Office of Planning and Budgeting

Christy Gullion, Director of Federal Relations, recently provided an update on the sequester–the large, automatic federal spending cuts originally scheduled to take effect January 1st of this year, but delayed until March 1st thanks to a last-minute, bipartisan deal.

For background information, please see our most recent post on the topic as well as the brief put out jointly by the UW offices of Federal Relations, Planning & Budgeting, and Research.

The Grapevine project’s annual compilation of data on state funding for higher education shows that 30 states increased their appropriations for higher ed institutions and financial aid from FY12 to FY13. On Tuesday, the
researchers at Illinois State University and the State Higher Education Executive Officers released their tables summarizing initial allocations and estimates reported by states from September 2012 through January 14, 2013. As most states are in the midst of FY13, their budgets for the year are more-or-less finalized; however, some changes could occur due to reporting lag time.

Overall, states are spending just 0.4 percent less on higher education in FY13, compared with FY12—a relatively small decline given that state support for colleges dropped 7.5 percent from FY11 to FY12. The net decrease in this year’s budgets resulted from cuts in just 16 states, with the worst appearing in Florida (8 percent), Alabama (6 percent) and New Jersey (5.5 percent). Another 16 states, including Washington, are showing increases of less than 2 percent, which The Atlantic notes “will likely amount to a cut once inflation takes its bite.” Budgets in the other 18 states indicate more sizable increases, all the way up to 14 percent in Wyoming.

Generally, however, the gains that some universities are receiving this year do little to make up for massive cuts since the recession. States are still collectively spending 10.8 percent less than they were five years ago, when the recession began, and thirty-eight states have decreased their overall higher ed appropriations during that time, according to a Grapevine table. Among those 38, Arizona and New Hampshire cut their budgets by 37 percent and 36 percent respectively and a dozen states, including Washington, sliced funding by over 20 percent.

A news release accompanying the survey data, cited by The Chronicle, states, “Barring a further downturn in the economy, the relatively small overall change … suggests that higher education may be at the beginning stages of a climb out of the fiscal trough caused by the last recession.” However, even if state appropriations continue to stabilize, the Moody’s report discussed in our previous post points out that federal spending, tuition revenue, endowment returns, and other traditional revenue sources for colleges and universities face major challenges in the coming year. We aren’t out of the woods yet.

Last week, Moody’s Investors Service issued a negative short-term outlook for the entire sector of higher education based on its conclusion that every traditional revenue source for even the most elite colleges and universities is under pressure. That pressure, according to the report, is the result of nation-wide economic, technological and public opinion shifts, which are largely beyond institutions’ control.

The outlook report, released annually, articulates the fundamental credit conditions that Moody’s expects higher education will face during the next 12 to 18 months. For the last two years, Moody’s gave elite colleges and research universities a stable forecast; but this year, the following factors contributed to a negative outlook for the entire industry:

Struggling Revenue Sources:

  • State appropriations are unlikely to increase meaningfully due to weak economic recovery.
  • Federal spending on research and student aid could be truncated in response to the nation’s fiscal concerns.
  • Tuition revenue continues to be suppressed by low family incomes and public/political pressure to keep prices down.
  • Endowment returns are vulnerable to any economic volatility that could stem from federal tax and budget decisions.
  • Donations are not expected to increase and could face pressure as Congress evaluates associated tax deductions.
  • Financial diversity is no longer helpful as all revenue streams are strained.

Additional Challenges:

  • Student debt and loan default rates have increased and thus challenged the perceived value of a degree.
  • High school graduates are declining in number.
  • Public and political scrutiny of efficiency and degree value could add to institutions’ list of regulatory requirements.
  • New technologies such as online learning and MOOCs could provide new revenue opportunities, but could also undermine traditional higher ed models.

Moody’s analysts warn that revenue streams will never rebound to post-2008 levels and leaders in higher education will need to adapt by thinking strategically and adjusting their operations.

