The State Fiscal Stabilization Fund and Higher Education Spending

While many policy researchers and the media have focused their attention on K-12 education in their reporting on the American Recovery and Reinvestment Act of 2009 (ARRA), few have focused on the law’s effect on higher education funding. Today, the New America Foundation’s Federal Education Budget Project released an issue brief titled The State Fiscal Stabilization Fund and Higher Education Spending in the States that explores how state funding for higher education fluctuated as a proportion of total state spending during the implementation of the ARRA.

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 was designed under the assumption that states would not be able to maintain then-current levels of spending due to the economic recession and would need federal assistance to maintain their education programs. As a result, the law includes a maintenance of effort provision that gives states flexibility to cut their spending on education to 2006 levels in 2009, 2010, and 2011, and use the SFSF monies to fill any gaps up to the higher of 2008 or 2009 levels.

But many stakeholders have expressed concern that some states would lower state expenditures on education by more than necessary to balance their budgets to take advantage of the federal funds. This issue brief draws general conclusions about how the ARRA may have affected state spending on higher education and whether policymakers’ concerns about the law were valid.

Using state budget data collected directly from the states, the issue brief concludes that 42 states and the District of Columbia chose to use SFSF funds to support higher education spending in 2009 or 2010. Of those, 23 cut the proportion of state spending dedicated to higher education in the first year they used the funds. While most of these 23 states made cuts to both higher education spending and total state spending, six appear to have cut their higher education spending while actually increasing total state spending. These states confirm the concern that the SFSF would lead some states – particularly those states with relatively stable tax revenue – to cut higher education spending during the economic downturn and use those funds for other purposes. Seventeen of the 42 states that chose to use Education Stabilization funds for higher education, on the other hand, actually increased the proportion of state spending on higher education.

The State Fiscal Stabilization Fund played an important role in maintaining higher education spending in many states. However, the program’s maintenance of effort provision appears to have allowed some states to cut funding for higher education by more than necessary to balance their budgets.

Now that Congress has passed the Education Jobs Fund, a program similar to the SFSF that provides funding only for K-12 education, states will be held to a new and stricter version of the maintenance of effort provision that also takes higher education spending into account. While the new provision is an improvement over the maintenance of effort provision in the SFSF, some states will likely continue to manipulate their higher education budgets to take advantage of the federal funds.

To download the issue brief, click here.