Hans P. L’Orange Director, SHEEO/NCES Network and Director of Data and Information Management

1. State Higher Education FinanceFY 2004 Hans P. L’Orange Director, SHEEO/NCES Network and Director of Data and Information Management David L. Wright Senior Research Analyst AIR National Forum San Diego, California May 30, 2005 State Higher Education Executive Officers

2. Making Sense of Interstate Higher Education Finance Data SHEF can help educators and policy makers: • Understand the extent to which state resources for colleges and universities have kept pace with enrollment and cost increases; • Examine and compare how state higher education spending is allocated for different purposes; • Assess trends in how much students are paying for higher education; • Gain a perspective on the funding of their state’s higher education system in the context of other states; and • Assess the capacity of their state economy to generate revenues to support public priorities.

3. Diverse Perspectives on State Higher Education Finance Data What SHEF contributes to the national conversation: • Annual, ongoing; continuous time series from FY 1980 forward; • Captures state tax and non-tax support (lottery revenue, lease income, earnings on state endowments); • Adds revenue from local government and student sources; and • Interstate comparisons “as valid as possible.” • Accounts for inflation and enrollment growth; • Sets aside special purpose appropriations for research, agriculture, and medicine; and • Adjusts interstate comparisons for differences in state cost of living and public system enrollment mix.

4. “As Valid As Possible” Higher Education Cost Adjustment (HECA): • Attempts to reflect provider “market basket” without being self-referent. • Components federally maintained and routinely updated; transparent, accessible. • Serves as a benchmark rather than descriptive measure of higher education cost inflation. • 75% of the index is based on Employment Cost Index for white-collar workers (BLS). • 25% based on GDP Implicit Price Deflator (BEA). • reflects general price inflation in total U.S. economy • current $ GDP / constant $ GDP

5. “As Valid As Possible” Enrollment Mix Index (EMI): • Average instructional expenses per student vary by institution type. Average Instructional Expenses per FTE, Fiscal 2001 • Enrollments are distributed differently across states’ public HE systems. • The EMI adjusts operating revenues to account for both factors.

6. “As Valid As Possible” State Cost of Living Adjustment (COLA): • Driven primarily by housing costs. • Adopted index developed by Berry et al (2000). • One value per state, ranging from 0.88 to 1.16. • Hawaii and Alaska assigned value of the next highest state (Massachusetts)

7. “As Valid As Possible” State Cost of Living and Public Higher Education System Enrollment Mix Index Values Dollars per FTE are adjusted upward the most in states with an inexpensive enrollment mix and low cost of living. The reverse is true for states with a more expensive enrollment mix and high cost of living. In some states, the two factors cancel each other. Source: SHEEO SHEF

8. Current Status State and local governments provided $69.4 billion for public and independent higher education in 2004. An additional $31.5 billion in net tuition revenue brought the amount available from state, local, and student sources for general operating expenses to $100.9 billion. Distribution of State, Local, and Net Tuition Revenue, U.S. Fiscal 2004 State Support (Tax and Non-Tax) Net Tuition Local Taxes Source: SHEEO SHEF

9. Recent Trends “The fiscal 2004 SHEF study documents a 4-year period when state funding for higher education failed to keep pace with normal inflation and extraordinary enrollment growth in the U.S., leaving per student state & local funding near their lowest levels nationally in 25 years.” From fiscal 2001 to 2004: • State & local appropriations for general educational expenses in public colleges and universities were essentially flat, while: • enrollments grew by 11.8% and • higher education costs grew by 10.3% as estimated by HECA. • In inflation-adjusted terms, • Educational appropriations per FTEdecreased 16.8%, from $6,874 to $5,721; • Net tuition revenue per FTEincreased 10.7%, from $2,879 to $3,187; and • Total educational revenues per FTEdecreased 8.7%, from $9,753 to $8,908.

