Whether you call it a "double whammy," "perfect storm," or "tipping point," public higher education has reached a crossroads, and new, more strategic ways to support universities are required if they are to meet state priorities. The demands are soaring while state appropriations are shrinking, and it will take much more than an improved economy to close the gap between institutional needs and available resources. States and public higher-education institutions must do business differently to educate and train a labor force with the skills that our country needs to compete globally. If fundamental changes don't occur, the nation will be short millions of college-educated workers in the next few decades.

There is widespread agreement on the scope of the problem -- but much less on the solutions. In particular, two of the key groups, governors and college presidents, differ in how they view the burgeoning crisis.

Governors see it through the lens of productivity. As leaders of their states' economic development, they want exponentially greater numbers of students to obtain and demonstrate college-level skills, but without corresponding increases in state expenditures. Thus they urge efficiency, and criticize colleges and universities for program duplication, mission creep, weak graduation rates, inefficient use of technology, and a general tendency to try to "be everything to everybody." They expect their public higher-education system to work within current fiscal realities, including a public demand to keep tuition reasonable and predictable. That challenges deeply held beliefs -- and some evidence -- that quality in higher education is measured by the amount of money institutions spend on their educational programs.

College leaders approach the crisis from an investment standpoint. Arguing that higher education provides long-term returns for regional and state economies, they question the rationale for cutting institutions' share of state budgets, especially when enrollments are rising. Therefore, they look for alternative sources of support, increasingly turning to private donors. With few exceptions, however, such alternative funds pay for isolated programs or specific initiatives, and don't replace core support for basic instruction. That could ultimately raise difficult questions about accountability to taxpayers, as well as institutional direction and purpose.

Whichever perspective one takes, it is clear that, for too long, public institutions have faced significant swings in state appropriations that have hampered their ability to plan, meet state priorities, and serve students. The resulting instability in tuition rates has also harmed students and their families, especially those who are most vulnerable financially to unplanned hikes. In the mid-1990s, for example, higher-education appropriations grew an average of 6 percent to 7 percent each year, while tuition at public universities increased by 3 percent to a little more than 4 percent. Today, the situation has reversed: Annual state support is down an average of 2 percent to 3 percent, and percentage increases in tuition now average in the double digits.

A major part of the problem is how states support colleges. Whether by enrollment formula or percentage increases and decreases, states provide lump-sum support, without regard to priorities or performance. Those support mechanisms evolved in the 1970s and '80s, when states made heavy investments to build growing institutions, but that approach now helps only maintain the status quo. For example, more money goes to graduate education and research than to community colleges, where much of the work-force training occurs, not because it's a priority but because it's always been that way.

States should support higher education in new ways that are both more stable and more strategic. To build an educated work force, they should focus more on matching state subsidies with current priorities, reallocating resources, and developing multiyear plans. That can help states avoid perpetuating the "feast or famine" cycle that prevails throughout public higher education today. For example, although it may never be possible to fully blunt cyclical woes, states should allow colleges to build reserves by carrying over appropriations and tuition revenues -- and then should hold those institutions accountable for drawing on those reserves to meet specific priorities.

Moreover, states and institutions should think more carefully about how they spend their public support, given that the taxpayers provide public investment for higher education. Public support should promote a social good that the market cannot, or will not, promote without intervention -- as in the case of the loan-forgiveness programs for teachers that some states have used to correct for the market's inability to supply teachers at prevailing salaries. Today, however, public support is not always spent that way. For instance, a recent nationwide poll conducted by The Chronicle found that Americans place the highest academic priority on undergraduate education and work-force training for adults. But state spending patterns do not reflect this priority.

In fact, the question facing presidents, chancellors, boards, and policy makers is simple yet controversial: Should some programs be given higher priority for scarce state resources than others? For example, should some state funds now going to graduate and professional education be reallocated to undergraduate education? Some institutions and states are already discussing whether they should charge different tuitions based on how much it costs to provide an education, as well as how much money graduates make, in different disciplines. States should reassess the priority assigned to higher education, campuses should reassess the priority assigned to various programs, and both should realign their investments in a way that best accomplishes state and regional goals.

By thinking and acting more strategically, states and colleges can make better use of limited resources. In the past, it has served states and the nation well to allow institutions to make their own decisions about programmatic spending. But if states find that colleges and universities are unwilling to allocate funds to support key priorities, institutions should expect that states will shift their appropriations toward performance rather than institutions.

A promising way to move from the lump-sum method of supporting institutions would be for states to set aside a portion of their support to purchase specific educational services. Any institution could submit a bid to provide those services. For example, a state that needs more engineering graduates could request proposals from its public institutions that demonstrate how they could meet that demand. By encouraging students enrolled in one institution to take courses at others, and by establishing statewide policies that encourage the transfer of course credits, two regional universities and several community colleges, for example, might collaborate and present the most competitive bid to the legislature.

States could also create education enterprise zones in historically underserved regions with low rates of high-school completion and college participation. Legislatures could appropriate money to those areas and solicit plans from partnerships of colleges and other community-based organizations on how to use the resources to improve educational performance in those areas.

Washington State has adopted a new performance-based budgeting model that includes such strategies. To produce more graduates in high-demand fields like science, math, engineering, and special education, the state increased institutional support in those disciplines. Similarly, the state responded to a demand from industry for a more skilled work force in the area spanning Portland, Ore., to Vancouver, Wash., by investing in a science and engineering institute there. In the next budget cycle, public colleges and universities will be required to change how they describe their activities; instead of just naming specific programs, like "libraries," "instruction," "plant operations," or "research," they will have to detail how they benefit the public.

While states should preserve and enhance their financial stake in higher education, institutions need to be willing to establish priorities for programs and focus on cost-effectiveness. Campus officials must recognize that a significant source of money for new initiatives will most likely come from reallocating existing resources and making necessary tradeoffs. Although academic audits and related tools can help campuses identify "centers of excellence" and sharpen mission focus and fulfillment, too much of that work now occurs on the margins of planning and budgeting.

Colleges should also pursue cost-effective strategies that improve student learning. For example, new technologies, as well as course consolidation and elimination, offer great promise to save money, expand access, and improve quality, but many campuses don't seize such opportunities for fear of the investment costs and because of faculty resistance to such changes. Colleges need leaders who face those issues directly and develop creative strategies to deal with them.

Finally, because the issues are long term and will outlast individuals, states and colleges should establish a sustained forum where higher-education leaders, policy makers, communities, and the private sector commit to finding ways to pragmatically respond to increasing demands on higher education with fewer public resources. North Dakota's Higher Education Roundtable has been such a place, contributing to decisions on key issues such as mission differentiation, resource allocations, and tuition-policy revisions.

In a world of term limits in politics and regular changes in campus leadership, it will not be simple or quick to focus and maintain the public's investment in higher education. But without a thriving system of public higher education, we cannot remain a democratic and globally competitive society. A generational shift is now just beginning on campuses as the majority of senior faculty members and administrators is due to retire in the next decade. That offers a prime opportunity to ask tough, thoughtful questions about how government and college leaders act -- and interact -- on key issues. Both groups owe it to today's students, and the millions who will follow, to work together to steer more purposefully the public's investment in its colleges and universities.

Kristin Conklin is a senior policy analyst at the National Governors Association. Travis Reindl is assistant to the president at the American Association of State Colleges and Universities.