How Budget Battles are Stacked Against Higher Education

How do you make up for a major increase in defense spending? Simple: You slash a lot from domestic programs.

This morning, as the Trump administration unveils its budget, students across the country are right to worry that the federal government’s intent to ramp up spending on national defense and border control could harm other areas—like higher education. After all, the single largest spending item at the Department of Education, the federal Pell grant, provides $28.4 billion in aid to low-income students. This high price tag makes Pell, and other aid programs like it, a target for cuts.

But any slashes to financial supports such as these will mean big trouble for students. Over the last 30 years, students have become more reliant on Pell and other sources of federal financial aid to cover the cost of college. In part, that’s because as state funding for public institutions has fallen, colleges have increased the tuition they charge students. In other words, cutting federal aid to students to beef up defense spending at a time when state investments in higher education are down means low-income students will be hit twice: with both higher tuition bills and fewer aid dollars to pay them.

To get an idea of how these state funding shifts unfold and how they impact students, we need only look at Michigan’s public colleges and universities.

“I call it the scissor chart,” Peter Ruark, Senior Policy Analyst at the Michigan League for Public Policy, told us in an interview, referring to how, when graphed, declining appropriations and rising tuition form an "X" or scissor shape. “Up through 2002, the majority of university revenue came from state appropriations, and now it’s nearly 75 percent that comes from student tuition and fees.” While Michigan has been especially hard hit, these trends are far from unique. Eight years after the Great Recession, per student funding for higher education in 46 states still lags pre-2008 levels.

Michigan families have felt the consequences of these cuts deeply. Over the last ten years, tuition at Michigan’s public four-year institutions has increased by over a third. Meanwhile, students in the state borrow on average 57 percent more in student loans than they did in 2004. Students pursuing a degree face difficult choices when confronted with these costs. But given the realities of state budgeting, the choice to cut higher education support was not nearly as fraught for legislators.

“It almost was an easy decision. The higher education budget was low-hanging fruit, politically,” said Lynn Jondahl, former tax committee chairman in the Michigan House of Representatives.

A sagging economy and a declining tax base all but forced Michigan to tighten its belt following the collapse of the auto industry, a budgeting crisis that was exacerbated by the 2001 and 2008 national recessions. Amid these pressures, higher education funding was the most plausible line from which to cut.

The story in Michigan is one that echoes across many states in the country, and it cannot be disentangled from the tectonic shift that occurred during the wake of the Great Recession. With Michigan’s economy concentrated in the once-booming auto industry, declines in American manufacturing and globalization have taken their toll. The state lost over 850,000 jobs, 356,000 of which were in the manufacturing sector, between 2001 and 2009. Michigan’s unemployment rate topped out at 15 percent in 2010, 6 points above the national average. These trends hurt many families and also cut into the tax base, restricting funds for the various state programs that could have helped struggling Michiganders most.

By 2009, the state faced a $1.6 billion deficit, which sent lawmakers scrambling. “Legislators look at places with the highest number of dollars. That’s where your eyes tend to go on the balance sheet, again and again,” Jondahl explained. But trimming these large budget areas can often be a nonstarter. The largest line item in Michigan, healthcare, has increased by a whopping 76 percent since 2002 and now constitutes almost half the state’s total budget. But legislators  can’t cut Medicaid spending, because the federal government requires states to spend a certain amount to qualify for federal money.

K-12 schools, the second largest budget item, was another unlikely place to shave appropriations. Michigan has a dedicated funding stream for public education, known as the School Aid Fund. Protected by statute and entitled to a fixed percentage of gross tax revenue, the fund has nonetheless been used to cushion other budget priorities. Between 2008 and 2015, per-pupil funding was cut close to $530. “There has been an effort now to say where can we get money for higher education. One of the controversial measures was to look at language in the Constitution about the School Aid Fund,” said Jondahl. Since K-12 school funding had already been depleted in the past to balance the budget and prop up universities, the fund is fiercely guarded.

That meant the budgets for prisons and universities were the only meaningful budget areas left to cut. But with rising incarceration costs and after already closing eight prisons, there was no wiggle room in the corrections budget. “There are other sources: federal funds, tuition dollars that can address the higher education needs,” Jondahl said. The answer was pretty clear: Cuts would continue to be shouldered by universities.

Federal higher education funding typically comes in the form of vouchers like Pell Grants and loans. This design makes it easy for states like Michigan to cut general operating support to its universities in times of financial trouble. Furthermore, while the $5 billion Michigan received as part of the federal stimulus temporarily protected state higher education funding from cuts between 2009 and 2010, this provision expired in 2011, well before the state’s budget struggles were over. “There was more money coming in from federal sources so that would enable us to save money at the state level,” Jondahl said. And while general operating support was locked, the stimulus rules did not prevent many states including Michigan from slashing financial aid programs. For every dollar received in stimulus money, states across the nation reduced student aid by an average of 12 cents.

When an economic crisis hits, state legislators have relatively few options. Michigan’s decade-long recession expedited the process of state disinvestment. But many of the state’s fiscal issues did not crop up overnight. “The real story goes way beyond ten years,” said Ruark. Michigan has a flaw in its tax structure: It spends more on tax credits than it does in the appropriations process. To rebuild its tax base, the state hoped to attract new jobs with a strategy that cut taxes for businesses, while raising taxes on individuals. Unfortunately, this plan was insufficient to drive job growth at the level required for the state to restore revenue streams and avoid further cuts.

In addition to structural flaws with state revenue, Michigan’s higher education governance has had critical impacts on the financial decisions that evolved. Codified in the state’s constitution, Michigan’s university system is one of the most decentralized in the nation. Individual university board’s have wide latitude to set prices and priorities, and there is no statewide agency to coordinate the colleges. The legislature’s weak say over how much colleges charge or how they use their funding creates fewer opportunities for colleges to exert concerted pressure on lawmakers to increase appropriations. Without a higher education coordinating board, competition between universities for funding has further stressed the system. Each institution must vye for funding individually, and since each school gets their own line item, avoiding cuts to the University of Michigan won’t affect Michigan State.  

Funding for higher education is a vulnerable line item, subject to the fluctuations of an unpredictable economy. The clock is still ticking, and the United States is likely closer to a future recession than it is to the last, but higher education can no longer serve as a balance wheel of state finances. When the next recession hits, legislators will once again be in the position of making choices about how to allocate insufficient funding.

Unless states like Michigan find a way to smooth higher education finances, it will be students’ wallets that are again left closing the budget gap. And if President Trump gets his way, low-income students may have less federal aid to pay those rising tuition bills.