The 50 states are responsible for public systems of higher education, and accommodate 80 percent of the total enrollment. With growth and large expenditures of state funds in recent years came increasing regulation of higher education. In many instances institutional autonomy has been threatened by state action. Six recommendations are made for the public sector to adapt appropriately and efficiently to enrollment declines: (1) states should use a consolidated governing board combined with institutional boards to focus responsibility; (2) public research universities must be maintained, undiluted, as the foremost institutions in the public sector; (3) a funding formula consisting of a base grant plus a grant per full-time equivalent student, rather than being tied to enrollment, would offer institutions a chance to maintain quality while clarifying their missions in the public system; (4) the licensing function for both private and public institutions should rest in the state higher education agency; (5) institutions must be willing and capable of adopting improved management techniques to maximize returns from the public funds available; and (6) a peer review system for monitoring educational quality should be used rather than monitoring by state agencies. (Author/MSE)