Higher Education Finance

Comprehensive two-year colleges emerged at the beginning of the twentieth century during a period of experimentation in all sectors of American education. In keeping with the spirit of the time, the community college–initially known as the junior college–developed as a result of increasing demand by the American public for accessible and affordable education. This unique institution, in which the associate degree is most commonly the highest degree awarded, quickly became a bridge between work and further education for traditional and adult learner populations. Throughout this entry, the term community college will be used to refer to public comprehensive two-year colleges. Included in this designation will be publicly supported associate degree institutions, technical colleges, and branch campuses. Private two-year colleges, usually recognized as junior colleges, are not included in this designation.

Historical Background

Beginning with Joliet Junior College in 1901, community colleges evolved in three distinct ways: as an upward extension of public school systems, as a downward extension of the university, and through voter approval. In the first half-century, most community and junior colleges were influenced in structure and operation by the public school systems and boards of education of the states in which they were located. According to a 2000 report from the American Association of Community Colleges, growth was steady during the first half of the twentieth century, with 648 institutions enrolling 168,000 students in 1950. With the expansion of the economy following World War II and growing public need for access to postsecondary education, community college campuses and enrollments grew at an explosive pace. By 1975, the number of two-year colleges (known variously as community colleges, junior colleges, technical colleges, associate degree institutions, branch campuses, etc.) had grown to 1,230 institutions enrolling 3,836,000 students. In fall 1999, the latest year for which official statistics are available, twoyear colleges numbered 1,600 institutions and enrolled 5,339,000 students–one out of every two students enrolling in college on a first-time basis and 44 percent of all undergraduate students enrolled in American colleges and universities.

Although much of this growth has been attributed to changing demographic and economic conditions, it was also a product of public sentiment that favored the development of community colleges as a distinct educational entity within a local service region. Citizens committed to the idea of an affordable college within easy reach approved bond and tax referenda that provided capital and operating support at a record pace between 1960 and 1990. Local support not only paved the way for large-scale growth, it also positioned community colleges as a different type of institution from other postsecondary institutions. Public community colleges in most states receive significantly more support from local tax funds than do for-profit and baccalaureate degree granting institutions. And, as a reflection of their status as community-based institutions emphasizing access and convenience, tuition and student fees are typically lower than student charges at other institutions.

Financing Community and Junior Colleges

In significant ways, the financing of community and junior colleges is similar to college and university finance. All two-year institutions charge tuition and fees. They generate support from gifts and grants and the proportion of support they get from state funds is more like that received by baccalaureate colleges than K–12 school systems. State funds are often distributed to public community colleges by formula rather than by direct appropriation from the state legislature, which is the typical procedure used for state financing of four-year colleges and universities. Private junior colleges, of course, rely much more heavily on tuition than do public community colleges. In this respect, they are more like privately controlled four-year colleges and universities.

By looking at the methods of financing community and junior colleges over the six-year period from academic year 1991–1992 through academic year 1996–1997, one can gain an understanding of both the sources of funding for these colleges and the shifts that have occurred over time. Inclusion of funding data for four-year colleges and universities in the analysis provides a framework for comparison of resources allocated to different institutions by source over a common reporting period.

Sources of revenue. The status and methods of financing current operations between 1991–1992 and 1996–1997 for community and junior colleges and four-year colleges are illustrated in Table 1. (In interpreting these data, it is important to note that Pell revenue is not included in tabulations of support from the federal government.) Several observations of note can be gleaned from this information. One is that public community colleges are holding steadily to the principle that funds from state appropriations, local tax, and student payments in the form of tuition should be the primary sources of revenue in support of operations. For independent junior colleges–smaller in number and enrollment–tuition and fees are the primary source of operating income. When public and private two-year colleges are considered together, state, local, and student sources of income constitute, in combined form, more than 80 percent of the operating income. It appears that tuition and local tax are providing a proportionally greater share of support for operations in 1996–1997 compared to their level in 1991–1992 and that state appropriations are declining as a source of support for operations. The percentage of revenue through state appropriations shows a shift from 45 percent in 1991–1992 to 42 percent in 1996–1997. Student tuition and fees accounted for 21 percent of operating revenue in 1991–1992 and 23 percent in 1996–1997. In 1991–1992, local tax constituted 17 percent of operating revenue; by 1996–1997, it had increased to 18 percent.

