The annual report on financing from the State Higher Education Executive Officers (SHEEO) always gets a lot of attention. But the media reporting of their results is consistently wrong.
SHEEO is typically pretty careful about explaining what they are doing and why (see the great technical papers at the end), so I usually chalk up misleading representations to reader error. But in this year’s press release, SHEEO contributed to the confusion by incorrectly stating that there was “a 9 percent decrease in state and local support per student in constant dollars from 2011.” Ninety-nine percent of people familiar with the term “constant dollars” would conclude that this means the reported values are adjusted for inflation, and they would be right — that is what “constant dollars” means. The only problem is that’s not what SHEEO did.
In the SHEEO report, “constant dollars” are adjusted using the Higher Education Cost Adjustment (HECA). HECA estimates the rate of growth in the prices of what colleges buy, and as such is pretty useful for internal budgeting purposes. But because it is tailored to higher education, it is not a suitable tool to adjust for inflation. To correctly adjust for inflation requires a general price index, such as the Consumer Price Index (CPI). As Lloyd Armstrong wrote
It is natural for those of us in higher education to want to use the HECA as our inflator — this is what we see when we try to manage. However, the people who pay the bills — legislators, students, parents, etc. — live in a world in which the CPI is the natural inflator…
Use of HECA in calculations such as these seems to me to be unfortunate, in that it implies that these higher costs are forced on us and the outside world must respond appropriately. On the contrary, the outside world clearly is telling us that we need to respond by containing HECA increases…
The difference between the HECA and the CPI are not large on a year-to-year basis, but these small differences rapidly compound over time, leading to very flawed conclusions. For example, using the numbers from Technical Paper Table 1 on page 52 of the SHEEO report, suppose that “current” (non-inflation adjusted) funding per student was $70.13 in 1997 and $100 in 2012. When using the CPI to convert the 1997 value into 2012 dollars, we find that in constant dollars, per-student state funding was $100 in both years (to convert a current value into a constant value, you multiply by the index value for the year you are converting to and divide by the index value of the year you are converting from). However, if we (inappropriately) use the HECA to adjust for inflation, the 1997 value in 2012 “HECA constant dollars” is $107.53. Since this is greater than the 2012 value of $100, we could conclude that state funding was cut by around 7 percent even though there was no cut at all.
In other words, the use of HECA leads to systematic bias when estimating changes in state funding over time. It overestimates state funding in earlier years, and as a result, projects bigger declines (or smaller increases) in state funding than is the case in reality.
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