Special Edition ~ March 2001

By George M. Dennison

During the 1990s, the state of Montana altered the way it funds its higher education system. Early in the decade, state funds supported the education of resident and nonresident students, although not to the same extent. Thus, at The University of Montana-Missoula, state funds accounted for roughly 70 percent of the support for the educational programs and approximately 41 percent of the total budget, including research, auxiliaries, and other self-supporting activities.

In 1992, the state began to reduce the support that went to nonresident students, with one exception, the Western Undergraduate Exchange Program, an innovative effort to promote resource sharing among participating states. It actually works as a scholarship program and allows selected students to attend college in another state and pay only 150 percent of resident tuition rather than the full cost of the education. The participating states seek to maintain a balance between incoming and out-going students. Before 1992, however, Montana colleges and universities had allowed the balance to shift drastically in favor of incoming students. By 1995, the State Board of Regents had restored the balance.

The second change came in the wake of the successful effort to restructure the Montana University System in 1994-95. The regents grouped all of the four-year campuses and the five former vocational-technical centers into two universities: The University of Montana-Missoula, Montana Tech of The University of Montana, Western Montana College of The University of Montana, and the Helena College of Technology of The University of Montana; and Montana State University-Bozeman, Montana State University-Billings, Montana State University-Northern, and Montana State University-Great Falls College of Technology. Three of the former vocational-technical centers became colleges within the four-year institutions -- Missoula, Butte and Billings.

The funding arrangement adopted for the restructured system rested on two premises: The state paid for the number of residents the two universities agreed to educate, using estimates as close as possible to anticipated numbers, with the intent of bringing the state contribution to 75 percent of the cost of the education; and the universities established nonresident tuition at 100 percent of the cost of the education and had the discretion to educate as many nonresidents as possible up to the limits of physical capacity, subject to annual estimates of anticipated nonresident enrollments.

To enforce these policies, the regents agreed to return funds to the state for resident students fewer than the appropriated number and to redistribute tuition revenue received from nonresident students more than 2 percent above the estimated number on a campus. These two enforcement mechanisms prevented the universities from overestimating resident student numbers in order to secure additional state funding because they had to return funds if they failed to educate the estimated number. They also couldn't overenroll nonresident students as a means of justifying new facilities since they lost tuition revenue associated with the nonresident enrollments more than 2 percent above the estimated number by campus.

Lump-sum payments
The final component of the new funding approach involved a lump-sum appropriation by the Legislature to the regents and reallocation to the two universities by the regents in accordance with a funding model based upon the cost of education by discipline and student level. Under the cost of the education funding model, the methodology involved used peer data to compute the cost of educating each student by discipline and level to establish the tuition contribution and then to aggregate the costs for resident students to calculate an allocation for each campus from the lump-sum appropriation. In theory, the approach looked toward full funding at 100 percent of the funding model, with the result that the campuses would receive the same amount for each student -- the combination of the allocation of state funds and tuition for resident students and tuition for nonresident students -- thus preventing an incentive to substitute nonresident students for resident students. Moreover, the approach allowed tuition to float, by campus, based on the difference between the dollar amount appropriated per resident student and the computed cost of the education by campus. However, three intervening variables seriously affected the function of the cost-of-education funding model.

Not keeping pace
First, state appropriations failed to keep pace with the rising cost of education as determined by peer comparisons and inflation. The funding model assumed state appropriations would contribute 75 percent of the cost of educating a resident student, with the cost varying by discipline and student level. Because state appropriations failed to keep pace, the Montana University System actually received some $6 million dollars less in 2000 than in 1992, while resident enrollments increased by 522 full-time equivalent students. After taking inflation into account, the University System lost 23 percent in the purchasing power of the appropriated funds between 1992 and 2000.

Second, the regents allowed tuition to rise, but not at the rate required to meet the escalating costs of education and compensate for inadequate state appropriations. Moreover, the regents adopted equal percentage increases in tuition by campus, with the result that some campuses fell farther behind in the effort to meet the rising costs of delivering the education because the cost differed by campus in accordance with the different arrays of disciplines represented. To deal with the widening gap between available resources and real costs, campuses resorted to various expedients. Some imposed salary freezes, thus forcing faculty and administrators to forgo income while the campuses used the savings to cover operating and other expenses. Some reallocated funds from the operation and maintenance of facilities to sustain the academic programs. Still others delayed searches for regular faculty and employed temporary instructors, in many cases jeopardizing program quality over the long term.

Most either suspended or eliminated programs to reduce costs. All squeezed administrative costs as much as possible to meet instructional expenses and struggled to balance their budgets by relying on one-time-only efforts while hoping for an appropriate state response to save them from having to continue such actions year after year.

Third, the universities and their affiliated campuses resorted to unrealistic enrollment estimates to establish their budgets. For understandable but nonetheless counterproductive reasons, they tended to accept optimistic projections because of the revenue potential involved, and they budgeted very close to the margin with little, if any, reserves to protect them against enrollment fluctuations. For whatever reason, resident and nonresident enrollments did not rise as the universities anticipated, even though the high school cohort group continued to increase. Predictably, the piper insisted upon payment even when enrollment projections proved inflated and the campuses had no reserves. Because of having to return funds to the state when resident enrollments failed to meet optimistic targets or having to reduce budgets when nonresident enrollment projections went unmet, all the campuses except the Colleges of Technology have experienced severe budget problems during the last three years.

