EconSouth (Second Quarter 2000)
Many people associate university towns with memories of studying, partying and attending big games. But universities are more than just that. In fact, universities generally contribute significantly to their local communities’ economies by making direct expenditures, such as those for payroll, by attracting associated support industries and by bringing in students and staff who spend money locally. These and other factors, including a university’s sources of funding, help to differentiate the economy of a university town from other communities.
raced with tree-lined campus thoroughfares, traversed by seas of students moving between classes and invaded periodically by cheering crowds of exuberant sports fans, university towns seem to exist in a world apart from other urban venues. Music clubs, pizza parlors, fast food stops and microbreweries coexist peacefully beside used bookstores, tiny import shops, art galleries and gourmet vegetarian take-out concessions. These towns hum along madly from September to May but fall into deep lulls when most students pack for home. To what extent does the economy of a university town mirror its unique atmosphere?
Studies by the business centers of three state-funded universities — the University of Georgia in Athens, the University of Alabama in Tuscaloosa and the University of Florida in Gainesville — suggest that these institutions, all of which are housed in smaller cities of 200,000 people or less in the metro area, provide some unusual benefits to their host communities.
Fueling the local economy
As with any major public or commercial establishment in a small to medium-sized city, expenditures by an academic institution and by a core population of employees and patrons fuel the economy in a university town. According to University of Georgia economist Jeffrey Humphreys, however, spending by universities is marked by an especially strong “multiplier” effect; that is, every dollar spent by the institution and its affiliates generates more indirect spending than another kind of business might in a similar-sized town. Humphreys speculates that the labor-intensive nature of an academic enterprise and the extensive interaction between the university and the surrounding community intensify the multiplier effect.
While university towns experience volatile seasonal swings in economic activity because of the shifting student population, academic institutions appear to provide host cities with some cushion during times of recession. Cutbacks in university funding, which tend to lag the business cycle by three to six months, can nonetheless have an adverse affect on local economies.
Intangible benefits accrue from the presence of a university as well, such as an educated and skilled workforce, access to advanced technologies and sophisticated cultural events, and, eventually, individuals who are destined to earn significantly more than they would have earned had they not received their university diplomas.
These benefits are not, however, without costs. State appropriations supply significant amounts of university funding. Students not only incur the cost of their education but also give up income they might have earned during the time spent pursuing their college degrees. Additionally, the presence of a state university or college may have an adverse effect on local revenues since a university requires significant infrastructure but is tax exempt. Studies by the University of Alabama’s Center for Business and Economic Research indicate that, despite these costs, the presence of the university is on the whole a big benefit for the host community and for the state that funds the university.
Money, money, money
Academic institutions are significant local spenders. The University of Georgia in Athens registered initial spending of $979.6 million in 1999. Much of this amount remained in the local area. Humphreys’ research indicates that initial expenditures are magnified through re-spending so that every dollar spent generates an additional 56 cents.
Looking at Georgia’s university system as a whole, which comprises 34 institutions statewide, Humphreys found that initial spending by the institutions and students of roughly $5 billion in 1999 expanded to a total output impact of $7.7 billion. Value-added impacts, which exclude expenditures related to domestic and foreign trade and thus provide a more accurate indicator of in-state economic benefits, constituted $4.5 billion of the total output impact — an amount equal to almost 2 percent of Georgia’s gross state product. Labor income received by the residents of host communities equaled $3.6 million, or 78 percent of the value-added impact. Georgia institutions as a whole thus tend to enhance the economies of their host towns.
Ahmad Ijaz, an econometric analyst at the University of Alabama’s Center for Business and Economic Research, estimates a multiplier effect of 1.5 for expenditures by his institution, indicating that each dollar spent by the university and its students results in another 50 cents for the local economy. Ijaz calculates that the total impact of the institution on the local economy of Tuscaloosa County in 1998 was $619.3 million, a figure that represents about 19 percent of Tuscaloosa’s total personal income. Of this amount, 41 percent was generated by student expenditures, 33 percent by the university’s payroll and 26 percent by institutional purchases. Local economic impacts for the University of Georgia and the University of Alabama do not include amounts spent by visitors on sporting or other special events.
In 1993–94, which represents the last year a comprehensive economic impact study for the University of Florida was conducted, the university accounted for expenditures of $1.8 billion. Of that amount, $986 million went to salaries and benefits, $567 million applied to operating expenses, $263 million was spent by students off-campus, $58 million was spent in construction, and $19 million was spent on visitors. Thus, much of this amount remained in the Gainesville area, and 95 percent stayed within the state.
