Tim Pawlenty Governor of Minnesota Chair
Edward G. Rendell Governor of Pennsylvania Vice Chair
Raymond C. Scheppach Executive Director
HIGHER EDUCATION, MANDATES AND UNINTENDED CONSEQUENCES: AN ANALYSIS OF THE MOE MANDATE IN HR 4137 Summary The “College Opportunity and Affordability Act of 2007” (H.R. 4137), which was recently reported out of the Education and Labor Committee in the House of Representatives, contains a maintenance of effort (MOE) mandate on state higher education funding. The mandate would require that state higher education spending never fall below the average of such spending for the last five years or the most recent year. Governors oppose this mandate based on three major concerns. First, while this mandate would reduce the cyclical nature of state higher education funding, it would have the unintended consequence of slowing the growth of state higher education funding over the long-run as states adjust to the MOE mandate. State higher education funding is cyclical: States freeze or slow the growth in spending during economic downturns but more than make up for these lean years with significant increases of as much as 10 to 13 percent during good budget times. However, if states have an MOE requirement, they will not make these large increases in higher education funding because they know that they will be held to the higher level in leaner times, which states could not afford. Second, the MOE mandate represents a significant intrusion into the sovereign affairs of state government and would result in a new federal mandate on more than 10 percent of state revenues. Coupled with existing federally mandated Medicaid expenditures, the MOE requirement would mean that the federal government is deciding for states how they must spend about one-third of all state revenues. In addition, the MOE mandate will become an impediment to states that float bonds for major capital expansion and improvement programs as well as to those states wanting to make significant research and development (R&D) grants to state universities, which are becoming an integral part of states’ long-term economic development strategies. Both capital and R&D grants vary over time; thus, states—faced with an MOE mandate—will become more reluctant to make these investments. Recently, many states have dramatically increased R&D grants, particularly in the biotechnology arena. The bottom line is that the MOE mandate will lead to smaller and less innovative state postsecondary education systems. This is quite the opposite of the higher education system the United States needs to compete in the global economy of the 21st century. What’s more, lower state investments will also mean higher tuition for students and families. Higher tuition not only reduces college affordability, but also limits access to postsecondary opportunities for lowincome students.
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State Commitment to Accessibility, Affordability and Innovation Political leaders are increasingly concerned with the rate of increase in college tuition. These increases are not only squeezing middle-class families, they also may be pushing higher education beyond the reach of many low-income students. Tuition increases are a problem, but so, too, is maintaining the competitive edge of our postsecondary systems and, thus, of our workforce. There is a growing awareness that other countries have modeled their postsecondary systems after ours and are improving on our system by enhancing their R&D capacities. This makes universities centers of innovation, which helps countries compete in the new and highly competitive international marketplace. State leaders are beginning to recognize that their postsecondary systems are their most valuable state economic asset. Postsecondary education not only increases the state competitiveness, it also increases the average income and wages of citizens. As a result, governors are beginning to convene university officials, private sector representatives and state leaders to address tuition increases, overall accountability, R&D investment and the fluctuation in direct aid with the goal of formalizing compact agreements. Maintaining Effort The House Education and Labor Committee is concerned about tuition increases at public colleges and universities as well as about the cyclical nature of state higher education spending and has incorporated the MOE mandate, advocated by Congressman John F. Tierney (D-MA), into the “College Opportunity and Affordability Act of 2007.” The goal of Mr. Tierney’s proposal was to decrease the variability of state higher education spending and reduce the cost of college for students. The committee should be commended for its concern and efforts to address these issues. However, while the mandate will reduce fluctuations, it also will have the unintended consequence of reducing the rate of growth of state higher education spending in the future. State Spending Understanding this consequence requires additional detail on how states fund higher education and why it is cyclical. Over the past ten years, the cyclical nature of the economy has resulted in fluctuations in state higher education spending. The average growth in state spending on higher education during this period was 5.7 percent, which is very similar to the growth rate of total state expenditures (6.1 percent). This indicates that over time, state higher education funding has largely followed the trend of overall state spending. State funding for higher education has four major components: General Operating Support First, there are direct payments to offset operating costs. According to State Higher Education Executive Officers (SHEEO), 62 percent of public postsecondary general operating expenses were funded by state support in 2006. This component is quite cyclical because governors attempt to protect funding for Medicaid and other health care for low-income individuals, as well as elementary and secondary education, when there is a downturn in revenues. In general, states will freeze or slow the growth of higher education operating spending during downturns but have significant increases when revenue growth is positive. Capital Expansions The second category of state spending on higher education comes in the form of major capital expansions, such as the $1.65 billion program recently announced by Governor Tim Kaine of
Virginia. Governor Kaine’s bond package includes new construction and renovation projects that focus on workforce development and enhancing capacity. The plan would fund four facilities focusing on research such as photon beam cancer therapy and alternative energy. Similarly, Massachusetts Governor Deval Patrick announced last fall a ten-year, $2 billion capital investment plan for capital improvements at the commonwealth’s five University of Massachusetts campuses as well as state and community colleges. Capital spending, which is often funded by states floating bonds, is by its very nature cyclical. In 2006, states spent $8.6 billion on capital expansions for higher education, according to the National Association of State Budget Officers (NASBO). The MOE mandate would severely impede future capital expansions. Student Aid The third type of spending is for aid to students, which has been relatively stable over time. Since 2002, state funded student financial aid, which primarily includes grants, loans and tuition waivers, has risen steadily. The National Association of State Student Grant and Aid Programs reports that in the 2005-06 academic year, states funded $8.5 billion in total student financial aid. Since 1995-96, undergraduate grant aid has grown an average of 9.1 percent per year.
