A New Kind of Public Funding

As states pull support for higher education construction, cities offer incentives to develop new campuses.

December 1, 2011

The two newest public university campuses in Arizona -- Northern Arizona University’s campus in Prescott Valley, which is in its second year of operation, and Arizona State University’s Lake Havasu campus, slated to open in fall 2012 -- will be testing grounds for some fairly innovative concepts.

Tuition at both is significantly lower than at the universities’ main campuses. Administrators have pledged to try alternative delivery methods designed to cut down on costs. Both institutions have partnered with local community colleges to teach some classes. And both hope to offer accelerated degree programs.

But the most innovative feature might be one that students never see: how the universities are funded. Unlike other public campuses, neither is receiving direct funding from the state, and both received significant indirect investment from municipal governments and local residents. Whereas the main campuses fund about a quarter of their operations through state appropriations, a percentage that has decreased significantly since 2008, the branch campuses will try to be self-sufficient, operating mostly on tuition revenue, with only some administrative expenses being shared with the main campuses.

At a time when state governments, citing decreased tax revenue and high entitlement costs, are decreasing state support for public colleges and universities, cities and groups of private citizens in some states have stepped in, offering incentives such as facilities and infrastructure to get institutions to build new campuses and expand old ones.

The municipal support represents a shift in the funding equation for colleges and universities. While cities and towns have supported community colleges in the past, their investment in four-year campuses has been minimal. Their current foray into university education provides a new financing opportunity for colleges looking to grow their reach and capacity at a time when states are reluctant to invest in new facilities.

“Given the economic difficulties, this could be the nature of how things are going to be financed in the future,” says Richard Stanley, senior vice president and university planner at Arizona State University. “Different groups are seeing the value of putting incentives together.”

It also changes the nature of the public university and of town-gown relationships. At some of these new campuses, state support makes up little, if any, of the overall funding. In the long term, the shift could change how responsive public universities are to state lawmakers’ demands and give municipalities and local residents, who have long derived significant economic benefit from the presence of a college campus, a greater stake in institutional ownership.

Joni Finney, a professor at the University of Pennsylvania’s Graduate School of Education who studies the public financing of higher education, said partnerships with municipalities have not been a common tactic for funding expansion.

During recessions, municipal budgets are often hit harder than state budgets, she said. This being the case, Finney said it is surprising that cities are investing in universities.

Finney noted that such partnerships could be a good strategy for public institutions to improve access, particularly in underserved areas. No-frills campuses in rural locales could likely provide inexpensive degrees, as long as the institutions remain focused on local needs and don't try to expand beyond what will serve the community best. “In this setup, an institution has to be responsive to local and regional needs, and that may be a good thing," she said.

But institutions and municipalities should be aware of the investment they’re making. “They do need to look at the long-term costs. What’s the city’s capacity to sustain this over time?” Finney said. “With a school building you have questions about ongoing maintenance that will have to be somebody’s responsibility." While a large city such as New York might be able to afford the type of investment required for a university, she said, investing in higher education could eventually become too expensive for a small municipality, especially when it comes to constructing the new facilities that tend to accompany residential campuses.

“At some point they are going to need support from the state,” she said.

Arizona Out Ahead

Arizona municipalities have been at the forefront of helping public universities develop new campuses, a drive that can be attributed in part to the structure of higher education in Arizona. While most states have systems of smaller regional public four-year universities that serve different parts of the state, Arizona's four-year higher education options are limited to three large research universities, a handful of for-profit institutions, and only one four-year, private, nonprofit college. If a student wants to stay near home or wants to attend a smaller institution, he or she has few options.

Arizona significantly lagged other states in degree production by the time the recession began. In 2009, the state’s governor challenged the three universities to increase degree production and access to higher education -- particularly in rural areas -- without increased investment from the state, a tall order for university administrators.

Lake Havasu City, which had been trying to lure a higher education institution for several years, saw the governor’s challenge as an opportunity. The city, located along the state’s western border, is a 3.5-hour drive from the closest public university, Northern Arizona. Many city residents who graduate high school do not end up going to college.