But not all is gloom and doom. Although Moody’s gave higher education a negative outlook, most of the country’s top colleges and universities still hold the strong credit rankings. The UW, for one, continues to maintain a Aaa credit rating—the highest offered by Moody’s. Additionally, the report stressed that the intrinsic value of and demand for higher education remains stable.

Dartmouth will stop granting college credit for students with high AP test scores beginning with the class of 2018, which will enter in the Fall of 2014. Currently, Dartmouth students with scores of four or five (out of five) on an AP test can have certain lower-level courses waived, earn placement into higher-level courses, or receive credit toward their degrees. When the new policy takes effect, the first two of options will still be available, but students will not be able to earn credits. Dartmouth’s Committee on Instruction proposed the change in policy and the faculty passed it with an “overwhelming majority,” according to Inside Higher Ed.  However, faculty members say they “still value AP courses – just not as a replacement for a college classroom.” 

Dartmouth changed the policy after its psychology department performed an experiment to assess the college-level competence of top AP scorers. Students who had earned a five on the AP psychology test were asked to take a placement exam based on the final for intro psychology; 90 percent of those students failed, according to the college. The researchers also found that the students who failed and then chose to take intro psychology did not perform better than their peers who had never taken AP psychology or who had scored less than a five. These results challenge those of an independed study published by College Board. College Board officials say they question Dartmouth’s results and believe the college has an obligation to share the details of its experiment.

There are concerns that the college’s change in policy will discourage high school students from accepting the challenge of an AP course and/or could keep students on campus longer than they would if college credit were granted for their scores. Dartmouth’s Committee on Instruction plans to review the policy in three years.

In Washington, RCW 28B.10.053 requires that institutes of higher education “recognize the equivalencies of at least one year of course credit and maximize the application of the credits toward lower division general education requirements that can be earned through successfully demonstrating proficiency on examinations, including but not limited to advanced placement and international baccalaureate examinations.”

In its new report, “Knocking at the College Door,” the Western Interstate Commission for Higher Education projects that 45 percent of high school graduates in 2020 will be minority students, up from 38 percent in 2009. According to the report, the number of white and African-American students will decline, while the number of Asian-American/Pacific Islander and Hispanic students will rise precipitously. While the supply of high school graduates will decline a bit in the next decade, it is expected to stabilize at three million students per year. Of course, this large number masks the individual experiences of states: in Texas, Colorado, and Utah, for example, the number of high school graduates is expected to increase by 15 percent before 2020, while Michigan, Maine and New Hampshire are projected to have 15 percent fewer high school graduates in that same time frame. Washington State is expected to have moderate growth in the number of high school graduates, on the order of about five percent by 2020. The trend can already be felt at the University of Washington, where 51 percent of the 2012 entering freshman class was minority students (including Asian-American students). Underrepresented minorities at the UW comprised 17.4 percent of the freshman class of 2012.

Universities are already beginning to respond to the expected increase in minority students by analyzing their admissions criteria and financial aid policies, and assessing the new resources they will need to meet the needs of this growing group of students. As higher education student demographics become more diverse, colleges will focus increasingly on raising educational attainment among underrepresented minorities.  Universities also want to do better in reaching out to high school seniors and graduates during the application process, as underrepresented minority students often have less access to information about the college application and financial aid processes.

To read more about the report, and how universities are responding to it, please read the Chronicle’s analysis or the full report.

Last Thursday, California Governor Jerry Brown released a proposed 2013-14 budget that includes substantial increases for higher education—made possible by the passage of Prop 30. For the UC and CSU systems, the proposal provides an ongoing increase of $125.1 million each. This includes $10 million each to expand the delivery of courses through technology and is in addition to the $125 million that UC and CSU will each receive in 2013‑14 for not increasing tuition and fees in 2012‑13, as required by the 2012 Budget Act.  In sum, the proposal says “the state’s General Fund contribution to UC and CSU will increase by 5 percent per year in 2013-14 and 2014-15 and by 4 percent in each of the subsequent two years.”

