DB.

ANNALS, AAPSS, 655, September 2014 79

DOI: 10.1177/0002716214534606

State-Level Responses to

the Access and Completion Challenge in

the New Era of Austerity

By WILLIAm DOyLE

and WILLIAm ZumEtA

534606ANN The Annals of the American AcademyState Responses in the New Era of Austerity research-article2014

understanding just how state leaders respond to fiscal crises and the continuing challenges of adequate fund- ing should provide insight into how successful states are likely to be in creating environments where most citi- zens can attend and benefit from higher education. this article describes and begins to classify the nature and range of state responses to ongoing fiscal chal- lenges. We focus on state-level leadership and govern- ance, fiscal policies, and accountability mechanisms. We identify five types of responses: cutting costs (emphasizing cost controls and low-cost providers); buying degrees (allocating state funds based on out- comes not inputs); the grand bargain (providing more campus autonomy in exchange for lower funding); hunkering down and waiting (hoping that state appro- priations will return to past levels); and falling apart (weak governance mechanisms compounding financial difficulties). the tradeoffs inherent in each approach are discussed.

Keywords: state policy; financing higher education

understanding just how state leaders respond to fiscal crises and the continuing challenges of adequate funding should provide insight into how successful states are likely to be in creating environments where most citi- zens, including in particular those from under- represented groups, can attend and benefit from higher education. this article describes and begins to classify the nature and range of

William Doyle is an associate professor of higher educa- tion in the Department of Leadership, Policy, and Organizations at Vanderbilt University. His research includes evaluating the impact of higher education pol- icy, the antecedents of higher education policy, and the study of political behavior as it affects higher education.

William Zumeta is a professor of public affairs at the Evans School of Public Affairs at the University of Washington. He holds a joint appointment as a professor in the College of Education. His research interests focus on higher education policy, including accountability, finance, graduate education and academic research policies, public policies affecting private higher educa- tion, and education and workforce policies.

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state higher education policy responses to ongoing fiscal challenges and identifies the responses most likely to result in higher levels of educational attainment. We focus on state-level leadership and governance; fiscal policies; and accountability mechanisms.

the federal government is seeking to play an unusually prominent (for the united States) role in promoting educational attainment, but the states remain the crucial players. It is the states that “own and operate,” albeit as somewhat autonomous entities, the public colleges and universities that enroll more than 70 percent of all students (National Center for Education Statistics 2012). States also have some, although varying, leverage over private institutions within their borders by virtue of regulatory authority and several billion dollars of student aid funds that they provide annually to private college students (Callan and Finney 1997).

As described in the introduction to this volume, the fifty states vary widely on a number of dimensions relevant to their capacity and willingness to substantially improve and equalize postsecondary access and attainment. Among the impor- tant characteristics that vary across states, we include the proportion of students enrolled at different types of institutions; tuition and financial aid levels; prepara- tion for higher education at the K–12 level; and governance arrangements for higher education. In addition, the macropolitical environment and the willing- ness and ability of state policy-makers to engage with higher education also vary across states.

the Fiscal Crisis

One force that varies little across states is the recent and long-lasting economic stagnation (during and after the Great Recession) that sapped tax revenues and led to sharp cuts in state support for higher education. these cuts, while deeper and longer lasting than in past economic downturns, are consistent with the gen- eral historical pattern by which higher education incurs larger cuts in downturns than other major state functions and recovers close to past support levels only if the period between recessions is fairly long (Doyle and Delaney 2010).

As Jennifer Delaney discusses in her article in this volume, other components of state budgets have advantages over higher education in the competition for funds. Nearly all states have underfunded pension obligations that present an ongoing fiscal drag (Pew Center on the States 2010). the medicaid program, jointly funded by the federal government and the states and based on eligibility criteria largely set by the former, has long been the fastest growing component of state budgets (Kane, Orszag, and Apostolov 2005). this situation is unlikely to change as the population ages and the Affordable Care Act expands medicaid eligibility. Funding for primary and secondary education, the largest component of state general fund spending, is very difficult to reduce, especially when school enrollments are growing. Another sizable component of state spending is prison and other criminal justice costs, an area where (as in K–12 education) flexibility is constrained by compelling public pressures and court mandates. unlike in

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these other major state-supported functions, there are no mandated require- ments to fund higher education “caseloads” (enrollments) and there is the temp- tation of turning to clients (students) for help with financing (Hovey 1999). Despite the increasingly recognized importance of higher education, these con- verging trends put higher education in a structurally unfavorable position in the stiff competition for finite state appropriations.

much of the decline in state support for higher education over the last quarter century occurred during and following the Great Recession. According to the State Higher Education Executive Officers (2013), from Fy2007 through Fy2012, real state support per full-time equivalent (FtE) student fell 23 percent while net tuition revenue per FtE jumped by 19 percent. Nearly all states sharply decreased appropriations per student and steeply increased per-student tuition revenue during this time period. the net effect of these diverging trends was a decline in the sum of these two major sources of funding for higher educa- tion of 7.9 percent per student over these years. State appropriations per FtE student fell in forty-eight of the fifty states and “total educational revenue” (the sum of the two major revenue sources) per FtE student dropped in thirty-six states. Per-student decreases in state appropriations over these five years exceeded 50 percent in New Hampshire and exceeded 25 percent in half the states. Even after adding in net tuition revenue, total educational revenue per FtE fell by more than 10 percent in fourteen states and by 5 to 10 percent in another thirteen states.

