Of Pennies and Pounds

Education Secretary Arne Duncan recently characterized reduced state spending on public colleges as “penny wise and pound foolish,” indicating that he believes that the long-term effects of such strategies are likely to be very bad for state economies.

He’s likely correct, but there’s a much bigger policy problem that’s causing this to happen, one it’s probably time to address.

According to an article by Eric Kelderman in the Chronicle of Higher Education:

In a speech at the annual policy meeting of the State Higher Education Executive Officers, Mr. Duncan noted that during the recent economic downturn, only four states have increased what they spend, per-student, on higher education. “Disinvestment is not the strategy that other countries are choosing,” he said, comparing the United States’ approach to that of China and Singapore.

The result is that tuition has gone up to replace the state dollars, and middle-class families, especially, are being squeezed by college costs, Mr. Duncan said, citing the association’s recent annual report, which noted that in 2011 state and local spending on higher education hit a 25-year low. “Higher education should not be a luxury for those who can afford it,” he said.

It’s understandable that Duncan wants state governments to spend more to support higher education but, as I’ve explained before, but it’s actually more complicated than that.

State support comes out of taxes. When the economy goes bad states collect less money in taxes. States, however, are legally required to fund certain things. Pension plans, for instance, are usually not things the governor can simply reduce or cut one year. He has to pay for them. To a certain extent this makes sense, but it can be devastating for other items in the state budget.

Add to this the fact that state governments have little incentive to fund state pension plans responsibility. As Sylvester Schieber and Phillip Longman demonstrated in the May/June issue this year:

[State] Government decisionmakers face an inherent conflict of interest when it comes to making pension policy for government employees, and so do their staffs. This is true whether or not unions are involved. Beyond the enticement of self-dealing is the temptation to self-aggrandizement that comes when politicians are allowed to take credit for delivering benefits whose full cost only becomes apparent after they are long gone. That all this can be done within a tight circle of insiders without the press or the public taking much notice only further perverts the logic of decisionmaking.

Politicians appeal to key constituents by increasing state pensions. They’ll be long out of office by the time the true costs of the increases become apparent. The cost gets even worse if the economy is bad. But the constitutions of many states require the governor to maintain pension benefits. No states require the government to ensure that state colleges receive a steady level of funding every year. No wonder public colleges cost more.

Duncan’s right to point out that such state funding priorities are “penny wise and pound foolish,” but what’s the solution? To extend Duncan’s analogy further, the basic structural problem is that annual state budgets mostly reflect the state’s balances at the moment; they’re all pennies.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer