How Do State Funding Cuts Affect Tuition Inflation?

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Richard Pallardy

By Richard Pallardy

June 4, 2019

In the quest to diagnose the cause of rising tuition costs, state disinvestment has emerged as one of the more likely explanations. Cuts to education funding are low-hanging fruit in times of economic exigency.

After all, unlike many other programs reliant on state funding, higher education has an obvious alternate source of revenue: tuition. If state funding doesn’t come through, universities can just ratchet up tuition and the status quo holds. (Or so goes the theory.)

Even when the economy recovers, funding typically does not return to prior levels and thus inflated tuition persists.

Take Illinois, for example. Illinois Board of Higher Education data indicates that in 2002, prior to the Great Recession, state appropriations had reached their highest level. By 2018, ten years after the start of the recession, inflation-adjusted funding levels had crept back to a mere half of what it was at its height.

The State Higher Education Executive Officers Association (SHEEO) found that after five years of increases, from 2017 to 2018, state support had plateaued nationally. Still, tuition comprised nearly twice as much revenue as it did three decades ago. In fact, it accounted for more revenue than state funding for the first time.

A study by Thomas G. Mortenson, a respected researcher, suggests that if current trends continue, by 2059, state investment in higher education will cease.

Politicians have latched onto this phenomenon. Hillary Clinton proposed a massive federal program that entailed investment in state university systems during the 2016 presidential election.

(Despite the hysteria, interestingly, a survey by the Hechinger Report showed that most Americans don’t believe that state funding has decreased.)

Of course, no one factor accounts for rising tuition. In the complex 21st century economy, all sorts of factors play into the cost of higher education. Some studies have attributed the rise in tuition almost exclusively to state disinvestment, though others have drawn more measured conclusions, allowing room for other explanations.

While a handful reject decreases in state funding as contributing to the tuition crisis, the consensus appears to be that it has at least some bearing on the phenomenon. It is worth noting that due to sometimes dramatic disparities in financial situations and demographics, national averages may at times obscure the severity of the problem in individual states.

State Funding and the Recession

During the 1990s, state appropriations increased on average, reaching their apex in 2001. Nonetheless, a National Center for Education Statistics study from 2001 found that up to 28% of tuition changes could be accounted for by changes in state investment. So, reductions in state funding do not affect tuition only during a recession.

In the wake of the Great Recession, however, it is certainly true that states were forced to make even more substantial cuts as they struggled to meet their other financial obligations. Higher education funding is typically the third highest area of spending in a state budget, after primary and secondary education and Medicaid. Rising Medicaid costs in particular have forced states to take a hard look at what they spend on higher education. During an economic downturn, state support of postsecondary education is the first budget cost center to get cut.

Because universities typically spend all of their revenue each year, they are highly sensitive to such fluctuations. Universities typically rely on state and local appropriation for around half of the cost of instruction.

Higher education funding may be as much as $10 billion below what it was before the financial crisis.

The Center on Budget and Policy Priorities found in 2018 that 45 states spend less that year on each student than they did in 2008. On average, states spent $1,500 less.

Simultaneously, a shifting economy increased the demand for higher education. The wealth gap between those who went to college and those who didn’t had become a chasm. As such, between 2008 and 2011, the rate of full-time equivalent (FTE) enrollment increased by over a million students, from 10.2 million to 11.6 million, further exacerbating the problem.

In effect, public colleges are doing more with less.

By 2012, decreasing enrollments had eased pressures on university systems to some extent. There were only 10.9 million FTE enrolled students by 2018, up by about 700,000 from 2008. Still, with state funding continuing to lag, students were left to make up the difference. Average tuition at state universities rose by $2,651 between 2008 and 2018.

In some states, there are controls in place, such as the requirement of legislative approval for tuition increases, and in others, there are not. In some states, legislative controls may be limited to tuition, but not fees. So, the on-the-ground effects of these increases vary widely from state to state.

How Much Do State Funding Cuts Affect Tuition?

The real-world effects of state funding effects on tuition are often stated as a pass-through rate—the amount of a cut in funding as translated to actual tuition increases.

A 2017 study in the Economics of Education Review found that the pass through rate since 1987 has been on average $257 for each chunk of $1,000 taken from state appropriations. So: students pay $257 more for each $1,000 cut. Since the turn of the century, this average has crept up to $318.

A 2018 survey of the literature by the Urban Institute found that the best available studies suggested that 25-50% of appropriations decreases were compensated for by tuition increases.

