Financial Forces and the Future of American Hisher Education

Recent shifts in state funding are altering the most basic realities of American higher education, from student access to faculty research.

Each year over the past quarter century, undergraduate tuition and fees in the United States have increased by an average of 2.5 to 3.5 percentage points above the inflation rate.1 This continuous rise recently led one congressman to propose that the government penalize institutions that raise their tuition by more than twice the rate of inflation for several years in a row; fortunately, his colleagues in Congress expressed little interest in his proposal, and he dropped it.2

Colleges and universities, both public and private, often claim that faculty salaries are among the major causes of persistent increases in tuition. The most recent AAUP annual report on faculty salaries, however, questions this assertion. Published in the March-April 2004 issue of Academe, the report notes that average faculty salaries at four-year colleges and universities in the United States have risen at only about 0.5 to 1.0 percent a year more than the inflation rate over the past twenty-five years.

The most important reasons for tuition increases differ in public and private higher education. In the private sector, contributing factors include the rising costs of technology, student services, and institutional financial aid; the unrelenting competition to be the best in every dimension of an institution's activities; and, at the research universities, the increasing institutional costs of scientific research. Public higher education must deal with all these factors in addition to another important driver: the withdrawal of state support.

Dwindling State Support

In his 2004 Cornell University PhD dissertation, Michael Rizzo illustrates the dramatic decline in state funding of higher education that has occurred over the past quarter century, arguing that the attention paid to recent fiscal difficulties in the states has obscured this persistent decrease.3 Figure 1 shows that the share of state general funds going to higher education has shrunk by more than one-third over the past twenty-five years. Had this share remained constant at 1977 levels (8.9 percent of state general fund budgets), institutions of public higher education would have received, on average, an additional $3,900 for each full-time-equivalent student in 2001.

In Higher Education Spending: The Role of Medicaid and the Business Cycle, a 2003 report published by the Brookings Institution, economists Thomas Kane and Peter Orszag attribute the decline in state funding of higher education that took place during the 1990s to the expansion of state spending on Medicaid (resulting from increased health care costs, changes in the federal government's financing of Medicaid, and an expansion of Medicaid caseloads in most states).

Rizzo reports that pressure to fund elementary and secondary education also accounted for a significant portion of the decline. Between 1977 and 2001, twenty-two state courts mandated K-12 finance reforms to equalize spending across school districts within these states. He says that these reforms led to an average increase in K-12 spending of $340 million in these states. More than 25 percent of that increase ($90 million) came directly from reducing state higher education budgets to below the levels that otherwise would have prevailed.

There is no reason why higher education's share of state spending should remain constant over time. As a result of this decline, however, per-capita state appropriations for each full-time-equivalent student at public colleges and universities rose in constant dollars from $5,622 in fiscal 1974 to $6,717 in fiscal 2004-an average increase of only 0.6 percent a year. This slow growth occurred during a period in which institutions of higher education faced rapidly rising real costs because of the reasons discussed above. At the same time, private colleges and universities relentlessly raised their tuitions by a much greater annual percentage than the increases in state appropriations for higher education.

Public institutions responded to diminishing state support by increasing their tuition levels at slightly higher percentage rates than the private institutions did. However, because tuition at public institutions started at much lower levels than those at private colleges, the public institutions generated less income from their increases than their private counterparts did from theirs.

Rizzo notes that statehouses nationwide responded with hostility to efforts by public institutions to recover lost appropriations by seeking private gifts and raising tuitions. On average, each dollar of private giving (per student) was met with a twenty-cent cut in per-student appropriations, and each dollar that tuition was raised led to at least a one-dollar cut in future state appropriations.4

The diminished resource base of public academic institutions relative to that of private colleges and universities has affected faculty salaries. As the 2003-04 AAUP report on faculty salaries notes, the average professor at a public doctoral university earned about 91 percent of what his or her counterpart at a private doctoral university earned in 1978-79. By 2003-04, however, the percentage had fallen to 77 percent. Increasingly, public institutions find it difficult to attract and retain high-quality faculty. This difficulty surely influences the quality of public colleges and universities, where most U.S. students are educated.5