Recent shifts in state funding are altering the most basic realities of American higher education, from student access to faculty research

Ehrenberg, Ronald G

Rizzo, Michael J

English

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Articles and Chapters ILR Collection 
7-2004 
Financial Forces and the Future of American Higher Education 
Ronald G. Ehrenberg 
Cornell University, rge2@cornell.edu 
Michael J. Rizzo 
Centre College 
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Financial Forces and the Future of American Higher Education 
Abstract 
Recent shifts in state funding are altering the most basic realities of American higher education, from 
student access to faculty research. 
Keywords 
faculty, funding, higher education, research 
Disciplines 
Education Economics | Higher Education | Labor Economics | Labor Relations 
Comments 
Suggested Citation 
Ehrenberg, R. G. & Rizzo, M. J. (2004). Financial forces and the future of American higher education 
[Electronic version]. Academe, 90(4), 28-31. 
Required Publishers Statement 
Originally published in Academe, the magazine of the American Association of University Professors. 
Copyright by the American Association of University Professors. 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/articles/687 
Financial Forces 
and the Future of 
American Higher 
Education 
BY RONALD G. EHRENBERG AND MICHAEL J. Rizzo 
Ronald Ehrenberg is Irving M. Ives Professor of Industrial and Labor 
Relations and Economics at Cornell University, director of the Cornell 
Higher Education Research Institute (CHERI), and chair of the 
AAUP's Committee on m PI 
1M 
Ronald Ehrenberg Michael Rizzo 
the Economic Status of 
the Profession. His most 
recent book is Governing 
Academia, published in 
2004. Michael Rizzo, 
assistant professor of eco-
nomics at Centre College, 
is a research associate at 
CHERI. 
Recent shifts in state funding are 
altering the most basic realities of 
American higher education, from 
student access to faculty 
research. 
28 ACADEME 
Each year over the past quarter century, under-graduate tuition and fees in the United States have increased by an average of 2.5 to 3.5 per-centage points above the inflation rate.1 This continuous rise recently led one congressman to propose that the government penalize institutions 
that raise their tuition by more than twice the rate of inflation 
for several years in a row; fortunately, his colleagues in Congress 
expressed little interest in his proposal, and he dropped it.2 
Colleges and universities, both public and private, often 
claim that faculty salaries are among the major causes of persis-
tent increases in tuition. The most recent AAUP annual report 
on faculty salaries, however, questions this assertion. Published 
in the March-April 2004 issue of Academe, the report notes 
that average faculty salaries at four-year colleges and universi-
ties in the United States have risen at only about 0.5 to 1.0 
percent a year more than the inflation rate over the past 
twenty-five years. 
The most important reasons for tuition increases differ in 
public and private higher education. In the private sector, con-
tributing factors include the rising costs of technology, student 
services, and institutional financial aid; the unrelenting compe-
tition to be the best in every dimension of an institution's 
activities; and, at the research universities, the increasing insti-
tutional costs of scientific research. Public higher education 
must deal with all these factors in addition to another impor-
tant driver: the withdrawal of state support. 
Dwindling State Support 
In his 2004 Cornell University PhD dissertation, Michael 
Rizzo illustrates the dramatic decline in state funding of higher 
education that has occurred over the past quarter century, 
arguing that the attention paid to recent fiscal difficulties in the 
states has obscured this persistent decrease.3 Figure 1 shows 
that the share of state general funds going to higher education 
has shrunk by more than one-third over the past twenty-five 
years. Had this share remained constant at 1977 levels (8.9 per-
cent of state general fund budgets), institutions of public high-
er education would have received, on average, an additional 
$3,900 for each full-time-equivalent student in 2001. 
In Higher Education 
Spending: The Role of Medicaid 
and the Business Cycle, a 2003 
report published by the 
Brookings Institution, econ-
omists Thomas Kane and 
Peter Orszag attribute the 
decline in state funding of 
higher education that took 
place during the 1990s to the 
expansion of state spending 
on Medicaid (resulting from 
increased health care costs, 
changes in the federal gov-
ernment's financing of 
Medicaid, and an expansion 
of Medicaid caseloads in 
most states). 