In Fy2013, states, in aggregate, reduced appropriations to higher education by a further 0.4 percent in nominal terms. Still, thirty-one states increased their funding in 2013, although most very modestly, suggesting that state support is stabilizing but not truly recovering to prerecession levels (Kiley 2013). Just before the Great Recession, most states were projecting structural budget defi- cits—an imbalance between projected expenditures and projected revenues—as far ahead as could be reasonably forecast (Boyd 2009). During the recession and its aftermath, states engaged in unprecedented levels of public job cutting and other reductions, resulting in fewer deficits than initially forecast. this fiscal surgery came at the cost of a range of state services that need to be provided at some level, suggesting the likelihood of some future rebalancing (Dadayan and Boyd 2013).

Although a decline during a recessionary period is not unusual, several aspects of the recent downturn make this decline different. First, the severity of the cuts and their duration are unprecedented in most states. Second, because of the slow economic recovery there have been only modest increases in state revenues. Last, few state policy-makers are promising a return to normalcy in terms of capacity for higher education investment. Instead, the future looks notably dif- ferent from higher education’s boom-and-bust patterns of the recent past. State support per student will almost certainly not grow consistently in real terms, and political resistance to large tuition increases as a means for offsetting the revenue shortage seems to be growing. thus, financial resources in higher education are apt to be much more constrained than in the past, even as demands for greater output grow.

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Categorizing Patterns of State Response to Current Challenges

Our review of the current landscape leads us to conclude that state policy-makers need a system of higher education that can produce more graduates with less public funding per student than has been available in the past (Zumeta et al. 2012). In this section we characterize emerging responses to this situation by state policy-makers and higher-education sectors. While several of these responses are explicit policy “postures” that have been adopted by state policy- makers and higher education leaders, others may be characterized as policy drift or public policy by default. Policy drift, although not atypical in complex, loosely coupled systems confronting rapid change, is unlikely to be helpful in achieving ambitious, equity-oriented access and completion goals.

We begin with three explicit policy-oriented stances that state and institutional leaders have emphasized to deal with the persistent downturn in revenues: cut- ting costs (emphasizing cost controls and low-cost providers); buying degrees (allocating state funds based on outcomes not inputs); and the grand bargain (providing more campus autonomy in exchange for lower funding). We also detail two responses that few state or institutional leaders may be willing to explicitly voice: hunkering down and waiting (hoping that state appropriations will return to past levels) and falling apart (weak governance mechanisms compounding financial difficulties).

We arrived at this classification of state responses to the fiscal downturn from an analysis of materials collected from a variety of sources, including state higher education commissions, legislatures, executive agencies, regional associations, national associations and policy advocacy groups, and press coverage. We used this information to identify the nature of a state’s response and, as appropriate, refine the emergent categories of state responses. Presented below are examples of state activities that best demonstrate each type of policy response to the down- turn. We do not attempt to classify all fifty states. State leaders might engage in several strategies at once; it is not surprising that the entirety of a state’s higher education system might not have one uniform response to a downturn in funding. Nonetheless, many states demonstrate identifiable responses to current condi- tions, falling clearly in one of the five categories.

Cutting Costs: Emphasizing Lower Expenditures and Low- Cost Providers

One response to the expectation to achieve greater output in the context of con- strained resources is to focus on cutting costs, presumably without decreasing quality. One early adopter of this approach was the university System of maryland (uSm). Labeled the “Effectiveness and Efficiency (E&E) Initiative,” the effort began in 2003 as new system chancellor, William E. Kirwan, took the helm in the depths of the deep cuts brought on by the dot-com recession of

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2000–2001. undergraduate tuition for state residents jumped almost 40 percent over four years in the early 2000s, and there was strong political resistance to further increases (mills 2006). At the same time, the system faced urgent enroll- ment pressures. Kirwan and the uSm Board of Regents felt that some serious internal measures needed to be taken to improve efficiency. As Kirwan (2007) put it, “the totality of these circumstances prompted the university System of maryland to undertake revolutionary change: a top-to-bottom reengineering of how we operate, not simply to get us through the tough times but to reposition uSm to thrive in this new era of permanently diminished resources and perpetu- ally escalating demands” (p. 42).

One important step to do this was to link two of the state’s lower cost provid- ers, its community colleges and the online university of maryland university College (umuC), to guarantee that community college students who complete a prescribed preparatory curriculum could finish their bachelor’s degree through umuC. Second, in locales lacking ready access to a uSm baccalaureate institu- tion, the system partnered with community colleges to offer on their campuses upper-division courses and programs that were in local demand. A variant of this involves the creation of low-cost “education centers” that house programs from a variety of institutions in one place and share services. the system seeks to ensure that, compared with past patterns, more students enroll in lower cost “compre- hensive” campuses rather than research institutions.

