The State of Higher Education Finance in the American West David L. Wright State Higher Education Executive Officers CIRPA-ACPRI & RMAIR 2005 October 25, 2005

Wrong ideas about Money  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

Right questions about Money  What do we need from higher education?  What can we do better with the money we have?  What do we need that justifies additional funds?

Making Sense of Interstate Higher Education Finance Data 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.

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 “As Valid As Possible”

Enrollment Mix Index (EMI):  Average instructional expenses per student vary by institution type. “As Valid As Possible”  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 2001

State Cost of Living Adjustment (COLA):  Driven primarily by housing costs.  Adopted index developed by Berry et al (2000).  One value per state, ranging from 0.88 to  Hawaii and Alaska assigned value of the next highest state (Massachusetts) “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. The reverse is true for states with a more expensive enrollment mix and high cost of living. In some states, the two factors tend to cancel each other. “As Valid As Possible”

Current Status Distribution of State, Local, and Net Tuition Revenue, U.S. Fiscal 2004 Net Tuition Local Taxes State Support (Tax and Non-Tax) Source: SHEEO SHEF State and local governments provided $69.4 billion for public and independent higher education in An additional $31.5 billion in net tuition revenue brought the amount available from state, local, and student sources for general operating expenses to $100.9 billion.

Total Educational Revenues per FTE by State, Fiscal Year 2004 Source: SHEEO SHEF Total educational revenues per FTE (educational appropriations plus net tuition) averaged $8,924 in Current Status

Net Tuition Revenue per FTE by State, Fiscal Year 2004 Source: SHEEO SHEF The national average net tuition revenue per FTE was $3,187 in With the exception of Oregon, South Dakota, Colorado, and Montana, Western states were below the U.S. average. Current Status

Educational Appropriations per FTE by State, Fiscal Year 2004 Source: SHEEO SHEF The national average educational appropriation per FTE was $5,737 in The WICHE states with above- average tuition revenue per FTE (CO, MT, OR, and SD) were below the national average in educational appropriations per student. Current Status

Net Tuition as a Percentage of Total Educational Revenues, by State, Fiscal 2004 Source: SHEEO SHEF Nationally, the average share of educational revenues represented by net tuition in 2004 was 35.7%. Among Western states, reliance on tuition as a major source of operating revenue ranged from 59.2% in Colorado to 12.8% in New Mexico. Current Status

Net Tuition Increase Needed to Offset a 1% Decrease in State Government Support for Public Higher Education, by State, Fiscal 2004 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 1.9% on average to offset a one percent decrease in state support (based on 2004 SHEF data). Current Status

From fiscal 2001 to 2004: “The fiscal 2004 SHEF study documents a 4-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 near their lowest levels nationally in 25 years.” Recent Trends  State & local appropriations for general educational expenses in public colleges and universities were essentially flat, while:  enrollments grew by 11.8% and  higher education costs grew by 10.3% as estimated by HECA.  In inflation-adjusted terms,  Educational appropriations per FTE decreased 16.5%, from $6,874 to $5,737;  Net tuition revenue per FTE increased 11.1%, from $2,869 to $3,187; and  Total educational revenues per FTE decreased 8.4%, from $9,743 to $8,924.

U.S. Trends since 1980 FTE enrollment in public institutions has grown by more than 40% since Enrollment growth since 2001 has already outstripped that of each of the previous two decades % + 8.5% Educational Appropriations per FTE, U.S., Fiscal , Constant 2004 Dollars %

Over the long term, state and local government funding per student has been narrowly outpaced by enrollment and inflation as estimated by the HECA, decreasing on average one- fourth of one percent annually. The level of support has varied from year to year, at times dramatically. U.S. Trends since 1980 Educational Appropriations per FTE, U.S., Fiscal , Constant 2004 Dollars Economic downturns tend to depress state funding per student because budgets are constrained while enrollment grows rapidly. In the past, state support per FTE has rebounded following a downturn.

Regional Trends since 1980 Each region generally mirrors the national trend in per student operating appropriations from state and local governments. The level of the spending has been always at the highest in New England and the lowest in the South. Educational Appropriations per FTE, by Region Fiscal , Constant 2004 Dollars Adjusted by SHEEO HECA, EMI, and COLA

Regional Trends since 1980 Total Educational Revenues per FTE, by Region Fiscal , Constant 2004 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 and Southern states have operated with less.

Recent Trends  The Rockefeller Institute reports that state tax revenue in the 4 th quarter of 2004 grew 7.8% compared to the same period in 2003 (the strongest fourth-quarter growth since 1991), but warns of continuing cost pressures in Medicaid, elementary & secondary education, and other areas.  According to Grapevine, state tax appropriations for higher education, unadjusted for enrollment or inflation, were down 2.1% in fiscal 2004 (the first such nominal decrease in 11 years) but up 3.8% in  A SHEEO early look at FY 2006 state tax appropriations for higher education in 30 states indicated that 25 anticipated increases; only one expected a decrease. Signs that things may be turning around: Will recovery offset enrollment growth and inflation?

