Even before the economic collapse, colleges have been going through intense debates about how they should be financed and what missions they should hold onto -- and which they should revamp. A new book from Cambridge University Press, Mission and Money: Understanding the University, explores these issues. The authors are Burton A. Weisbrod, the John Evans Professor of Economics at Northwestern University; Jeffrey P. Ballou, an economist at Mathematica Policy Research; and Evelyn D. Asch, research coordinator at the Institute for Policy Research at Northwestern. Weisbrod responded to questions about the new book.
Q: What most surprises you about the economics of financing colleges? What would most surprise the public about the revenue on which colleges and universities depend?
A: None of our findings about college finance really came as a surprise. Study of public and nonprofit organizations in many industries including not only colleges but also hospitals, nursing homes, museums, day care centers, medical research organizations, food pantries, and so on have shown that all are continually searching for revenue wherever they can find it. The missions of not-for-profit organizations encompass providing services that may well be socially desirable but that are privately unprofitable -- such as serving the poor, supporting basic, not patentable, research, and preserving society's cultural values through, for example, music and art. Because these activities are typically unprofitable, colleges have no choice but to find offsetting sources of profitable activity or close their doors, which some end up doing.
But for those that remain, it comes as no surprise that they engage in price discrimination, charging full tuition when they can, and cutting price by offering financial aid discounts when that is necessary. It comes as no surprise that they engage in all sorts of efforts to generate donations not only from alumni and parents but from other individuals, corporations, and foundations. It comes as no surprise that they spend money on lobbying Congress and state legislatures, and that they bring law suits when necessary to protect their moneymaking patents and copyrights.
Some elements of college finance are likely to be quite surprising to most of the public: (1) State government grants to public universities are much less important than is commonly believed; it not unusual to find state universities that receive well under 20 percent of their budgets from the state, with the University of Virginia receiving but 7 percent. (2) Public universities are increasingly dependent on student tuition and private donations, just like private nonprofit schools, leading to growing concern about the "privatization of public universities." (3) College financial aid is increasingly going not to the needy but to the high-performing students being sought by schools wanting to tout their "quality" so as to perform better in the increasingly competitive higher education industry. (4) At private nonprofit schools the overall importance of endowments as a major source of revenue is typically exaggerated; most schools have small, virtually inconsequential endowments, and the super-rich schools, topped by Harvard, provide education to well under 5 percent of all undergraduates. (5) Little recognized is that a growing number of schools are reaching out for profit from activities that are not part of their tax-exempt missions at all -- selling Mediterranean cruises, accepting commercial advertising space in their school publications, and renting their football stadiums for commercial rock concerts and even professional football games.
Q: Of the new or growing revenue sources, which do you think pose the most danger of eroding important missions of colleges and universities?
A: The greatest danger and the greatest hope are the same: entanglement with private firms, especially with wealthy organizations engaged in applied scientific research in, for example, the pharmaceutical industry, and Wall Street enterprises with strong connections to banking and finance. The private enterprise sector is where most of the nation's wealth is, and so colleges and universities see the enormous financial potential for cooperation with private firms, and even for joint ventures with them. But with such financial relationships come dangers, such as allowing financial ties to influence both what research goes on at a university and how it is pursued. With financial dependence comes the risk that university research will slip into the service of private funders. The risk is uncertain but the cruciality of revenue is clear. The result: the need for vigilance and caution.
Q: You write at length about topics such as branding, the finances of college sports or patents, etc. Many academics look down on such activities, but many administrators say these efforts support traditional missions. Do you view these activities as paying for mission or diverting mission?
A: They typically do both -- advance the mission and divert it. Part of the problem is the vagueness of college and university missions. In our book we present examples of mission statements, showing that they are typically so broad as to permit virtually any activity to be undertaken in support of it. But there is more. Many academics do look down on such activities as big-time sports teams with 100,000-seat stadiums with luxury sky-boxes, football coaches with 7-figure salaries that dwarf the compensation of the school president, and intense practice regimes and travel schedules than undermine academic studies.
