Growing Pains

The University of North Carolina system has managed to dodge the budgetary bullet the last couple of years. Unfortunately, now there’s a great, big cannonball headed straight for it, with no more time to get out of the way. At least, that was the impression given by system president Erskine Bowles at the October 6 Board of Governors meeting.

Although the university system has faced cuts to its general operating budget over the past two years, it has still fared better than most other North Carolina government entities. This was due in a large part to a combination of intense lobbying and North Carolina’s traditional affection for the university system.

The UNC system must have its preliminary budget—which includes the requests from the chancellors of the 17 schools in the system—ready in November. Bowles said at the meeting that there was likely a “$3.5 billion hole” in the state’s overall $19 billion budget.

Former governer James Holshouser, an emeritus member of board, broke down the projected deficit: according to Governor Perdue’s office, he said, there is a “shortfall” in tax revenue collections of between 3.5 and 4 percent. Furthermore, he cautioned that two other key sources of revenue are likely to end this year—federal stimulus money (from the 2009 American Recovery and Reinvestment Act) and a temporary state sales tax that runs out at the end of 2010. (He said they added a combined $2.8 billion to the North Carolina budget last year).

Some of the looming fiscal debacle for the university could have been avoided with greater foresight. UNC attempted to continue on the expansionary course it was following before the downturn of 2008, using temporary fixes as well as its popularity with legislators. This failure to recognize the severity of the downturn results from differences in the way the economic downturn is perceived by people on opposite sides of the political spectrum. To the liberal establishment that has historically dominated North Carolina politics, UNC, and currently, the national government, the recession is a temporary event—one that can be overcome through greater government spending and borrowing.

Conservatives on the other hand, have viewed this extended downturn as a sign that the economy—like that of much of Europe—is structured incorrectly, that government spending and debt levels are too high and the economic malaise will continue until drastic reform occurs.  And this latter scenario is becoming more likely the case, as the slump is well into its third year, with no end in sight.

UNC’s strategy was to patch together enough funding and trim around the edges so that it could continue on its pre-recession course. When the economic downturn began, there still was considerable “fat” in the system that could be cut, such as travel expenses and unfilled administrative positions (in April, 2010, Bowles said that 834 of the 935 positions eliminated by the 2009-10 budget were administrative).

In the second year, during the 2010-11 budget session, the system was still able to expand its financial aid program and grow the student population. A $170 million drop in appropriations to the system’s general operating fund did not cause the job losses and cuts to academics that were anticipated, because a massive last-minute tuition hike—over 20 percent for most undergraduate students—offset the reduction.

So now—after exhausting the quick fixes—the university system faces more severe problems than it would have if it had forgone its continued growth. For instance, the escheats fund, which provides $116 million of the $162 million appropriated by the state for need-based financial aid (tuition provides another $122 million), will run dry by 2013 if current expenditures continue, according to Bowles. (The escheats fund gets its money from estates that revert to North Carolina when people die without naming heirs.)

And for the first time in many years, the university system will have to use its political clout and popularity to strictly play defense. Its lobbying efforts to continue its growth-oriented policies were extremely successful last year. For instance, the legislature initially introduced a bill that would cap future enrollment growth at 1 percent annually, but, not only did the bill fail, but the legislature fully funded a 3.1 percent enrollment increase. 

This year, however, the passage of such a bill is more likely. Bowles said that he believed that enrollment growth “will be restricted, almost out of necessity, by the legislature.”

Other past decisions are also forcing further expansion. Bowles cited two new programs that need more money to begin or expand operations: a dental school at East Carolina University, and the joint School of Nanoscience and Nanoengineering at UNC-Greensboro and NC A&T.  

A third expansion item proposed by Bowles suggests that he and the UNC administration have not fully grasped the magnitude of the need for cuts. One of the more wasteful problems in higher education is six-year graduation rates of less than 60 percent. For a state system, this means that taxpayers are funding students who do not significantly improve their skills, and therefore do not reward the state’s generosity by earning higher incomes and paying more taxes, as expected. Putting an end to lax admissions practices would reap large savings.

But instead of raising admissions standards and standards for receiving financial aid, which would enable cuts on the order of at least $100 million, the solution proposed by Bowles will raise costs instead of reducing them. In February, the administration will unveil a plan in which enrollment growth is tied to graduation and retention. But instead of planning on lowering enrollments by rejecting students who are not likely to do well, the plan is to raise retention and graduation rates through intensive “handholding” programs for students who are likely to drop out.

In fact, Bowles proposed that the system ask for more funding from the legislature to expand such programs this year, raising the future cost of taxpayer-subsidized education even higher.

Bowles did call for at least some austerity. He suggested that chancellors’ requests for new construction will likely fall on deaf ears.  He said that any capital spending should be used on the $2.1 million backlog of “deferred maintenance” projects. Holshouser added that UNC-Chapel Hill was doing the right thing by backing away from construction of a new law school at the new Carolina North campus.

Statewide borrowing for either repairs or new construction is an unlikely prospect, Bowles added. He indicated that the state’s debt load probably cannot go much higher without affecting its top bond rating, which permits it to borrow at the best interest rates. Any borrowing will have to be generated locally, depending on the situation of the individually campuses, and paid for by user fees instead of tax revenues.

To its credit, the Bowles administration has shown some fiscal foresight by increasing cost-effective online programs and working with the lower-cost community colleges to improve the transfer process. However, incoming system president Thomas Ross will be forced to make some severe choices right from the start, and will also be facing a less friendly political reality.

One of the political realities that Bowles mentioned at the meeting concerns control of tuition money. In decades past, tuition was treated as revenue by the state, and the legislature distributed it to the different campuses. In recent years, tuition stayed on the specific campuses where it was raised. In the 2009 budget session, the legislature took back control of the scheduled tuition hike for 2010-11, but in the 2010 session, it relented and gave control back to the campuses.

In the next few years, however, the legislature is much more likely to follow through on its attempts to rein in university spending. Not only is the economy forcing it to impose austerity, but there is the possibility of a new Republican majority after the November elections that will not display the same generosity toward public higher education that UNC’s Democratic allies have shown.