Institutions Adrift

Budget Priorities
Feb 24, 2015 · 17 min read

Dealing with Declining State Appropriations at Kentucky’s Regional Comprehensive Universities

State governments have recognized the tremendous importance of higher education since the very beginning of the republic. Indeed, many states boast public universities as old the state government itself. Scarcely anything is more important to assuring a prosperous future for individual citizens and the broader community. The core purpose of colleges and universities is to produce and disseminate knowledge and understanding. They receive generous public support because higher education advances the public good in myriad ways: by preparing young adults to compete in the marketplace, by helping to develop in them a humane and tolerant character, by equipping them to play an active and informed role in the civic life of their communities, by educating civil servants, and by developing new technologies and new solutions to address the problems facing society.

The 2008 financial crash and ensuing recession strained state budgets, many of them already overextended, to the breaking point. To deal with the pressures of declining tax revenue and the urgent need for increased social welfare spending, many states made draconian cuts to higher education funding. The instinct, regrettable to be sure, is not hard to understand. Unlike most state expenses (Medicaid, prisons, public pensions, employment security programs, and K-12 education to name the major ones), post-secondary institutions have a second funding stream available to them: tuition revenue, which is itself subsidized in a variety of ways by the federal government. It is easier for legislators to make cuts to budget areas that can raise revenue another way than it is to cut in areas that are entirely dependent on state appropriations. It is also short sighted. Higher rates of college graduation yield economic dividends down the road in many ways, improving the state’s economy, increasing its tax base, and reducing the number incarcerated by the state or dependent on its income-security and Medicaid programs.

Cuts to higher education were deep in many states. Between 2008 and 2014, inflation-adjusted state appropriations for higher education fell an average of 23% or $2,023 per student. Only two states, Alaska and North Dakota, increased funding to state colleges and universities over the six-year period. Arizona, Louisiana and South Carolina made the largest cuts in percentage terms, each reducing higher education funding by more than 40%.[1]

Coupled with increased competition from for-profit institutions offering online degrees and caps to tuition increases, declining state appropriations created a significant budget challenge for university administrators. Like any other organization facing financial pressures, universities have to balance their budget, which often requires that administrators make difficult strategic decisions to ensure the fiscal health of their institution.

Since strategic decision-making involves the identification and prioritization of the core mission of the institution, one would expect colleges and universities to respond by seeking to educate students more efficiently. In budgetary terms, one would expect to see the proportion of institutional budgets devoted to the core mission of the university — instruction (and to a lesser extent, public service and research) — increase as administrators struggle to trim expenditures without impacting the quality of the education provided to students. In every sector of the economy, difficult times force managers to allocate limited funding to priority functions, those that support the core mission of the organization. When budget cuts and reallocations are necessary, responsible managers cut non-essential spending first.

But is that what we have seen in higher education? Judging from the recent chorus of criticism directed at higher education administrators over their budget priorities, many stakeholders — faculty members, students, parents, alumni, and legislators — believe public universities have lost sight of their core mission in recent years.

How have institutional administrators responded to the challenges posed by the recent economic downturn? The question is amenable to a budgetary analysis given the detailed financial disclosures most public institutions are required to publicize. Taking the regional comprehensive universities in Kentucky as a case study, we find very mixed results.[2]

Kentucky’s cuts to higher education between 2008 and 2014 were somewhat deeper than the national average. In inflation adjusted terms, the Commonwealth reduced funding to public colleges and universities by 25.4%, which amounts to $2,649 per student. Unlike most states in the Union, however, Kentucky did not significantly increase funding to higher education in the 2013–14 budget year. Its 0.3% increase to higher education spending, which amounts to $27 per student, is far below the national average. Most of the 42 states that increased funding to higher education in 2013–14 made a significant investment, raising the state appropriation by an average of 7.2% or $449 per student. In other words, Kentucky institutions faced deeper budget cuts over the crisis period than institutions did in most states; they have not, however, experienced the same relief as the economy has improved.

Facing problems similar to those faced by state institutions across the country, Kentucky’s institutions responded in a variety of ways. Some prioritized instruction and sought to keep tuition increases manageable. Others sought to increase revenues by prioritizing enrollment growth and by permitting dramatic tuition increases.

Data Source

The State of Kentucky makes state universities’ financial data readily available to the public through the Kentucky Council on Post Secondary Education (CPE) website. There, Kentuckians can find reports on tuition and mandatory fees, state appropriations, the distribution of budget expenditures across institutional activities, Full-Time Equivalent (FTE) student enrollment, the breakdown of faculty and staff, etc.