Support provided through the federal government remained stable at roughly five percent between 1991–1992 and 1996–1997 for community and junior colleges. Gifts, private grants, and contracts account for only one percent of the revenue received by community colleges. This income source has become increasingly important to two-year colleges, however, as indicated in the 24 percent gain registered between 1991–1992 and 1996–1997.

Finally, the table illustrates the great variation in proportion of funding from different sources for public community colleges and four-year colleges. Public and private four-year colleges show a markedly higher reliance on student tuition and fees to support operations in comparison to community colleges. Additionally, they rely more on the federal government, auxiliary enterprises, private gifts and grants, and other revenue to finance their operations. Public community colleges, in contrast, rely more on local tax support. The information in Table 2 shows the proportion of operating revenues from different funding sources on a state-by-state basis for two-year colleges in 1996–1997. Public community colleges in thirty-five states received local tax support for their operations ranging from $.02 per capita in Washington to $56.57 per capita in Arizona. Public community colleges in states like Arizona, Wisconsin, California, and Illinois received a healthy portion of their operating revenue–in excess of one-third–from local tax while colleges in states like Connecticut, Indiana, Massachusetts, and Utah relied exclusively on state appropriations and student charges for operating support.

An interesting sidebar to the data in Table 1 is the basic difference in the way public and private two-year colleges are financed. Detailed information showing the distribution of revenue by source and type of institution for 1996–1997 (Table 3) reveal that private junior colleges get about two-thirds of their operating revenue from student tuition and fees. The only other significant sources of operating funds are private gifts, grants, and contracts and revenue earned through auxiliary enterprises. This pattern is similar to that found in privately controlled four-year colleges and universities, but even here significant differences are noted. Private four-year colleges and universities receive only about 43 percent of their income from student tuition and fees and more than one-third of their total revenue from gifts, grants, and contracts and other sources such as endowment. Clearly, private junior colleges have much smaller endowments than private four-year colleges on which to draw to support their current operations.

Open access. Student charges are an important source of revenue for all postsecondary institutions. For public community colleges, however, the cost of education is an important part of their mission. Access to educational opportunity is a defining characteristic for them and keeping

TABLE 1

TABLE 2

the door to opportunity open through low tuition is both a philosophical premise and a practical necessity.

Comparative student charges for two-year colleges and four-year colleges are shown in Table 4. Over the 22-year period from academic year 1976–1977

TABLE 3

TABLE 4

to academic year 1997–1998, tuition and fees in two-year colleges have, on the average, amounted to one-quarter of those for four-year colleges. This differential has widened over time as state appropriations to four-year colleges and universities have diminished in periods of economic fluctuation and tuition has increased to reduce the gap between income and expenditures. In 1976–1977, for example, the average cost of tuition and fees for a full-time student in two-year colleges ($946) approximated 28 percent of the average cost for students enrolled in four-year colleges ($3,329). By 1997–1998, the disparity had increased with the cost of tuition and fees in two-year colleges ($1,592) averaging 25 percent of those for four-year colleges ($6,329). When private two-and four-year colleges are removed from the analysis leaving only public institutions, the cost differential diminishes considerably with tuition and fees at public community colleges ($1,318) averaging 42 percent of those at public colleges and universities ($3,110).

Expenditures. Generally speaking, budgets and financial reports of colleges and universities are developed and analyzed according to categories of educational and general expenses. Subdivisions are commonly used to organize and report expenditures; the most common are instruction, research, public service, academic support, student services, institutional support, plant maintenance and operations, scholarships and fellowships, and transfers.

The information in Table 5 shows that public community colleges employ all nine expenditure subdivisions. As would be expected in any educational institution, the largest category of expenditure is instruction with 43 percent of all educational and general expenditures classified in this category in 1996–1997. When costs for academic support, student services, and institutional support are added to instructional cost, they account for more than threequarters of all expenditures. These costs, for the most part, are attributable to personnel, which is why two-year colleges, and colleges and universities in general, are described as labor intensive organizations.

It is interesting to note that the categories of cost fluctuate as a percentage of expenditures as cost allocations

TABLE 5

change over time. For example, total expenditures for instruction increased by 25 percent between 1991–1992 and 1996–1997 whereas expenditures for academic support increased by 40 per cent, expenditures for student services by 38 percent, and expenditures for instructional support by 39

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percent. This could be a reflection of the tendency of community colleges to shift more of the instructional workload to part-time faculty as a method for decreasing fixed costs and increasing flexibility. Proportionally larger costs for academic support could indicate that more resources are needed to acquire advanced technology in support of classroom in struction and to provide tutorial assistance to students experiencing academic difficulty. Rising costs for student services and institutional support could be a result of more extensive efforts by community colleges to market programs and services to a wide array of audiences and to make more and better services available using technology and specialized support staff.