10. + 11.8% + 6.2% + 8.5% National Trends since 1980 FTE enrollment in public institutions has grown by more than 40% since 1980. Enrollment growth since 2001 has already outstripped that of each of the previous two decades. Educational Appropriations per FTE, U.S.,Fiscal 1980-2004, Constant 2004 Dollars Adjusted by SHEEO HECA Source: SHEEO SHEF

11. National Trends since 1980 Over the long term, state and local government funding per student has been narrowly outpaced by enrollment and inflation as estimated by the HECA, decreasing on average one-fourth of one percent annually. The level of support has varied from year to year, at times dramatically. Economic downturns tend to depress state funding per student because budgets are constrained while enrollment grows rapidly. In the past, state support per FTE has rebounded following a downturn. Educational Appropriations per FTE, U.S.,Fiscal 1980-2004, Constant 2004 Dollars Adjusted by SHEEO HECA Source: SHEEO SHEF

12. National Trends since 1980 Signs that things may be turning around: • The Rockefeller Institute reports that state tax revenue in the 4th quarter of 2004 grew 7.8% compared to the same period in 2003 (the strongest fourth-quarter growth since 1991), but warns of continuing cost pressures in Medicaid, elementary & secondary education, and other areas. • According to Grapevine, state tax appropriations for higher education, unadjusted for enrollment or inflation, were down 2.1% in fiscal 2004 (the first such nominal decrease in 11 years) but up 3.8% in 2005. • A SHEEO early look at FY 2006 state tax appropriations for higher education in 30 states indicated that 25 anticipated increases; only one expected a decrease. Will it be enough to offset enrollment growth and inflation?

13. National Trends since 1980 The choice of baseline year is fundamental to any analysis of long-term funding trends. Choosing a “peak” or “valley” would lead to dramatically different conclusions about trends in revenues per student. Educational Appropriations per FTE, U.S.,Fiscal 1980-2004, Constant 2004 Dollars Adjusted by SHEEO HECA Baseline year chosen for remaining analyses Source: SHEEO SHEF

14. National Trends from 1991-2004 In public institutions, net tuition tends to grow as a percentage of total revenues when the state appropriation per student decreases in economic downturns. Nationally, net tuition accounted for 26% of total educational revenues in 1991; remained fairly constant at about 30% from 1993 to 2002, then increased each of the last two years to its current level of 36%. Net Tuition as a Percentage of Total Educational Revenues, U.S., Fiscal 1991-2004 Source: SHEEO SHEF

15. National Trends from 1991-2004 In the post-recession periods of the early 1990s and early 2000s, increases in net tuition per student have been unable to offset decreasing levels of state & local government support. In constant 2004 dollars adjusted by the HECA, educational appropriations per FTE in public institutions dipped during the early 1990s recession but had recovered by the end of that decade. However, recent constant dollar decreases in educational appropriations result in a net decrease of 12% for the period, from $6,499 in 1991 to $5,721 in 2004. Total Educational Revenues per FTE, by Component, U.S., Fiscal 1991-2004 Source: SHEEO SHEF

16. Interstate Comparisons from 1991-2004 Enrollments in public institutions increased 21.8% from 1991 to 2004. Over half of this increase occurred since 2001, the beginning of the current downturn. Changes in enrollment ranged from an 86.9% increase in Nevada to a decline of 8.5% in Missouri. Full-Time Equivalent Enrollment, Percent Change by State, Fiscal 1991-2004 Source: SHEEO SHEF

17. Interstate Comparisons from 1991-2004 In constant dollars, educational appropriations per FTE in public institutions declined by an average of 12% from 1991 to 2004. The change in educational appropriations ranged from 27.3% growth in Georgia to a decrease of 42.2% in Vermont. Educational Appropriations per FTE, Percent Change by State, Fiscal 1991-2004 Source: SHEEO SHEF

18. Interstate Comparisons from 1991-2004 In constant dollars, net tuition per FTE increased by an average of 38.2% from 1991 to 2004, and all but six states experienced increases. Decreases in net tuition revenue may be associated with institutional discounting, increases in the state financial aid program, or student migration to lower-cost institutions. Net Tuition Revenue per FTE, Percent Change by State, Fiscal 1991-2004 Source: SHEEO SHEF

19. Interstate Comparisons from 1991-2004 The average share of educational revenues represented by net tuition in 2004 was 35.8%, ranging from a high of 79% in Vermont to a low of 16% in Georgia. New England and Midwestern states tended to exceed the national average on this measure, and Western states were beneath it. Net Tuition as a Percentage of Total Educational Revenues, by State, Fiscal 2004 Source: SHEEO SHEF