Research and Development (R&D) The final type of funding is state grants for R&D, which are part of a state’s long-run economic development strategy. Recently, R&D has become an increasing component of state budgets as states increase their investments in biomedicine, biotechnology and even nanotechnology. In 2006, state governments spent more than $3 billion on R&D, according to the National Science Foundation. This spending is also cyclical over time because, often, state expenditures on R&D are made in large, one-time investments, or in large investments followed by several years of ramped-up spending on a particular project. For example, in July 2007, New York Governor Eliot Spitzer signed a seven-year, $300 million agreement with International SEMATECH, a global consortium of leading nanoelectronics manufacturers, to expand R&D at the University of Albany’s Center of Excellence in Nanoelectronics and Nanotechnology and support college and university research at five other centers throughout the state. Meanwhile, the state of Washington created the Life Sciences Discovery Fund in 2005, which commits $350 million over the next 10 years for bioscience research that provides economic and health benefits to the state’s residents. Much of this fund is dedicated to grants for public and private universities, hospitals and health clinics. In addition, through California’s Institutes of Science and Innovation initiative, the state works with universities and industry partners to address problems such as climate change, energy and traffic congestion. The state is investing $100 million in each of the four institutes, which focus on essential research in biomedicine, bioengineering, nanosystems, telecommunications and information technology. California’s investment has leveraged an additional $800 million from private-sector partners, for a total of $1.2 billion. Although state investments in R&D have increased annually for more than 50 years, the annual growth rate has varied significantly. Following an economic downturn in 1991, the growth rate in state R&D spending dropped from 11.3 percent to 1.2 percent. This trend shows that states ramp up their investment in R&D during strong economic times and slow during economic downturns.
The MOE mandate would discourage states from making these large R&D investments in higher education during good economic years because of the difficulty of maintaining such large increases in spending during tight fiscal times. Thus, the MOE mandate would have the unintended consequence of slowing state investment in R&D, which other countries have shown to be critical for competing in a 21st century economy. The MOE mandate is an inappropriate measure to impose on states, particularly when one considers the impact such a mandate would have if it were applied to federal spending. For example, from 1990 to 2006, growth in federal support for higher education fluctuated between a low of -4.1 percent and a high of 24 percent. This includes federal student aid, on-budget support for postsecondary education and research at education institutions. Given these fluctuations, if the federal government were to impose an MOE mandate for higher education support on itself, it, too, would undoubtedly encounter severe constraints. Impact of MOE Mandate According to NASBO, state spending on higher education, including R&D, could grow much more slowly in the future if the MOE mandate were adopted. Since 1996, state higher education spending has grown 5.7 percent per year, on average. The MOE mandate would force states to trim annual spending growth so that it is possible to maintain spending in years of slow economic growth and tight budgets. This would be particularly detrimental for capital expansions and R&D spending because, as noted previously, states often make large one-time contributions to these projects in a single year. The MOE mandate would certainly discourage states from making such large, one-time contributions. The MOE mandate also would force students and families to assume a higher tuition burden than they would under the current level of state support. According to SHEEO, state spending comprised 62 percent of total educational revenues for general operating expenses at state universities. Tuition comprised 32 percent of education revenues, and local spending comprised 8 percent. A slowdown in state spending would reduce the proportion of general operating revenues that states are able to support, thereby increasing the tuition burden on students and families. This would limit both access and affordability to higher education for low-income students. A Hypothetical Example A hypothetical example is as follows. Assume that state X spends $6.460 billion on higher education in 2006—a relatively good economic year. Assume now that the economy continues to be strong, so the state would like to increase funding for higher education by 10 percent, or $646 million, for a total of $7.106 billion in fiscal 2007. However, the state is concerned that the economy is beginning to slow, so rather enacting a 10 percent increase, the state opts for a 5 percent increase—or $323 million—because it does not want to be held to the $7.106 billion MOE for the next fiscal year, 2008. The cumulative impact of this and similar reductions over time would lead to dramatically lower funding for higher education. Conclusion The negative consequences of the MOE mandate in H.R. 4137 greatly outweigh the potential benefits of short-term stability in state spending. By attempting to reduce the cyclical nature of higher education funding, the MOE mandate would reduce total state support for higher education, as well as for spending on capital and R&D, and increase the tuition burden on students and families.