Will the Tuition Incentive Work a Second Time?

Data Source: Virginia Department of Planning & Budget

by James A. Bacon

In a gambit to hold the line on the rising cost of college attendance, the General Assembly last year budgeted $52.5 in incentives to be distributed to higher-ed institutions that froze in-state tuition increases. It worked. Governing boards of every institution agreed to hold steady on tuition and mandatory fees. This year lawmakers in the House of Delegates are hoping for a repeat, proposing a comparable incentive: $111.8 million spread over two years.

Governor Ralph Northam did not include the sum in his proposed budget, however, nor did the state Senate in the budget it passed last week. The fate of the initiative will be worked out in the Senate-House budget conference.

“If passed, three straight years of tuition freezes would give Virginians a chance to play financial catch-up when it comes to the share of household income they’ve been spending on college education,” James Toscano, president of the Partners for College Affordability and Public Trust, told the Richmond Times-Dispatch.

It would be a positive development indeed if Virginia’s public institutions kept a lid on tuition & fee increases for another two years — or even for one more year. What are the chances of that happening? Let’s start our inquiry by examining the Northam administration’s proposed higher-ed budget (shown above), which does not take the $112 million incentive into account.

The Governor proposed increasing General Fund contributions to higher-ed institutions by $244 million in FY 2021 — a 12.8% increase. That is a hefty boost, way more than the increase in the Consumer Price Index (roughly 2%). About two-fifths of that $244 million in extra spending was allocated to the Virginia Community College System as part of the Governor’s free-tuition initiative for lower-income students. Even with the community colleges getting a big chunk of new money — both the House and Senate have trimmed Northam’s free-tuition initiative, so the final amount is up in the air — there will be plenty left over for other institutions. 

On the Nongeneral Fund (NGF) side, the Governor’s budget anticipates $367 million in additional spending, a roughly 4.6% increase. The NGF reflects mainly revenues from tuition, fees, and auxiliary enterprises that include room and board. The Department of Planning & Budget document from which I have extracted this data does not specify how much of this added revenue would come from hikes in tuition & fees at each institution. But, assuming 2% inflation, the revenues would appear to be well in excess of what is needed to carry on business as usual.

In other words, the Governor’s budget appears to assume meaningful tuition hikes in addition to a hefty boost in General Fund support. Given the fact that tuition & fees account for some 45% or so of Nongeneral Fund revenues, the implication is that something on the order of $165 million in higher tuition & fees is assumed. 

Here, then, is the bargain offered to higher-ed institutions collectively: We’ll give you $55.9 million in incentive money in FY 2021 in exchange for which you will not increase tuition and fees, thus foregoing $165 million (rough guesstimate).

Evidently, lawmakers anticipate that this deal will prove unattractive to a number of institutions. That’s why they propose restructuring the incentive. In FY 2020, if an institution turned down the offer, the money would have gone back into the General Fund. Next year, if an institution turned down the offer, the institution’s share of the funds would go back into the pot to be redistributed between those that accepted the deal.

The prospect that the distribution would increase if some institutions drop out would create some interesting gamesmanship. I would expect some Boards of Visitors to wait as long as possible to see what other public colleges and universities decide before setting their own tuition & fees.

I would expect that the colleges and universities with the weakest pricing power (those facing the most price resistance from students) would be the most likely to embrace the House’s proposed incentive, while more prestigious institutions with greater pricing power would decline. I have no idea how the Senate and the Northam administration are inclined to accept the incentive idea. But if the proposal does get incorporated into the budget, it will create a fascinating new dynamic. I support the idea just for the pure pleasure of watching Boards of Visitors squirm with uncertainty as they set their tuition & fees.

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2 responses to “Will the Tuition Incentive Work a Second Time?

  1. It is perilous to try to draw any conclusions about higher ed spending from a summary chart such as this. One significant obstacle is that the NGF category encompasses so much stuff, from tuition to parking revenue to revenue from the dining facitilities to whatever. Also, a big chunk of that increase was to pay for already approved increases in the salaries of state employees who are wholly or partially supported by NGF sources. Even if the amounts in the introduced budget include revenue from anticipated increases in tuition, if a freeze were put in, that revenue would not materialize and thus could not be spent, appropriation or not.

    Furthermore, it needs to be noted that the freeze, last year and the one proposed this year, applies to tuition only, not to fees. As has been pointed out earlier in this blog, capital debt supported by fee revenue continues to get approved and those increased fees will show up in appropriations. Fees will go up.

    • I agree with Dick. Absent systematic reform, likely brought about by strong, indeed tough, political actions, these solutions are cosmetic, and fix nothing, only invite more trickery.

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