The University and Its Environment February 20, 1995

CHAPTER 2: ECONOMIC TRENDS

This section reviews the economic environment of The University of Iowa, considering both direct income sources such as state appropriations and federal grants and indirect influences such as the financial context in which we must operate and compete.

Global Trends

Increasingly, the state of Iowa and The University of Iowa participate in a world-wide economic and educational competition. Students attend the University from nearly every country in the world and will return to their native lands with connections to Iowa and its people. Iowa is inextricably linked to the international community. The competitiveness of our agricultural and manufactured products in the world market directly influences the income of many Iowans as well as the tax and tuition revenues that support this institution. Global integration of economic activity increases the demand for highly skilled workers, both at home and abroad, and it alters the types of knowledge desired. As world commerce expands, education and human development will become increasingly important. Programs that develop understanding of different languages and cultures will become more valued. Future citizens of Iowa, the United States, and the world will require broader, more sophisticated knowledge of the diverse social and economic systems in which they will live and compete.
The University of Iowa community, in all its instructional, creative, and scholarly endeavors, contributes to the globalization of society by increasing the world's supply of human capital--the knowledge embodied in individuals. Through teaching, scholarship, and creative works, the faculty and staff of The University of Iowa help build the future of Iowa in an international context. We and our students are confronted with global problems such as overpopulation, famine, climate changes and environmental concerns, ethnic conflicts, poverty, and disease control. Through our teaching and research, The University of Iowa fosters social, economic, and political ties; promotes understanding of international issues; communicates with researchers and policy makers across the world; and educates students who will carry forth the effort to solve such problems. The study of global problems presents the University with opportunities to provide leadership and to carry out its educational mission in the largest possible sense.

The Iowa Economy: An Overview

Iowa's economy and society obviously have agrarian roots. Early settlers were attracted to Iowa's fertile soils, giving rise to perhaps the most productive agricultural economy in the world. The processing of food products, a natural adjunct of this productivity, also became a major economic endeavor. Manufacturing developed but was largely oriented toward the needs of the farm sector.
During the first half of the present century, these trends interacted in important ways. The mechanization of agriculture, a major force in the Iowa economy, greatly reduced the need for labor services in the agricultural sector and, at the same time, increased the scale and sophistication required to manage efficient farms. This process was accompanied by the movement of population out of farming and away from many small towns to a smaller number of central places.
Much of the labor released from the agricultural sector was absorbed in the growing industries--food processing, manufacturing, and services. For most of the post-World War II years, this pattern of development produced an economic setting of substantial stability. While Iowa's labor force moved gradually from agricultural to other pursuits, especially manufacturing, the population grew, but growth in this state was comparatively slow because of steady outmigration.
Except for a painful recession in the 1980s, Iowa's post-war economy has been remarkably prosperous. Between 1950 and 1980 manufacturing has grown more rapidly in Iowa than in any other Midwestern state and, in fact, more rapidly than in the United States as a whole. During the 1970s, a major impetus for growth in Iowa's economy was provided by rapid increases in commodity prices, the dramatic growth of export markets for food and manufactured products, and considerable expansion in the financial services industry. This era of steady progress came to a abrupt halt with the onset of the "farm crisis" of the 1980s and events related to the dramatic reduction in worldwide inflation.In the past several years, Iowa's economy has been engaged in a major recovery. Manufacturing industries have been restructured, as has agriculture, and while this transition has not been painless, unemployment is below the national average and lower than it has been in over a decade. Income and employment are both growing. Reflecting this recovery, state budgets are in better shape than they have been in several years.
On balance, it seems likely that Iowa's economy over the next five years will continue along the steady and relatively prosperous path that it has followed for most of this century, rather than fall back into the stagnation of the early eighties. There is good reason for this optimism: Iowa's resources--its land and people, its farms and factories--are highly productive. Changes in technology, especially information technology, are evolving in ways favorable to states like Iowa which have a dispersed but skilled population. But there is no room for complacency: the internationalization of the world's economy and the increased mobility of many economic activities will ensure a very competitive economic climate.
Despite relatively robust economic growth, Iowa's legislative and executive leaders face many competing demands for the use of tax revenues, including tax relief, and are likely to be conservative in revenue estimates and expenditures. The University will have to present strong cases for additional state financial support, in competition with requests from many other important agencies and programs. Most observers do not expect growth in state support for higher education in the near future to exceed growth in the Consumer Price Index, or, more optimistically, the Higher Education Price Index. Thus it is now clear that the forecasts in Achieving Distinction for real growth in University budgets were too sanguine.

The University's Contribution to Economic Development

In efforts to promote economic development, there is an increasing expectation that universities serve as "economic engines," sources of new products and services for local, state, and regional economies. Iowa's educated populace and strong institutions of higher education are increasingly viewed as competitive advantages. Many of the most rapidly growing industries in Iowa and elsewhere in the nation are knowledge-intensive, and, hence, dependent on highly trained personnel. Examples of knowledge-intensive areas in which Iowa's economic diversification has been occurring are printing and publishing, finance, insurance, biotechnology, computer simulation, and various professional services. Increases in employment opportunities requiring more education will permit more college-educated Iowans to remain in the state rather than seeking careers elsewhere.
The growing importance of knowledge-intensive industries in the state and nation makes the University and other educational institutions even more important to Iowa's future prosperity than they have been in the past. One major way for The University of Iowa to contribute to economic development is to provide a high-quality, college-trained labor force from which growing industries can draw. The University's research effort can also aid the development of industries that will provide jobs in Iowa.
In addition to the general contribution of an educated work force, The University of Iowa produces a dramatic direct impact on the regional economy, as documented in a recent report by Backhaus and Whiteman (1994). University activities result in $1.4 billion in Iowa spending, $130 million in state tax revenues, and 55,000 jobs. Although much of the economic impact is in contiguous counties, University expenditures in goods and services affect most of the state, with Polk county ranking ahead of Johnson, and Black Hawk, Dubuque, Fayette, Scott, and Woodbury also ranking among the top ten counties (see Figure 2.1). The Oakdale Research Park has been growing in success as an incubator of new businesses and stimulator of new research efforts.
It is likely that the growing collaboration between the University's researchers and Iowa businesses will continue to produce mutual benefits and contribute to the state's economic development. Continuing innovation, particularly in computer simulation, educational testing and publishing, bioscience and health-related industries, and the design and management of manufacturing and telecommunications systems build on University strengths, and these fields appear to have very high potential for economic gains. In this context, the University's participation in promoting economic development should enhance, rather than conflict with, its research and scholarship mission.