For the purposes of the present analysis of institutional budget priorities, the first four categories are of particular interest. We adopt the 2005–2006 academic year as our baseline because it best represents the priorities of Kentucky’s public universities in a non-crisis budget year that predates the financial crisis. The most recent data available across each of these four categories comes from the 2012–2013 academic year. By comparing the most recent budget allocations to our pre-crisis baseline, we can get a sense of how institutional planners dealt with budget challenges. As such, expenditures and revenues will be adjusted to 2013 values to facilitate accurate comparisons (using the Bureau of Labor Statistic’s inflation factor, 1.2065 from 2005 to 2013).

Eastern Kentucky University (EKU)

In the 2005–06 academic year, tuition and mandatory fees at EKU were $4,660 ($5,622 adjusted); the institution’s FTE enrollment stood at 13,126 students. The state appropriation for the year was $74.89 million ($90.36 million adjusted).

Seven years later, in 2012–2013, tuition and mandatory fees were up by $2,660 to $7,320. FTE enrollment and state appropriates were down: to 12,920 students (-1.6%), and $67.67 million. While the 7-year tuition increase appears quite high (57.1%), the adjusted increase, while still significant, is less shocking (30.2%). Similarly, the decrease in state support, which initially appears manageable (-9.6%), balloons once adjusted for inflation (-25.1%). Notably, on an adjusted percentage basis, this is the largest cut to state appropriations among the five universities examined.

How did EKU’s budget and expenditures change over this same period?

The total budget across all the categories reported to CPE (Instruction, Research, Public Service, Academic Support,[3] Other E & G,[4] and Auxiliary[5]) increased from $263.76 million ($318.23 million adjusted) to $340.62 million, an increase of 29.1%. Adjusted for inflation, the increase amounts to a modest 7%.

Taking a more detailed look at the categories themselves, we see the following adjusted changes: Instruction, up 11.0%; Research, down 59.0%; Public Service, down 20.6%; Academic Support, up 1.6%; Other E & G, up 13.9%; and Auxiliary, up 66.6%.

Kentucky Council on Post Secondary Education Data for Eastern Kentucky University (2005–2013)

Faced with a dramatic decline in state support, EKU appears to have prioritized certain institutional goals over others. In particular, the university sought to protect instruction, the core mission of the university, at the expense of research and public service. This comes across even clearer if one examines the change in expenditures in the instruction category on a per FTE enrollment basis: while EKU spent $6,496 (in constant 2013 dollars) per FTE enrollment in 2005–06, it spent $7,328 in 2012–13, a net increase of $832 per FTE student. As a result, EKU (which ranked third in 2005–06) spent more on instruction per FTE in 2012–2013 student than any other school in the study group. Although EKU’s expenditure on public service declined, it still spends much more on regional outreach and engagement than any of its peers, fully three times more (in per student terms) than second-place NKU. Also notable, EKU had the second lowest increase in the Other E & G category and the highest increase in Auxiliary expenditures as compared to the other regional comprehensive schools in Kentucky. The Auxiliary figures suggest a concerted effort on the part of EKU’s administration to increase the number of revenue generating, self-sustaining activities on campus. Lower levels of E & G spending, moreover, may be an indication of lower expenditures on scholarships, student services, and superfluous amenities designed to attract undergraduates. This may account for its slight decline in enrollment. Most impressive, while EKU’s tuition was third lowest in the state in 2012–13 (and only $36 higher than MSU, which boasts the second lowest tuition rate), it spends significantly more on instruction and public service than any of its sister institutions.

Morehead State University (MSU)

In the 2005–06 academic year, tuition and mandatory fees at MSU were $4,320 ($5,212 adjusted); the institution’s FTE enrollment stood at 7,058 students. The state appropriation that year was $43.43 million ($52.40 million adjusted).

Seven years later, in 2012–2013, tuition and mandatory fees were up $2,964 to $7,284. The institution’s FTE enrollment grew 9.7%, to 7,741 while the state appropriation fell slightly, to $41.02 million. The unadjusted seven-year increase in tuition and mandatory fees is very high (68.6%); the adjusted increase, while lower, nonetheless remains the highest among Kentucky regional comprehensive schools (39.8%). Similarly, the decrease in state support, which initially appears quite manageable (-5.6%), becomes more problematic once adjusted for inflation (-21.7%).

How did MSU’s budget and expenditures change over this same period?

The total budget across all the categories reported to CPE (Instruction, Research, Public Service, Academic Support, Other E & G, and Auxiliary) increased from $160.06 million ($193.11 million adjusted) to $229.47 million, an increase of 43.4%. Adjusted for inflation, MSU’s budget grew by an impressive 18.8%. Only one institution, NKU, saw a greater increase to its total budget in percentage terms during the period examined.