At the program level, the uSm pared back course requirements for majors that require more than 120 credits for a bachelor’s degree. Students are now also expected to earn at least twelve credits outside the classroom from Advanced Placement courses, study abroad programs, internships, and the like. Faculty productivity (through teaching) was mandated to increase by 10 percent (calcu- lated at the academic-unit level). Administrative savings initiatives were also undertaken in areas such as system-wide purchasing; energy use; and centraliza- tion of “backroom” operations, including financial aid processing. two campuses made scheduling changes and created incentives to more fully utilize facilities during off-hours and thus improve student throughput.

Kirwan (2007) reports that savings in the first two years equaled about 3.5 percent of uSm’s general fund appropriation, with more in subsequent years. the system’s bond rating was upgraded in part due to the permanent efficiency savings. most notably, Kirwan has stated, “Our E&E initiative received such a positive reaction both in the media and the state capital that we have merited significant budget increases for three consecutive years [just prior to the Great Recession], with two governors and various legislative leaders specifically citing our E&E efforts as key reasons for this increased support” (Kirwan 2007, 42).

Another potential cost-saving initiative is the university System of Georgia’s efforts to consolidate campuses. the Board of Regents of the Georgia system determined that the cost model for its thirty-five campuses was unsustainable and set out to consolidate campuses—a daunting task. the Board of Regents first set out principles for consolidation that were applied to all campuses in the state (Weider 2012; university System of Georgia 2013). Eight institutions were identified as potential targets for consolidation. In January 2013, the system

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consolidated these eight institutions into four, primarily (although not exclu- sively) on a regional basis (Diamond 2013). None of the physical campuses associated with these institutions were closed. Instead, a single administrative unit now runs the campuses. the university System anticipates cost savings as a result of requiring fewer administrative staff to run each campus, but it remains to be seen whether these savings will actually be realized (Diamond 2013; university System of Georgia 2013; Weider 2012).

Campus consolidation efforts in Georgia are similar in many ways to extensive campus reorganizations that occurred in both Kentucky and minnesota in the 1990s and early 2000s. In minnesota, the merger of the community college and technical college systems never brought about the hoped-for levels of cost savings that architects of the plan envisioned, primarily due to ongoing governance strug- gles and an inability to articulate a coherent mission for the newly formed system (trombley 1997; Weider 2012). In Kentucky, by contrast, many observers credited higher success rates and greater levels of educational attainment to the merger of the state’s community college and technical college systems (mills 2005).

Below, we highlight three other efforts to lower costs: emphasizing the use of technology, encouraging enrollment in low-cost campuses, and eliminating dupli- cative education efforts.

Emphasizing the use of technology

Although much has been made of the advent and possible impact of massive Open Online Courses, some tangible progress in providing low-cost educational options through the use of information technology has been made using hybrid models, where students have the option of taking coursework online, thereby reducing demand for classroom space (Allen and Seaman 2013). the National Center for Academic transformation has pioneered the use of information tech- nology to “unbundle” faculty roles, allowing faculty to spend time on their core strengths while using technology and other staff to handle more routine duties around delivering courses (twigg 2005). the National Center for Academic transformation led an effort called the Redesign Alliance from 2006–2012, engaging many large multicampus systems such as the California State university, the Pennsylvania State System of Higher Education, and the Northern Virginia Community Colleges (National Center for Academic transformation 2013). these efforts have not yet translated into lower costs per student or greater stu- dent progress in these systems as a whole.

Encouraging enrollment in low-cost campuses

In the united States, enrollment at different types of institutions carries dif- ferent per-student costs, with higher state subsidies for students at research I universities than for those at community colleges (Desrochers, Lenihan, and Wellman 2010). States can create cost savings by encouraging students to enroll at lower-cost institutions for at least some of their postsecondary years. Policies aimed at shifting student enrollment include creating articulation agreements

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between two- and four-year institutions so that students may start at a community college and transfer easily to a bachelor’s-degree-granting institution (Wellman 2002). In general, however, transfer rates from two- to four-year institutions have remained stubbornly low. Another policy lever is the use of state financial aid to encourage attendance at private institutions, which generally requires no direct state subsidy on a per-student basis beyond the aid itself (Zumeta 1996).

Eliminating duplicative educational efforts

many students need to take courses in postsecondary education that cover content that should have been mastered in high school (Kurlaender, this volume; Kirst and Venezia 2004). Reducing the number, and improving the success, of students who enter higher education needing remedial education could decrease costs. Some states have shifted such precollege education to be solely the respon- sibility of community colleges as a cost-saving measure.

