State Funds
The largest single funding source for higher education has become in the last 50 years, the States. The predominance of the states as revenue sources for colleges and universities will likely continue because public colleges, with few exceptions, are viewed as state institutions and because the framework has been established in most states for some public aid to private colleges. This chapter examines the state funding process, efforts to move to equitable funding of institutions, the relationship of states to their public institutions, and state aid to private colleges.
The growth of state support has paralleled the growth of public college enrollment. By 1980, it had come to consume about 14 percent of all state taxes and provide about 45 percent of all current funds revenues of public colleges in the United States. The amount of state funds for higher education exceeded 18 billion dollars. (SREB Fact Book, 1981 and 1982, pp. 62-66)
The State Funding Process
The authorization of budgets is one of the major responsibilities of state legislatures, and higher education appropriations receive a great deal of attention in the consideration of moneys to be allocated to various state services. Higher education systems and individual institutions must decide how to determine and present their needs effectively to the state. Those who play an important role in funding include the governor, the budget officer, legislators, higher education coordinating commissioners, and the general public. The results of the process are decisions concerning the total amount to be allotted to higher education and the relative amounts to individual institutions. In those states with single governing boards for all of higher education, institutional allotments may be made by those bodies.
Meisinger (1976) describes the state higher education funding drama as having three major actors: (a) the state, (b) the coordinating agency, and (c) the institution (p. 178). Each one has certain expected and specified responsibilities. The state includes the executive and legislative branches. The executive branch’s most important member is the governor with support from the state budget or finance office. The governor’s major influence is exercised through the development of a state budget which is recommended to the legislature. The governor’s proposed budget serves as a starting place for legislative consideration of the total state funding for legislative consideration of the total state funding of services. Moreover, the governor’s perspective and general attitude toward higher education will have an important hearing, not only on the budget recommendations themselves but also on how postsecondary education fares in the legislature.
The legislative branch of the state government plays a major role in the funding process. Brown (1983) notes:
The state legislature has the ultimate responsibility for making decisions on the higher education appropriation. It is at this point that the legislature has its most direct impact on higher education. Most often the budget developed by the governor serves as a starting place in the appropriation deliberations, and as the larger number of individuals with differing backgrounds and representing varying constituencies become involved, the process becomes even more complex. (p. 13)
Legislators are influenced in their decisions about higher education by many factors: their own experiences, educational or otherwise; opinions of their constituents; institutions located in their districts; how effectively they are solicited by institutions; and what kinds of bargains and compromises they can secure.
With colleges on one side and the state on the other, the coordinating agency enters the drama. The typical role played by coordinating agencies is that of buffer or middleman between the state and the institutions. One of the reasons for the creation of coordinating agencies is to shield state officials, especially legislators, from the importunings of college presidents and institutional lobbyists. The coordinating commission and its staff may vacillate in its role from higher education champion to neutral arbitrator to state-level champion. The role of middlemen is not an easy one; coordinating boards have no loyal constituent group on which they can rely for continuous support. If they veer too far in the direction of favoring the state they incur the wrath of the colleges; if they veer too far toward the institutional point of view, they are distrusted by the members of state government.
In earlier days when there were fewer public institutions, fewer state dollars to be fought for, and far fewer students to be accommodated, the battles for state appropriations were conducted directly by the institutions in the halls of the legislature and the offices of the executive branch. The process, which by its very nature is political, tended to result in the lion’s share of funds being distributed to the institutions that could wield the greatest political power and influence. As the number of institutions increased and so did their dependence for survival on state funds, the purely political determination of appropriations became more fierce and less satisfactory. States cast about to find ways of more equitably distributing funds among institutions and of determining their needs more objectively. The result in most states was some kind of overall coordinating group to try to represent the various facets of higher education. As these agencies developed, they sought acceptable standard methods for justifying the funding requests of institutions.
In several states with relatively simple higher education systems, the primarily political approach to state appropriations continues to prevail. In the other states, two major kinds of efforts have been made to use more systematic ways of presenting band justifying needs for state support of higher education: (a) appropriations related to program budget requests and (b) appropriations based on the application of some kind of formula. The variations on each of these are numerous.
In states using program budgets as the basis for seeking state funds, institutions are required to prepare and submit detailed information on program costs. These are reviewed, perhaps revised and consolidated, and submitted by a coordinating or other central state agency as the basis for requested appropriations.
About half the states use some kind of formula as the basis for coordinating agency recommendations for state appropriations. A formula, according to Miller (1964), is "an objective procedure whereby quantitative data dealing with the relationship between programs and costs are manipulated in such a manner as to arrive at an estimate of future budgetary requirements." The term "formula" and the description of it as an objective procedure may carry an implication of scientific or mathematical bases which are not justified. In practice, these formulas are as political in a sense as other bases for allotting state funds, that is, the formula used is based on judgments and compromises about what it should contain. Note also should be made that they are based on quantitative data and express an institution’s needs in numerical terms but do not take account of the qualitative aspects of institutions and programs.
Montgomery (1977) specifies three principles which, if followed, will make formulas work reasonably well:
Principle 1. The formulas should be sufficiently clear and simple that a legislator can explain them to a constituent. This point also implies that an administrator can explain them to a legislator.
Principle 2. The formulas should allow the state the flexibility, if desired, to maintain different types of institutions which are funded at different levels. This principle means that the land-grant university is understood to be different from a community college and to require different funding.
