEEO SHEF This figure shows each state’s rate of change in the two components of total educational revenues per student – educational appropriations and net tuition – relative to the national average. States in the upper right quadrant have exceeded the national average on both dimensions. Note: G eorgia's data included Department of Technical & Adult Education institutions for the first time in FY05 AL AR DE FL GA KY LA MD MS NC OK SC TN TX VA WV SREB MHEC NEBHE WICHE US -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% -30%-25%-20%-15%-10%-5%0%5%10% Percent Change in Educational Appropriations per FTE Percent Change in Net Tuition Revenues per FTE Notes: 1) Figures are adjusted for inflation, public system enrollment mix, and state cost of living. 2) Funding and FTE data are for public non-medical students only. Tuition % CHANGE: above avg Approps % change: below avg Tuition % CHANGE: above avg Approps % change: above avg Tuition % CHANGE: below avg Approps % change: above avg Tuition % CHANGE: below avg Approps % change: below avg Putting the pieces together

Net Tuition Revenue per FTE and Total State Student Grant Aid per FTE, Fiscal 2005 Sources: SHEEO SHEF States that rely heavily on net tuition revenues might also try to fund a balanced state financial aid program. In this figure, the horizontal axis shows FY05 net tuition revenue per FTE for each state. The vertical axis shows FY05 state-funded financial aid per FTE. States in the upper right quadrant exceed the U.S. average on both. Putting the pieces together

Perspectives on taxes and state support of higher education Taxable Resources and Effective Tax Rate Indexed to the U.S. Average, by State, Fiscal 2003 Source: SHEEO SHEF States whose effective tax rate exceeds the national average are plotted above the horizontal axis, and states with above average wealth (total taxable resources per capita) are plotted to the right of the vertical line. Shaded states have actual tax revenues per capita within +/- 5% of the national average.

The South:  Has outpaced all geographic regions in public higher education enrollment growth since the turn of the century.  Mirrors the national recurring patterns of (1) recession, retrenchment, and recovery, amid (2) increasing reliance on tuition as a revenue stream.  Achieves roughly the national average of operating resources per student…  …only it does so with slightly higher-than-average levels of state & local government support and lower-than-average levels of tuition revenue per student.  This relative non-reliance on government support as a source of operating revenue makes some states’ public higher education systems susceptible to state budget cuts.  States with statewide merit scholarship programs are the only ones that have managed to keep ahead of enrollment growth and inflation.  Perhaps the lesson of the previous point is that in the future, new funding for higher education will be predicated on initiatives that “make sense” and demonstrate tangible benefit to legislatures and the public. Funding enrollment growth and quality enhancements for their own sake is not a given. Summary

Wrong ideas about state higher education spending:  There is a “right” amount  The only way to get better results is to spend more money  We can get the results we need without spending more money Conclusion Right questions about state higher education spending:  What do we need from higher education?  What will it take, given our circumstances, to obtain and sustain such a system?  What can we do better with the money we have?  What do we need that justifies additional funds?

REPORTS & PRESENTATIONS: DATA: CONTACT: Takeshi Yanagiura, Data Analyst (303) FY 2005