Buying Degrees: Allocating State Funds Based on Outcomes, Not Inputs

For much of the last 40 years, many states have relied on some version of a for- mula-funding model, whereby higher education institutions receive funding based on enrollments, with allowances sometimes made for the distribution of enrollment across levels of instruction. Institutions were also assumed to have differential fixed costs, which were typically incorporated into the funding for- mula (mcKeown-moak 1996). the result was a reasonably stable system of financing, whereby institutions could expect steady revenues from the state based on their enrollments. Even in downturns, states still typically took enroll- ments into account in allocating cuts.

these systems were not perfect, however, and over time a serious flaw emerged. In many states, institutions became adept at enrolling students but showed less success in graduating them. Indeed, many institutions had severe problems with students even completing courses, let alone degrees. In short, bas- ing funding on the number of students incentivized enrolling students but did not ensure student success (Alexander 2000).

As described in other articles in this volume (Dougherty et al; Rutherford and Rabovksy), some states now provide funding based not on enrollments or other inputs, but on measured outcomes. In this article, we highlight actions that three states—tennessee, Ohio, and Arkansas—have undertaken in this vein.

the Complete College tennessee Act of 2010 laid out a new basis for funding institutions, known as the Outcomes-Based Funding Formula. Each institution is now given a set of measurable outcomes, including student progression goals, degrees produced, graduation rates, and others depending on institutional mis- sion. Each outcome is tied to specific indicators. these indicators are weighted to reflect the importance of each indicator for that particular institution. Both the

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indicators and the weights were set through a negotiated process between institu- tions and the staff at the tennessee Higher Education Commission (tennessee Higher Education Commission 2012).

under the Outcomes-Based Funding Formula, four-year institutions with dif- ferent mission priorities such as the university of tennessee (ut)–martin and ut–Knoxville have different performance indicators and different weights attached to indicators. Both institutions are held responsible for student progres- sion through 24, 48, and 72 hours of credit. this approach rewards institutions for completion of courses as opposed to enrollment in courses. Both institutions are also responsible for producing bachelor’s degrees, but with a heavier empha- sis at ut–martin. Both institutions are responsible for research and public ser- vice as measured by grant funding and other activities, but ut–Knoxville has a heavier emphasis on this outcome due to its status as a Carnegie research (very high) university (tennessee Higher Education Commission 2012).

the outcomes-based formula looks quite different for community colleges. the indicators and weights for Chattanooga State and Cleveland State (which grant two-year degrees and certificates) emphasize student progression and out- comes such as certificates. yet the particular challenges and goals for each cam- pus are reflected in the relative weights of their indicators. For instance, 20 percent of Chattanooga State’s outcome-based funding is based on job place- ments, while 20 percent of Cleveland State’s funding is based on student success in remedial and developmental education (tennessee Higher Education Commission 2012).

In addition to the core outcomes-based indicators, institutions are also rewarded for improving performance of targeted subpopulations, such as return- ing adults and low-income students. Each institution also has a set of quality assurance benchmarks such as student satisfaction or student employment rates that, if achieved, will result in additional performance-based funding.

Ohio has implemented a different model that emphasizes course completions over course enrollments. In Ohio, the main campuses of the Ohio State university (OSu) have 100 percent of their instructional funding based on outcomes, while community colleges in 2014 will have 5 percent of their funding based on out- comes with the proportion increasing over time (Ohio State university Office of Government Relations 2013).

Ohio’s performance funding system dictates that 50 percent of funding for the OSu main campus be based on degree completions in 2014, with 28 percent of funding based on course completions. the main campus and regional campuses will no longer have a stop-loss provision, which previously guaranteed state fund- ing equal to 96 percent of the previous year’s support. Community college fund- ing will continue to be based primarily on enrollments, but, in 2014, 25 percent of community college funding will be based on a set of indicators known as “suc- cess points,” and 25 percent will be based on course completions. Community colleges in Ohio, unlike four-year institutions, will continue to have a stop-loss provision that ensures continuity of funding, but it has not yet been determined how long this provision will remain in place (Ohio State university Office of Government Relations 2013).

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Arkansas is planning to commit 5 percent of its state funds for higher educa- tion to a performance-funding program that is similar in many ways to tennessee’s design, as it emphasizes student progression and completion and allocates addi- tional “points” for positive outcomes for selected subpopulations such as minority students (Arkansas Department of Higher Education 2013). Arkansas has not only adopted performance funding “2.0” (as described by Dougherty et al., this volume), but also has adopted performance funding at least four times. In each of the previous three instances, the program did not survive downturns in overall state support for higher education (Gorbunov 2013).

Indiana, where performance funding now accounts for 7 percent of all state support of public higher education, has also been pushing for “performance funding 2.0” (HCm Strategists 2012). Indiana’s performance metrics reward not just the number of degrees but also the types of degrees, with an emphasis on degrees in StEm majors. Indiana also includes a “wild card” indicator—a per- formance metric that institutions may select (Indiana Commission for Higher Education 2013).

tennessee, Ohio, and Indiana are in the early stages of implementing these policy changes. In Fy2012, institutional funding in tennessee was for the first time based entirely on the outcomes-based formula. It is too early to tell if the policy will be effective in increasing student success and institutional perfor- mance. (See Dougherty et al. and Rutherford and Rabovsky, this volume, for discussions about the effectiveness of performance funding in achieving these goals.)