Taking a more detailed look at the spending categories themselves, we see the following adjusted changes: Instruction, down 14.8%; Research, up 7.5%; Public Service, down 45.6%; Academic Support, up 13.3%; Other E & G, up 45.8%; and Auxiliary, up 4.2%.

Kentucky Council on Post Secondary Education Data for Morehead State University (2005–2013)

Overall, MSU saw a steady increase in its budget despite a significant reduction in state support. It achieved this by combining the second highest rate of increase in FTE enrollment (9.7%) and the highest rate of increase in adjusted tuition (39.8%). Notably, the only spending category to keep pace with or exceed the rate of budgetary growth is Other E & G, up 45.8% (more than double the rate of increase reported by any other school in the study group). More concerning, the university cut spending on instruction by 14.8% in adjusted terms. In terms of FTE enrollment, MSU went from spending the most per student on instruction to the least: from $7,350 in 2005–06 to $5,711 today (the lowest expenditure per FTE student in the state by more than $550). Put another way, in what is probably the most significant shift identified in our study, MSU spent $1,639 less per student on instruction in 2012–2013 than it did 7 years prior. If spending on instruction had kept pace with the adjusted rate of budgetary growth, MSU’s expenditure on instruction would have been a staggering $17.43 million higher ($61.63 million). MSU also cut public service more dramatically than any other institution, reducing expenditures on regional engagement and outreach by more than half in adjusted terms over the study period, from $1463 to $726 per FTE student.

Murray State University (MuSU)

In the 2005–06 academic year, tuition and mandatory fees at MuSU were $4,428 ($5,342 adjusted); the institution’s FTE enrollment stood at 8,563 students. The state appropriation that year was $53.05 million ($64.00 million adjusted).

Seven years later, in 2012–2013, tuition and mandatory fees were up $2,412 to $6,840 and FTE enrollment had grown to $8,768 (a 2.4% increase). MuSU’s state appropriation, meanwhile, declined significantly to $48.01 million. While both the unadjusted seven-year increase in tuition and mandatory fees (54.5%) and the adjusted increase (28.0%) are high, they are nonetheless the lowest in the study group. The decrease in state support, which at first glance appears manageable (-9.5%), is among the highest in the state once adjusted for inflation (-25.0%).

How did MuSU’s budget and expenditures change over this same period?

The total budget across all the categories reported to CPE (Instruction, Research, Public Service, Academic Support, Other E & G, and Auxiliary) increased from $139.79 million ($168.66 million adjusted) to $171.11 million, an increase of 22.4%. Adjusted for inflation, MuSU’s budget growth is negligible at 1.5%. No regional comprehensive saw a lower rate of budget growth over the study period.

Taking a more detailed look at the categories themselves, we see the following adjusted changes: Instruction, down 4.4%; Research, down 54.8%; Public Service, up 3.2%; Academic Support, down 3.5%; Other E & G, up 3.6%; and Auxiliary, up 21.5%.

Kentucky Council on Post Secondary Education Data for Murray State University (2005–2013)

Faced with the second most dramatic cut to its state appropriation and the lowest rate of growth in total budget expenditures, MuSU appears to have spread its cuts fairly evenly across its functions, with the notable exception of research. While MuSU increased spending in the Other E & G category the least and saw the third highest increase in Auxiliary expenditures — which may indicate a concerted effort to increase the number of revenue generating, self-sustaining activities on campus — MuSU is one of only two schools to functionally cut its spending on instruction on an adjusted basis. That said, this cut, which amounts to a decrease in spending on instruction of $474 per FTE enrollment, leaves MuSU’s per FTE enrollment spending at $6675, the second highest in the state. MuSU’s appears to have prioritized limiting tuition increases and maintaining high levels of instructional spending over the course of the study period.

Northern Kentucky University (NKU)

In the 2005–06 academic year, tuition and mandatory fees at NKU stood at $4,968 ($5,994 adjusted); its FTE enrollment was 11,030 students. The state appropriation for the year was $46.60 million ($56.23 million adjusted).

Seven years later, in 2012-2013, tuition and mandatory fees were up $3,096 to $8,064; FTE enrollment grew 10.1%, to 12,143. NKU’s state appropriation was almost unchanged, at $46.84 million. Both the unadjusted seven-year increase in tuition and mandatory fees (62.3%) and the adjusted increase (34.5%) are quite high, the second highest among Kentucky regional comprehensive schools. Notably, NKU is the only school to see an increase in funding in unadjusted terms (0.5%); however, this very modest increase represents an effective cut in state support of 16.7% in adjusted terms.