Educational Appropriations per FTE, U.S., Fiscal , Constant 2004 Dollars Adjusted by SHEEO HECA The choice of baseline year is fundamental to any analysis of long-term funding trends. Choosing a “peak” or “valley” would lead to dramatically different conclusions about trends in revenues per student. Selecting an Appropriate Baseline for Subsequent Trend Analyses Baseline year for remaining analyses regression line

Net Tuition as a Percentage of Total Educational Revenues, U.S., Fiscal Source: SHEEO SHEF In public institutions, net tuition tends to grow as a percentage of total revenues when the state appropriation per student decreases in economic downturns. Nationally, net tuition accounted for 26% of total educational revenues in 1991; remained fairly constant at about 30% from 1993 to 2002, then increased each of the last two years to its current level of 36%. U.S. Trends from

Net Tuition as a Percentage of Total Educational Revenues, by Region, Fiscal Source: SHEEO SHEF Regional Trends from Nationally, the average share of educational revenues represented by net tuition in 2004 was 35.7%, 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.

Total Educational Revenues per FTE, by Component, U.S., Fiscal , Constant 2004 Dollars Source: SHEEO SHEF In constant 2004 dollars adjusted by the HECA, educational appropriations per FTE in public institutions dipped during the early 1990s recession but had recovered by the end of that decade. However, recent constant dollar decreases in educational appropriations result in a net decrease of 11.7% for the period, from $6,499 in 1991 to $5,737 in U.S. Trends from In the post- recession periods of the early 1990s and early 2000s, increases in net tuition per student have been unable to offset decreasing levels of state & local government support.

Full-Time Equivalent Enrollment, Percent Change by State, Fiscal Source: SHEEO SHEF Nationally, enrollments in public institutions increased 11.8% from 2001 to Regionally, increases in enrollment ranged from a 27.9% in South Dakota to 6.3% in Montana. Enrollment Growth Since 2001

Full-Time Equivalent Enrollment, Percent Change by State, Fiscal Source: SHEEO SHEF Nationally, enrollments in public institutions increased 21.8% from 1991 to Regionally, these increases ranged from an 86.9% increase in Nevada to 2.9% growth in Wyoming. Enrollment Growth Since 1991

Educational Appropriations per FTE, Percent Change by State, Fiscal , Constant 2004 Dollars Source: SHEEO SHEF Nationally, educational appropriations per FTE in public institutions declined by an average of 16.5% from 2001 to Regionally, these changes ranged from 18.1% growth in Montana to a 35.4% decrease in California. State & Local Government Support Since 2001

Source: SHEEO SHEF Nationally, educational appropriations per FTE in public institutions declined by an average of 11.7% from 1991 to In the West, changes in educational appropriations ranged from 26.7% growth in Washington to a decrease of 31.9% in California. Educational Appropriations per FTE, Percent Change by State, Fiscal , Constant 2004 Dollars State & Local Government Support Since 1991

Net Tuition Revenue per FTE, Percent Change by State, Fiscal , Constant 2004 Dollars Source: SHEEO SHEF Nationally, net tuition per FTE increased by an average of 11.1% from 2001 to 2004, and all but two 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. Tuition Revenue Since 2001

Net Tuition Revenue per FTE, Percent Change by State, Fiscal , Constant 2004 Dollars Source: SHEEO SHEF In constant dollars, net tuition per FTE increased by an average of 38.6% from 1991 to 2004, and all states but Washington 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. Tuition Revenue Since 1991

Total Educational Revenues per FTE, Percent Change by State, Fiscal Source: SHEEO SHEF When aggregated nationally, total educational revenues per FTE have decreased by 8.4% since Total Educational Revenues Since 2001

Total Educational Revenues per FTE, Percent Change by State, Fiscal Source: SHEEO SHEF When aggregated nationally, increases in net tuition revenue generally offset decreases in state appropriations to yield an average 1.4% increase in total educational revenues per student. Individual state circumstances, however, varied substantially around that mean. Total Educational Revenues Since 1991

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 10 Western states with above average enrollment growth from 1991 to 2004, only Nevada and New Mexico maintained educational appropriations per student on a constant dollar basis for the period.

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 two states in the upper left quadrant lag the U.S. average but have been catching up. Hawaii, in the lower right quadrant, exceeds the national average but has lost ground. Putting the Pieces Together

Percent Change by State in Educational Appropriations and Net Tuition Revenues per FTE, Fiscal Source: SHEEO SHEF Putting the Pieces Together 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.

Net Tuition Revenue per FTE and Total State Student Grant Aid per FTE, Fiscal 2004 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 FY04 net tuition revenue per FTE for each state. The vertical axis shows FY04 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 2002 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 +/- 10% of the national average.

In making funding decisions, a state must answer the following key questions:  What kind of higher education system do we want?  What will it take, given our circumstances, to obtain and sustain such a system?  Are we making effective use of our current investments?  What can we afford to invest in order to meet our goals? Conclusion

REPORTS & PRESENTATIONS: DATA: CONTACT: David Wright, Senior Research Analyst (303)