The Little Budget that Could (Avoid New Taxes)

Recent rumors of the University of North Carolina’s demise were greatly exaggerated (with apologies to Mark Twain).  Despite some dire predictions to the contrary, public higher education in North Carolina as we know it will not end this year on account of budget cuts.

In fact, with the budget that the legislature presented to Governor Perdue last week, there might not be all that much real change to the UNC system. (While Perdue has vetoed it, the budget bill passed through both houses of the legislature with veto-proof majorities, so it will very likely become law.)

This state of affairs did not come about easily. At the end of 2010, it appeared that the state would need to find $3.4 billion in budget cuts to make up for a loss of tax revenues and federal stimulus money (from $21.9 billion estimated to maintain services at 2010-11 levels). The UNC system—long the darling of Democratic legislative majorities—was the fattest target for reducing. The new Republican majority in the legislature appeared to some to resemble Madame DeFarge in Charles Dickens’ A Tale of Two Cities, silently but obsessively knitting a list of the intended targets of her revenge. (Others hoped the new legislators would view the need to cut expenditures as an opportunity to reform higher education.) 

Various scenarios of impending doom and gloom were bandied about, starting with former UNC system president Erskine Bowles’ comment at the November Board of Governors meeting that an entire campus might need to be shuttered.

But instead of enacting “Doomsday,” the legislature crafted a compromise budget that addresses some long-term problems. It will excite nobody, but UNC system President Thomas Ross said that the system will “survive” the cuts and small government advocates can live with them as well.

But back in January, when the legislative session began, the predictions were pretty wild. Recently, Ross described how, at that time, there had been discussions of cuts to higher education as high as 30 percent.

Then the legislature buckled down and got serious. The House of Representatives education appropriations committee drafted a higher education budget reducing university appropriations by 21 percent. The House eventually settled on a 15.5 percent reduction before passing it on to the Senate.

Throughout this process, the governor, UNC officials, and the media hammered away at the legislators. The university system also launched an all-out lobbying effort, employing lobbyists, members of various boards, alumni, administrators, and even students to push for higher funding. One major point of contention was the Republicans’ insistence on allowing a one-cent temporary sales tax to elapse; keeping it, as the Governor did in her $19.9 million budget proposal, would have allowed cuts to be less severe.

Eventually, with slightly higher-than-expected tax revenues and some creativity on the part of legislators, the legislature sent a $19.7 million budget to the governor’s office last week. That’s a $2 billion reduction rather than the anticipated $3.4 billion, a cut of approximately 9 percent from the $21.9 billion needed to maintain current services.  

Higher education’s share was a bit higher, but that was to be expected since its budget has outpaced all other state spending in recent years. UNC is getting a $406.6 million (14.6 percent) cut from a $2.78 billion continuation budget. The continuation budget is what the budget would be if the legislature made no changes, with automatic increases and the loss of non-recurring items from the previous year’s budget figured in.

While this reduction is a considerable amount, it will not cause UNC to overhaul the way it conducts business. Consider that many of the faculty positions are unfilled, meaning that there will be far fewer layoffs than the 3,200 positions estimated by the UNC general administration (probably many fewer than 1,500). At a House education appropriations subcommittee meeting, member Paul Stam further put the lay-offs into perspective: the UNC system has an annual turnover rate of 10 percent of its 48,000 member workforce, meaning that roughly 4,800 employees leave the system each year as a natural process.

And because the entire reduction and a little extra—$413 million—is in the form of “management flexibility,” in which the UNC system and the individual universities will decide the actual cuts, the real impact will be unknown for some time. (The loss in management flexibility is partly offset by some additions, such as $46.8 million increase for enrollment growth).

The blow to the university will also be softened by tuition raises put into place by the UNC Board of Governors in February. For 2011-12, the increases will average 6.8 percent—raising revenues system-wide by roughly $63.8 million.

Furthermore, a specific $35 million reduction to the UNC need-based financial aid program does not mean the system will suffer an equal drop in revenue. Many students who lose some of their aid will make up the loss by working more, getting a greater family contribution, or by taking loans.

Financial aid was a particular problem area that the new budget addressed in a variety of ways. It had been growing at an unsustainable rate in the last few years; state spending on financial aid and tuition waivers for college students currently exceeds $300 million annually. UNC need-based aid, given solely according to the family income of students, has grown much faster than enrollment, which was growing twice as fast as the population.

To enable this expansion, previous legislatures had shifted the financing of need-based financial aid from the already overburdened General Fund (supported by taxes) to the Escheats Fund (supported by the proceeds of unclaimed estates).  This quick fix was not sustainable; it threatened to kill the goose that laid the golden egg, for the Escheats Fund could not handle the huge demand on its principal and was in danger of disappearing by 2014.

The new budget takes care of this. Overall state appropriations on the UNC need-based aid programs will fall from $162 million to $127 million, mainly due to reduced funding from the Escheats Fund. Providing further relief, $37 million in appropriations from the Escheats Fund will be shifted back to the General Fund.

Need-based financial aid funding will slightly decrease even more next year due to a provision that will limit need-based aid to only 9 semesters (one extra semester beyond the traditional four years) for each student. That will save $301,446 in 2012 and approximately $5 million in 2012-13.

This budget solves still another financial aid problem. Until now, students were told how much financial aid they would receive for the next year in winter or early spring, while the amount of money available was unknown until the budget passed in the summer. This meant that students would occasionally have their financial aid packages adjusted at the last minute before school started. To end this poor timing, this budget “funds forward” $59.9 million dollars, and need-based aid will be henceforth funded a year in advance.

The budget also reduces several programs of financial aid for North Carolina residents attending private colleges located in the state. They are the Legislative Tuition Grants, which are given to all resident private school students, the State Contractual Scholarship Fund, which is need-based aid, and some smaller programs. Together they received $104.5 million in 2010-11; they will receive a 12.3 percent cut for 2011-12, or $12.9 million. In 2012-13, however, these scholarships will be phased out and folded into a single new program, based on need only, with a starting allotment of $81.9 million.

One of the two specific cuts not related to financial aid is a temporary $26 million reduction to the annual $44 million UNC Healthcare gets for indigent care. This was in response to the system’s building up $732 million in unrestricted reserves. The other is part of a two-year phase-out of the annual $12 million appropriation to UNC-TV.  In the first year (2011-12), UNC-TV loses the entire amount, but $10.6 million is restored for just next year. The following year, no money is restored, and the public broadcaster will have to depend on other revenues such as advertising. (This phase-out still depends on the results of an ongoing legislative review, which could lead the legislature to restore some state appropriations on a permanent basis.)

There are few specific increases (besides the $46.8 million for enrollment growth) in the new budget; they total $23 million. For one, the new dental school at East Carolina University will receive an additional $3.5 million on top of its current $11.5 million operating appropriation, some of which will go to create clinics where dental students will provide care to area residents. The dental school will get another $1.5 million on top of this increase in 2012-13.

Given the fiscal realties, this year’s North Carolina higher education budget has both good and bad. Still, it helps to fill the massive deficit without raising taxes—perhaps reason enough to applaud it. And it greatly improved a serious trouble spot in financial aid, which had become a tangled, unsustainable mess of programs.

Final judgment on the budget must be withheld a while longer, though. Its key feature is the decision to give the universities final say on how to implement the entire $413 million reduction. Perhaps it might have been better for the legislature to specifically eliminate some of the most egregious waste, such as a $2 million annual grant to study ocean waves’ potential as an energy source. However, the legislature sought to make the size of the reduction more palatable by giving the university system complete flexibility.

It will be interesting to see whether the system’s administration uses that leverage for real reform, or to avoid it.