A coming issue for a lot of us in higher education is that the effects on colleges of the economic slowdown tend to lag the overall economy. In other words, the economic impact on campuses follows the changes in the larger economy. The reason is that economic downturns ultimately result in reductions in two of the primary funding sources for universities: State tax revenues and endowments.

Public universities obviously get a significant percentage of their funding from state governments. As someone who spent eight years in a major state university system I can tell you that states are not renowned for their advance planning. They tend to be very optimistic about revenues…saves politician from making tough when budgets are being developed. States seldom project a reduction in year-to-year revenues so when the economy goes bad they are stuck with massive shortfalls.

We have officially been in a recession since December 2007 but the effects on state revenues have hit hard in just the last few months…I realize this is not news to many of you. According to NACUBO, 21 states have already implemented cuts to higher education ranging from 5-15 percent of previously appropriated funding. For most states the worst will hit in the 2010 fiscal year (beginning July 2009) when they are facing shortfalls from the current year and, almost universally, projected shortfalls for 2010. It may be very ugly. A lot will depend on steps taken by the Obama administration to bail out the states and whether we see a modest economic recovery in 2009.

Historically, state and local support for higher education has rebounded once the economic growth resumes, but there is often a significant delay. An examination of state higher education funding following the 2001 downturn shows flat public support through 2004 so expect some lean years ahead even if there is a recovery sometime in 2009.

Private colleges are tied to “spending policies” from their endowments. For the (gratefully) uninitiated, most colleges have a formal policy to spend a specified percentage of their endowment each year to fund normal operations. For example, a college may spend 4.5% (the current national average) of its total endowment value each year on the assumption that the overall value of the endowment will grow by more than 4.5%. The average annual endowment growth from 2003-2007 was 11.5%, so even if you spend 4.5% your overall endowment fund is still growing by 7%.

Now imagine that your endowment shrinks 20% this year. Oops. You are now spending 4.5% of a much smaller pie. Most schools use some sort of moving average to determine their endowment spending so they minimize the immediate effect of reduced endowment values, but the loss will figure into spending calculations for 3-5 years. It also becomes more difficult for senior administrators to convince Trustees that it is a fiscally sound idea to spend from endowment funds that are shrinking rather than growing. The recent crisis at Harvard provides a sobering reminder of what can happen to even the wealthiest schools in a poor economy (Harvard letter on its endowment).

Remember, this is not the first recession we have faced. Try to find out how your institution and department responded to previous recessions (2001, 1991). Did the strategies work? Will they still work?