On March 27, Congress passed their third legislative response to the COVID-19 pandemic. Among the health and economic provisions included in that bill, known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, were emergency measures to mitigate financial fallout on college students, including emergency financial aid and temporary loan relief. However, Congress left a number of higher education needs unmet, and now faces those challenges in its next round of legislating. In particular, any “phase four” efforts by Congress must address the near- and medium-term effects on state budgets. Health care and education funding make up the bulk of state spending, and as a result, will need more federal support from the next response package.
The CARES Act and State Higher Education Funding
The bill passed late last month, the CARES Act, includes about $31 billion for education. Of that, about $3 billion will be sent to governors to spend on either higher education or secondary education expenses. Another $14 billion will be sent directly to institutions to cover new costs related to COVID-19, with half of that funding earmarked for emergency grants directly to students. The rest could stay with institutions to cover other needs that have arisen, such as costs associated with the shift to online learning. This $14 billion will be allocated based on a formula that weights the needs of institutions that serve Pell recipients more heavily, and the calculation excludes students who were enrolled exclusively online before the COVID-19 outbreak (on the assumption that the costs facing those schools has not changed).
The law also provides for $150 billion in funding to state and local governments to cover the costs of responding to COVID-19 that were not otherwise budgeted for. The funding helps states with urgent needs and also mitigates the likelihood and severity of immediate cuts to other budget items such as education.
Anticipated Declines in State Funding and Rise in Urgent Expenditures
The funds provided in the CARES Act were a good start, but they’re just that—a start. We don’t know yet how severe this economic downturn will be, and economists have warned that prior recessions may have significant limitations as a guide for this year’s: the COVID-19 outbreak is akin to “a hurricane hitting every place in the United States … every day for weeks, months, or perhaps even a year.” Some economists expect the unemployment rate to rise to 15 percent by midyear; other projections suggest that the real unemployment rate already reached 20 percent in March, though the official numbers do not reflect that, due to when the March unemployment survey took place.
The funds provided in the CARES Act were a good start, but they’re just that—a start.
The impacts of the crisis will vary by state, and will depend on the local severity of the pandemic, the related economic decline and loss of income tax revenue, the make-up of the state’s tax base (for example, states such as California and New York rely disproportionately on capital gains taxes, which can dissipate quickly), and existing debts such as state pensions obligations, as economists have projected funds may see an average loss of 21 percent this fiscal year.
Not every state has yet produced revised revenue estimates, but the revisions that have been released so far are foreboding, and states are already cutting or restricting spending. For example:
- Colorado expects a loss of $396 million for the current fiscal year and up to $1.8 billion for the next fiscal year.
- New Mexico predicts a revenue loss of 20 to 27 percent next fiscal year.
- New Jersey is freezing current year expenditures: $71 million in college operating aid, or about half of the total, is being frozen as part of a $920 million spending freeze.
- Illinois is projecting an $8 billion decline over the next few fiscal years.
- Missouri just reported that they will restrict $180 million in spending, including for higher education—with more potential for cuts in the future.
- New York has projected a revenue hole as large as $9 to $15 billion next fiscal year.
Though different in many respects, the Great Recession is a useful point of reference due to its recency and severity. In one quarter, income taxes were 18 percent lower than they had been one year prior, and over the course of the Recession, sales tax revenue fell by a record amount, nearly 10 percent. According to data from the Annual Survey of State Government Tax Collections, during the Great Recession, state tax revenue fell from $780 billion in fiscal year 2008 to $705 billion in fiscal year 2010, a decline of 9.5 percent.
At the same time, state budgets may face significant new expenses, including but not limited to direct health care costs from the pandemic. The Medicaid program costs states $228 billion per year, and while the Families First Act provided for a brief reprieve in state funding (a 6.2-percent federal medical assistance percentage (FMAP) increase, translating to about $35 billion to states), states also expect an uptick in enrollment due to high unemployment rates and uninsurance rate increases. And while the CARES Act provided significant new federal unemployment insurance dollars for previously ineligible workers, states will also see a significant uptick in people with claims qualifying for state dollars that stretch their unemployment insurance (UI) trust funds.
