The Win-Win Budget Battle

This year’s North Carolina legislative budget session is entering its high drama stage after Governor Bev Perdue vetoed the legislature’s final version on Friday, June 29. Initially, the session seemed like a noncontroversial affair, but with the Republicans in the House needing some Democrat support to override her veto, the fireworks may be finally starting.

It may even be good for higher education in North Carolina if the budget doesn’t get passed for a long time. In that case, the state will simply continue spending at current levels.  That’s a far cry from the recent past, when the state often spent money on higher education like students armed with their parents’ credit cards on spring break.  As a result, it was forced to make equally wild cuts and tuition increases in the other years.

Taxpayers, administrators, students, and their families can all use a little more budgetary stability than they’ve been getting. Repeating last year’s level of spending certainly introduces some stability.  

The current version of the vetoed budget also offers some consistency. The main reason was because there was little change in revenues, as the legislature rejected raising taxes. As a result, this year’s appropriation differed very little from the amount anticipated in the previous year’s legislative session. In the final tally, the total budget was $20.18 billion, only 1.2 percent higher than the anticipated $19.94 billion for 2012-13. Additionally, whatever extra money that could be found was needed to fill a huge hole in the K-12 budget due to a loss of temporary federal funding.

All parties involved in the process knew these facts coming in. There was some obligatory over-the-top pre-legislative session posturing: the UNC system requested an 8.5 percent raise in their state appropriations—a whopping $216 million. Instead they only got $24.6 million (0.9 percent) more than last year’s $2.54 billion, but UNC system president Thomas Ross issued a statement suggesting that he was largely satisfied.

The community college system got an additional $5 million—a roughly 0.5 percent increase. A spokesperson for the system released the following strategically curt statement in response to a request for comments: “We appreciate the General Assembly’s leadership in working closely with us to support our System’s priorities.  They continue to recognize the value of North Carolina’s Community Colleges.”

Despite the higher education budget’s apparent lack of controversy, it still misses the mark on some key issues. One problem deals with UNC enrollment funding. The system’s original enrollment request was for $17.5 million, but it only received a relatively insignificant $1.4 million. Even that amount seems excessive after looking at the enrollment appropriations for 2011-12 and the actual enrollment.

Additions to the UNC enrollment appropriation are made according to projections—and the dollars doled out last year for 2011-12 far exceeded actual costs. For 2011-12, the system received $46.8 million in anticipation of an increase in the number of students. Yet, overall system enrollment was down:  by the most accepted measure, Fulltime Equivalent Students (in which the credits of part-time students added together to equal the credits of one fulltime student), the system lost 761 students in the fall of 2011 from the previous year. Undergraduate enrollment fell at nine of the 16 schools, while graduate enrollment fell at 12 schools.

But none of that $46.8 million was given back to the state. Just the opposite, UNC is getting an additional $1.4 million for 2012-13—even though the system’s projections for the next school year show another slight drop in enrollment. The reason for the positive appropriation despite lower enrollment is because much of the drop in enrollment will be for students in the less-expensive programs and schools, while the more expensive schools and programs increased enrollment slightly.

UNC’s consistent gains in enrollment funding despite losses in enrollment raise a question of fairness concerning the community colleges. That system suffered a big drop in enrollment after explosive growth the previous two years. Since the system’s funding is based on actual attendance figures, it had $12.1 million taken away.

If the legislature wants to give UNC money, there are ways to do that. But these enrollment games are the wrong way to go about it. They especially provide a bad incentive for the system to grow at a time when it is finally starting to limit its growth (or an incentive to make questionable projections about enrollment).

Enrollment in the UNC system has been a point of contention in recent years. It grew much faster than the population for a decade, until last year. This occurred despite questions of whether the state’s economy can handle the additional expense of educating more students in the high-cost university system.

One proposed solution to the state’s mounting higher education costs has been to limit enrollment growth at UNC schools, with the community colleges picking up the extra students. Having the community colleges do so makes financial sense, for their cost per academic student is roughly 30-40 percent that of the UNC system. 

The House version of the UNC budget, which did not survive a compromise between the two chambers of the legislature, did the sensible thing. It gave no money to UNC for enrollment growth, sending a loud clear message: “Don’t grow!”

Another questionable aspect of the final budget is that it again cuts financial aid money from general appropriations and takes it from the state’s Escheats Fund (created from unclaimed estate money). Using the Escheats Fund in this manner caused a major problem several years ago, when the amount taken for UNC financial aid threatened to deplete the fund.

To prevent that from recurring, the state was forced to shift financial aid support back to the general fund in 2011, at the very time state revenues were plummeting. This wreaked havoc with many students’ financial aid plans. While only $5 million more will be taken from the Escheats Fund this year, such creative budgeting could once again become a habitual means to increase spending unsustainably.

The legislature missed a couple of opportunities to “spin off” UNC entities that are capable of developing financial independence. Last year, UNC-TV’s $10.6 million appropriations were made year–to-year instead of automatic and placed under review. This year, $9.1 million was again made automatic. Doing so may be a mistake. Chances are that the media outlet could have gradually been weaned off the government teat to become self-sufficient. Now, with $9.1 million coming from the state every year, it has less incentive to become independent.

The UNC Health Care system dodged a bullet. The House version eliminated the last of its $18 million annual appropriation. Instead, its only cut was $3 million to the UNC School of Medicine for medical education.

This is another example of unnecessary subsidies to an entity that is capable of self-support. UNC Health Care’s relationship to the state has been a cause for controversy, with private competitors claiming that its state agency status and subsidies give UNC an unfair advantage in the fight for customers.

The budget restores $9.2 million from last year’s management flexibility reduction, which can be used however the university system sees fit. The legislature also provided roughly $11.4 million to enable UNC schools to operate newly constructed buildings, such as N.C. State University’s new library on its Centennial Campus.

North Carolina’s private colleges got additional money for financial aid, $281, 517 recurring and $4.5 million for next year only. Proponents of these measures claim that they reduce overall state spending on higher education by encouraging students to attend private colleges; since private schools receive much less government funding (if any) than public schools do, the state’s overall higher education burden is reduced. However, critics say that this “quick fix” to fight off rising tuition costs interferes with private schools’ independence, which may not be best for higher education in the long run, and could also contribute to rising tuition.

The community colleges received a one-time $5 million appropriation to prepare long-term unemployed North Carolina residents with job training and training in “employability skills.” 

All in all, the budget has some good points. Living within our state means is crucial for our future prosperity, and perhaps, except for the shift of $5 million to the Escheats Fund, this budget achieves that goal. It also provides some badly needed stability, rather than the erratic lurching in all directions that has characterized previous higher education appropriations. If the economy comes back, legislators should restrain themselves from rapidly increasing higher education spending just because they can—as the last couple of years have shown, the correction can be pretty painful.