These figures cover such a broad range for a variety of reasons. State financial situations vary considerably, for one. Not only do funding cuts differ between states, but the approaches to dealing with them do as well. Depending on the state and the university, the rest of the shortfall may be made up by increases in enrollment of out-of-state students, who pay higher tuition and/or by decreases in expenditures as well as tuition hikes.

It is difficult to come up with an across-the-board average. Further, the metrics used to track inflation have their own idiosyncrasies that may result in misleading conclusions.

One of the main clearinghouses for this type of data is the College Board, which conducts annual surveys of college tuition prices. Because they require two years worth of data from each institution, and not every institution responds every year, their conclusions about tuition inflation are not consistent year over year and likely underestimate it.

Further, because the College Board’s methodology looks at sticker prices, it does not factor in the discounting effect of financial aid and other factors that may actually bring net tuition revenue down.

The Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (CPI-U) also makes tuition inflation look like it is decreasing, but this is due to its inclusion of other factors, notably shifts in enrollment patterns away from four-year universities, changes in retention rates and declines in the number of students enrolling in college.

The Higher Education Price Index (HEPI) tracks cost drivers and is thus limited because these drivers tend to increase at a faster rate than inflation as a whole. Because of this, HEPI typically indicates a higher rate of inflation than the CPI-U.

The Higher Education Cost Adjustment (HECA) created by the State Higher Education Executive Officers Association attempts to reconcile the consumer costs accounted for by the CPI-U and institutional expenditures. Most of the institutional expenditures tracked relate to personnel costs (75%) and the rest are other goods and services.

Both HEPI and HECA have been criticized for their focus on what universities pay rather than what students pay. This bias has led to charges that they obscure the fact that revenues per student have actually increased. These critics contend that this statistical sleight of hand acts as leverage for universities to extract additional state funding while still jacking up tuition regardless.

All of this is to say: it’s nearly impossible to ascertain a reliable national figure representing the relationship between state funding cuts and tuition inflation. But, state-level studies continue to find more-reliable evidence of a causal relationship.

How Do Cuts Affect the Quality of Education?

In avoiding tuition increases that may deter prospective students, state universities frequently make cuts in other areas.

One technique involves adjusting the proportions of out-of-state and international students, who are required to pay higher tuition that state residents. By recruiting more of the former, universities can make up some of their lost funding. Of course, this takes opportunities away from the latter contingent. This disproportionately affects low-income students, who may see a reduction in the number of available slots.

Many universities also look to faculty salaries, a major cost center. By cutting full-time faculty positions and either replacing them with adjunct faculty, who are paid far less, and do not receive benefits, or not replacing them at all, colleges can reduce the financial impacts of disinvestment. The University of Arizona, for example, cut 320 positions, including faculty, in 2015, claiming that it needed to adjust to state funding cuts.

The quality of the education provided to attendees takes a hit, though. Adjunct faculty may not have the experience or knowledge base of more experienced (and expensive) tenured faculty. And, if eliminated faculty aren’t replaced at all, class sizes must increase, reducing the individual attention received by each student.

Some universities have been forced to eliminate degree offerings and close research centers. The University of Iowa, for example, closed seven different centers in 2018 and reduced funding for several others.

Such closures have reputational impacts down the line, especially if universities hope to stay competitive in attracting students and faculty who are interested in research.

Contesting the Theory

Despite growing evidence that state disinvestment does translate, at least to some degree, into rising tuition costs, some researchers have found little relationship between the two.

A 2017 American Enterprise Institute study found that for every $100 in cuts, students saw only a $5 increase in tuition.

A 2004 study found that perhaps 6 cents of every dollar in state appropriations translated into tuition savings. And a study from 2014 found that around 10 cents of every dollar in appropriations actually offset tuition. The fact that this statistic has remained relatively steady over a period that included a major recession has given some researchers pause.

Even studies that attribute a large proportion of tuition increases to state disinvestment leave room for additional contributing factors. In 2017, the Cato Institute found that 57-68% of tuition increases were related directly to state funding reductions. So, even at the high end, estimates of the relationship between disinvestment and inflation don’t find that one fully accounts for the other.

Another 2017 analysis found that funding cuts explained more than 100% of tuition hikes —sometimes substantially so. This is mathematically impossible and reinforces the need for additional explanation.

State revenues and tuition revenues may simply grow at differing rates. So, even if in an ideal system, a steady percentage of state revenue goes to appropriations for higher education, state revenue may nonetheless fluctuate, leading to reduced appropriations.

Thus, further research is needed to fully track the relationship between state support and tuition inflation. The former almost certainly affects the latter, but diagnosing it as the primary cause ignores considerable data inconsistencies and overlooks other potential contributing factors.

A good place to start:

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