It is well known that public higher education funding fluctuates dramatically with the business cycle – bearing the brunt of the legislative axe during tight budget periods with the expectation that it will be generously increased when flush times return. What is not well known is that public higher education budgets have suffered a steady erosion in funding priority for over 25 years – including during the bull-market of the 1990s. In particular, between 1977 and 2001, in all fifty states, three budget share measures have suffered substantial declines. First, the average share of state general fund budgets allocated to public education has fallen by four percentage points. Second, the average share of public education budgets allocated to public higher education has fallen by six percentage points. Third, the average share of public higher education budgets allocated to institutions (as opposed to direct student aid) has fallen by four percentage points. Together the declines have translated into real institutional appropriation losses of $2,800 per student in an “average” state –significantly more than the approximately $1,700 increase in real average public four-year instate tuition rates over this same period.
Using a rich panel data set spanning 26 years that was assembled from a variety of sources, I estimate a variety of specifications to investigate the causes of the declines in these three budget share measures. Among the main findings are that competing budget items do not appear to “crowd out” education’s budget share, rather its fall is caused primarily by changes in the income distribution within states. Court mandated K12 funding equalization has resulted in substantial increases in education spending within states, however, over a third of this increase has come at the expense of public higher education.
Attempts by public institutions to respond to lagging state appropriations by increasing tuition or private fundraising efforts are seen to trigger a cycle of future higher education budget share cuts, which calls into question what politicians expect institutions to do in the face of budget difficulties, as the institutions rapidly spiral toward a private “high tuition” equilibrium. The sensitivity of higher education budget shares to observable state factors has increased over time and dynamic panel estimates indicate that states exercise more discretion over the determination of the higher education – K12 split than they do over other budget decisions.
Three additional findings indicate that states have taken advantage of the higher education finance system to achieve other goals. First, the increasing ethnic heterogeneity across the noncollege and college aged cohorts has led to a shift of funding away from higher education. Second, the surge in popularity of targeted, non-means tested student aid programs appears to have been in an effort to redistribute income to economically well-off families. Finally, states appear to have “gamed” the higher education finance system to take advantage of perverse incentives created by federal student aid programs. Specifically, as more households in a state become eligible to receive federal Pell grants, states respond by moving aid away from institutions and toward students – allowing tuition to rise and to capture increased eligibility for federal grant aid.