Looking for Dollars in Unusual Places

Governors seek unorthodox sources to pay for higher education

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List: Creative financing: states seek new sources of funds for higher education

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By KARIN FISCHER

Surrounded by a dozen public-college presidents, Gov. Mitchell E. Daniels Jr. proposed an ambitious plan in December to keep top students in Indiana and attract world-class researchers to the state's universities.

The price tag: $1-billion. The cost to taxpayers: nothing.

To pay for the "Brain Gain" proposal, Governor Daniels, a former director of the Bush administration's Office of Management and Budget, wants to lease the state's lottery to a private contractor for at least $1-billion. The money would establish a new scholarship and create an endowment to pay for researchers' salaries and start-up costs.

Leveraging public assets for higher education is not a wholly new idea. As far back as 1650, the Massachusetts Bay Colony granted Harvard College a charter to operate a ferry across the Charles River for profit.

But in the last year, governors from both political parties have put forward creative strategies to tap new sources of revenue for higher education and other priorities. In Kansas Gov. Kathleen Sebelius wants motorists on the state's turnpike to pay higher tolls to help tackle a backlog of repairs on public-college campuses.

Gov. Matt Blunt of Missouri has proposed selling off student-loan assets to finance university building projects. And in Illinois, where portions of the state's student-loan portfolio have already been sold to pay for a scholarship for middle-class students, Gov. Rod R. Blagojevich is pressing to privatize the lottery, giving the state a large upfront payment for education.

Public officials in several other states, including Maryland, New Jersey, and Texas, are also considering plans to cash in on some of their most valuable assets, like toll roads and lotteries. The efforts promise quick cash, often without the political cost of tax increases.

"Governors are going to look for ways to pull a rabbit out of their hat," says Paul E. Lingenfelter, president of the State Higher Education Executive Officers, which represents states' top higher-education officials. "They want to do something as politically feasible and as painless as possible."

Supporters, including many college and university officials in these states, applaud the unconventional financing proposals, saying the new revenue could pay for more far-reaching endeavors than colleges could undertake with taxpayer dollars or tuition income.

"In most states, higher education is not necessarily first in line to get funding," says Stanley G. Jones, Indiana's commissioner of higher education. "It takes a proposal like this to provide funds of this magnitude."

Skeptics, however, worry that these efforts are the latest sign of diminishing state taxpayer support for higher education, which has declined to 10.6 percent in the 2005 fiscal year, from 14.9 percent in 1990, according to the National Association of State Budget Officers. Other observers say the proposals could be one-time gimmicks that do not meet the continuing needs of colleges, or the broader challenges facing them.

D. Bruce Johnstone, a professor of higher and comparative education at the State University of New York at Buffalo and a former chancellor of the SUNY system, says states can use outside sources of revenue to "plug holes" in their operating budget. "This year they can sell assets, and next year they can sell more assets," says Mr. Johnstone. "But eventually they'll be out of assets, and they might be a lot poorer for it because they won't have the income from those assets."

Fiscal Realities

In Indiana, higher education's moment in the sun stands in sharp contrast to the gloomy financial situation public colleges there faced just five years ago, when they were forced to return $74.4-million, or about 5 percent of their overall state support, to help close a gaping budget deficit.

This year Indiana is projected to have a budget surplus. Yet Mr. Daniels quickly ruled out using general-revenue funds for his higher-education plan, says Neil Pickett, the governor's senior policy director.

For one thing, at $1-billion, the price tag was simply too high. "This was meant to be dramatic, transformational," Mr. Pickett says, noting that Indiana ranks just 44th in the share of its state population over 25 years old with a bachelor's degree. "We're in a talent race."

And in Indiana, as in many states, increasing costs in other areas of state government, like health care, corrections, and elementary and secondary education, threaten to swallow any surplus money that might otherwise be available for new programs.

At the same time, raising taxes, even to support widely popular efforts like scholarships, is out of the question in most states, says Sujit M. CanagaRetna, a senior fiscal analyst with the Council of State Governments. "Raising taxes is politically radioactive," Mr. CanagaRetna says.