A Grand Bargain: Providing more Campus Autonomy in Exchange for Lower Funding

Even before the Great Recession, public research universities complained about declines in state funding and restrictions placed on them by state governments. these universities compete with well-endowed, elite private institutions for fac- ulty and students, and the gap in resources available between private and public research institutions has been growing. Key issues include state control or influ- ence over tuition setting; state laws and policies regarding purchasing, contract- ing, and investments; and program approval requirements that restrict both revenue streams and responsiveness to competitors in a market-driven environ- ment. In short, the universities argue that, if they are to sustain quality and com- pete effectively with alternative providers—from elite privates to online institutions—and meet societal needs reflected by the market, they need free- dom to compete without a hand tied behind their back.

Versions of this argument have been advanced more or less forcefully by flag- ship campuses in Virginia, Washington, Oregon, and Wisconsin, to name a few. under Governor mark Warner in 2006, Virginia passed the Higher Education Restructuring Act, the culmination of an initiative begun by the state’s three major research universities a few years earlier (Zumeta and Kinne 2011). the

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universities had sought more freedom to set tuition levels, set local retention of interest earned on tuition revenues, and, most important, relax fairly extensive state controls over institutional business practices such as purchasing and con- tracting. In the end, the institutions claimed control over the tuition interest revenues, received a restatement of existing state law providing that institutions set their own tuition rates, and obtained a process through which public colleges and universities (all of them, not just the three instigators) could prove to the state that they were capable of managing their business operations relatively autonomously. At the insistence of Governor Warner, the act also provided for an extensive accountability system, generally called the “state ask” to ensure that institutions continued to attend to a list of more than a dozen state policy priori- ties (Couturier 2006).

the end result in Virginia displays important aspects of what might be called a grand bargain between public universities and their state supporters and over- seers in light of the emerging fiscal realities. In this model, as state funding recedes, the state concedes that institutions need alternative revenue streams and more flexibility to pursue them and compete in the marketplace. State pol- icy-makers also realize that in doing so there is a real risk that their ostensibly public universities may come to act less and less like public institutions absent explicit efforts to condition state-granted authority and support on achievement of specific state policy goals. these goals typically include increased degree pro- duction, often in high-demand fields; enrollment (and graduation) of a diverse mix of students; increased research relevant to state needs; limits on resident tuition increases and nonresident enrollments; assistance to K–12 schools; and impact on regional economic development.

Available information raises some questions about the implementation of these initiatives. In Virginia, state policy-makers have begun to question institu- tional practices, particularly among the institutions granted the highest level of autonomy. For instance, state lawmakers and former Governor Bob mcDonnell advocated for institutions to cease using tuition dollars to fund institutional stu- dent aid, a key strategy for many institutions seeking to increase economic diver- sity (Virginia Department of Planning and Budget 2011; Kiley 2012). State policy-makers also instigated an “audit” to understand what drives college costs in the state.1 In short, it is not clear that the new compact has exempted universi- ties from intrusive state oversight, one of its initial goals.

the university of Washington, whose state appropriation was cut by more than 50 percent between Fy2008 and Fy2013, sought legal authority over its state-resident undergraduate tuition rates as well as regulatory relief in some of the same areas as the Virginia institutions. Some of the regulatory relief measures have been granted, and, under great fiscal pressure, the legislature gave the insti- tutions authority over resident tuition rates for five years beginning in 2012 (Garber 2011). Resident undergraduate tuition increases at the university of Washington were dramatic during the downturn years—14 percent in 2009, fol- lowed by 14, 20, and 16 percent in the succeeding three years, respectively (university of Washington 2013). the university also replaced 150 state resident freshmen in the entering class of 2011 with higher-paying nonresidents to offset

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some of the state funding cuts. the university had to backtrack in the succeeding year in response to a legislative mandate regarding the number of in-state fresh- men (Long 2012a). Accountability measures have been greatly discussed but implemented only sporadically in Washington, although the institutions do a good deal of voluntary reporting and seem to pay attention to certain clearly articulated state needs (e.g., more degrees in StEm fields). the state restruc- tured (and renamed) its coordinating agency effective June 30, 2012, and took away the agency’s authority to review programs and new program proposals (Long 2012b). this change leaves the universities with considerable latitude to launch new ventures that they think are viable in the marketplace.

more limited versions of something resembling the grand bargain approach have surfaced in the last few years in Wisconsin and Oregon. unlike Virginia and Washington, the flagship campuses in these states are part of a system of universi- ties that are all under the same governing board. State funding for these state systems has been tightly constrained over many years. the flagship campuses felt they were particularly squeezed given their efforts to compete in the national marketplace for prestige and the quality faculty, students, and research grants that go with it. At the leadership level at least, each felt that it could fare better on its own rather than as part of the statewide system. Without support from the system heads (although university of Wisconsin–madison’s plan had gubernato- rial support), each university’s president floated proposals that would make it autonomous and able to pursue revenues and programs of its choice (Blumenstyk 2010; Krueger 2011). Each also made some concession to the need to remain in service to the state, but exactly how accountability would work was unspecified.

