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I. Introduction

The Texas higher education system consists of 140 public and private colleges and universities, including 101 state-supported institutions and 39 private colleges and universities. The enrollment in all colleges and universities in the state in the fall of 1999 was 966,840 and is expected to reach 1.1 million students by 2015.

Texas, more than any other of the most populous states, depends heavily upon public colleges and universities, rather than private institutions, to educate its students. Almost 90 percent, or 860,866 students, are enrolled at its 57 junior colleges and other two-year institutions (440,334), 35 universities (407,950) and 9 health-related institutions (12,582). Public higher education in the State is funded through a combination of tuition, student fees, hospital and clinic revenue and other local funds (including gifts from benefactors), income from the Permanent University Fund and general revenue appropriations made by the Legislature. Tuition rates are set by each institution’s boards of regents within a range prescribed by the Legislature; institutions may double the maximum tuition rate for graduate students. The boards of regents of the various colleges and universities also set many student fees.

Tuition for general academic institutions (public universities and state colleges) may range from a minimum of $40 per hour up to a maximum of $80 per hour in 2000-2001 for resident students. Resident tuition rates at public institutions are somewhat below the national average rate for undergraduate tuition at public colleges and universities. Nonresident tuition is $255 per semester credit hour in 2000-2001 and is set to equal the average nonresident tuition charged by the five most populous states, excluding Texas.

During the 2000-2001 biennium, state higher education “all-funds” appropriations totaled $13.4 billion, or almost 14 percent of the state budget. This was an increase of $1.2 billion, or 9.5 percent, over total higher education funding in 1998-99. Of this amount, general revenue totals $9.2 billion. Student-paid tuition and fees and the clinic and hospital revenues of health-related institutions generate most of the remaining $4.2 billion.[1]

Even though state higher education financing is increasing, it is still losing ground to other functions. After adjusting for inflation, spending on public safety and corrections increased by 256 percent and health and human service expenditures increased by 149 percent from 1984-85 to 1998-99, while real public and higher education expenditures increased by only 70 percent and 31 percent, respectively, during this period. From 1984-85 to 1998-99, total inflation-adjusted state spending rose 90 percent.[2] Texas also continues to trail most other large states in higher education funding. Even though state public university funding increased by 36 percent from 1992-93 to 1997-98, on a per-capita basis, Texas still ranks 8th out of the 10 most populous states on state appropriations per full-time equivalent student.[3]

Previous Studies

At least four previous studies have attempted to quantify the impact of the Texas higher education system on the state economy. The first and most ambitious was the study of the University of Texas System conducted by UT Austin’s Bureau of Business Research (BBR) in the summer of 1994.[4] Similarly, Resource Economics recently conducted a more narrowly focused study of the University of Houston System.[5] Finally, the Texas Faculty Association and the Texas Guaranteed Student Loan Association have carried out two more succinct studies of the statewide higher education system in recent years.

UT System Study

Based on operating budget summaries and a survey of its component institutions and other sources, the Bureau of Business Research found that University of Texas system attracted a total of $835 million to the state in 1994. This total included $659 million in research and development funding and $176 million in out-of-state and international student expenditures. Then, based on economic multipliers from the Comptroller’s input-output study,[6] the BBR estimated that these $835 million in outside revenues directly and indirectly support a total of $2.4 billion in business activity, $1.6 billion in personal income, and 35,623 jobs throughout the state.[7]

In addition to the immediate economic impact, BBR also looked at the long-term effect of a University of Texas education on the earnings of its graduates. Here, based on US earnings differentials between high school and college graduates and the direct and indirect costs—including lost wages—of an average UT System four-year education, the study estimated that the annual rate of return on an average system bachelor’s degree was approximately 14.5 percent. Finally, following an approach suggested by Gary Becker and Edward Denison,[8] the UT analysis suggests that because of “advances in knowledge” caused by university research, the total social return to the Texas economy from a college education and associated research is closer to 20 to 25 percent.[9]

University of Houston Study

Unlike the UT System study, Resource Economics concentrated on analyzing only the long-term economic return instead of shorter-term multiplier effects in its recent study of the University of Houston system. On the other hand, the UH System looked at a much wider range of graduates than UT.

Following an approach similar to the Bureau of Business Research, Resource Economics found that the rate of return from a BA/BS degree at the University of Houston was 16.2 percent. For higher-level degrees, the annual rate of return ranged from 10.5 percent for PhD’s, to 14.1 percent for master’s and to 17 percent for professional degrees, such as law and optometry. Then, by discounting future earnings by five percent and reducing this total by current direct and indirect college costs (including foregone earnings), Resource Economics found that the net present value of a UH bachelor’s, master’s, doctoral, and professional degrees was $205,000; $266,000; $341,000; and $341,000 respectively. Finally, based on these net present values and UH’s 5,100 average annual number of graduates,[10] Resource Economics calculated that in 1998, the system contributed about $1.3 billion in annual income to the Texas economy.

Statewide Studies

The Texas Faculty’s Association report, The Economic Value of Higher Education in Texas was written apparently in response to reductions in the higher education budget under consideration during the 1991 legislative session. In this environment, the study pointed out that based on the average 12 percent national-level rate of return, the $2.7 billion invested by the state in fiscal 1991 in higher education would pay for itself by 1997 in economic output.

In 1997, another similarly-titled statewide study, Economic Returns from Higher Education in Texas by Texas Perspectives for the Texas Guaranteed Student Loan Association, concentrated once again on the returns from just a bachelor’s degree. Based on the earnings differential between a college and high school degree, an annual direct education cost of $10,000 per year (for four years), foregone earnings while attending college, and a discount rate of 6 percent, Texas Perspectives estimates the net present value of a bachelor’s degree to be $208,000. Moreover, although it is not presented, the baccalaureate rate of return, under these assumptions would be just over 12 percent.[11]

Implications of Previous Research

By focusing on a particular institution or type of economic impact, none of these studies present a complete picture of the impact of the higher education system on the Texas economy. The University of Texas and University of Houston studies offer the most comprehensive economic impacts, but focus on those two institutions alone.

Furthermore, by ignoring the fact that not all of the earnings gain from a higher educational degree is gained from the education itself rather than the innate abilities of the student, all of these studies probably overstate the economic return from a higher education degree. These studies also generally assume that all college attendees work after graduation—an assumption that is not supported by the data.[12] Given the scope and limitations of previous work, a more comprehensive and realistic study of the impact of the state higher education system on the Texas economy is clearly needed.