Higher Education Appropriations and Public Universities: Role of Medicaid and the Business Cycle

Higher Education Plays a critical role in supporting macroeconomic growth and, for individual students, represents a gateway to future economic success. Higher education also exerts significant influence on a regional and local basis, in terms of both economic and civic development. For example, the quality of a region's higher education institutions and the proportion of college graduates in the population appear to be important determinants of per capita income growth.¹ Research spillovers from universities are also somewhat geographically localized.² The status of the nation's overall higher education system and local higher education institutions is thus of crucial importance to major urban areas.

In the United States, state governments historically have taken the lead in financing higher education. But over the past twenty years, state government support for higher education has gradually waned, and the share of higher education expenditures subsidized by state appropriations has declined. One result of declining state support has been the widely publicized rise in tuition at public institutions.³ However, there is a second result, which is less well recognized, namely a widening gap in expenditures per student and in average faculty salaries between public and private institutions. The relative decline in spending per student at public universities appears to be exerting an adverse effect on the quality of faculty, students, and education delivered at such institutions. Since roughly three-quarters of college students are enrolled at public institutions, any decline in the relative quality of the nation's public universities could have significant implications.

In this paper, we examine interactions between state appropriations for higher education and other state budget items (especially Medicaid) and the business cycle. We document the substantial decline in state support for higher education over the past two decades, explore the business cycle's effects on higher education subsidies, and compare the cyclical patterns in higher education spending with the cyclical patterns in other types of spending. We also examine the relationship between the Medicaid program and state higher education spending. In addition, we look at how declining state appropriations for higher education affect the relative quality of public higher education institutions.

State Support for Higher Education

The decline in state support for higher education over the past several decades manifests itself in several common measures.⁴ Figure 1, which shows state appropriations for higher education relative to personal income,⁵ demonstrates state appropriations have fallen from an average of roughly $8.50 per $1,000 in personal income in 1977, to an average of $6.80 in 2003. Since personal income amounted to $9 trillion in 2003, state appropriations would have been about $15 billion higher in 2003 if appropriations had been maintained at the ratio to personal income that existed in 1977.⁶