The Pew Charitable Trusts

WASHINGTON -- State higher education budgets have enjoyed prosperity in the past five years but would likely face heavy cuts in even a mild recession, according to a report issued today (Tuesday) by the National Center for Public Policy and Higher Education.

The sponsoring organization is a non-partisan think tank that studies policies affecting education beyond high school.

Because tuition has been frozen or reduced in some states, appropriations have been increased more than the inflation rate and new scholarship programs have been created, 39 states would have gaps between the cost of keeping services now in place without increasing taxes, the report said.

"The last five years have been about as good as it gets in state funding of higher education. This environment will not continue," said report author Hal Hovey.

The report finds that public colleges and universities have done disproportionately well in healthy budget times and equally as poorly in tight budget years. Hovey said economic and political factors require higher education to do better than other sectors just to maintain current service levels.

Directing a greater share of state budgets to higher education would involve an unlikely reversing of long-standing trends, the report said.

"For the past quarter century the pattern the states have followed has been to cut higher education budgets and raise tuition sharply in times of economic hardship," said Patrick Callan, president of the National Center for Public Policy and Higher Education. "The 39 states that Hovey projects to encounter gaps between revenues and expenditures are the likely candidates to repeat this pattern."

In tight budget times, the options for states are to either raise taxes substantially or cut funding for public programs. In the latter case, higher education programs would have to fight over the shame diminishing pie as elementary and secondary education, health programs, welfare programs, prisons and other public works programs.

The report concludes that over an eight year period, Nevada would have to increase higher education spending by 114.8 percent to maintain current levels. The overall national average is 47.7 percent.

Hovey bases his conclusions on an accepted principal of state finances: due to the states' reliance on sales taxes and fees, state and local taxes are slow to react to increases in income. Unless broad-based tax increases are enacted, he said, state revenues will not grow as quickly as total personal income, leaving "structural" deficits.

The report warns that the states should be mindful of their budgets even in these times of healthy reserve funds because of structural deficits. Only ten states show structural surpluses; one state has no surplus or deficit, and the remaining 39 are projected to have structural deficits.

States will have varying structural surpluses or deficits based on differences in tax systems, spending needs and economic growth rates.

Iowa, Nebraska, North Dakota, Ohio, Kentucky, Connecticut, Michigan, New York, Maine and Minnesota have structural surpluses, with Iowa's being the highest at 2.7 percent.

All ten states have personal income taxes and nine use graduated rates.

Nevada, Alaska, Hawaii, Idaho and New Mexico have the worst structural deficits, with Nevada's standing at 18.3 percent.

Massachusetts is the state with neither a surplus nor a deficit, according to the estimates.

Even if states were not facing structural deficits, the percentage of state funding devoted to higher education will need to increase annually in order for higher education to maintain current services, the report said.

Hovey estimates that state funding for all services will need to increase by 5 percent annually to maintain current service levels, but state funding for higher education will have to increase by 6 percent, largely due to enrollment increases across the states.

The report acknowledges that structural deficits are based on assumptions that could prove erroneous. And since the foundation of the analysis is the concept of the structural deficit, the conclusions reached might be flawed.

The projection of structural deficits depends on demographic, economic and federal budget assumptions, which are all notoriously subject to capricious reversals. It is possible, Hovey says, that the national economic growth will continue to exceed long-term forecasts.

The full report can be found online at: http://www.highereducation.org.