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Getting Off the Higher Education Finance See-Saw

A college education is one of the best investments a California family can make. A diploma from one of our public universities remains one of the greatest opportunities many families have to make a good living and contribute to a prosperous future.

Many people are rightly concerned that this opportunity is increasingly out of reach, in large part because of the way we pay for higher education. The higher education finance problem in California is a ticking time bomb. It has gotten worse over the last thirty years because of a chronic and growing structural imbalance between revenues and spending. In flush economic times, the state can pay more, tuition holds steady, and enrollment is easier. In bad years, which have come about roughly every five to seven years, the state is forced to make drastic budget cuts, institutions reduce the number of students who can get in, and tuitions skyrocket. When good times return, revenues go back up, spending increases, and tuitions are held steady. But nothing fundamentally changes, and when the next recession rolls around, it all happens again: budget cuts, tuition increases, and cutbacks in enrollments. No one is well served by this: not California families, the state, the institutions and the people who work for them, and most of all students.

It shouldn’t be impossible to find ways to manage this better by tackling the problem of revenue instability and adapting good budget practices that every household knows to use: save money in good times, avoid excessive debt, and manage spending to fit within the budget you have—not the one you’d like to have or the one you used to have.

Reform has to begin at the state level, to adapt budgeting to the realities of the state general fund, which is the platform on which everything else rests. The general fund of 2017 is structurally very different than it was in 1968, when the State Master Plan was built. This is a result of changes in the economy and the structure of the workforce, as well as because of many constitutional restrictions on how the revenues can be used. The budget is more volatile than in the past, and the legislature and governor have less discretion over spending within it. Sixty-eight percent of revenues come from personal income tax, and over half of that comes from taxpayers making over $500,000 a year. Those taxpayers earn more from capital gains than the typical salaried employee. This means that revenues are disproportionately affected by economic booms and busts. As an example, in the Great Recession year of 2009, California personal income dropped 3.7%, and Gross Domestic Product by 4%—but the general fund declined by nearly 20%.

If higher education is to be a vehicle for economic mobility, we must take steps to make sure that the wheels of opportunity don’t come off every time the economy dips.

In order to stabilize reasonable revenue levels and to improve long-term fiscal planning, the state and our university systems must take a number of important steps:

  • They must build buffers into the budget to cushion against revenue instability, through contingency reserves built intentionally to forestall budget cuts and tuition increases after recessions.
  • They must provide tuition predictability, by stabilizing general funds for higher education and avoiding the zig-zag pattern of spikes in tuition whenever there is a recession. The long-standing habit of skipping tuition increases in good times and letting tuition spike in recessions is simply bad planning. Instead, we owe it to students, the institutions, and the state to make modest and predictable annual increases in tuition matched with state funding.
  • They must take pressure off higher education spending by using one-time revenues from capital gains to buy down debt and to pay for the growing backlog of maintenance and repair.

These are rational, achievable goals, but that doesn’t mean that getting there will be easy. Everyone will have to contribute something—our elected officials, university leaders, families, and taxpayers. But the result will be more than worth it.