State and university leaders may also be reluctant to raise tuition, after several years of record growth. Lawmakers in a few of states, including Indiana, are actually considering measures to cap tuition increases.

Arturo Pérez, a fiscal analyst with the National Conference of State Legislatures, says that while most states are "in better shape than a couple of years ago," about 20 report structural, or chronic, budget deficits. The long-term budget outlook, combined with the still-fresh memory of the economic downturn that walloped states at the beginning of the decade, has made public officials cautious about committing taxpayer resources to new projects, he says.

That is the case in Kansas where taxpayers are still paying off what the state borrowed in its last attempt, in 1996, to deal with crumbling infrastructure on its public-college campuses. In fact, the earlier effort may have exacerbated the colleges' deferred-maintenance problems because a portion of money that should have gone to repairs was diverted to pay off the bond, says Kip Peterson, director of government relations and communications for the Kansas Board of Regents. The governing board puts the current maintenance backlog at $727-million.

In January, just days after Governor Sebelius, a Democrat, announced her toll-increase plan, an overhead pipe at the University of Kansas broke, leaking its foul contents into a chemistry classroom.

It remains to be seen, however, whether lawmakers in Kansas' Republican-controlled Legislature will hold their noses and support the governor's plan, which would raise tolls on the turnpike by 5 percent annually and use the money to issue $300-million worth of bonds over the next six years for campus construction.

"I don't know if I'd say that the governor's proposal went over even as well as a lead balloon," says Sen. Dwayne Umbarger, chairman of the powerful Senate Ways and Means Committee. "There was a lot of criticism."

Mr. Umbarger says he has not yet made up his mind about Governor Sebelius's plan, but last week a special Senate panel proposed several alternative sources of money for university building repairs, including building casinos, raising property taxes, and placing a surcharge on ticket sales for university events.

Public Gamble

Kansas is not the only place where unconventional financing proposals are taking political heat. A year after it was first introduced, Missouri lawmakers have still not given their final approval to Governor Blunt's plan to use $350-million in profits from the sale of student loans for some two-dozen campus construction projects.

Legislators have expressed reservations, including concerns that the sale could drive up the cost of student borrowing and that controversial embryonic stem-cell research could be conducted in buildings financed by the loan sale.

In Indiana, the Senate Tax Committee agreed last week to legislation to lease the lottery for 30 years, but the measure's passage is not guaranteed. In fact, political analysts in the state say that voter anger over a similar plan, passed in 2006, to lease a state toll road for $3.8-billion helped swing control of the state House of Representatives to the Democrats in the last election.

The financing mechanisms themselves are a gamble, observers say. Public officials must wager that drivers will pay higher tolls rather than switch to back roads, for example, or that decades from now, a negotiated lottery lease price will still look like a good deal.

A key Missouri legislator recently withdrew his support from Governor Blunt's plan because proposed federal changes could make the student-loan business less profitable. That could make it more difficult for the Missouri Higher Education Loan Authority to make payments to the state without jeopardizing its financial health, Rep. Robert (Jeff) Harris, the House Democratic leader, wrote in a letter to Mr. Blunt, a Republican.

James C. Palmer, a professor of higher education at Illinois State University and author of a 50-state survey of higher-education spending, says states could be "sacrificing long-term sustainability of revenue streams for short-term gains."

But many college leaders say that, while they have general concerns about declining state support, they welcome the focus on and investment in higher education.

"I don't see anywhere else in the budget where there's a bumper crop of available funds," says Lloyd W. Benjamin III, president of Indiana State University, who calls Governor Daniels's plan a "bold step."

His colleague, Jo Ann M. Gora of Ball State University, agrees. "I think it's a sign of the times," she says.

While state budgets are generally healthy, public officials face the prospect of mounting costs for health care, elementary and secondary education, and other mandatory expenditures. That situation has led the governors of some states to seek alternative sources of money for higher education and other priorities. In recent months, they have pitched a variety of creative financing proposals, including privatizing the state lottery to pay for scholarships and selling student-loan assets to cover college-construction costs. These are several states where such proposals have been or are being considered.