While university spending is eventually affected by recessions, the immediate impact of recessions may not be experienced as severely in university towns as in other parts of the state. Since state-funded institutions are significantly dependent on tax revenues, local recessions are more likely to be felt three to six months after the start of a recession as the tax base shrinks and funding cuts take effect, says Humphreys. These cutbacks can be particularly sharp in states like Alabama, where state funding for its educational trust is allocated as 90 percent of sales tax — a type of revenue that can be hard-hit by decreased spending associated with recessions.
According to Ijaz, universities do not typically respond to cutbacks by laying off existing employees. Crimps in funds are more likely to be reflected through decisions by administrators to leave positions vacant, through elimination of departments with low enrollments or through the postponement of capital and research projects. Thus, employment within the institution may remain stable relative to that of other types of industries or even other state-funded agencies. The multiplier effect, however, is doubtless affected by curtailments in university spending. The extent to which these kinds of cutbacks affect the host community depends largely on the diversification of the local employment base, Humphreys notes.
During the 1981–82 recession, Auburn and Tuscaloosa in Alabama, Athens, Ga., Gainesville, Fla., and Oxford, Miss. — all of which are home to major academic institutions — enjoyed significantly lower percent changes in levels of unemployment than did their respective states (see the table). The same pattern held true during the economic dip of 1990–91, with the exception of Gainesville, which experienced a slight decline in employment as compared with a slight increase in Florida as a whole, and Tuscaloosa, which experienced a decline in employment sharper than the state’s.
Athens typically enjoys lower rates of unemployment than other Georgia cities, according to Humphreys. This lower unemployment rate occurs, he says, because students are not counted as unemployed while they are in school. Additionally, students often leave Athens to return home after graduation so they do not show up among the ranks of the locally unemployed. Despite apparently low levels of unemployment, however, the labor market in Athens is not tight, explains Humphreys. On the contrary, he notes an abundance of potential labor. Nonetheless, he argues that businesses placing a high premium on the availability of labor in selecting a location might tend to avoid a city like Athens, which registers low official unemployment rates despite large pools of highly skilled professional talent.
The availability of skilled and educated labor nonetheless remains a draw for high-tech and information-based businesses. The academic specialties of the university affect the types of businesses that locate in the area. Margaret Wagner Dahl, director of the University of Georgia’s Research, Development and Technology Alliance, reports strong synergies in the Athens area for the development of bio-tech enterprises based on soil, crop and dairy sciences. While many of these enterprises are spawned by faculty members within the university, they help to provide the infrastructure that attracts companies from outside. For example, a producer of veterinary pharmaceuticals recently located in Athens, attracted by the research potential provided by the university’s school of veterinary medicine. Dahl was recruited by the University of Georgia from Austin, Texas, and she sees similarities between the two communities.
According to Robert Wells, assistant academic vice president for research at the University of Alabama, the presence of the university and the potential for shared projects in research and management training was significant in the package of incentives that convinced Mercedes-Benz to locate in Tuscaloosa County.
Universities provide significant numbers of jobs in their state and local economies. In 1996 the University of Alabama at Tuscaloosa was the largest employer in its county, hiring approximately 3,403 full-time workers, or approximately 5 percent of Tuscaloosa County’s total workforce. Ijaz explains that the university’s share of the total number of jobs has actually dropped in the last decade — from 7.7 percent of the county’s total wage and salary employment in 1990 to 4.8 percent in 1998. (These figures do not include indirect impacts.) This drop is explained by the fact that employment and wage growth are increasing at a pace much slower at the university than in the county as a whole, particularly when compared with the private sector, Ijaz says.
Despite the decline in the university’s share of jobs overall, its share of total income in Tuscaloosa County has risen significantly in the last decade, from around 4 percent in 1990 to around 7 percent in 1998. This change reflects the fact that most of the job growth in the county has been in retail and service-related businesses, which tend to pay less than manufacturing firms, which played a larger role in the economy a decade ago.
Athens researchers estimate that collectively the 34 institutions of Georgia’s university system generated an employment impact of approximately 94,700 jobs in fiscal year 1998 and nearly 100,000 jobs in fiscal year 1999 — an increase of 5.6 percent. This figure, which includes part-time jobs and indirect employment as a result of institutional and student spending, accounts for 2.7 percent of all the jobs held by Georgians, or about one in 37 jobs in the state. Each million dollars of initial spending by the university system in fiscal 1999 resulted in 20.1 jobs.