Both higher ed systems had asked for more; but, according to The Chronicle, Gov. Brown said “the gap between what we’re going to give them and what they say they’re going to need” would have to be made up through efficiencies.  Cal State system’s chancellor that Mr. Brown’s proposal at least “heads us in the right direction.”

However, in exchange for new money, state institutions are expected to keep tuition and fee levels stable over the next four years.  The institutions are required to increase access to online courses and limit resident tuition rates to the first 150 percent of credits needed to graduate.  This limitation is an attempt to encourage timely degree completion, reduce student debt, and free up classroom space for other students.

At a news conference Thursday, Governor Brown stated that he would be attending UC and CSU board meetings in the hopes of encouraging both systems to keep tuition prices stable.

The 2013 Washington State legislative session, scheduled to last 105 days, began today. OPB will be tracking all bills that are relevant to the University and we will do our best to keep you updated on the happenings in Olympia. For the most comprehensive legislative session information, please see the Washington State Legislature’s website.

As always, check the BillTracker for the latest information on bills relevant to the UW, including scheduled hearings, bill summaries, and the official UW position on a bill. This year, we have also integrated our Fiscal Note process into the BillTracker, which will hopefully streamline the data gathering process.

For more information about how to use BillTracker and bill analysis generally, check out this presentation. If you have questions about submitting Fiscal Notes, please review this Fiscal Note presentation.

Please also feel free to check out the Office of State Relations website for up-to-date information on the state of events in Olympia.

We will post updates on the budget situation to the blog, and we will announce any new budget briefs here as well. If you have a pressing budget-related question, please contact Sarah Hall at sahall@uw.edu. For any questions related to bill tracking or Fiscal Notes, please email uwbills@uw.edu.

Two years ago at the annual Council of Independent Colleges, a group of private-college presidents advocated for limiting the amount of financial aid awarded on criteria other than need—usually referred to as “merit-based” financial aid. Although the presidents received an enthusiastic response from the Council, little action followed. However, last Saturday at this year’s Council meeting, the conversation was revisited and two encouraging developments suggest progress may be more conceivable this time.

First, the presidents unveiled a draft “statement of principle,” which they hope will unite colleagues who believe that meeting financial need should be the highest priority of aid policies. Titled “High Tuition/High Discount Has No Future,” the statement articulates that the merit-aid/tuition discounting model is unsustainable and those signing their support acknowledge they’ve contributed to the problem. The statement cites a 2009 study that found “the increased use of merit aid is associated with a decrease in enrollment of low-income and minority students, particularly at more selective institutions.”

Second, David L. Warren, president of the National Association of Independent Colleges and Universities, revealed information from preliminary conversations with U.S. Justice Department officials regarding ways in which groups of presidents could discuss their tuition and/or financial aid policies without penalty and, hopefully, reach collective agreements to make college more affordable. This is significant as the Overlap Group, a set of elite universities that joined forces on admissions and financial-aid decisions for several years, faced antitrust charges by the federal government in 1991. The federal case effectively ended any meaningful collaboration on such topics, keeping schools in the dark about each other’s financial aid and admissions strategies.

“The fear, obviously, is that unilateral disarmament” in the merit-aid race won’t work, said one of the efforts’ leaders according to The Chronicle. Presidents worry that increasing need-based aid and decreasing merit aid, which is used to attract top students, will result in less robust enrollment and less prestige. But hopefully between the statement of principle, which could align presidents behind common goals, and discussions with the federal government, which could result in permissible collaboration, some progress will be made and the game of financial-aid chicken can end.

Yesterday, the Senate and House of Representatives approved legislation to avert the fiscal cliff. The deal postpones the automatic, across-the-board spending cuts—known as “the sequester”—by two months and increases tax rates only for individuals earning over $400,000 and couples earning over $450,000. The bill also preserves funding for Pell Grants and extends for five years the American Opportunity Tax Credit (AOTC), which allows students and their parents to claim up to $2,500 a year for tuition and college expenses.

For details, please see the blog post provided by Christy Gullion, Director of Federal Relations, and the articles provided by Inside Higher Ed and The Chronicle