A Flawed Report in the Funding Debate

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As Idaho’s Legislature considers how much to fund the state’s public colleges, a recent report from the Idaho State Board of Education claims to show the colleges’ economic value to the state. The report is thoughtful and rigorous, but has flaws that diminish its usefulness in the funding debate.

The report, “The Economic Value of Idaho Public Colleges and Universities,” is an economic impact study estimating that in 2019-2020, these institutions contributed $4.5 billion to Idaho’s gross state product while spending just $1.5 billion, a return of $3 for every $1 spent.

About two-thirds of this $4.5 billion comes from “alumni impact.” In other words, the report claims that graduates provided $3 billion more to Idaho’s economy than they would have if they had not gotten their degrees. It estimates that the institutions’ past expenditures have provided a 16.6% annual return to their alumni and a 4.6% annual return to Idaho’s taxpayers, who subsidize the institutions.

This study avoids the common error of using outlandish multipliers to give inflated estimates of economic value. It even addresses counterfactuals by asking whether some students would go to college elsewhere (and therefore earn similar amounts of money anyway) and how many of them would return to Idaho if their schooling took them out of state.

But some assumptions in the study seem faulty. For example, the authors assume that if Idaho’s public colleges and universities did not exist, students who followed other paths would bring Idaho’s economy only 15 percent of what those alumni now bring in increased earnings. This assumption seems unreasonably pessimistic.

Given the alternative options available in Idaho–at least four significant private colleges/universities plus ways to stay in Idaho while earning online degrees at non-Idaho colleges–15 percent seems far too low. The authors do consider such “alternative education” effects, but even then they claim that Idaho’s economy would only see 23 percent of the alumni impact, still unreasonably low.

Furthermore, the study’s conclusions are not sufficient to justify sizable public investment in Idaho’s public colleges and universities in the future. Demographic trends suggest lower college enrollments ahead as the population of traditional college-aged students shrinks. Additionally, returns to higher education investment will almost certainly diminish as a greater portion of the population receives degrees.

Besides, we know that returns vary substantially by major. A recent report from the Idaho Freedom Foundation shows many programs in which recent alumni have relatively large debt and low income. What programs would be cut first if Idaho reduced higher education funding? Would they be the high-return programs or the negative-return programs? In fact, if colleges did cut the programs that generate negligible value for future alumni, the colleges’ average return would increase.

The financing of higher education is in need of reform throughout the country. Idaho has an opportunity to be a leader in this arena. A forward-looking strategy will empower students to find the best degree programs suited to their talents and interests wherever they are offered, perhaps by attaching state funding to students rather than to institutions. It will also give public colleges and universities incentives to prune programs that have not adequately prepared students for the workforce.

In general, the economic-impact approach to funding misleads policymakers into thinking that increasing public investment would have the same return as previous subsidies: “We’ll get $3 back for every $1 we invest!” But those returns are likely to decline, and it matters where those investments go. This report is no substitute for careful cost-benefit analysis.

Not all higher ed dollars are created equal. Idaho’s legislators should create more incentives for the state’s students and colleges to excel instead of simply maintaining the institutional status quo.

Reprinted from IdahoEdNews.org

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