Earmarking and the business cycle: The case of state spending on higher education

Recent economic events have created severe budget problems for state governments, and one area seemingly affected by this fiscal crisis is state funding for higher education. State governments have the ability to alter funding to higher education mostly through general fund contributions and earmarked revenue. This paper examines trends in state higher education appropriations, with a specific focus on the relationship between these two funding sources. We find that on average, total appropriations have actually increased over the past decade, and moreover, earmarked revenue has constituted an increasing share of higher education funding, while general fund contributions have been declining. Our regression analysis suggests that the magnitude of the fungibility between the two sources is substantial, but somewhat surprisingly, does not differ across recessions and expansions.