State Funding: Financial Risks Facing Higher Education
As the headlines point to states taking a more active role in financing higher education, I'd like to share a summary of the latest State Higher Education Finance (SHEF) Report produced by the State Higher Education Executive Officers Association (SHEEO).
This report provides valuable insights into the current status of state financial support for public colleges and universities nationwide. It can be leveraged as a risk management tool to help guide financial decision-making. I also wanted to spotlight the Arizona statistics, as I live there, and what I found out was very eye-opening.
Key highlights:
According to the latest State Higher Education Finance (SHEF) Report, state and local government funding for higher education totaled $139.1 billion in fiscal year 2024.
States contributed $124.3 billion (a 7.7% increase), and local governments in 32 states contributed $14.8 billion to higher education (a 4.7% increase).
Inflation-adjusted education appropriations per full-time equivalent (FTE) student increased 0.8%, exceeding pre-pandemic (2019) levels by 17.9%.
Challenges continue:
However, despite the positive trends in the report, net tuition revenue per FTE dropped by 3.7% and has fallen 8.1% over the past five years.
Total public FTE enrollment grew 2.9%, the first uptick in over a decade, but enrollment remains 10.8% below its 2011 peak.
It is no surprise that federal stimulus funding, which was allocated by the states, has declined 63.3% in FY2024, amplifying future budgetary constraints for institutions that rely heavily on federal support.
What are the financial and operational risks?
Reliance on volatile state appropriations may result in tuition increases. This risk factor, combined with potential decreases in federal funding and research grants, can make college more costly.
Widening disparities in state funding levels may impact some states more than others, resulting in inequities between wealthy and less affluent communities.
Program cuts may be needed to shore up finances.
Risks stemming from deferred maintenance may increase.
Staffing cuts may be needed to help offset the loss of funding.
State appropriations - Arizona, the outlier
Almost all states rely on state tax appropriations to fund higher education initiatives, although the distribution of state and local higher education funding sources varies across the nation. According to the SHEF report, "In 2024, all but one state (Arizona) had the majority of higher education funding from state tax appropriations. Arizona is also the only state where a large proportion (42.4%) of higher education funding came from local appropriations."
Further, the report noted that 22 states' appropriations to higher education remain below Great Recession levels, with Arizona leading the pack at 40.3% below 2008 levels, Iowa (29.9% below), and Delaware (29.8% below).
What does this mean for higher education in Arizona?
Arizona's decentralized funding structure- where appropriations are shifted to local governments such as counties and municipalities - may lead to wider disparities in institutional priorities impacting student access and affordability.
Further, Arizona already ranks among the lowest states for per-student public funding. Any additional cuts in federal support, such as Pell Grants, research funding, or stimulus-style relief, could impact already strained budgets, particularly for community colleges.
Arizona lawmakers already approved a $1.4 billion deficit reduction plan in the 2024 state budget, which included substantial cuts to higher education. Community colleges statewide were set to lose approximately $54 million in state funding. Maricopa County Community Colleges, the largest district in the state, would have faced a significant reduction in its budget under the proposal. However, voters came out and passed Proposition 486, showing confidence in the value of the community college system.
Risk mitigations
As state funding remains volatile and stimulus funding continues to wane, fiscal pressures will mount across public higher education institutions. Proactive, long-term investment planning is necessary to mitigate these financial risks. So what can be done?
Institutions must invest in relevant academic programming that aligns with local workforce needs.
Institutions can engage in more public-private partnerships to help mitigate budget shortfalls.
Institutions can invest in community engagement to help grow public trust and voter support for higher education funding.
Institutions can expand philanthropic initiatives to grow endowments and planned giving.
Bottom line:
The fiscal environment facing higher education is undoubtedly challenging. However, there are ways to face these challenges proactively. These risk mitigations can not only bolster an institution's finances but also promote the value of higher education and build trust, not just in Arizona but in the US as a whole.