Rizzo reports that pressure to fund elementary and secondary 
education also accounted for a significant portion of the decline. 
Between 1977 and 2001, twenty-two state courts mandated 
K-12 finance reforms to equalize spending across school districts 
within these states. He says that these reforms led to an average 
increase in K-12 spending of $340 million in these states. More 
than 25 percent of that increase ($90 million) came directly from 
reducing state higher education budgets to below the levels that 
otherwise would have prevailed. 
There is no reason why higher education's share of state 
spending should remain constant over time. As a result of this 
decline, however, per-capita state appropriations for each full-
time-equivalent student at public colleges and universities rose in 
constant dollars from $5,622 in fiscal 1974 to $6,717 in fiscal 
2004—an average increase of only 0.6 percent a year. This slow 
growth occurred during a period in which institutions of higher 
education faced rapidly rising real costs because of the reasons 
discussed above. At the same time, private colleges and universi-
ties relentlessly raised their tuitions by a much greater annual 
percentage than the increases in state appropriations for higher 
education. 
Public institutions responded to diminishing state support by 
increasing their tuition levels at slightly higher percentage rates 
than the private institutions did. However, because tuition at 
public institutions started at much lower levels than those at 
private colleges, the public institutions generated less income 
from their increases than their private counterparts did from 
theirs. 
Rizzo notes that statehouses nationwide responded with 
hostility to efforts by public institutions to recover lost appro-
priations by seeking private gifts and raising tuitions. On aver-
age, each dollar of private giving (per student) was met with a 
twenty-cent cut in per-student appropriations, and each dollar 
that tuition was raised led to at least a one-dollar cut in future 
state appropriations.4 
The diminished resource base of public academic institutions 
relative to that of private colleges and universities has affected 
faculty salaries. As the 2003-04 AAUP report on faculty 
salaries notes, the average professor at a public doctoral univer-
sity earned about 91 percent of what his or her counterpart at a 
FIGURE 1 
Average Share of Discretionary State Expenditures on Higher Education 
10 
1977 1980 1983 1986 1989 1992 
Academic Year Ending 
1995 1998 2001 
Sources: U.S. Census Bureau, State and Local Government Finances, selected years, and Center for the Study of Education 
Policy, Illinous State University, Grapevine: A National Database of State Tax Support for Higher Education. 
JULY-AUGUST 2004 29 
1977 1980 1983 
private doctoral university 
earned in 1978-79. By 
2003-04, however, the per-
centage had fallen to 77 per-
cent. Increasingly, public 
institutions find it difficult 
to attract and retain high-
quality faculty. This difficul-
ty surely influences the 
quality of public colleges 
and universities, where most 
U.S. students are educated.5 
Aid Fullback 
In the face of persistent tui-
tion increases, the changing 
pattern of financial aid in 
the United States has influ-
enced who gets a college 
education. In 1982-83, 
more than 50 percent of federal financial aid was in the form 
of grants; by 2002-03, however, grants made up only 40 per-
cent of such aid. Most federal financial aid now comes in the 
form of loans, and research suggests that students from lower-
income families are less willing than other students to take on 
large loan burdens to finance their higher education. 
Moreover, federal grant aid has not kept up with increases 
in college costs. During the mid-1970s, the average Pell 
Grant covered about 46 percent of the average costs (includ-
ing room and board) of attending a public college or univer-
sity. Last year, the average grant paid for less than 30 percent 
of the costs (the percentage is much lower at private institu-
tions, but they have more institutional resources for financial 
aid). The Bush administration has proposed increasing loan 
limits (a step private institutions applaud), but it has shown 
less interest in an across-the-board increase in the level of 
Pell Grants.6 
States have placed additional pressure on public university 
tuitions by devoting an ever-increasing percentage of their 
higher education expenditures to targeted grant aid for stu-
dents, as opposed to appropriations to institutions. Figure 2 
shows the drop between 1977 and 2001 in the share of state 
dollars to support higher education that went direcdy to public 
institutions. 