State Support for Higher Education

Although Iowa is not a large or rich state, it has traditionally invested heavily in education at all levels. It has attempted to preserve a high degree of accessibility to its institutions of higher learning by maintaining low tuitions and fees. However, in order to raise the quality of its programs and to continue to compete with the nation's best institutions of higher learning, the University must seek new funds. While part of the funding for new initiatives can come from internal reallocation--and the University must constantly strive to determine the most cost effective use of its financial resources--it is very likely that increases in state appropriations and/or tuition will be necessary. Recent trends suggest that some other states have increased their appropriations and tuitions at a faster rate than our state. The State of Iowa or Iowa students may have to increase state contributions and/or tuitions to maintain comparable program quality.
On the appropriations side of revenues, the University did not receive the increases in state support anticipated in the 1989 statement of environmental assumptions, slowing the progress expected in the plan. Although state funding over the past 5- and 10-year periods has approximately matched the Higher Education Price Index, over the past 15 years the UI has lost 8.1% to inflation in per-student appropriations. However, in the context of support for higher education nationally, Iowa has fared relatively well, not suffering the massive cuts seen in Massachusetts and California. With respect to student tuition revenues, Iowa has seen a 31% increase (inflation adjusted) over the past 15 years, but this amount is well below the national average (47.5%) and 4th lowest in the region.
Previous summaries of state support for The University of Iowa have compared Iowa appropriations for higher education (the three Regents' institutions) with support patterns for other state universities in the region. Those state by state comparisons do not take into account the great variety of higher education systems in the region or the fact that in Iowa the community college system, unlike many other states, is partly supported by local property taxes. It is more appropriate that The University of Iowa be compared, financially as well as qualitatively, with our peer institutions.
Comparative revenue data for 1992-93 are shown in Table 2.1 for The University of Iowa and the ten peer institutions with which it compares itself. In terms of state appropriations per student, Iowa ranks exactly in the middle of the 11 universities, but three of the five universities with lower average appropriations do not include medical schools. With respect to tuition, seven of the other ten universities have higher charges. With state appropriations and tuitions combined, The University of Iowa has the 5th lowest revenue per student with only Ohio State and the three comparison universities without medical colleges ranked lower.

Economic Forecast for The University of Iowa

Regardless of which political party controls the Iowa Legislature or the executive branch, almost all political and economic observers agree that dramatic changes in appropriations for higher education are unlikely in the near future. There are high expectations for the state's economy, but there are also many competing demands for any new revenues plus a political will to avoid commitments that may be difficult to keep. The state's support for education in general and higher education in particular will almost certainly continue, but new funds are likely to be targeted to specific objectives and goals.
This not to say that there should be no new requests for meritorious projects and initiatives. However, such proposals must be carefully crafted to serve both University and state objectives. "Cost consciousness" will be the watchword of the next half-decade. New goals may have to be served by reordering priorities and reallocating funds within units and divisions. To the extent that the University and its units can show progress in meeting its objectives by careful stewardship of its resources, proposals for additional support related to new goals will be better received. It is likely that some special initiatives will be approved by the Board of Regents and the state; steady, inflation-adjusted appropriations appear to be reasonably certain.
Most new funding will probably come from tuition revenues, perhaps from more out-of-state students; growth in return of indirect costs from extramural research; and continued increases in donations and gifts through The University of Iowa Foundation. Where appropriate, some units may be encouraged to enhance revenues through increased sales and services. Yet all of these sources of revenue will be severely challenged in the immediate future. There is growing public pressure to restrain tuition increases, even though Iowa tuition is low in comparison to national averages. Greater competition for grants and shifting federal priorities have slowed the rate of increase in extramural support in recent years. Similarly, while the generosity of alumni and friends of the University has provided an enormous boost to new initiatives, it is highly unlikely that philanthropy can be expanded enough to support all the new goals and increased expenditures of the University. In general, the University and its units will have to make choices about which tasks and missions it can fulfill and which will have to wait for new funds. There will be a general trend toward greater self-sufficiency and tying budgets to responsibilities of individual units.

Summary

The University and the state will develop in an increasingly global context, both economically and educationally. The University contributes significantly to the state economy, providing an excellent return on state investment. The state's economy is better diversified and healthier than at any time in the recent past, but state government will encounter many competing demands for use of tax revenues. Although the UI has not suffered the massive cutbacks that occurred in some institutions across the country, state support for higher education in Iowa has barely kept pace with inflation. Some of the gap has been filled by tuition increases, but greater resistance to tuition growth can be expected in the future. While substantial increases in state support for The University of Iowa over the next five years appear to be unlikely, the University should expect to receive stable, inflation-adjusted revenues, possibly with additional support for well-documented needs or critical projects, especially those that raise or maintain the quality and accessibility of educational programs.