How did NKU’s budget and expenditures change over this same period?

The total budget across all the categories reported to CPE (Instruction, Research, Public Service, Academic Support, Other E & G, and Auxiliary) increased from $150.25 million ($181.27 million adjusted) to $216.03 million, an increase of 43.8%. At 19.2%, the inflation-adjusted figure is the highest among all the regional comprehensive universities examined.

Taking a more detailed look at the categories themselves, we see the following adjusted changes: Instruction, up 13.7%; Research, down 9.2%; Public Service, up 82.8%; Academic Support, up 15.0%; Other E & G, up 18.9%; and Auxiliary, up 27.4%.

Kentucky Council on Post Secondary Education Data for Northern Kentucky University (2005–2013)

While state support decreased, NKU was nevertheless able to grow its budget by 19.2% in constant 2013 dollars. It achieved this by combining the highest level of enrollment growth (10.1%) with the second highest tuition increase in the state. NKU invested new revenues in two primary areas: instruction, which increased by 13.7% on an adjusted basis, and public service, which increased by 82.8%. In terms of FTE enrollment, instructional spending grew to $6,275 per student in 2012-13, up $200 from 2005-06. In spite of the increase, only one institution spends less on instruction per student. NKU also saw the second highest growth in auxiliary expenditures, indicating a push to generate revenue by creating more self-sustaining activities on campus.

Western Kentucky University (WKU)

In the 2005-06 academic year, tuition and mandatory fees at WKU were $5,316 ($6,414 adjusted); the institution’s FTE enrollment stood at 15,295 students. The state appropriation that year was $74.84 million ($90.29 million adjusted).

Seven years later, in 2012-2013, tuition and mandatory fees were up $3,156 to $8,472 and enrollment was up 5% to 16,054. WKU’s state appropriation, meanwhile, actually declined to $72.43 million. Both the unadjusted seven-year increase in tuition and mandatory fees (59.4%) and the adjusted increase (32.1%) are quite high. However, they are only the third highest among Kentucky regional comprehensive schools. Like its regional sisters, WKU experienced a decrease in state support in unadjusted terms (-3.2%). While modest at first glance, the reduction represents an effective 19.8% cut in state support, the second smallest decrease in the study group.

How did WKU’s budget and expenditures change over this same period?

The total budget across all the categories reported to CPE (Instruction, Research, Public Service, Academic Support, Other E & G, and Auxiliary) increased from $236.74 million ($285.63 million adjusted) to $322.45 million, or 36.2%. Adjusted for inflation, the increase stands at 12.9%, the third highest among the institutions examined.

Taking a more detailed look at the categories themselves, we see the following adjusted changes: Instruction, up 9.7%; Research, down 33.0%; Public Service, down 22.3%; Academic Support, up 42.0%; Other E & G, up 21.2%; and Auxiliary, up 19.2%.

Kentucky Council on Post Secondary Education Data for Western Kentucky University (2005–2013)

While WKU saw the smallest reduction in state support, it nonetheless represented a significant budgetary challenge. WKU responded by growing its enrollment and tuition at comparably modest rates. This increased the institution’s overall budget, though less dramatically than MSU’s or NKU’s. WKU chose to protect instruction at the expense of research and public service. It should be noted, however, that while research spending fell 33%, WKU still spends almost twice as much (per FTE student) on research ($969) than its nearest rival. The decision to prioritize instruction and limit tuition increases resulted in a relatively small increase in instructional spending per FTE enrollment. WKU still ranks third in instructional spending, though its increase of $284 dollars per FTE enrollment puts it less than $100 behind second-place Murray State.

Conclusion

All of Kentucky’s regional comprehensive universities faced a significant budgetary challenge when state funding to higher education cratered in 2008. Each institution increased tuition by a sufficient margin to make up the shortfall. Many saw their adjusted budgets increase significantly in spite of state cuts. But that is where the uniformity ends.

Relative Rankings of Kentucky’s Regional Comprehensive Universities

Kentucky’s regional comprehensive institutions took three broad approaches to the crisis.

The “education first” approach is best exemplified by Eastern Kentucky University. EKU boasts the second lowest tuition increase in the Commonwealth over the study period and saw a small enrollment decline. EKU nonetheless increased spending on instruction by $831/ FTE student to become the state leader in the category while maintaining its high investment in public service. In short, EKU did what one would expect responsible managers to do: it prioritized its core mission and made a concerted effort to keep tuition increases down. It increased tuition more than enough to cover the reduction in state support; but it employed the extra revenue to support instruction and outreach, the core mission of the university. Unfortunately, it may have lost students to the universities that cut instruction to invest in student life, scholarships and athletics.

