The Stimulus as Savior?

That depends on where your college is. As states decide how to spend tens of billions in federal funds, higher education stands to benefit in some states, but get shortchanged in New York and elsewhere.
March 27, 2009

Public college leaders in many states are looking to the recently enacted federal stimulus package as a lifeline, if not a savior, in the worst economic climate in more than a generation. But keep those expectations in check: As the murky picture surrounding the stimulus funds slowly begins to clear, the evidence so far suggests that higher education may fare well in some states, but could receive relatively little in others.

New York is looking diciest. Unless state officials intervene and redirect other funds to higher education, those close to the situation say, the City University and State University of New York systems could receive as little as $40 million of the $2.5 to $3 billion in federal stimulus funds that the state is receiving for education, with the rest of the money going to elementary and secondary education.

Money from the American Recovery and Reinvestment Act, the massive economic stimulus law that Congress and the Obama administration crafted last month, will flow to colleges and students in many ways -- to institutions in billions of dollars in research grants and job training money, and to students in the form of Pell Grants, work study funds, and expanded tax breaks for tuition and other costs. But among the biggest individual pieces of the stimulus package is a $53.6 billion state stabilization fund. The fund is designed to ward off job losses for school and college employees and tuition increases for students primarily by backfilling cuts that states have had (or will have) to make to their education budgets in the 2009-11 fiscal years. The federal government will divide about $48 billion of the total funds to states to allocate themselves; the U.S. Education Department will allocate the other $5 billion in incentive grants to states.

States must use 81.8 percent of the stabilization fund money they receive directly to restore cuts made in elementary and secondary education and higher education programs, under a series of restrictions and accountability requirements designed to ensure that the funds are spent efficiently and that, to the extent possible, they minimize tuition growth. (The other 18.2 percent of each state's allocation is to be distributed at the discretion of governors to deal with "education, public safety, and other government services, including education and public or private educational facilities." More on this pool of funds later.)

More than a month after the stimulus bill passed, and with the Education Department's own deadline for disbursing the first pool of funds quickly approaching, a great deal of uncertainty remains about how the money will flow to schools and colleges in various states, for a variety of reasons. First, the rules governing how states can and must spend their share of money from the stabilization fund are complicated and are continually being refined and explained by the U.S. Education Department. Second, because of the interplay of factors -- how states have funded K-12 and higher education in recent years, where states are in their 2009-10 budgeting process, etc. -- the situation looks different in just about every state, so trying to summarize the overall picture in any coherent way is just about impossible.

Still, enough states have begun announcing their plans for using and distributing the stabilization fund money that it can be said with reasonable authority that it appears as if the dollars will, as intended by Congress and President Obama, avoid (or at least delay) major higher education budget cuts (and job losses) in states such as Massachusetts and Tennessee, among others.

Filling Holes, Forestalling Cuts

In both of those states, the stabilization fund will -- if legislatures enact governors' proposals -- do exactly what the stimulus legislation meant for it to do: fill holes left in public higher education budgets by state cuts.

Under a plan announced Tuesday by Gov. Deval Patrick in Massachusetts, the state would use $162 million in funds from the stabilization fund to restore two budget cuts made midway through the current 2008-9 fiscal year and another round of cuts planned for the 2009-10 fiscal year that begins in July. The money -- about $81.6 million for the University of Massachusetts system, $36.7 million for the state's other four-year colleges, and $40.3 million for Massachusetts' community colleges -- would forestall a planned $1,500 tuition increase at UMass, as well as increases anticipated at other public institutions.

"The stabilization fund had the requirement that we restore funding as the No. 1 priority, with the goal of trying to stop the bleeding on potential budget cuts and repair the damages from the cuts we've already seen," said Jonathan Palumbo, communications director for the Massachusetts Executive Office of Education. That agency primarily oversees elementary and secondary education, but is involved in allocating the stimulus stabilization funds because they are to be distributed to schools as well as colleges.

A similar pattern emerged this week in Tennessee, which is due about $970 million from the state stabilization fund. The budget proposed by Gov. Phil Bredesen would give Tennessee's public colleges $470 million of the $770 million fund that is supposed to be spent on filling holes in education budgets -- $100 million to replace cuts the institutions suffered in the current year, and another $370 million to make up for expected reductions in the 2009-10 and 2010-11 fiscal years.

In addition, the budget would give public colleges another $136 million -- money the state itself must produce to fulfill the stimulus legislation's mandate that states continue to spend at least as much on higher education as they did in 2006, says Russ Deaton, director of fiscal policy & facilities analysis at the Tennessee Higher Education Commission. (That "maintenance of effort" provision, as it is called, has put the stimulus funds at particular risk in those states that saw their state aid for higher education drop significantly since 2006; Nevada has already sought a waiver from the requirement, and Rhode Island is reportedly planning to seek one.)

