Understanding the Effects of State Oversight and Fiscal Policy on University Revenues: Considerations for Financial Planning

Abstract

INTRODUCTION Public universities are increasingly finding their revenue structures affected by state policies and accountability measures aimed at regulating everything from tuition pricing and state appropriations to debt financing (Heller 2001; Knott and Payne 2004; Moody 2007, 2008; Zumeta 2001). Although direct state funding to higher education has decreased (Archibald and Feldman 2006, 2008, 2011; Cheslock and Gianneschi 2008; McLendon, Hearn, and Mokher 2009; St. John and Priest 2006; Tandberg 2008), state efforts to govern public higher education institutions are on the rise. It is clear that states must deploy their resources among a growing number of state operations. However, it is a distressing reality that during economic downturns, higher education is often less able to compete for state funding than other governmental programs. Often, state expenditures to public colleges and universities are considered discretionary rather than mandatory. This perception is likely due to the fact that public higher education has access to a vital revenue sourcetuition and fees--that institutions maintain both in tandem with, and separate from, state appropriations (Cheslock and Gianneschi 2008; Kane, Orszag, and Gunter 2003; Titus 2009; Zumeta 2004). As states continue to face ever-increasing demands on already tight resources, retrenchment strategies have become popular techniques for stabilizing and balancing budgets. In the face of the diminished state support that results, public institutions are continually required to take on larger and larger budget cuts. It is in this same environment that public colleges and universities are being subjected to increasing governance and greater accountability measures and requirements. Because states must fund multiple programs, it is not surprising that policies aimed at state budgets as a whole could result in implicit fiscal difficulties for public higher education institutions. For example, states employ a diverse set of restrictive fiscal policies including tax revolt provisions (TRPs), balanced budget requirements (BBRs), and debt limits to rein in taxes and spending, balance budgets, and limit debt levels. Recent research shows that TRPs such as tax and expenditure limitations (TELs) and supermajority requirements (SMRs) aimed at limiting state government revenues and/or expenditures negatively impact public higher education funding (Archibald and Feldman 2006, 2008, 2011). More recently, Serna (2012) provides evidence that tuition and fees are also impacted by these types of state- level fiscal policies. This article outlines the ways in which increased state oversight and restrictive state fiscal policies have affected public four-year college and university revenue structures, with special attention to tuition and state appropriations. It also highlights how these policies introduce new considerations for institutional financial planners. The article concludes by outlining some possible responses to state fiscal policies and accountability measures. UNIVERSITY REVENUES Public colleges and universities are not immune to the effects of state economic and political climates. For financial planners in these institutions, a primary task is to develop a comprehensive understanding of internal budgetary processes that incorporates the forces at play within the state's larger economic and political environment. As part of budget development, institutional planners must make resource allocation decisions in a rapidly changing environment. Significant changes in costs and expenditures due to variable environmental factors are typical during the budgeting process. College and university planners are well aware that even small changes to personnel and physical-plant maintenance costs or the prices of required goods and services, variations in support for unfunded mandates, shifts in the demand for higher education, and changes in funding policy can affect institutional budgets significantly and quickly. …