Higher Ed’s Biggest Funding Challenge: State Budgeting Calendars

By Hugh T. Ferguson, NASFAA Staff Reporter

Higher education funding has been severely hampered by past economic downturns, but what makes the fallout from the novel coronavirus more dire has stemmed primarily from the outbreak’s timing. 

The virus has led to unprecedented uncertainty across all economic sectors and has reached new peaks in the middle of the state budgeting process with no near-term end in sight, forcing states to make difficult projections as they aim to balance their budgets for the upcoming fiscal year, all the while trying to garner what sort of federal aid could be coming their way.

While each state is different in its annual spending process, the vast majority require a “balanced budget” each year, which prohibits states from spending more than they collect in revenue on either an annual or biannual basis.

However, the parameters by which that process operates can significantly vary on a state-by-state level.

“Some states basically just say that you have to pass a balanced budget or that you have to propose a balanced budget,” said Kim S. Rueben, Sol Price fellow and project director of the State and Local Finance Initiative at the Urban Institute. “But other states basically say that the governor must propose, the legislature must pass, and the governor must sign a balanced budget, in which case, how much wiggle room there is, is a little more restricted.” 

Due to this flexibility, states have the ability to move funding around in a manner that shows a fiscal balance for a given year by shifting spending and delaying certain payments in order to abide by the constitutionally required balance. 

“Historically, most of these [balanced budget policies] have been in place for many years,” Rueben said. It's less likely for states to amend the policy, she said, as many may try to “circumvent it” instead. 

What further complicates the state budgeting process is that nearly every state is currently trying to make projections for the next fiscal year, but governors and state officials are still trying to sort out what their current budgets will look like as the federal government begins to sort out its next aid package.

“If we think about this in terms of higher education, it's especially fraught,” Rueben said. “There is the question of how much money states are going to send to their institutions of higher education, not totally knowing yet whether those institutions are going to be open or doing remote learning, and what it means in terms of how much money is needed and how that money should be set aside.”

Since the federal government is only just beginning its negotiations for the next coronavirus aid package and it’s unclear how both sides will come to an agreement — with the White House and Senate Republicans not even on the same page and the congressional calendar filling up — spending relief for higher education is becoming all the more fraught.

At the outset of the Great Recession, higher education actually wasn’t hit disproportionately when compared to other sectors, due to federal assistance, according to Kathryn Vesey White, director of budget process studies at the National Association of State Budget Officers (NASBO). State higher education budgets only started to take a hit after federal aid lapsed.

“Higher education saw declines, even after the economy started to recover and after state revenue started to recover because of the abrupt end in federal fiscal relief last time, that required states to find areas to cut that they were able to,” White said, noting that other state service areas have mandatory spending requirements for their programs. “For various reasons, higher education is often hit disproportionately when states have to balance their budgets in an economic downturn.”

Since institutions of higher education have budgets that are more malleable than other sectors — some may be able to compensate by raising tuition, for example — they're more susceptible to cuts.

According to Rueben some of the decline in support for higher education funding since the Great Recession at the state level can be linked to the expansion of federal aid provided under the American Opportunity Tax Credit (AOTC) and for the Pell Grant program.

“The amount of money that the federal government is putting into higher education, either directly through expanded Pell Grants or indirectly through people's ability to get tax credits, meant that, at some level, states felt that they could shift some of the burden to tuition, because there was some federal aid make that up, in a way that it's not clear we'll see right now,” Rueben said.

States also have to take into consideration their health care costs, and in the wake of COVID-19, those expenses are not easily mitigated. 

“Over time, health care expenses have been taking up more of state and local budgets, in part because it's had federal money that's matched,” Rueben said of evolving state policies related to funding provided through the Affordable Care Act, which had not been implemented at the onset of the Great Recession.

However, that doesn’t necessarily mean that implementation of the Affordable Care Act puts state higher education funding in a more precarious position, which has made significant progress in getting college students health care coverage. Some, according to White, might argue that the federal matching implemented under the Affordable Care Act has put state funding for higher education in a more precarious position, but there is a lack of consensus.

“You could see, the arguments could be made for either helping or hurting,” White said.

Any state policy related to health care needs to be considered through the lens of the pandemic, according to White. Since health care officials on the state level are also struggling, state policymakers will aim to prioritize that their budgets do not hurt essential health care providers.

The budgeting process for states is very uncertain, in part because the pandemic’s long-term costs remain unclear. 

“Coming into this crisis, states were better prepared for a recession than they were going into the Great Recession,” White said, “But no state could have prepared for this crisis — an unprecedented crisis — we’re facing now.”

 

Publication Date: 7/27/2020


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