The total of $600 million in one-time funds Bredesen is proposing is surely good news for Tennessee's public colleges, but their officials, while relieved, are hardly jumping for joy, says Deaton. That's because they know, he says, that the federal monies forestall, but do not erase, the reality that the colleges will eventually have to learn to live with 15 percent less money in their base operating budgets.

"There is no cavalry coming on the horizon after the federal money runs out" in two and a half years, Deaton says. "We keep searching for the right metaphor, but it's like rather than having to jump off a cliff, we get to hang glide off a cliff. The cliff is still going to occur when the federal money runs out, but we get to transition to that lower base over 27 months rather than immediately in three months. And hopefully that means that we can be more deliberate in thinking about how we are going to change the way we operate, rather than doing it all at once."

The Flip Side

If the situations in Massachusetts and Tennessee, where heavily damaging cuts are being delayed, can be viewed as the bright side in public higher education financing, New York is poised to be the alternative. No officials in the state are looking to do harm to colleges or students, and in fact right now they are scrambling to find a way to help.

But as of now, because of how the stabilization fund was structured by Congress and the state's mechanisms for funding public education, higher education is prepared to get short shrift in a serious way. Here's why:

Based on the Education Department's preliminary allocations of stabilization fund money, New York is due to receive a total of about $3 billion, with about $2.5 billion for K-12 and higher education and about $500 million to be distributed at Gov. David Paterson's discretion. But based on state officials' interpretation of the requirements of the stimulus law, the state's K-12 districts are due a full $2.5 billion -- $700 million in monies cut from their 2009 budget, and $1.8 billion that a recently enacted law directed the state to spend on elementary and secondary education in the current fiscal year to carry out a State Court of Appeals decision mandating equitable spending (which the state, as of now, does not have the money for).

If the amount of money a state needs to fill the holes in its K-12 and higher education budgets exceeds the share of the stabilization fund it is supposed to spend on education (in New York's case, a total of $2.5 billion), the stimulus law dictates that the money be divided proportionally between the two sectors, based on the size of the cuts they face.

That's where the states' public colleges get a raw deal, as its officials see it. From fiscal 2008 to 2009, the CUNY and SUNY systems saw a total of about $215 million cut from their discretionary operating budgets, college officials say. But that decrease was offset by a $170 million increase in fringe benefit payments that the state was contractually obligated to pay to employees. As state officials interpret the formula contained in the stimulus law, higher education would be due just $40 million against nearly $2.5 billion for K-12 to make up for cuts in fiscal 2009.

With the public colleges facing a cut of another $235 million from their operating budgets in 2009-10, on top of the $215 million they consider themselves to have lost in 2008-9, the $40 million wouldn't go very far in staving off major cuts or tuition increases, or both.

Supporters of higher education in New York's legislature -- and even in Congress, where college officials have asked Rep. Timothy Bishop (D-N.Y.) to press state leaders on their behalf -- are hoping that state decision makers will find creative ways to use other parts of the stimulus package to do what the education stabilization fund appears not to be doing in their case.

"No one in New York is trying to stick it to higher education -- it's just that the proposed cuts are so significant for K-12" that it skews the stimulus calculation, Bishop, the New York Congressman and former college administrator, said in an interview. He said he had been in "extensive" discussions with Governor Paterson's office about the prospect of directing toward higher education money from the 18 percent of the stabilization fund set aside for governors' discretionary use (a total of $500 million over two years) or from the billions of dollars in federal Medicaid funds that the stimulus package contains for New York and other states.

"To the extent that [the Medicaid] contributions from the feds exceeds the cuts proposed for health care [in New York], that becomes discretionary money for legislature to spend," Bishop said. "Hopefully through those two areas of flexibility, higher education can receive a piece of that."

Bishop and others may be working against the grain if they're hoping that states' leaders will use funds other than those targeted for higher education to help colleges and universities, given the many competing priorities and constituencies, virtually all of whom see themselves as needy in the current economy.

"It's a little hard now to gauge exactly what states are doing, but what states are not doing is taking the [discretionary] 18 percent of stimulus money and throwing it into higher education," says one state executive branch official, who asked not to be identified. Some colleges seem to have pegged their hearts on deriving those dollars for facilities and other things, but at the end of the day, there are a lot of other priorities in states after that money -- criminal justice, health care, health insurance. I don’t think you’re going to get a lot of new roofs [on college campuses] out of this."

And while the stimulus funds appear poised to help public colleges in many states stave off the harshest cuts and steepest tuition increases in the short term, they are unlikely to dramatically alter the financial picture for state higher education unless state and institutional leaders use the money to restructure and reengineer their operations for a leaner future, experts on public higher education say.

"Anybody who thinks this is going to make life easy is dreaming, but it was never intended to do that," says Paul Lingenfelter, executive director of the State Higher Education Executive Officers. "This is an effort to make things manageable, to reduce the damage of this downturn, and to really stimulate an upturn economically and promote innovation on campuses."

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