Rizzo attributes this decline to two factors. First, states have 
allowed their higher education appropriations to lag to take 
advantage of the perverse incentives built into the federal 
financial aid system, which brings more Pell Grant dollars into 
a state when its tuition level is higher. Second, there has been 
an aggressive movement away from need-based aid and 
toward non-need-based aid. As late as 1993, less than 10 per-
cent of all state grant aid to students was not based on need. 
But the growth of "merit-based" programs such as the HOPE 
Scholarship program in Georgia, which started in 1993, raised 
the share of non-need-based aid to almost 25 percent by 2001. 
Under the HOPE program, any in-state student with a 3.0 
grade point average is eligible to receive a scholarship if he or 
she attends an institution in the state. 
FIGURE 2 
Average Share of State Higher Education Expenditures to Institutions 
1986 1989 1992 
Academic Year Ending 
1995 1998 2001 
Note: The Hope Scholarship Program in Georgia began in 1993, launching a trend in which states reduced aid dollars 
allocated direcdy to institutions. 
Sources: Center for the Study of Education Policy, Illinois State University, Grapevine: A National Database of State Tax 
Support for Higher Education, and National Association of State Student Grant and Aid Progrms, Annual Survey, selected years. 
Since 1993, twelve additional states have implemented 
HOPE-type programs. Increasingly, financial aid at private 
colleges and universities in the United States is also based on 
"merit" rather than on need. Many private institutions now 
use financial aid to manage enrollment (to attract a class with 
the most "desirable characteristics" at the least cost) rather than 
to expand access to higher education among lower-income 
students. Probably fewer than fifteen to twenty private aca-
demic institutions provide financial aid based solely on stu-
dents' financial need today. 
As a result, the United States has failed to reduce education-
al inequality based upon family income levels. Disparities in 
college enrollment by family income quartiles (measures used 
to categorize the population into four equal groups based on 
the level of household income) are almost as large today as 
they were thirty years ago. Harvard University's president, 
Lawrence Summers, recendy told a group of college presidents 
that the gap in opportunities for children from different eco-
nomic backgrounds is the "most severe domestic problem in 
the United States," and he called on colleges and universities 
to take steps to ameliorate it.7 
More students from lower-income families are being forced, 
for financial reasons, to enter higher education through public 
two-year colleges. The U.S. college-age population is expect-
ed to grow over the next decade, primarily among groups now 
underrepresented in higher education. Limits on state resources 
for both operating and capital expenses may increasingly 
restrict access to college; students are already being turned 
away from four-year public universities in California and 
Washington. If these trends continue, disparities in college 
attainment by income, race, and ethnicity may worsen in the 
years ahead. 
Research Costs 
The importance of scientific research has grown at American 
universities, fueled by major advances in genomics, advanced 
materials and information technology, and dramatic increases 
in governmental and private funding. A little-known fact, 
30 ACADEME 
however, is that despite expanded funding, universities increas-
ingly finance research out of their own institutional resources. 
The share of research and development expenditures universi-
ties paid out of their own pockets grew from 11.2 percent in 
1972 to almost 21 percent in 2000. 
Universities increasingly bear the costs of their faculty 
members' research for many reasons, but the magnitude of the 
start-up packages needed to attract new faculty members in 
the sciences is an important factor. At research universities, 
these costs average $300,000 to $500,000 for assistant profes-
sors and often well over a $1 million for senior faculty. 
Universities properly view these costs as investments in their 
faculty members' research productivity. Yet, where institutions 
get the money to fund these investments is of great concern. 
Demise of the Tenure Track 
Public universities, more often than private institutions, some-
times leave faculty positions vacant until salary savings generate 
necessary start-up funds; leaving these faculty positions open 
surely affects the quality of undergraduate education at the 
public institutions. Researchers at the Cornell Higher 
Education Research Institute (CHERI) have also found evi-
dence that escalating research costs have led both public and 
private institutions to raise student-faculty ratios and substitute 
part- and full-time non-tenure-track faculty for tenure-track 
faculty. 
In fact, throughout American higher education, institutions 
rely increasingly on part- and full-time non-tenure-track facul-
ty. During the 1990s, the percentage of full-time non-tenure-
track faculty and the ratio of part- to full-time faculty grew sig-
nificantly. The share of newly hired full-time faculty appointed 
off the tenure track was over 50 percent in 2001-02. 