In both Oregon and Wisconsin, the flagship campus proposals for secession from the state system ran into a firestorm of criticism and resistance, and the presidents of both institutions quickly departed. One lesson here may be that the structure of the state system of higher education matters. A grand bargain may be more readily struck when a university can negotiate directly with the state than when there is an additional layer to work through with all the attendant interests, embedded attitudes, and power centers.

Rather than a gradual process of fiscal disengagement from the state, for Washington and Virginia the grand bargain seems to have produced both much lower levels of state support and much higher tuition quite quickly. the large tuition increases in Washington were described above. In Virginia, net tuition revenue per student increased from $3,900 to $7,800 between Fy2000 and Fy2012, a 100 percent increase in inflation adjusted terms over the course of just over a decade. At the same time, state appropriations per student declined, with precipitous drops in state funding for higher education in both Virginia and Washington since Fy2008 (State Higher Education Executive Officers 2013).

A related difficulty is that the grand bargain approach tends to suit the inter- ests of some research universities, especially flagship campuses, better than the interests of other institutions. Baccalaureate and comprehensive institutions as well as community colleges generally have fewer options for alternative revenue streams when states reduce funding than do research universities. Being less prestigious and enrolling less affluent students, these schools have much less

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market power to raise tuition sharply or attract out-of-state students. they also tend to lack alumni who can make large donations. By definition, they lack the large research base from which to pursue revenues from commercialization of research discoveries. Some entrepreneurial institutions in this group may be able to “keep the lights on” by mounting widely marketed online courses, contract- funded programs, or recruiting international students anxious for a u.S. degree. But it is not clear that these activities benefit traditional state resident under- graduates or increase capacity to educate them.

Hunker Down and Wait: Hoping that State Appropriations Will Return to Past Levels

We do not see policy-makers and campus leaders in every state engaging in a thoughtful dialogue regarding the future of higher education as a result of the Great Recession and its lingering aftermath. In many states, the response of multiple key policy actors has been to wait and hope that funding returns to previous levels. to cope with shortfalls in the short term, state and institutional leaders can make across-the-board cuts to all or most units, defer some recurring costs (e.g., mainte- nance of capital), and freeze or reduce other general costs such as salaries and benefits (e.g., via furloughs). Such a strategy can, over a short period, allow institu- tions to “weather the storm” without obvious damage until state revenues recover.

In the past, this strategy has not been unreasonable. Institutional leaders in the 1980s who saw their budgets cut on a per-student, inflation-adjusted basis by at least 5 percent could have expected recovery to previous funding levels within about five years (Doyle and Delaney 2010). Recovery time from a similar sized cut in the 1990s averaged about seven years. In the 2000s, the majority of state systems that received cuts of this magnitude did not recover to past levels of sup- port. yet many policy-makers and institutional leaders have still opted for the “hunker down and wait” strategy. As Lindblom (1959) and others have noted, powerful organizational forces encourage this strategy. Assuming that the future will be something like the past allows most leaders to govern through difficult times in the least internally disruptive way. Incremental actions to adjust to a downturn in revenues cost little in terms of political capital while efforts to iden- tify new ways of organizing or delivering higher education at a lower cost are typically much more arduous.

the only states that have employed this kind of strategy with any success in recent years are states that primarily depend on energy extraction as a source of revenue (an inherently volatile revenue source). In North Dakota, per-student, inflation-adjusted funding from the state declined from $6,895 in 1998 to $5,406 in 2005 (a 21 percent decrease) when the state’s economy was relatively weak, before beginning a rapid increase to $7,192 in 2012 (State Higher Education Executive Officers 2013). No other state matched this pattern of cuts and recov- eries, particularly during the Great Recession. many have attributed North Dakota’s remarkable funding turnaround to its reliance on new gas and oil

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drilling methods, which generated windfall revenues for the state between 2005 and 2012 (Kiley 2013). In the vast majority of states that do not enjoy windfall revenues from such sources, it seems unlikely that the standard cut-and-recover model of previous years will apply to state finances or to the support of higher education. From the 1960s until the 1990s, state financial support for higher education steadily increased in most states in most years. When downturns occurred, these could be viewed as exceptions to the rule of steady year-to-year increases in inflation-adjusted, per-student support. In the situation of steadily increasing state support, hunker down and wait makes perfect sense as a strategy, since institutions could assume that increased funding would be coming in the near future. this strategy of hunker down and wait depends on making short- term changes that minimize disruption, such as deferring maintenance, restrict- ing travel, and limiting raises. these changes can easily be undone if revenues continue to increase after a brief downturn, which is why hunker down and wait has been an expedient and popular strategy. But institutional leaders cannot con- tinue such measures indefinitely. Buildings must be repaired; some travel will be required; and faculty, administrators, and staff will leave if salaries never increase. Expecting steady year-to-year increases in revenues from the state is no longer realistic for most public institutions in most states, thus making hunker down and wait an untenable position.

