Major State Spending Items that Compete with Higher Education for ResourcesBack to table of contents
Medicaid is an entitlement; as a practical matter, as enrollments rise, states must raise their expenditures, at least in the short run. Approximately two-thirds of Medicaid spending is for the elderly and disabled. Demographic forces will put increased pressure on the elderly component of this spending. Between 2014 and 2034, the population aged sixty-five and over is expected to grow by approximately 2.6 percent annually, compared with 0.8 percent for the population overall.13 Further, many economists believe that health care will continue to struggle with “excess cost growth,” in which costs grow more rapidly than the economy as a whole. Moody’s Analytics projects that total state Medicaid spending will grow faster than state tax revenue in every year from 2017 through 2024.14
Primary and Secondary Education
The 2007 recession was so severe that states cut inflation-adjusted spending on K–12 education by approximately 4 percent between 2008 and 2013.15 The National Center on Education Statistics projects that the number of pupils will rise 0.6 percent annually from 2015 through 2024.16 Given the depth of recent state cuts in primary and secondary education and anticipated growth in the number of pupils, states will face pressure to raise spending on primary and secondary education in coming years.
State and local government pensions for all workers (not just higher education) are underfunded by at least $1.1 trillion according to conservative estimates.17 While some states are trying to cut these benefits, with varying degrees of success, states are likely to have to pay the vast majority of this obligation. In aggregate, states and localities are underpaying actuarially determined contributions by approximately $21 billion annually, and under some scenarios, expenditure needs could be much higher still.18 This will place great pressure on state finances in many states, crowding out funds that might otherwise be available for higher education.
While it is difficult to obtain objective measures of infrastructure needs, it is clear that states and localities cut back on this spending very sharply during the Great Recession and in the years that followed. Between the fourth quarter of 2007 and the fourth quarter of 2014, real gross investment in infrastructure by state and local governments fell by 18 percent, and net investment (after allowing for capital consumption) plummeted more than 55 percent.19
States feel great pressure to increase spending for infrastructure. In fact, it is one of the few activities for which the public appears willing to pay higher taxes. A recent national poll by the Mineta Transportation Institute found that 69 percent of respondents would support a ten cent gas tax increase for improved road maintenance.20
13 Donald Boyd, The Potential Impact of Alternative Health Care Spending Scenarios on Future State and Local Government Budgets, The Future of U.S. Health Care Spending Conference, April 11, 2014 (Washington, D.C.: Engelberg Center for Health Care Reform at Brookings, 2014).
14 Dan White and Sarah Crane, Crowded Out: The Outlook for State Higher Education Spending (New York: Moody’s Analytics, 2015).
15 Donald J. Boyd and Lucy Dadayan, The Economy Recovers While State Finances Lag, The Blinken Report (Albany, N.Y.: Nelson A. Rockefeller Institute of Government, June 2015), http://www.rockinst.org/pdf/government_finance/2015-06-23-Blinken_Report_Two.pdf.
16 Analysis of Institute of Education Sciences, National Center for Education Statistics, “Digest of Education Statistics 2014,” Table 203.10, https://nces.ed.gov/programs/digest/d14/tables/dt14_203.10.asp.
17 Donald J. Boyd and Peter J. Kiernan, Strengthening the Security of Public Sector Defined Benefit Plans, The Blinken Report (Albany, N.Y.: Nelson A. Rockefeller Institute of Government, January 2014), http://www.rockinst.org/pdf/government_finance/2014-01-Blinken_Report_One.pdf.
18 Don Boyd, “National Economic Forces Affecting State Budgets and Pension Systems,” Governor’s Forum: Pensions at the Harris School, University of Chicago, Gleacher Center, Chicago, April 27, 2015.
19 Boyd and Dadayan, The Economy Recovers While State Finances Lag.
20 More than a dozen states considered gas tax increases in 2015, and the Nebraska legislature even overrode a gubernatorial veto of a gas tax increase. See ibid.