While the economy is currently strong, conversations are already beginning about when the tides may turn. Survey data indicates that millions of Americans believe a recession is looming, and some business economists believe a recession is possible before the next presidential election.
Higher education’s relationship with the economy is counter-cyclical. During recessions, state budgets generally struggle to maintain investments in higher education and often make cuts, while enrollments tend to increase. This means that institutions are often called upon to increase capacity and streamline budgets at the same time — a perfect storm that often involves tradeoffs at the campus level.
From a policy perspective, there are three strategies states have pursued to support higher education systems during economic downturns:
- Rainy day funds. Every state has some type of rainy day fund, or a specified pot or pots of money to use when revenues do not meet the state’s expenses. At least two states — Alabama and Indiana — specifically reference education funding within their rainy day fund policies. These policies specify the conditions under which education can make deposits into or withdraw from a rainy day fund.
- Required planning. In anticipation of an economic downturn or in the early stages of a downturn, states may consider requiring institutions or systems of institutions to submit, as part of their budget request, plans for how they would face funding shortfalls. For example, as part of the budget request process, agencies in Florida are required to submit a plan that includes a 10 percent reduction in general revenue and a 10 percent reduction in state funds.
- Federal support. During the most recent economic downturn, states utilized federal dollars provided through the American Recovery and Reinvestment Act of 2009, or ARRA, to support higher education budgets as part of a maintenance of effort provision. For example, in fiscal year 2011, states applied $2.8 billion (in 2011 unadjusted dollars) of ARRA support to higher education. While there is no assurance that the federal government would again supply this funding in a future economic downturn, states made broad use of these dollars when they were provided in 2009.
When revenues to higher education are cut, be it from reduced appropriations or a reduced capacity to generate revenue through tuition, institutions will have one of six main reactions. These include enacting administrative controls, making staffing changes, examining academic offerings, seeking other sources of revenue, increasing advancement efforts and pursuing broad organizational changes. Any state policy around preparing higher education for recessions would do well to outline which institutional response the new policy may provoke.
As states seek approaches to prepare for the next recession, the Education Commission of the States team is here to support. A full response to a question we received on this issue is available here. Don’t hesitate to reach out for consultation on policy plans from your education policy team.