summarizes

Finance in Higher Education ­ THE ROLE OF GOVERNMENT INVESTMENT

IN HIGHER EDUCATION FINANCE ­

Lesson 2 Objectives ­

By the end of this lesson, students should be able to:

• Describe the historical changes in government funding for higher education over the past two decades.

• Discuss the potential financial effects of the increase of borrowing money for college on higher education and the nation as a whole.

• Express opinions on the primary concerns for future government funding of higher education.

• List and describe the most common funding models. • Define and discuss tuition discounting.

Lesson 2 Introduction ­

Higher education will always struggle to secure adequate funding for its programs. The level of support from state government has become one of the most important sources of funding. Students of higher education need to be familiar with the way states make decisions on levels of funding and allocation methods. Because government funding of higher education has increased the level of accountability has also increased. The growth in reports to satisfy external auditors is a financial concern and has an impact on the overall resources of universities. These costs are passed on to the students in the form of higher tuition and fees.

Community colleges continue to expand their offerings and provide educational services to the public at a relatively low cost. Effective senior college managers will be familiar with the community college and establish dynamic relationships with key community college leaders.

When states make decisions on funding for higher education they tend to invest more during good economic times. This fact may seem obvious but in reality the situation is much more complex. Policy makers still look at higher education expenditures as a “luxury” or something that they can fund with discretion. Usually, state funding is cut too much during hard economic times and when times are good the state usually increases funding too quickly. This over- reaction to the economy makes it hard for higher education administrators to guess how much resources they will have to do their jobs.

State funding decisions are primarily based on economic outlook. If the national economy is strong the trickle-down effect to the states is magnified. If the national economy is weak the same trickle-down effect applies so that the states are unable to expand higher education funding. Most states use “baseline budget projections”. The idea is that spending for next year is based on the current year expenditures and revenues are expected to be the same. There is a tendency to assume that spending per pupil will be the same; however, inflation drives up the costs. This tension between holding expenditures constant while prices increase is why higher education funding is always a main topic of discussion during budget discussions.

When states predict increases in revenue from taxes they are faced with the decision to reduce taxes for citizens or spend more on programming. When revenues are expected to decrease

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they are faced with the decision to raise taxes or cut programs. The result is a squeeze on all programs which rely on state funding.

The tax payers or the public want to hold agency’s accountable for the funding they receive. There are a few different systems for measuring performance and the selection of the particular system is dependent on the desired objectives and outcomes. States use one or more of the following performance indicator systems:

• Inputs, processes, outcomes analyzing the impact of education from the beginning to the end of the process.

• Resource efficiency and effectiveness measuring how well colleges utilize their resources both human and physical.

• State need and return on investment matching the strategic needs of the state to what is spent on higher education and which programs support the state objectives.

• Customer need and return on investment understanding the consumer demand of education and providing an effective and attractive program to meet those needs.

All of these measures of performance have merit; however, each approach has drawbacks. One major assumption is that data is readily available. In fact, most of the data needed to properly analyze performance does not exist in a format that is easy to analyze. The amount of time required to gather data and manipulate existing data is significant. Some performance cannot be reduced to data measurement. For instance, student satisfaction is dependent on a subjective response.

The important thing for higher education administrators to understand is that accountability systems are permanent and funding will be affected by the numbers. There are two primary models and one secondary model used for state funding:

• Incremental budgeting where states take last year’s budget and carries it forward with some predetermined rules about increases.

• Formula budgeting utilizes mathematical calculations to set levels of funding. • Performance-based budgeting is funding colleges based on a set of merit criteria. If

you can prove you have performed at a certain level then you receive the appropriate level of funding.

Community colleges experienced explosive growth in enrollments after World War II. For nearly three decades the community college in America grew in areas of power and influence. Eventually public scrutiny of public funded education caused the community colleges to look for ways to be more efficient. Efficiency in the community college meant that growth had to be focused in areas that are the most pressing for the public good.

The concept of vouchers for primary and secondary education has been debated back to the 1700’s. There are strong arguments on each side of this debate. Vouchers in higher education continue to grow and are an important part of funding today. Vouchers tend to favor private colleges and there will likely be a public outcry to end this practice in the future.

Private colleges typically do not pay taxes and do not receive significant funding from local, state and federal sources. One concern of private colleges is whether the public will demand

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that they invest more of their resources in the communities they serve. Private college administrators should be in touch with the political climate to ensure that public support does not erode to a point of crises in the future.

Federal support of higher education is directed to student aid programs, research and special programs of national interest. Tuition revenue paid by students is highest among private institutions. Most private universities rely on tuition as the primary source of revenue. All sectors of higher education have increased tuition costs at a pace faster than inflation. Funding for higher education is closely related to how well the economy is behaving. A strong economy usually means there is stronger public support for higher education. Fundraising has enabled universities to add significant resources to their efforts. This is what makes the largest difference in American universities. Philanthropy sets the US apart from other nations and is the main reason we spend more on the higher education. Private schools are largely dependent on donations for their endowments.

The prominent trends in student aid have been grants, work and loans. A shift has taken place over the last twenty years from grants to loans. Caution should be used by higher education as the country sees a shift to loans to pay for college. The parents are passing along the costs to their children which may restrict our ability to require cost increases in the future. Changes in demographics will have a profound impact on funding decisions for colleges. The public will simply demand even more accountability and will fund special interest groups over other well- deserving students.

The increased availability of federal aid may also increase the cost of higher education. This is a complex subject and there is no consensus on the matter. It is a fact that loans have increased the ability of students to pay higher prices. As a result, colleges have increased prices as students have greater access to money.

The Higher Education Act of 1965 facilitated a significant expansion in federal aid programs. Before this act there was one primary loan program and after this act we have seen many different programs of federal support. Loans have accounted for most of the growth in federal aid since that time. Until 1965 aid programs were directed to specific target groups and afterwards the programs were directed to a general student audience.

We have seen a shift in public funding of higher education to private sources of funding in the last two decades. Health care costs and increased costs associated with housing criminals has forced the country to rely more heavily on private sources of funding. At the same time this shift occurred we also saw significant increases in the cost of attendance. The major social challenges we presently face are related to access. As fewer students can afford to attend we will be faced with decisions about who will be aided to give them access.

Private colleges have reacted to the dilemma of fewer students who are able to pay by offering higher tuition discounts. This decision has also enabled private colleges to shape their classes to build a specific or target-group of students. The problem most private colleges presently face is whether to reduce tuition cost since most students don’t pay full price anyway. As a result, they can no longer increase net revenue.

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