Will further state higher-ed funding cuts hinder economic innovation?

New analysis shows Medicaid growth could jeopardize higher education funding.

hed-fundingA new analysis of state spending projects reveal that a slowing in the growth of the labor force will lead to slower economic growth over the next decade, while rising Medicaid costs will further reduce funding available for higher education and other discretionary programs.

These trends will make it more difficult for states to sustain higher education spending at a time when many economists argue that 60 percent of U.S. working-age adults must have a postsecondary credential by 2025 for the nation to maintain its economic edge over the rest of the world.

The study, “Crowded Out: The Outlook for State Higher Education Spending,” was released by the National Commission on Financing 21st Century Higher Education, which is directed by Ray Scheppach, an economic fellow at the University of Virginia’s Miller Center. The commission contracted with Moody’s Analytics to project and analyze state-by-state spending from 2014-2024. Spending categories included Medicaid – which is the major individual entitlement in most states – and higher education, as well as overall spending projections.

(Next page: Critical questions about how states will maintain higher-ed funding commitments)

“This study raises critical questions about the ability of states to maintain their funding commitment to postsecondary education over the next decade,” said Mike Castle, former Delaware governor and U.S. congressman and co-chair of the commission. “Education is the major source of innovation and productivity change and also a major cost to middle and low-income families. We are seeing the potential for a significant negative impact on both long-run economic growth for the nation and access to higher education, particularly for low-income families and minorities.”

While results vary by state, the study notes that over the past several decades, the growth in state funding for discretionary spending categories has been squeezed at an alarming rate. Mandatory spending programs, specifically Medicaid, are requiring more and more state funds, leaving fewer and fewer dollars for other programs. Medicaid spending, for example, was less than 10 percent of state-sourced spending 30 years ago, but today accounts for nearly 16 percent. Taking all funding sources into account, Medicaid has grown to more than a quarter of total state spending.

Higher education funding has borne the brunt of much of this crowding out, falling from around 14 percent of state-sourced spending in the late 1980s to just under 13 percent today. “Our baseline forecasts show that trend continuing throughout the next decade and beyond,” the report notes.

The impacts differ substantially by state but the major findings include:
• Total state spending will rise by about 6 percent per year in the early years but then drop to about 4 percent in the later years as the economic recovery slows.
• Medicaid spending will continue to grow between 6 and 8 percent per year over most of the decade but begin to accelerate beyond 2020 as the federal share of Medicaid declines.
• Medicaid will increase as a share of overall state spending from 15.6 percent in fiscal 2013 to 17.9 percent by fiscal 2024. In dollar terms, this represents $60 billion spent on Medicaid over the next decade that previously would have been available for discretionary items such as higher education.
• Higher education spending will be crowded out and grow less than 4 percent per year. With the exception of a few states, the share of total state spending that goes to higher education will decline between .25 and .50 percentage points over this period.

“For the United States to remain competitive in the integrated and technology-driven global economy, it must have a highly skilled, trained and educated labor force that is adaptable to change,” said Bob Graham, former Florida governor and U.S. senator and co-chair of the commission. “Unfortunately, the report shows state governments will not be able to generate sufficient funds to meet our higher education attainment goals. The bottom line is that these trends call into question the sustainability of the American dream.”

Over the next year, the National Commission on Financing 21st Century Higher Education will research, propose and develop creative new funding models that expand access to meaningful educational opportunities beyond high school. The work will identify new public investment and partnership strategies that can generate greater private investments. It will also look at realigning current incentives to both reduce the rate of increase in costs and enhance graduation rates. By commissioning outside nonpartisan research and analysis, the commission also will identify creative and practical solutions involving both public funding and private capital.

“The dismal outlook for state higher education funding in most states over the next decade underscores the importance of the work being led by the National Commission on Financing 21st Century Higher Education,” said Scheppach, an economic fellow at the Miller Center and senior lecturer with the University of Virginia’s Batten School of Leadership and Public Policy. “This important study is a first step to building a foundation of analysis that ultimately will lead to a report on findings, conclusions and recommendations.”

Note: This analysis does not include pensions as mandatory spending and, therefore, those states that have high unfunded liabilities could witness further slowing in the growth of higher education funding over the next decade. Those states with the highest percentage of unfunded liabilities include Illinois, Connecticut, Kentucky, Alaska, Mississippi, Kansas, New Hampshire, Hawaii, Massachusetts and North Dakota.

The full study is available at http://bit.ly/1yMlrcM.

Material from a press release was used in this report.

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Laura Ascione

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