20. Interstate Comparisons from 1991-2004 Net Tuition Increase Needed to Offset a 1% Decrease in State Government Support for Public Higher Education, by State, Fiscal 2004 A state’s vulnerability to state appropriation decreases is largely determined by its reliance on tuition as a revenue stream. Based on 2004 SHEF data, net tuition revenues would have had to increase 1.9% on average to offset a one percent decrease in state support. Source: SHEEO SHEF Notes: State dollars include Research-Ag-Med. Net tuition revenues are from all levels (undergraduate, graduate, first professional) except medical schools.

21. Interstate Comparisons from 1991-2004 When aggregated nationally, increases in net tuition revenue offset decreases in state appropriations to yield an average 1.2% increase in total educational funding per FTE. Individual state circumstances, however, varied substantially around that mean. Total Educational Revenues per FTE, Percent Change by State, Fiscal 1991-2004 Source: SHEEO SHEF

22. Putting the Pieces Together Plotting the SHEF data along two dimensions can bring state fiscal policy findings and trends into sharper relief. Here, data points on the vertical axis represent public higher education enrollment growth from 1991-2004. The horizontal axis shows each state’s percent change in educational appropriations per student over the same period. Of the 27 states with above average enrollment growth from 1991 to 2004, only three – Louisiana, Kentucky, and Nevada – increased educational appropriations per student on a constant dollar basis for the period. Percent Change by State in Enrollment and in Educational Appropriations per FTE, Fiscal 1991-2004 Source: SHEEO SHEF

23. Putting the Pieces Together The next two-dimensional analysis allows states to assess total educational revenues per FTE relative to the national average currently (on the horizontal axis) and over time (on the vertical). The six states in the upper left quadrant lag the U.S. average but have been catching up. The six in the lower right quadrant exceed the national average but are losing ground. Total Educational Revenues per FTE by State: Percent Change and Current Standing Relative to U.S. Average Source: SHEEO SHEF

24. Putting the Pieces Together This figure shows each state’s rate of change in the two components of total educational revenues per student – educational appropriations and net tuition – relative to the national average. States in the upper right quadrant have exceeded the national average on both dimensions. Percent Change by State in Educational Appropriationsand Net Tuition Revenues per FTE, Fiscal 1991-2004 Source: SHEEO SHEF

25. Putting the Pieces Together States that rely heavily on net tuition revenues might also try to fund a balanced state financial aid program. In this figure, the horizontal axis shows FY04 net tuition revenue per FTE for each state. The vertical axis shows FY04 state-funded financial aid per FTE. States in the upper right quadrant exceed the U.S. average on both. Net Tuition Revenue per FTE and Total State Student Grant Aid per FTE, Fiscal 2004 Sources: SHEEO SHEF

26. Putting the Pieces Together According to NASSGAP, 72.9% of all state grant aid dollars were awarded on the basis of student financial need in 2002-03. The 29 states displayed in green exceeded the U.S. average on this measure. Net Tuition Revenue per FTE and Total State Student Grant Aid per FTE, Fiscal 2004 Sources: SHEEO SHEF and NASSGAP

27. Perspectives on Taxes and State Support of Higher Education States whose effective tax rate exceeds the national average are plotted above the horizontal axis, and states with above average wealth (total taxable resources per capita) are plotted to the right of the vertical line. Taxable Resources and Effective Tax Rate Indexed to the U.S. Average,by State, Fiscal 2002 Shaded states have actual tax revenues per capita within +/-10% of the national average. Source: SHEEO SHEF

28. Conclusion In making funding decisions, a state must answer the following key questions: • What kind of higher education system do we want? • What will it take, given our circumstances, to obtain and sustain such a system? • Are we making effective use of our current investments? • What can we afford to invest in order to meet our goals?

29. REPORTS & PRESENTATIONS: www.sheeo.org DATA: www.higheredinfo.org CONTACT: dwright@sheeo.org David Wright, Senior Research Analyst (303) 299-3677