Cut state subsidies for university operations

Gov. Granholm's fiscal 2010 executive budget recommendation presentation contains this: "Due to Michigan's on-going economic challenges, state university operations are funded at $1.4 billion — a 3 percent reduction."[31] Many observers expected the funding to be restored with money from the federal "stimulus" spending bill, but the actual executive budget bill language included a condition: "It is expected that a public university or community college receiving federal stimulus funds will not raise tuition and fees charged to Michigan residents for the remainder of 2008-2009 and for 2009-2010."[*]

In other words, the governor recognizes that with or without stimulus money, state universities should discipline their spending. She is correct.

Higher education is currently the third highest general fund budget area,[32] behind Medicaid and prison spending. Despite relatively stagnant growth this decade in state higher education appropriations,[33] evidence suggests that for many decades, overall revenues and spending by these institutions have greatly exceeded inflation. For example, a 2007 Mackinac Center Policy Brief co-authored by Ohio University Distinguished Professor of Economics Richard Vedder found that as Michigan was sliding into a "one-state recession" between 2000 and 2004, revenues per full-time equivalent student were higher at the end of that period for every state university except Ferris State.[34]

Similarly, the Mackinac Center's 1996 and 2004 state budget studies both calculated that the rate of increase in higher education spending had far exceeded the rate of increase in enrollment and inflation.[35] Those studies recommended retroactively indexing spending to enrollment and inflation, which would encourage state universities to increase productivity. The 2004 study also noted that between 1985 and 2002, average tuition and fees increased from approximately $1,786 per student to $5,365, or 73 percent more than what would have been expected if the charges had just kept pace with inflation.[36]

These trends have continued. The amount of tuition and fees plus state operations funding received by the 15 state universities increased from $3.6 billion in 2004-2005 to approximately $4.3 billion in 2007-2008.[37] And between the school years 2005-2006 and 2008-2009, average tuition and fees for resident undergrads rose from $6,915 to $8,753, a 26.6 percent increase.[38] It's been tough times for Michigan students, citizens and taxpayers, and it seems appropriate that the recipients of the money feel some of the same pressure to tighten their belts.

As mentioned, notwithstanding the rapid growth in total university revenues, the portion that comes from state appropriations has been relatively flat in recent years. Many argue that if state appropriations were higher, tuition would increase less rapidly, but Vedder's research suggests the contrary:

"You might assume that every time the state legislature gives one dollar more in money per student to the universities that that would lead to one dollar lower tuition charged to the student than otherwise. But the empirical evidence for the United States . . . shows that that is not really true.

"The best I can tell . . . roughly thirty cents out of every new dollar in gross appropriations per student end up in lower tuition charges per student. In other words, the student gets thirty cents relief out of that new dollar. The other seventy cents goes to the universities for ... higher levels of spending of some sort."[39]

University lobbyists and spokespersons also assert that more college graduates and higher education spending are keys to reversing Michigan's economic decline. Yet the 2007 Policy Brief by Vedder provided "strong econometric evidence" based on nationwide statistics covering almost 50 years that state-level higher education appropriations do not positively impact economic growth in the state. "Indeed," wrote Vedder, "greater appropriations for universities are associated with lower state economic growth." He illustrated this finding with case studies of Illinois, Ohio and Michigan.

Advocates of university spending sometimes rely on simplistic "snapshot" comparisons alleging a cause-and-effect relationship between more graduates and higher per-capita state incomes. But multiyear trend data tell a very different story: Between 2001 and 2006, none of the 10 states with the highest proportion of college graduates was also among the 10 states with the fastest growing per-capita personal income. Only four states with an above-average number of college graduates were in the top 10 states with the fastest growing per-capita state gross domestic product.[40]

There is also an issue of fairness in using general tax money to confer benefits on a few. In the Center's 2004 budget study, LaFaive observed that college students who reap the considerable direct benefits of postsecondary education could reasonably be asked to carry the burden of paying for it.[41]

Central to all these concerns about higher education spending is accountability. As the author explained in a May 2006 Detroit News Op-Ed:

"Colleges have little incentive to cut costs, so they don't try very hard to do so. Faculty members receive ever-higher salaries (up 50 percent in inflation-adjusted terms since 1980) and ever-lighter workloads. ... At the University of Michigan, Michigan State University and Wayne State, there was an average of one nonfaculty employee for every nine students in 1977. By 2002, the ratio had increased to one for every seven students."[42]

The author recommended changing state university funding to a standardized per-pupil "foundation grant" system similar to that used for Michigan's public schools, with the money following a student to whichever state school he or she chooses. This would increase accountability by sharpening the incentives for the universities to contain costs and add value to students. If the Legislature wanted to give some schools additional money for research purposes, it could do so.[43]

As the governor's budget recommendation tentatively acknowledged, Michigan can't afford the status quo anymore. The best solution is to change the incentives in a way that forces state universities to increase value and provide more for less. Reduced state subsidies are one step toward that end.

[*] "House Bill No. 4441: Executive Budget Bill (Introduced)," (Michigan House of Representatives, 2009),, (accessed June 1, 2009). On April 2, the Michigan House passed House Bill 4441 with amendments that added the stimulus money and stripped out the no-tuition hike "expectation" (see "MichiganVotes: 2009 House Bill 4441 (Appropriations: 2009-2010 Higher Education Budget)," Mackinac Center for Public Policy, (accessed May 29, 2009).) However, this early in the budget bargaining, the vote marks more of an opening position than a final statement.