For the first time since the Great Recession of the late 2000s, the fiscal position of the states is looking bright. The economy is growing more rapidly than anytime over the last decade, causing state revenues to rebound, and many states will see additional revenues as a result of last year's federal tax overhaul.
But if there is one thing I've learned as an economist who led the National Governors Association for decades, it's that budgeting in good economic times can be much more difficult than in bad times. The competition for any surplus revenues is always going to be intense. Meanwhile, however, most economic forecasters are warning that the next recession could be far worse than the one that decimated state budgets a decade ago. That's why it's critical to seize this opportunity and invest the current surpluses in education and workforce talent. Otherwise, we will spend years struggling to recover from the next economic downturn.
Industry, higher-education and government leaders serving on the National Commission on Financing 21st Century Higher Education, which is funded by the Lumina Foundation, identified specific policy recommendations to prepare states for a strong economic future. Here are six takeaways for state leaders:
1. Communicate the college-attainment imperative. State leaders must help the public understand why boosting the number of their residents who earn college degrees is critical. The public needs to realize that increasingly the United States will be competing with the highly educated labor pools of Berlin, Shenzhen, Bangalore, Stockholm, Seoul and Hong Kong. Unfortunately, the U.S. has dropped from first in graduation rates among the Organization for Economic Co-operation and Development countries in 1995 to 19th in 2016.
2. Identify job skills and talent gaps. If states want businesses to expand in their states, they need to understand that future jobs increasingly will go where there is a highly educated labor pool. Just ask the cities vying for the second Amazon headquarters, which promises to bring $5 billion in economic development and 50,000 new jobs. Cincinnati leaders received a briefing from Amazon on why the city did not make it into the company's final 20 contenders, and were told that "talent was the most important factor out of everything they looked at."
3. Experiment with new funding models . Merely increasing state higher-education spending will not be enough to spur improvements. State leaders must experiment with new models. This includes income-share agreement (ISA) plans, such as the one recently developed by Purdue University, which allow students with loans to pay a set amount of their wages after graduation for an agreed-upon number of years; ISA payments adjust according to levels of income. Allowing community colleges to sell bonds to finance innovative delivery systems is another innovation in funding, as demonstrated by initiatives in Iowa, Kansas and Michigan.
4. Create new low-cost delivery models. In California, Gov. Jerry Brown's budget proposal calls for the creation of the state's first wholly online community college. Legislation in New Jersey proposes a multi-year plan to make community college free. And 11 universities, including Kansas, Michigan State and the University of California at Riverside, are working together in a network to ensure that more low-income students earn degrees.
5. Pay for results. Institutions that increase graduation rates for low-income and students of color and hold down costs should get more funding. Tennessee Gov. Bill Haslam is a leader in building bipartisan support for policies that create a higher-education system that delivers value for students and employers. To build on the state's extraordinary success, he has proposed a new Complete to Compete initiative. Among other things, it would restructure financial-aid requirements to keep students on track for on-time graduation.
6. Act now. State leaders should move quickly to invest the expected surpluses in higher education and other efforts to develop their workforce talent before they are taken by special interests and legislative pet projects. The states' fiscal position should remain strong for the next couple of years. Acting now will minimize the impact of the next economic downturn, in terms of lost jobs, as employers become more reluctant to terminate workers with higher education and skill levels.
In the long run, these steps will sustain a higher economic-growth path, with its positive impact on wages and incomes. They will effectively reduce wage inequality, which should be a top priority for all state leaders. And when the next recession does hit, states will be in a much better position to bounce back and avoid the painfully protracted recovery that followed the last recession.