State of crisis
As a result, the Universities and their affiliated campuses find themselves in a state of crisis. The failure of the state to make adequate investments in higher education stands as the basic cause of the crisis. During 2000 the Legislative Fiscal Division conducted an analysis of funding for higher education in seven western states and reported that Montana appropriates $2,629 less per full-time equivalent (students enrolled for 30 credits per year) student than the AVERAGE appropriated by these seven states -- not the actual appropriated amounts, but the AVERAGE -- calculated by dividing the total appropriation by the number of full-time equivalent students. On the other hand, the average tuition revenue per full-time equivalent student that supports Montana institutions -- computed by dividing total tuition revenue by the number of full-time equivalent students -- ranks second only to Oregon.

Moreover, the tuition charged by the Montana University System increased by 102 percent between 1992 and 2000 (as mentioned, during the same period state appropriations decreased by $6 million). With the exception of institutions in North Dakota, institutions in the remaining six Western states spent from 12 percent to just over 60 percent more per student than Montana institutions. For North Dakota, relatively low tuition keeps the expenditure level down.

Solution to success
To address this critical situation, the Montana University System has requested that the state appropriate $500 more per resident full-time-equivalent student for each year of the coming biennium. If the state accepts that request and provides the funding requested, nonresident tuition would have to increase by the same amount plus any increase in resident tuition unless the state alters its policy on subsidizing nonresident students. Even so, it would take five years -- not two --just to reach the AVERAGE appropriated in the seven Western states. While the $500 per student increase appears large, totaling some $37 million over the biennium without counting pay increases and other inflationary adjustments, such an investment makes a great deal of sense if all the discussion about the need for economic development in Montana reflects more than empty rhetoric.

A national trend
In that regard, recent data indicate that across the country higher education's share of Gross Domestic Product has been slipping since 1993. This is the first time since 1952 that the combined efforts of federal, state and local taxpayers and families have produced five consecutive years of declining shares of GDP devoted to higher education investments.

Between 1993 and 1998, higher education's share of GDP declined from 1.83 percent to 1.71 percent. Had it remained constant as a percentage of GDP, the investment in higher education would now be $10.2 billion more nationwide. This declining social investment in higher education has occurred at precisely the same time that the world economy has undergone radical change, moving, as Alan Greenspan commented, from the manufacturing to the conceptual economy. The analysts agree that there is now good evidence that we are under-investing in higher education, with apparent surpluses of workers with high school educations and less, and shortages of workers with college educations or more. Just so in Montana.

Education investment works
Of particular importance to Montana, the states that have made investments in higher education have fared well in the new, highly competitive, conceptual economy -- states such as Oregon, Idaho, Utah, Kentucky, Louisiana, Arkansas, Alabama, North Carolina, and even Mississippi. As the president pro tempore of the North Carolina State Senate explained, "We made the universities and community colleges top priority. Because of these investments, the students stay home and work here."

Even those who do not attend college benefit from the restructured and vibrant economy. The benefits of investments in higher education accrue to the traditional sectors of the economy as well. Those who study the economy by sector note that productivity increases have made possible the new prosperity without inflation. Productivity increases have resulted from the application of new technology to old challenges, even in the extractive industries. However, the development and application of new technology depends directly upon investment in higher education.

Those who find disturbing the fact that the average annual income in Montana ranks third from the bottom among the 50 states need to take heed. We cannot raise the income level unless we make the necessary investment. Experience in other states makes very clear the direct relationship between the level of investment in higher education and the average annual income. It should come as no surprise to anyone that Montana lags far behind in both rankings. We have the responsibility and the opportunity to do something about that situation for our own benefit and our children's future.

Research equals development
I believe that the value of such an investment becomes apparent after a moment's reflection about the state's experience with its universities' research programs. Before 1989, the state claimed the indirect cost recoveries associated with funded research on the campuses. Some people view indirect cost recoveries as profit, failing to recognize the induced costs on campuses associated with the conduct of research. Most research contracts and grants provide funds to pay the direct costs of the research and cover the indirect costs as well. Indirect costs actually constitute reimbursements for costs already incurred on the campuses in the conduct of the research. By sequestering the indirect cost recoveries, the state placed obstacles in the way of successful researchers on the campuses.

Beginning in 1990, the Legislature adopted legislation that left the indirect cost recoveries on the campuses where the funded research occurred, so long as the campuses invested the recoveries in ways calculated to fuel the research enterprise. In that year, the funded research conducted on campuses of the Montana University System barely reached $30 million. A decade later, the total exceeded $100 million. With a simple investment decision, the state fostered the creation of a significant industry, surely an exercise in economic development. Since roughly half of the research funds pays salaries, the income tax revenue to the state makes a considerable difference.

One might present a similar argument concerning the contributions of the nonresident students to the state economy. A conservative estimate of the annual expenditures by nonresident students exceeds $100 million. Thus, while these students enhance the campuses by bringing diversity to the student population, they also represent a substantial boost to the state economy.

Investment makes a difference. We all know the truth of that observation from personal experience. We must rely on it as we develop public policy to promote the appropriate development of the state. Experience shows that investments in higher education combined with strict requirements for accountability will serve the state and its people well.

President George M. Dennison has led The University of Montana since 1990.

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