Blog: Higher Education’s Financial Balancing Act

In the face of declining public funding for higher education, colleges and universities are put in the position to find alternative revenue sources to compensate so that they can remain status quo. While public colleges and universities have experienced little to no change in their average total operating revenues over the past 10 years, they have experienced fluctuations in their revenue streams. Typically, students and families bear the brunt of the disinvestment of public higher education

ASA examined the shifts in institutions’ various revenue streams. The figure below displays the change in the purchasing power of various revenue sources (or, revenues corrected for inflation) between 2007-08 and 2016-17. Notably, overall revenues shift only slightly and, in some cases improve, over the 10 years. Yet, a strong disinvestment of public funding occurs and a greater financial burden is placed on students and families with increased tuition and fees, regardless of institution type. 

Reports[1] taut year-over-year increases in state spending overall and for major functions, including higher education. Albeit, on average, spending on higher education perennially increases, change in spending is not even across states – some states do experience increases (for example, Michigan saw a 3.8 percent increase in higher ed spending in 2018 compared with 2017) while some states operate in the face of funding declines (Missouri’s higher ed spending declined 4.7 percent over the same year). Notably, a state can experience improved spending in one year, only to have it taken away the next – Missouri’s 4.7 decline between 2017 and 2018 was proceeded by a 4.7 percent increase between 2016 and 2017. Thirteen states experienced declines in state spending for higher education between 2017 and 2018, 16 states between 2016 and 2017. 

Thirteen states experienced declines in state spending for higher education between 2017 and 2018, 16 states between 2016 and 2017. 

In some states, higher education expenditures increase, in current dollars — those that were expended at the time. But, when taking inflation into account, purchasing power declines and colleges and universities feel a tightening of the purse strings. For example, ten states’ reported higher ed expenditure increases between 2017 and 2018, but these increases were below the 2.1 rate of inflation. And so, institutions felt a decline in the purchasing power of their total revenues.

Add to the mix fluctuations in enrollment or, in large part, enrollment increases. With enrollment increases and no corresponding increase in state funding, institutions feel an additional financial squeeze as the same dollars now need to be stretched over more students. 

Combined, these on-going occurrences – declining dollars expended, little or no increases that are less than inflation, and increases in enrollments – lead to the need for institutions to shift their revenue streams in order to keep a financial status quo. 

By sector, although doctoral institutions’ financial position improved with purchasing power about $900 more in 2016-17 as compared with 2007-08, state funding declined by about $3,000 per student offset by a $2,700 increase in constant dollar tuition per student. The situation in community colleges differs slightly where operating revenues were $162 less per student than a decade ago. The sector also experienced a disinvestment of public revenue sources (declining $335 per student), which was further exacerbated by a $144 decline in purchasing power of grants and contracts earmarked for operations; tuition and fees, averaging an increase of $317 per student, nearly replaced the sectors’ losses in public revenues. Comprehensive and liberal arts institutions experienced the same scenario with declines in public funding, offset by an increase in tuition and fees.

Averages mask the variation for each state and institution. And, the financial position in each is very different with some states continuing to support higher education at historical levels while others experience severe disinvestment. Notably, when corrected for inflation, in many cases institutions “feel richer” as the constant dollar value of their revenues—or purchasing power—improves. When public funding declines, institutions do not generally “feel the pain” in terms of a total decline in revenues, but appear to make up for the revenue loss with other funding sources, typically tuition and fees. Thus, the pain is more likely felt in identifying how to fill the lost revenues, or, how much to raise tuition.

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