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Budgetary blues: as the annual higher-education budget battles heat up, new challenges ranging from the repeal of the estate tax to the Internet pose bottom

Matrix: The Magazine for Leaders in Education - June 1, 2001

The smell of theatrical grease paint faded, and the roar of crowds that once flocked to the Kansas State University stage every summer was silenced this year when trustees for the institution faced a budget shortfall that current funding could not meet.

After a successful, 25-year run; University Theatre is forgoing its 2001 season to pay off a $60,000 operating deficit. Operators hope to resume productions in 2002.

KSU's woes are symptomatic of the annual plague that descends on the campuses of the nation's private and public institutions every year.

It's budget time, a ritual when administrators, faculty, staff and students briefly join for a wringing-of-hands ceremony in all effort to raise needed funding to finance their programs for the coming year.

This year, though, three new factors may impact the budgetary process: a possible end to tax-saving incentives that encourage donations to schools, the policies of a new president in Washington, and the growing phenomenon of distance learning that could shrink enrollment at some schools.

The funding and tax priorities of the Bush administration could radically alter financial aid, grants and outright financing for higher education. Proposed new tax codes and student performance incentives touted by the administration could substantially change the way public colleges and universities are financed.

The Internet, already a deeply ingrained part of every university and college's infrastructure, also represents a threat to enrollment, some administrators fear. While the Internet has become an integral teaching tool for professors to deliver course material and communicate with students, some institutions are using the distance-learning concept to widen recruiting efforts to attract students. The idea represents a golden opportunity to increase enrollment for some schools. It could potentially also weaken the enrollment of smaller schools that can't compete with more comprehensive programs.

NATIONWIDE WOES

The state of Pennsylvania this year allocated $336 million to finance public education at its 14 four-year state universities and 15 two-year community colleges. Still, faculty, staff members and students from these colleges boarded buses in March to travel to Harrisburg where they pleaded with Gov. Thomas Ridge and the legislature to allocate even more funds for their schools.

In Ladysmith, Wis., the 450-student Mount Senario College was forced to put its president on an unscheduled leave this spring, eliminate several administrative jobs at a school with a staff of just 40, and cut athletic programs because of financial and management difficulties it encountered last year.

In Burlington, Vt., a 75-year-old institution had to face the ultimate budget crisis last fall when trustees at Trinity College voted to close its doors, putting 125 teachers, staff and administrators out of work. Declining enrollment aggravated the fiscal crisis, say officials.

"We hoped to be the exception to the prevailing trend of financial difficulty faced by most small, single-gender, liberal arts colleges without significant endowments," says Trinity President Jacqueline Marie Kieslich.

Edward Connors, chairman of the Trinity Board of Trustees said the decision was unavoidable. "We couldn't ensure a financially sustainable future."

CODE BREAKERS

This year proposed tax code changes might weaken the ability of students to pay for college, or for some institutions that rely on private funds to attract money to finance new or existing programs.

Existing tax codes traditionally aid schools in attracting more students by offering them financial incentives to enroll in programs they otherwise might not pursue.

In a policy statement released in April, the American Association of State Colleges and Universities said these tax incentives are not inclusive enough to help most students who attend public universities today. The programs, which represent more than $7 billion a year in tax expenditures, raise concerns on two fronts. First, "AASCU has not supported the use of tax incentives as a means of federal student aid delivery," the organization said. Moreover, "using the tax code as a vehicle for student financial assistance tends to benefit students from middle- and upper-income families, who are already more likely to attend college."

The association recommends that the Bush administration and Congress "rewrite existing student loan guarantees and interest deduction laws to accommodate increased borrowing by students and families to finance postsecondary educations."

The number and size of these loans have risen dramatically during the past five years, financial aid officers say, and show no signs of slowing.

"Providing relief for this growing burden, especially for the neediest borrowers, should be a priority for federal policy makers," the AASCU says.

One way to do this, some college administrators say, is to lift the existing 60-month cap on the federal tax deductibility of student loan interest.

"We'd like to see government incentives that lead to less student borrowing and fees, not more," says Hilary Goldmann, AASCU director of Congressional Relations. "We'd like to see an end to loan origination fees. On the tax side," Goldmann says, "we'd like to see the government turn tax deductions into a tax credit. These are ways to help students borrow less."

Debt forgiveness laws regarding student loans are incompatible with tax codes, too. When current student loan laws were written, they included provisions that tied repayment to income. This was done to help low-income borrowers honor their debt instead of lapsing into default. However, current tax policy penalizes student borrowers by taxing any loan forgiven as taxable income.

"This policy is counterproductive to the objective of providing an incentive for at-risk borrowers to repay their loans," says Edward Elmendorf, AASCU vice president of Government Relations and Policy Analysts.

DEATH AND TAXES

While escalating costs plague both private and public institutions, some private school administrators are worried about a proposal by the Bush administration to repeal controversial estate taxes. A similar move to repeal these taxes last August in Congress was staved off when President Clinton vetoed a bill that would have gradually repealed federal inheritance taxes. Opponents say repeal will severely hamper the annual fund drives at the nation's colleges and universities.

"The University of Pennsylvania is a private institution," says Michael Masch, vice president for budget and management analysis. "Since we don't receive any state funding, our largest sources of income come from tuition and gifts."

The school raises additional funds by operating income-producing enterprises such as fee-based veterinary, dental and medical clinics, but the main source of the university's fund raising efforts still come from private donations.

Without the incentive to use gift giving to obtain tax relief, they argue, would-be donors might spend their money elsewhere. Bush campaigned on a pledge to repeal that legislation, and has included estate tax repeal in his first budget package to the Congress. Under the Bush plan, repeal of the estate tax could cost $294 billion over 10 years in lost revenues, according to the Center on Budget and Policy Priorities. Several studies say without estate taxes, the loss to the endowments to colleges and other charitable organizations is incalculable. "The research on the effects of the estate tax on charitable giving has consistently shown that levying estate taxes increases the amount of charitable bequests," said analysts for the Washington, D.C.-based center. More than $10 billion from private donors went to higher education in 1999, the last year for which figures are available. Private donor contributions make up more than 53 percent of the total gifts, according to the Council for Aid to Education. "President Bush's proposal to eliminate the estate and gift tax, however, would remove an enormous tax incentive for the wealthy to make charitable gifts," the CBPP said.

But not everyone agrees that repeal would spell an end to philanthropic donations. Without an estate tax, the gifts that wealthy donors leave to colleges might tend to be higher, argues Robert Lindgren, vice president for development and alumni relations at Johns Hopkins University. If they knew their heirs no longer faced an estate tax, "they might be willing to give us more," he says.

Other Bush proposals regarding public and private education funding have come under fire by the National Association of Independent Colleges and Universities. That organization has targeted the president's 2002 budget plan, saying Bush's incentives do not go far enough to help most needy students.

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