Preliminary research findings at CHERI suggest that as the 
percentage of part- and full-time non-tenure-track faculty 
grow at an institution, undergraduate students' six-year gradua-
tion rates fall. Moreover, as the share of faculty off the tenure 
track increases, the demand for full-time tenure-track faculty 
declines, and PhD programs become less attractive to 
American college graduates. 
This trend may partly explain the increase in the number of 
PhDs that U.S. universities grant to temporary residents of the 
United States. Over the past thirty years, the share of such 
PhDs rose from 10.4 to 26.3 percent. In key science areas, the 
increase was more dramatic. In 2002, almost 40 percent of all 
PhDs in the physical sciences and 55 percent of those in engi-
neering were awarded to temporary residents. 
As institutions of higher education improve elsewhere 
around the world, foreign students may choose not to pursue 
PhD study in the United States, and those who do may not 
seek employment here. The decline in the total number of 
PhDs produced by U.S. universities in recent years, together 
with the large share of American faculty approaching retire-
ment age, raises the question of who our next generation of 
professors will be.8 
Cowboy humorist Will Rogers once said, "Even if you're 
on the right track, you'll get run over if you just sit there." 
The United States has the best higher education system in the 
world, but it is not a foregone conclusion that we will main-
tain that position of excellence. Protecting the quality of 
higher education and increasing access to it are not mutually 
exclusive goals, and we simply cannot afford to treat them as 
such. Nor can we afford to ignore either of these important 
goals. Policy makers and taxpayers alike would be well 
advised to pay attention to the issues that we have raised in 
these pages. & 
Notes 
1. For further details, see Ronald Ehrenberg's 2002 book, Tuition Rising: 
Why College Costs So Much (Cambridge, Mass.: Harvard University Press). 
2. See Stephen J. Burd, "Plan to Punish Big Increases in Tuition Is 
Dropped," Chronicle of Higher Education, March 12, 2004. 
3. A paper based on the dissertation, "A (Less Than) Zero Sum Game? 
State Funding for Public Higher Education: How Public Higher Edu-
cation Institutions Have Lost," is available at www.ilr.cornell.edu/cheri. 
4. Even if states did not respond negatively to increased private giving, 
the giving and endowment levels of public institutions would probably 
not be able to catch up with those of private institutions, because the 
public institutions started from such a low base relative to their private 
counterparts. 
5. It is predicted that much of the enrollment expansion in coming 
decades will be driven by currently underrepresented minorities or first-
generation college students. Most of these enrollments are expected to 
occur in the public sector. 
6. The administration did include in its fiscal 2005 budget proposal 
$33 million for a pilot program that would provide an additional 
$1,000 for the first year of college for students from low-income 
families who had taken "rigorous" coursework to prepare for col-
lege. See Stephen J. Burd, "In His 2005 Budget Bush Proposes Few 
Increases in Student Aid," Chronicle of Higher Education, February 
13, 2004. 
7. See Julianne Bassinger and Scott Smallwood, "Harvard Gives a 
Break to Parents Who Earn Less than $40,000 a Year," Chronicle of 
Higher Education, March 12, 2004. In addition, Summers announced 
that parents of Harvard students from families earning less than 
$40,000 a year would no longer be asked to pay anything toward 
their children's education. 
8. Since September 11, 2001, the number of international students 
applying to U.S. PhD programs has declined consistently as well. 
The Council of Graduate Schools reports that the number of foreign 
applicants to American graduate schools for fall 2004 was 32 percent 
lower than for the previous fall. A summary of the report is available 
at http://www.cgsnet.org/pdf/CGS_PRJndSurvey.pdf. Also see 
"Foreign Students Decline to Study at U.S. Universities" on page 
4-5 of this issue of Academe. 
The United States has failed to reduce educational inequality based upon 
family income levels. Disparities in college enrollment by family income 
quartiles... are almost as large today as they were thirty years ago. 
JULY-AUGUST 2004 31 


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