Abstract
Over the last century, functions and activities of the higher education sector in the USA have changed dramatically. As the premise of institutional funding remains unchanged, states' burden on higher education funding continues to grow. With increasing pressure for more funding from state agencies coupled with the growing demand for ‘less government,’ states find it difficult to support higher education institutions at an ever-increasing level. Higher education administrators are quick to blame state legislators for lack of sufficient funds for institutional growth and quality improvement. Heavy dependence on state support is quite detrimental to operational viability of higher education institutions. Therefore, securing financial stability of higher education institutions should be a major priority among higher education policymakers. In this context, this paper presents a new funding formula that can be adopted by any state.
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Notes
This paper was prepared while I was at the College of Education, East Tennessee State University, USA. The views expressed do in no way represent the official position of East Tennessee State University, Tennessee Board of Regents, Tennessee Higher Education Commission, or any other state institution in any of the states in the USA. The ideas presented in this paper solely represent the author's viewpoint. I greatly appreciate Lou Ann Sevier's help in preparing this paper.
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Appendices
Appendix A
Let X t be the amount of funding a state allocates to its higher education institutions in year t. For any given institution, the annual state allocation of funds is given by X it . So, the total allocation of state funds is equal to the sum of allocation to each individual institution, that is,
In the new formula, in year t+1, the amount of state allocation for higher education institutions is based on the average of the three previous consecutive years' allocations, which is,
Similarly, a higher education institution's state allocation for the year t+1 will be
The dollar amount of state allocation of funds to its higher education institutions in year t+1 will continue to be applied for year t+2 and year t+3.
In the year t+4, state will reduce its allocation of funds by −x%. For example, the discount rate is set at 0.1%. So, in the year t+4, the amount of allocation will be equal to
Similarly, in year t+5, the amount of state allocation will be
Equations (4) and (5) are equal.
Similarly, Equations (3),(4),(5) can be equally applied to any institution within the state simply by adding institutional subscript, that is,
So, for any given year, the amount of state allocation of funds to higher education would be equal to
For the state, for any given institution of higher education, and for any given year, this funding formula can predict the amount of state fund allocation. For example, if we assume a 0.1% rate of discount and state allocation of funds to its higher education institutions in year t+3 as $1,000,000,000, then in t+4 state allocation would be
Likewise, in t+23 state allocation of funds to its higher education institutions will be
Similarly, if a higher education institution in year t+3 receives $100,000,000 as state allocated funds, then in year t+4 this institution will receive,
In year t+23 this institution will receive,
In this example, this institution will lose about $2,000,000 in the year t+23. To generate $2,000,000 in year t+23, this institution must plan to raise about 20 million dollars (assuming a 10% rate of return on invested funds) by year t+22. In effect, in every consecutive year, this institution must plan to raise an additional one million dollars more than the amount of dollars raised in a previous year. One caveat is in order. This funding formula does not take into account the inflation factor. This is not an omission. Destiny of higher education must be placed in the hands of higher education administrators and not on taxpayers. It is the responsibility of higher education administrators to plan operational activities by taking into account inflationary effects. This formula guarantees a steady stream of funds from state governments to higher education institutions and operational decisions are left for each institution.
Appendix B
Table 2 provides 20-year simulated data for a state that provides a total of $1,000,000,000 for its higher education institutions in year t+3, using two discount rates, 0.1 and 0.2% where X is the discount multiplier and Z is the state total allocation for Higher Education.
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Edirisooriya, G. State Funding of Higher Education: A New Formula. High Educ Policy 16, 121–133 (2003). https://doi.org/10.1057/palgrave.hep.8300006
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DOI: https://doi.org/10.1057/palgrave.hep.8300006