Principle 3. Once the formulas have wide agreement, use them to obtain funds. . . . Use the formulas to allocate the money and avoid the temptation to rush forward to check on why an institution spent some funds in a way which may deviate from the formula. (p. 62)
Montgomery’s third principle is related to an intrainstitutional controversy which occasionally develops when formula funding is used. There are many who hold the view that internal allocations by the institution should follow the same bases on which a formula generates appropriations for the institution. For example, if "X" dollars are generated by credit hours produced in a department, the same numbers of dollars should be allocated to that department for operation of its programs, not used for some other program or for noninstructional purposes. This idea is called the concept of trailing dollars. Clearly, the idea has some merit: if a program is generating $500,000, but the institution is allocating only $200,000 for its operation, other units must be benefiting from the low costs (and consequent low quality?) imposed on it. However, it is obviously impossible for a college to allocate every dollar on the same basis on which it was generated. Moreover, for it to attempt to do so to a very high degree would limit its budgetary flexibility to allocate dollars where they are most needed and will have maximum results. If the concept of trailing dollars were carried to its ultimate extreme, each professor would be paid on the basis of how many dollars the courses he/she taught generated, a practice entirely alien to the bases on which faculty compensation is determined, and one which would cause annual fluctuations in salaries that would not be tolerated.
Because a major component is tied to full-time equivalent students or to credit hours produced, formulas are usually enrollment-driven or credit-hour driven. Other parts of the formula may be related to the major component on a percentage or some other basis. Still other parts may be calculated on different bases such as headcount or square feet of floor space maintained. Formulas reflect costs and their end product is an amount of money to be levied against the state; they do not have built-in mechanisms for tying the costs to available state financial resources. Implicit in the building of state funding on a formula reflecting costs of higher education institutions is the acceptance of the assumption that somehow the state has responsibility for the total costs involved. That assumption is further strengthened in many formulas by the deduction of tuition—funds raised by the institutions—from the money the state is expected to pay. Moreover, the costs on which formulas rest are historical costs projected by some means into the future. Historical cost bases solidify and perpetuate any past inequities and discourage consideration of whether those costs were defensible when they occurred.
For example, formulas may weigh enrollment or credit hour costs by level of instruction or academic field or both. Such weights are derived from studies of relative instructional costs over several previous years. Because costs of undergraduate instruction were less than those for graduate instruction, advanced instruction is weighted more heavily. Because costs for engineering undergraduate instruction were greater than those for business undergraduate instruction, engineering is weighted more heavily than business at the undergraduate level. These weights, also called complexity indices, are then entered into the formula thereby affecting future funding and continuing whatever differences, either justified or unjustified, which prevailed earlier.
The Chart of Weighting Factors (Table 6-1) can be used to show more clearly how weights are applied in some formulas. Suppose that two institutions produced 10,000 semester credit hours each. For Institution A these hours were 7,000 undergraduate-business hours, 2,000 graduate-level 1 or master’s-level business hours, and 1,000 graduate-level 2 or doctoral-level business hours. Institution B produced 7,000 undergraduate engineering hours, 2,000 graduate-level 1 engineering hours, and 1,000 graduate-level 2 engineering hours. Applying the weights shown in the chart produces 27,830 weighted credit hours for Institution A and 43,010 weighted credit hours for Institution B. If the formula calls for $50 per weighted credit hour, the 10,000 business credit hours in Institution A will result in an amount of $1,391,500, and the 10,000 engineering credit hours in Institution B will amount to $2,150,500.
An examination of the application of a simplified hypothetical formula used to determine a coordinating agency’s recommendation for state funding of mythical Samson University will show how a formula works. Samson is a 10,000 FTE student university producing 300,000 credit hours. Its average weighted credit hour is 3.00, giving it a total weighted credit-hour production of 900,000. The hypothetical formula applied to it is oriented to students served; therefore, it begins with determining costs for instruction. The amount for instruction is calculated by multiplying $50 by the weighted credit hours produced in 1983-84. The $50 multiplier is determined by adding $3 for inflation to the $47 average cost in the region, that is, several states, for weighted credit-hour instructional costs in senior public institutions. The total for instruction is $45,000,000. Note that this amount is related to the previous year’s credit-hour production, which may be higher or lower than that for the year the appropriation covers. In this, as in most actual formulas, funding recommendations are always a year behind the productivity to be funded, a fact which can be a considerable disadvantage to a rapidly growing institution.
Table 6-1
Chart of Weighting Factors
Undergraduate / Graduate Level 1 / Graduate Level 2
1. Business / 1.12 / 3.27 / 13.45
2. General / 1.00 / 2.73 / 10.33
3. Education / 1.04 / 2.30 / 8.79
4. Nursing, Health / 2.74 / 4.94 / 17.60
5. Engineering / 2.07 / 5.45 / 17.60
6. Fine Arts / 2.09 / 4.95 / 17.71
7. Home Economics / 1.39 / 3.34 / 9.31
8. Science / 1.29 / 5.36 / 17.60
9. Military Science / 0.12 / -- / --
10. Law / -- / 1.75 / --
11. Architecture / 1.67 / 4.79 / 16.52
12. Agriculture / 1.51 / 4.57 / 16.03
13. Veterinary Medicine / -- / 5.77 / 20.53
14. Pharmacy / 2.07 / 5.06 / 14.09
15. Interdisciplinary / 1.26 / 3.23 / 10.33
Research and public service, two missions which receive little emphasis in the hypothetical formula, are calculated together at the rate of 8 percent of instruction. Academic support and institutional support are calculated at the rate of 10 percent each of the total for instruction plus the total for research and public service. Many formulas separate the amount for libraries from the rest of academic support and use a per student dollar amount which varies by level of students enrolled, that is, each enrolled undergraduate could result in $120 for library support and each graduate student in $400 for library support.