Out of these trends a greater focus is emerging on using resources more effectively through strategic planning. In this approach to allocating resources, priorities are determined through gathering and analyzing information about trends in the external environment and internal capabilities. Resources are allocated to these priorities in the operating budget and institutions measure their performance against achievement criteria established for each priority as a method for determining their progress in reaching stated goals. The fiscal impact that each priority has on expenditure categories in the operating budget is then analyzed to determine cost benefits and additional resource requirements. What are the costs of implementation associated with each priority? How much revenue did the priority generate? What additional resources need to be allocated to fully achieve the priority?

Critical Issues

A number of important finance and finance-related issues will challenge public community colleges, and to some extent private junior colleges, in the decade ahead. These issues can be organized and described in four categories: limits to institutional development, changing market conditions, new sources of support, and accountability.

Limits to institutional development. Public community colleges have been criticized in past years for having an unfocused mission–for being "all things to all people." As their mission has expanded to encompass new activities such as workforce development and corporate training, the requirement for resources to support these activities, in addition to a comprehensive battery of current programs and services, has stretched to a breaking point. Where will new and additional resources come from to support an expanding mission? Will contraction be necessary to free up resources for new activities? How will institutions support a comprehensive mission in a period when resources are drying up? Planning will become important to institutions in the future as a method to make better decisions with fewer resources.

Changing market conditions. Shifting economic conditions and resulting impacts on programs and services are a fact of life for community colleges. In forty-three states, state revenues lag behind projections; governors and legislatures in states including California, Florida, Virginia, and Washington are faced with filling budget holes of $1 billion. In most states, deep cuts in state expenditures once again mean higher education is facing a sharp-edged budget ax. Cuts in higher education will be used to balance overall state budgets in the short-term.

Demography will exert further pressure on states. By 2020, the retirement of baby boomers will cause an exodus from the workforce of 46 million workers with at least some postsecondary education. Replacing these workers will be an estimated 49 million new adults with at least some college education–a net gain of 3 million. But this gain of 3 million will not be nearly enough. The Bureau of Labor Statistics projects a 22 percent increase in jobs that will require at least some college by 2008. If the trend holds through 2020, roughly 15 million new jobs that require postsecondary-educated workers will be created. In sum, the nation faces a deficit of approximately 12 million workers with at least some college education by 2020. Community colleges will be expected to address this shortage by providing new and additional programs and services. In a tight economy, however, where will the resources come from to develop and sustain new services?

New sources of support. As state spending for higher education declines in periods of economic recession, new sources of revenue will need to be found or community colleges will face the uncomfortable task of reducing their operating budgets. Many colleges are ill-prepared for budgetary reduction: systems for review of programs and services are not in place, performance information is not available, and the culture of most institutions is focused on growth, not decline. To avoid the trauma of reduction, many colleges will turn to new sources of revenue such as training dollars from the corporate sector and private gifts and grants. Resources in these arenas are historically tight, however, in periods of economic recession. What new sources of support will be available to community colleges to finance growth? When will colleges develop a capability to contract–to grow smaller through program and service reductions–as a method to allocate resources to new programs and services?

Accountability. Community colleges, and colleges and universities in general, have been criticized for performing quite poorly over time in reporting performance and cost information to the public. Legislators are reluctant to provide blank checks to institutions that are not accountable for what they do or how they spend public money. What is the effect of poor or weak reporting systems on institutional credibility? What new standards will elected officials put in place to improve accountability? What steps will institutions take to improve cost and performance reporting in a way that will help the public understand what they do?

The Future

What does the future hold for finance in two-year colleges? In the public sector, the long-standing reliance on state appropriations and local tax funds and on student tuition and fees as primary sources of operating income will change dramatically. As economic conditions fluctuate, private sources of revenue will become more important as part of the operating budget. Institutions will seek to establish partnerships as a method for acquiring new revenue and reducing costs.

Community colleges in the twenty-first century will be more complex than their predecessors. At the same time, they will have less mass; many of the functions now handled in-house will be performed through alliances and networks. Shifting market opportunities and continuously evolving external networks will make these organizations dynamic. The power of an institution's "brand" will become increasingly important and new approaches to planning and budgeting will develop around the idea of brand. Budgeting will take on strategic importance as a method for transforming institutions in a turbulent market.