Falling Apart: Weak Governance mechanisms Compounding Financial Difficulties

the most recent fiscal downturn has also highlighted the importance of having a functioning higher education governance structure within a state, rather than simply strong colleges and universities. this section describes a pattern observed in two large states that had previously been regarded as models for the organiza- tion and governance of higher education: California and Illinois. In both states, the absence of an effective voice representing the public interest with regard to higher education policy led to slashes in funding in difficult times, further exac- erbating governance challenges. As the governance systems of higher education in each state became less able to respond, further cuts were easier to make, lead- ing to an ongoing cycle of decline.

California

California’s 1960 master Plan divided responsibility among its four higher education sectors (called “segments”). the university of California (uC) would be uniquely responsible for the research mission, as well as doctoral and medical education, and would enroll the top 12.5 percent of high school graduates. the California State university (CSu) would enroll from the top third of high school graduates, and serve as the primary source of access to baccalaureate and mas- ter’s-level higher education through campuses in the most heavily populated

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areas. the community colleges would provide broadly distributed education to anyone who might benefit, and serve as a path to transfer into the CSu campuses or the uC. Residents attending accredited private (nonprofit) colleges and uni- versities would be eligible for state funding through the state financial aid system, known as Cal Grants (Kerr 2001).

What the master plan did not include was an effective governance mechanism that would allow for the public perspective to be voiced on a permanent basis. Given the increasing importance of higher education to state economic develop- ment, it has become apparent to us that a discussion about higher education policy must expand beyond the “usual suspects” to include a broad array of stake- holders. Such a discussion among stakeholders regarding the structure and responsibilities of institutions in California is exemplified in the process used to create the master plan itself. Since that time, there has been a distinct lack of a formal process in California to involve a broad array of stakeholders in decision- making. Instead, each sector serves first and foremost its own interests, and competes with the others for legislative priorities and funding (Richardson et al. 1999; National Center for Public Policy and Higher Education 2005).

California was particularly hard hit during the Great Recession, and California’s public colleges and universities have seen large downturns in state funding. Per- student, inflation-adjusted funding in California dropped from about $9,000 in 2000–01 to about $5,000 in 2011–12, a decline of nearly 45 percent (State Higher Education Executive Officers 2013).

Given the magnitude of this crisis, the system of higher education in California would have been well served by deemphasizing sector-by-sector solutions and instead focusing on state priorities. Possibilities could include, for example, clos- ing some campuses; deciding that the research mission of all of the uC’s ten campuses could no longer be supported by the state and allowing some to become autonomous charter campuses; requiring all students to complete a cer- tain number of credit hours either through AP credits or community college enrollment before enrolling at a four-year institution. A strong state governance entity can be a key actor in advocating state priorities over sector-specific goals. We view such governance entities as necessary but not sufficient elements in a structure that can ensure that state interests are articulated in policymaking for higher education. the California Postsecondary Education Commission, whose primary role was to collect and disseminate data, historically played little role in policy decisions and was eliminated by the state in 2011 (murphy 2011).

In the absence of a policy voice focused on statewide interests, each sector pursued its own solution to the fiscal crisis. tuition in all sectors increased, with the largest increases at the uC (moore, tan, and Shulock 2014). At the CSu, campuses limited course offerings and accepted fewer spring entrants and trans- fers (California State university Office of Public Affairs 2009). At the community colleges, similar declines in course offerings occurred (moltz 2009). Large expensive campuses built during better fiscal times in isolated parts of the state, such as uC–merced, remained open while critically impacted campuses such as the Community College of San Francisco were so overwhelmed by the crisis that they faced the loss of accreditation (Schmidt 2013).

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As the situation continued to deteriorate, the lack of a credible state-level policy voice contributed to more across-the-board cuts, further intensifying each sector’s problems. Higher education in the state of California then achieved a remarkable, if not necessarily permanent, turnaround. Led by veteran Governor Jerry Brown, in November 2012 voters supported Proposition 30, which increased taxes on higher-earning individuals in the state to stave off further mas- sive impending cuts to both K–12 and higher education. While still too early to tell whether state funding will continue to recover, many of the grievous addi- tional cuts planned for higher education have not come to pass (Kiley and Fain 2012). Nonetheless, the state’s structural governance problems are not addressed simply by improved state finances. Also, governors usually turn to other concerns and eventually leave office. the gaps in the structure of the state system will, if uncorrected, continue to hamper state leaders’ capacity to deal effectively with a challenging fiscal environment.