Impact on State Education Budgets
The impact of the pandemic and the ensuing recession on state higher education budgets in particular may similarly be difficult to project. In addition to lower tax revenue, the short-term hit taken by other funding sources and new long-term enrollment trends will also impact funding needs. While some schools are wary of decreasing enrollment (and thus less tuition revenue, particularly from international students, who tend to pay high tuition) this fall, perhaps as a result of the need to attend class online, travel restrictions, or because of lost family income that limits a students ability to pay for school, historically, a recession has resulted in an overall increase in enrollment.
Indeed, as state revenue declined, higher education enrollment also increased as unemployed people went back to school to look for new opportunities: enrollment during the Recession was 33 percent higher than it was in 2006.
An analysis of data from the State Higher Education Executive Officers Association shows that inflation-adjusted appropriations per full-time equivalent student (FTE) peaked at $8,512 in fiscal year 2008 and bottomed at $6,459 in fiscal year 2012, a 24.1-percent decline.
The increased strain created by high enrollment may also be accompanied by an increased need for financial aid, as these new students and/or their families are far less likely to be able to afford tuition in the face of job loss or reductions in hours worked.
In other words, just as state revenue declines, schools may also see additional revenue declines in the near term due to fewer tuition dollars —followed by future strains on capacity and the need to fund expanded operating support as people return to school in higher numbers.
Experience from the American Recovery and Reinvestment Act
The federal government provided some state funding for education in response to the Great Recession. The funding in the American Recovery and Reinvestment Act (ARRA) provided $100 billion for educational costs, including about $40 billion through a state stabilization fund. Of those dollars, states spent about $9.7 billion on higher education. Congress attached a maintenance of effort requirement for spending on institutions, but did not include spending on state grant programs as a part of that requirement.
The maintenance of effort (MOE) provision in ARRA did appear to stem state cuts in appropriations to higher education institutions. However, subsequent research shows that states did cut state financial aid dollars over that time period, and while states maintained their nominal funding levels for institutional operating dollars for the years the MOE was in effect, they lost significant ground when one accounts for inflation and enrollment increases.
Phase 4 Funding: Supporting the States and Students
With all of the above in mind, as Congress considers its efforts to support states during this economic decline, higher education-specific funding should meet four core criteria.
First, the investment needs to be sizable enough to account for unexpected costs due to the pandemic, future enrollment increases, and the increase in financial need facing students enrolling in school and applying for state and institutional financial aid. The reduction in spending during the Recession led to a loss of $30.6 billion in the five years after the Recession (closer to $40 billion in real dollars), and ARRA made up for just $9.7 billion of it. Given the steep unemployment claims data, revenue losses during the oncoming recession may end up being higher.
Second, it needs to ensure that states maintain a reasonable level of funding. Ideally, it would include a maintenance of effort that discourages cuts to operational and financial aid funding, and as state revenue turns around, to bring their funding back up to at least the per student funding they provided before the pandemic hit.
Third, the dollars should be directed to both operational funding and financial aid at public institutions, with a greater share going to schools that serve more Pell grant recipients. Those institutions tend to be underfunded, have fewer options to handle budget shortfalls to begin with (such as endowment support), and are more likely to see increases in enrollment in the wake of a recession.
Finally, it should include “automatic stabilizer” provisions to provide additional dollars if unemployment persists or deepens beyond initial projections. Because of the unique nature of this economic crisis, estimates of the impact may not adequately account for either the depth of the crisis or the medium-term impact on enrollment decisions.
Provide Future Students the Support They Need
Leadership in the House of Representatives has already begun discussion about what their next funding package could look like. Ensuring that states have the support to serve students facing the economic fallout of this crisis must be a part of it.