The University of Georgia, the largest employer among the 34 state institutions, accounted for a total employment impact of 19,708 in the 1998–99 fiscal year. This number equals about 16 percent of the jobs in the six-county area that comprises the Athens economic region included in Humphreys’ study. Of these jobs, 14,443 were related to salaries and institutional operating expenses paid by the university, 828 were related to capital expenditures and 4,447 were related to students’ personal expenditures.
Though most of the University of Florida’s 37,559 employees were located on campus in Gainesville, employment impacts extended throughout the state through county offices of the cooperative extension service, regional research and education centers, and other off-campus programs. According to 1993–94 data, 4,486 of these employees were faculty, 9,915 were staff, 16,900 were students employed part-time and 3,587 were employees at Shands Teaching Hospital. An additional 2,672 worked at the University Medical Center in Jacksonville. Excluding student workers, who are typically not counted on employment rolls, University of Florida employees made up nearly 30 percent of the total number employed in Alachua County. This figure does not account for university employees who may live in adjacent counties.
Since both employment and expenditure impacts are directly correlated with the number of students enrolled at an institution, according to Humphreys, one might reasonably expect the economies of university towns to follow student demographics. In other words, when student populations increase, whether because of greater accessibility of education (such as that produced by the Hope Scholarship in Georgia) or greater numbers of university-aged students, the economies of university towns may be stimulated; conversely, a drop in student enrollment because of dwindling numbers of university-aged students or factors that limit the accessibility of university education could cause contraction.
Many universities draw significant resources from outside the region and the state. These contributions may come from out-of-state students, visitors to the city, research grants, or other federal and private funds. In 1993–94, out-of-state students contributed over $31 million to the University of Florida in tuition and other fees, approximately 33 percent of total fees of $95 million. Visitors to the University of Florida spent $19.2 million in 1993–94 to attend athletic, cultural, commencement and other activities. This estimate is conservative, says the University of Florida’s David Mulkey, an economist who worked on the 1994 study. Athletic events drew the most visitors by far — 327,500 of the 458,000 total (see sidebar). Federal research support provided more than $94 million in 1993–94, and federal financial aid provided nearly $75 million to students from within the state. The University of Alabama attracted $38 million in federal grants, most of which was spent in the region.
Retirees may eventually become an important feature of the university town. The University of Florida has recently planned a retirement village for alumni and faculty in Gainesville and reports a waiting list for occupancy. While Florida has a special appeal for retirees, they are increasingly moving to other areas of the Southeast as well. The University of Georgia is also aware of the potential to attract retirees and is currently building a retirement center. Universities that include medical care also offer older residents state-of-the-art health treatment facilities.
Live, graduate, pay taxes
The short-term benefits of the presence of a major academic institution are clearly significant for their host communities, but long-term impacts may be even more important for the state and the region.
In a 1995 study, the University of Alabama’s Center for Business and Economic Research calculated the value a degree from the university added to the lifetime income of its graduates. A graduate with a bachelor’s degree would earn $408,696 more over his or her lifetime than a graduate with a high school degree; a graduate with a master’s degree would earn $131,487 more than a graduate with a bachelor’s degree; and a graduate with a doctorate would earn $236,797 more than a student with a master’s degree.
Return on investment is calculated by dividing the value added by the approximate cost of the degree. The cost of the degree considers not only the actual cost of tuition and living expenses while in school but also the cost of forgoing income appropriate to one’s educational level. The average annual return on investment for a bachelor’s degree was 21.3 percent; for a master’s degree, 10.7 percent; and for a doctorate, 13.3 percent on top of the previous degree.
While state institutions often rely heavily on tax dollars for the cost of their operation, they also generate taxes through consumer spending and faculty and staff incomes, the higher incomes of their graduates and their capacity for retaining individuals who might otherwise go outside the state to seek an education. University of Alabama economists found that the state invested a total of $103.6 million in the graduating class of 1995. Sales taxes and income taxes collected from faculty and staff during the period of the students’ residency provided $63 million to help offset this amount. Taxes collected as a result of “value added” to the class of 1995 by the university would provide another $116 million, representing a gain by the state of over $75 million, or an average annual real rate of return of 4.3 percent. In 1995 about 65 percent of the University of Alabama’s alumni resided in state while 66 percent of Florida’s alumni remained living and working in Florida as of 1994.
Despite seasonal fluctuations, vulnerability to funding cuts and the effects of shifting student demographics, universities appear to provide a relatively stable economic base for their host cities. Over the long term, universities’ educated labor pools can be expected to draw technologically oriented and information-intensive businesses. Although graduates’ higher salaries do not have a direct impact on local economies, graduates who remain in the state will contribute to the states’ revenues that in turn support universities.