Illinois

Illinois, like California, was once viewed as a model for the nation for its higher education governance structures. under the “system of systems,” four public university boards were responsible for twelve public universities, while the Illinois Community College Board oversaw that part of the system. these boards were subordinate to the Illinois Board of Higher Education, particularly in budg- etary matters. the state’s clear lines of authority over its institutions and the abil- ity of the Board of Higher Education to serve as a respected voice for the public interest in higher education resulted in a system that provided high levels of access and affordability. Nonetheless, this system was abolished in 1995 and replaced with a system under which seven of the twelve public universities had their own boards (Richardson et al. 1999).

under the previous system, the Illinois Board of Higher Education (IBHE) both oversaw institutions and helped to form consensus around important policy priorities among institutional leaders. Appointees to the board were seen as highly capable and nonpartisan, and the director and staff of the IBHE were well regarded. In the aftermath of the dissolution of the system of systems, none of these factors held true (Perna, Finney, and Callan 2011). the current IBHE is viewed as ineffectual and comprises primarily political appointees—many from the discredited Blagojevich administration—with little expertise or interest in higher education. the board has failed to set priorities for institutions, identify institutional performance goals, or provide incentives for institutions to improve. Instead, the board has watched the state’s higher education system struggle as budgets have declined (Perna, Finney, and Callan 2011).

While California never had a statutory state-level organization that could articulate the public interest, Illinois has lost a mechanism by which public priori- ties were effectively voiced and carried out. the collapse of the system-level governance structure in the state has meant that institutions have been left to their own devices. the state has seen a decline in enrollment rates in higher education and steep increases in tuition during the last decade. Institutional and

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system leadership in response to this crisis has been ineffectual, as leaders strug- gled with more crises and high-level departures and never formulated a compre- hensive strategy to establish a funding base and create priorities for institutions (malone et al. 2010; Cohen 2012; Garcia and Pearson 2013). moreover, the notorious dysfunction at the highest political levels and the state’s troubled finances have precluded effective intervention by the governor or legislative leadership, as has recently occurred in California.

Patterns of appropriations and net tuition revenues in California and Illinois demonstrate the negative impacts of weak governance mechanisms and inatten- tion from the top on both state support and tuition revenues. In California, the “boom and bust” cycle of appropriations and net tuition revenues is abundantly clear. Appropriations decreased rapidly in each of the last three recessions, while rebounding equally rapidly during upturns in the economy. tuition revenues increased rapidly during times of state cuts, while tuition freezes negotiated by state leaders and system heads occurred during each period of recovery. In Illinois, state support rebounded after cuts in the early 1990s, a time when state governance of higher education was well organized and politically viable, but did not recover after cuts in the early 2000s. At the same time, net tuition revenues per student increased by 91 percent in real terms between Fy2000 and Fy2012 (State Higher Education Executive Officers 2013).

the experience of state policy-makers during the last recession suggests that strong and effective higher education governance may not be a luxury or an add- on to a system after institutional needs have been met. Instead, an effective voice for the public interest in higher education at the state level may make the differ- ence between a chaotic system that does not serve students or the state well and one in which public priorities are maintained even during a time of severe fiscal difficulty.

Conclusion

this article categorizes state responses to the most recent steep fiscal downturn in the context of a much longer period of gradual erosion of most states’ financial commitment to higher education and a future that promises little in the way of improved per-student support. While states may pursue some combination of these options, we believe that nearly every state facing the emergent fiscal cli- mate has chosen to pursue—or has defaulted into by not choosing—one or more of the routes that we describe. As with every policy choice, there are clear trade- offs with each option.

States that emphasize cutting costs attempt to provide an education of similar quality as in previous years, while revamping the way business is done. this approach may be disruptive and politically difficult but can place states and insti- tutions on better footing to weather a continuing difficult financial outlook. A key challenge is how to preserve quality under this strategy.

StAtE RESPONSES IN tHE NEW ERA OF AuStERIty 95

Buying degrees instead of enrollments may result in institutions pursuing pre- viously undiscovered efficiencies and directing their efforts toward student suc- cess instead of access alone. this approach may also lead to unintended consequences, however, as institutions could lower academic standards to increase degrees or become more selective in ways that poorly serve underrep- resented populations.

A grand bargain between states and institutions can provide public institutions with unprecedented autonomy in return for fewer state resources, but it also blurs the already fuzzy line between public and private institutions in some states. In short, public institutions that become more like privates may be unable to focus on public purposes. the grand bargain strategy appears to fit research universities much better than other types of public colleges and universities with limited access to nonstate revenues.

State and institutional leaders who elect or default to a hunker-down-and-wait approach face the least disruption and least conflict over their choices, at least initially. the best evidence suggests that this strategy will not be sustainable since the recent sharp cutbacks in public resources for higher education are unlikely to be substantially restored. this approach is a recipe for erosion of quality and, likely, access as well, which may prompt policy and institutional leaders eventu- ally to abandon it.

Illinois and California offer cautionary tales about the consequences of falling apart. In our view, establishing a voice for the public good in higher education is not a luxury but a necessity—all the more so in difficult times. Gubernatorial leadership may substitute for a time but, standing alone, cannot be sustained in most state contexts. Rather, institutionalized structures for ongoing deliberation and decision-making that motivate and engage on a sustained basis the full range of key players, including stakeholders outside of government, are needed for higher education policymaking (Zumeta 2007).

Notes

1. Virginia House Joint Resolution 108, passed 28 February 2012.

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