FEBP Releases New Issue Brief on the State Fiscal Stabilization Fund and Higher Education Spending

Since Congress passed the American Recovery and Reinvestment Act (ARRA) in 2009, many policy researchers and the media have focused their attention on the law’s funding for K-12 education. As a result, much of the reporting and analysis on the ARRA has overlooked the significant funding that the law provided for higher education. In response to this lack of coverage, the New America Foundation’s Federal Education Budget Project recently released an issue brief titled The State Fiscal Stabilization Fund and Higher Education Spending in the States, Part 2 that explores how states chose to divide their ARRA State Fiscal Stabilization Funds between K-12 and higher education.

The ARRA was intended to stimulate the economy with $862 billion in new spending and tax cuts. The law included nearly $100 billion in one-time funding for new and existing education programs, a historic sum given that annual appropriations for federal education programs were approximately $60 billion in fiscal year 2009. The largest single education program included in the law was the State Fiscal Stabilization Fund (SFSF), a new $48.6 billion program that provided direct grant aid to state governments in 2009 and 2010. The program was designed to help states maintain support for both K-12 and higher education that they might have otherwise cut in response to budget shortfalls brought on by the economic downturn.

The SFSF requires that states use the funds for both K-12 and higher education in proportion to each sector’s share of a state’s budget shortfall. It is important to keep in mind that when a state faces a budget shortfall, its legislature decides how to adjust spending to bring the budget into balance. State lawmakers have flexibility over the extent to which they will reduce funding for K-12 or higher education (or both) in response to budget shortfalls. In a state where the legislature made a 60 percent cut to K-12 spending and a 40 percent cut to higher education spending compared to the previous year, the SFSF regulations require that state to spend 60 percent of its allocated Education Stabilization funds on K-12 education and 40 percent on higher education. States where the legislature chose to spare higher education funding from spending cuts could use the funds to fill only the gaps created by cuts to K-12 education.

By examining how states divided their SFSF allocations between K-12 and higher education by fiscal year, we can make general conclusions about how the ARRA may have affected state spending on higher education.

Using data on SFSF allocations collected directly from the states, the paper concludes that states spent the majority of Education Stabilization funds on K-12 education – roughly 78.9 percent of the total $39 billion available for Education Stabilization funds. The remaining 21.2 percent – $8.3 billion – were spent on higher education. This allocation of funding between K-12 and higher education mirrors the typical state budget, in which states tend to spend far more on K-12 than higher education each year. This indicates that most states chose to make larger budget cuts to K-12 education than to higher education in response to lower tax revenues resulting from the economic recession. 

However, five states – Colorado, Louisiana, Montana, Nevada, and Wyoming – spent a greater percentage of their Education Stabilization funds on higher education than K-12 education over the three fiscal years that the funds were available. This suggests that, when confronted with budget shortfalls, these states chose to make cuts to higher education spending rather than K-12 spending and fill those gaps with Education Stabilization funds. When the State Fiscal Stabilization Funds run out at the end of fiscal year 2011, these states will no longer have federal funding to support higher education budget gaps. It remains to be seen whether they will be able to support their public higher education systems absent continued federal support.

Though more of the funds went to K-12, the SFSF did play a significant role in higher education funding in many states in 2009, 2010, and 2011. Most states did not protect higher education from budget cuts during the economic downturn and in some cases made larger cuts to higher education than K-12 education. While it is impossible to speculate on whether, and how, states would have cut higher education spending absent the Education Stabilization funds, it is clear that the funds helped to keep higher education budgets afloat in many states. 

To download the issue brief, click here.