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Thu May 1, 2014
Professor Says Higher Ed Spending Brings Long Term Benefits
Illinois budget cutting has targeted higher education for more than a decade. But a professor who has studied funding for colleges says it actually leads to more state financial problems.
Walter McMahon is a Professor Emeritus of Economics at the University of Illinois. He says more investment would serve the state well in the future.
McMahon's column below on higher education spending is part of the Institute of Government and Public Affairs' Illinois Budget Policy Toolbox.
After 16 years of cuts in state support, universities and colleges across Illinois have reached a tipping point. Significant improvements in internal efficiency have already been made. The funding cuts in Illinois have led to 50 to 100 percent tuition increases, shifts to temporary professors and teaching assistants, and now declining enrollment. Especially worrisome, with inadequate need-based financial aid, the proportion of college students coming from middle-income families has declined sharply.
The 64 percent of adult Illinoisans who never attended college have lower real earnings than they had in 1980, whereas college graduates had a 48 percent increase from 1980 to 2008. The recession slowed college earnings growth, but it also reduced high school earnings.
If personal and corporate state income tax rates fall next January as scheduled to 3.75 and 5.75 percent respectively, overall state spending will have to drop by 8.5 percent to balance the budget. Proportionate decreases in higher education will lead to continued erosion of the system. Further increases in tuition and cuts in need-based financial aid would lead to an estimated 9,181 fewer associate degrees and 14,541 fewer bachelor’s degrees granted each year. Colleges and universities will be forced to hire more part time faculty, and recruit more high tuition foreign and out-of-state--and fewer Illinois—students.
What would this mean for Illinois?
Associate degrees currently yield a 16.6 percent rate of return based on increased earnings, and bachelor’s degrees yield 14.1 percent. Both of these are about double the 7.33 percent 10-year average for S&P 500 index funds, a standard benchmark. In fact, few investments have such a large sustained return for growth of personal income—both for the individual and society.
With fewer persons with increased earnings, income growth statewide would decline by about $462 million per year. This lost economic activity would reduce state sales and income tax revenue by $41.5 million annually. State spending on Medicaid, K-12 education, welfare relief, and prison costs can be expected to rise about $190 million annually in due course.
This is because graduates use their college-based skills not just at work, but twice as many hours each week at home and in the community, time that improves their health, children’s test scores, personal savings, asset management, civic institutions, life expectancy, tax revenue, crime rates, and their community. Based on how much it would cost to produce these outcomes by other means, the non-monetary benefits from this time is worth about $1,480 million annually. Including this, the rates of return to development are about twice those cited. These effects also reduce state budget costs.
Overall, an 8.5 percent cut in higher education would lower state revenues by $41.5 million and eventually increase Medicaid, welfare, and prison costs, increasing Illinois’ annual budget deficit by about $24 million. In short, cutting higher education eventually makes Illinois’ fiscal crisis worse.
Higher education spending is very different than most other parts of the state budget. It does not support consumption, but is rather an investment in human capital. It encourages shared investment by families, yielding lifetimes of higher earnings and societal benefits. Higher education investment also contributes directly to the state’s fiscal well being through increased sales and income tax revenues and reduced healthcare and prison spending.
Rather than cutting, Illinois should consider increasing investment in higher education as the economy recovers. An 8.5 percent increase would have positive effects on growth, development, and the budget. Looking ahead, this is the most effective policy option available to Illinois for fixing the budget deficit, supporting earnings growth and development, and fostering a middle class equipped to keep up with technological advances.
McMahon's column on investment in higher education is part the Institute of Government and Public Affairs' Illinois Budget Policy Toolbox series.