Murray State falls into the same category. It increased tuition less dramatically than any other school in the study group and managed to grow enrollment slightly. Spending on instruction is down in adjusted terms, but not by much. In spite of the reduction, Murray State ranks second in instructional spending, though WKU is close on its heels. Spending on research plummeted, but the reason appears to be the university’s decision to prioritize limiting tuition increases and protecting the instructional budget.

Morehead State University took a very different, “everything but education,” approach. It raised tuition and grew its enrollment significantly. As a result, MSU’s budget increased 43.4% (18.8% in adjusted terms) in spite of appropriations cuts. Only one institution increased its budget and its enrollment more. MSU nonetheless cut spending on instruction and public service more dramatically than any other regional comprehensive in the state. Seven years ago, MSU spent more than any of its peers on instruction (on a per FTE student basis) and the second most on public service. As a result of reallocations during the study period, it ranks last in both categories today. This is easily the most significant shift in budget priorities identified in the study. MSU shifted funding from instruction and public service to Other E & G, presumably in an effort to attract students thereby to increase its enrollment and tuition revenue. Today, MSU spends an astonishing $7,402 more per student than any other institution on student services, athletics, institutional support, operation and maintenance, scholarships and fellowships, and transfers. The disparity in MSU’s spending patterns over the crisis period, as compared to its regional sisters, makes it a good candidate for a more detailed budgetary analysis.

NKU and WKU, two of the three largest regional comprehensives, drifted toward a middle path. Both institutions increased their tuition rates; and both saw significant enrollment growth, 10.1% at NKU and 5.0% at WKU. Both universities increased funding to instruction modestly and cut research funding, but this is a natural consequence of growing enrollment more than it is the result of a decision to prioritize education. Per FTE student spending on instruction did increase at both schools, but only by about $200; this would be commendable if tuition had not increased by 60% or more on both campuses (34.5% at NKU in adjusted terms, and 32.1% at WKU). More concerning, recent budget pressures led both institutions to increase their budget allocation to Other E & G by more than they increased their instructional budgets, a disparity that is wider at WKU. WKU and NKY rank 3rd and 4th in instructional spending, up one place respectively from 7 years ago. Their improved standing is mostly due to cratering instructional spending at MSU, which fell to last in the rankings, not to a decision to prioritize teaching by administrators at WKU or NKY.

Faced with declining state appropriations, all of the KY universities in the study group raised tuition dramatically. Although the cost of an education went up everywhere, only one institution (EKU) increased the amount it spends on instruction per FTE student significantly and demonstrated a concerted effort to limit tuition increases. In general, our findings suggest that declining state appropriations in Kentucky tended to increase the total cost of a student’s education while diminishing the proportion of it spent on instruction. Why? We speculate that reduced state appropriations drive universities to compete for students and their tuition dollars. As colleges and universities become more dependent on tuition revenue to balance their budgets, administrators have a strong incentive to shift money from instruction (which students undervalue) to the bells and whistles students appear to prioritize when deciding which institution to attend. In other words, state funding cuts to higher education have consequences that go beyond skyrocketing tuition rates. Budget pressure can lead state institutions to deemphasize instruction, the core purpose of a university. This bodes ill for the future of those institutions and the states they serve. EKU proves that strong leadership can resist the forces that have led many administrators to depreciate education, but at the cost of risking declining enrollment. In most cases, however, institutions risk drifting away from their core mission as they struggle to survive in a difficult fiscal environment. State legislators should thus restore higher education funding—not only to reduce graduates’ increasing debt burden, but to prevent the further deterioration of public universities.

The authors of this study are two faculty members at a Kentucky institution concerned about the negative effects of declining state appropriations on the quality of higher education in the state.

[1] Michael Mitchell, Vincent Palacios, and Michael Leachman, “States Are Still Funding Higher Education Below Pre-Recession Levels.” Center for Budget and Policy Priorities. http://www.cbpp.org/files/5-1-14sfp.pdf.

[2] The following analysis excludes the University of Louisville and the University of Kentucky because, as research intensive universities, their mission and funding differ greatly from their regional comprehensive counterparts. Kentucky State University is also excluded because of its unique situation as a historically Black, land grant institution.

[3] Includes expenditures for libraries.

[4] Includes expenditures for student services, institutional support, operation and maintenance, scholarships and fellowships, and transfers.

[5] Auxiliary services are supposed to be self-sustaining and revenue neutral.

    Budget Priorities

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    Concerned with the impact of declining state support on institutions of higher education and their students. We need to invest in the future.

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