But with the lure of a major bowl appearance generating millions of dollars of revenue and national publicity that brings increased applications to the admissions office and perhaps increased donations to the school's development office -- relationships we examine in the book -- the attraction is real. Protection of property rights, through patents and copyrights, present a similar dilemma. The school mission includes the dissemination of knowledge, but generating revenue requires restricting that dissemination to those who will pay the most for it.
Critics of such "commercialism" have a point. However, there is no realistic and reliable source of revenue that poses no problem of diverting mission. The adage that "There is no such thing as a free lunch" emerges in university finance, too.
Q: What lessons does for-profit higher education offer to nonprofit colleges trying to balance money and mission?
A: For-profit schools have identified types of students and programs that the traditional public and private nonprofit schools have paid relatively little attention to -- especially students older than 18-25 and students who hold full-time jobs that restrict their availability to attend courses during usual school hours. Seeing the market for such non-traditional students, and seeing that in a global economy, changing market conditions are causing increasing numbers of working-age adults to seek retraining and re-education opportunities, for-profit schools have often led the way in expanding these opportunities. They have been leaders in online education and putting no-frills classrooms in easily accessed locations with parking, demonstrating both the growing demand and potential profitability of serving these students.
Traditional schools have not been oblivious to the educational implications of our changing economy, but the growing competition from the for-profit schools is becoming increasingly influential in an industry, higher education, that is increasingly dominated by competitive pressures on their very survival. What the for-profits have also made clear is that some traditional programs are profitable and others are not — a fact that was never in doubt but that the for-profits have delineated more sharply. The for-profits work hard to distinguish the two groups of programs and provide only those such as business, education, and nursing, that are profitable. The not-for-profit schools continue to offer mission-based programs that are expensive to staff, require costly laboratory construction, or attract too few students to be profitable. That is part of their mission, and public subsidies help to finance it.
Q: How do you think the economic downturn will affect the trends discussed in your book?
A: One of the principal costs of attending college for many students is the income they forego. A low income family may find it hard to survive without the income that their high school graduate son or daughter could bring in. The current and worsening economic downturn has made it increasingly difficult to obtain and hold a job, and so with deteriorating job opportunities, more young people and more older workers will see their best opportunities as going to school to get additional training. This process is clear; even in the Great Depression of the 1930s there was a boom in school attendance. Today, not only will undergraduate enrollments increase but so will master's degree programs such as M.B.A.'s, as workers conclude that now is the time, when jobs are so difficult to get and hold, to invest in added education and training.
This does not mean, however, that all colleges and universities will thrive. Students from the lowest-income families will typically be attracted to low-cost public schools -- community colleges and state colleges -- but with growing financial pressures on governmental budgets these are the very schools likely to be constrained in their ability to hire more teachers and find more classroom space. So, the demand for more education will increase, but the supply is problematic.
Class sizes will increase. Hiring of tenure-track faculty will give way to increased hiring of part-time and non-tenure track faculty, speeding a process that, as we discuss in our book, is well underway. Downward pressure on faculty salaries will strengthen and be sustainable because of limited alternative job opportunities. At private colleges and universities, especially those in non-urban locations and without sizable endowments, the prospects are especially troubling. More of their traditional students will be unable to pay the tuition they were paying last year or even last term. The schools will face the unhappy choice of increasing financial aid or seeing students drop out and their contribution to revenue drop even further.
Efforts will be made to increase donations to partially offset these losses, but with unemployment increasing and salaries dropping, donations are unlikely to be sustained, let alone increased. Total national donations have been relatively stable for decades at about 1.9 percent to 2.0 percent of disposable income. With that income falling, donations are almost certain to drop. It is not clear, though, whether the drop will occur equally for schools, hospitals, art museums, and soup kitchens and homeless shelters. Our colleges and universities are in an intense competitive struggle — an important theme of our book -- not only with each other but with organizations contributing to all these other social goals.
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