A few years earlier, the city offered Arizona State a piece of land on the lakefront to build a new campus that could accommodate between 800 and 900 students. But since the recession dramatically limited the university’s budget, the state’s ability to finance a project, and the city’s ability to raise money, the university could not afford to develop the campus.

But when the city consolidated its two middle schools during the recession, residents realized they now had a prime piece of real estate to offer the university. Arizona State agreed to turn the school into a new campus if the city could finance renovations. Since the city, according to state law, cannot directly offer incentives, a group of private citizens raised $2 million in four months to support the infrastructure improvements.

To ease startup costs, Arizona State will pay no rent on the property for at least the next five years. If the city can demonstrate that it needs the space after that, the university will pay rent based on how many students it enrolls, another compromise made by the town to keep costs manageable for the university.

Lake Havasu Mayor Mike Nexsen said the outpouring of support for the new campus surprised him. On Fridays, many of the town's residents wear ASU apparel around town to show their support. “Ninety-nine percent of this community is so happy that ASU agreed to put a campus here,” he said.

Residents said they were eager for a university campus because of the benefits that could come with it. For one, college campuses bring a large group of students and staff and faculty members, who can support local businesses such as restaurants, bars and apparel stores. That increased business can also generate more tax revenue for the city. “Look at Flagstaff, Ariz.,” said Jo Navaretta, chairwoman of the Lake Havasu City school board, referring to the location of the main campus of Northern Arizona University. “What would that town be without N.A.U.? It came in there and transformed the whole town into a college town.”

For a city like Lake Havasu, whose economy relied mainly on construction and tourism until both took a significant hit in the 2008 recession, a college campus could provide some much-needed stability. “It would be a huge economic driver for an economy that needs to be diversified,” Nexsen said.

Nexsen also said the university presence could help improve the K-12 education system. “Any college town tends to be a little bit more progressive,” he said. “Being a town where a college or university is located tends to bring up the quality of K-12 education, because people are more education-minded and believe how important making that investment in children is.”

A local campus could also provide new opportunities for local high school graduates who are reluctant to leave, and attract students to the area who might decide to stay upon graduation. Tuition for full-time in-state students at the Lake Havasu campus will be about $6,000, roughly $3,000 cheaper than tuition at Arizona State's main campus. Out-of-state tuition is slated to be about $9,000, and administrators hope to attract students from California.

While Arizona State is already spread out among four campuses in the Phoenix area, the Lake Havasu campuses will not be thought of in the same way as one of the other four branches, which are designed to complement one another and not duplicate programs. The Lake Havasu campus will offer four degree programs when it opens, and it is designed to be self-sustaining within three years, Stanley said. Students taking classes at Lake Havasu would not study at the other campuses. The university does not plan to spend any money designated for the main campuses on the Lake Havasu programs aside from what is spent on shared administrative services.

Prescott Valley's town manager, Larry Tarkowski, said similar concerns played into its decision to invite Northern Arizona to set up a branch campus. The town had recently constructed a new municipal library building with a significant amount of classroom space. A partnership between the town, the local community college (Yavapai College), and the university set up NAU-Yavapai. The town also provided funds for marketing.

The Prescott Valley campus is Northern Arizona’s second full-fledged branch campus, though the university has several distance-education programs and several partnerships with community colleges throughout the state. The first branch campus, in Yuma, was established in 1988. Back then, the city’s residents successfully lobbied the state legislature for a line-item appropriation to fund the university’s operations.

The Yuma campus is a transfer institution by design, with students taking lower-level classes at the local community college and transferring credits for a less expensive degree. The campus now serves about 600 students in both graduate and undergraduate programs. John D. Haeger, president of Northern Arizona University, said the success of the Yuma campus was one of the motivating factors behind creating the new branch campus in Yavapai.

Haeger said that if the Prescott Valley campus proves successful, the university will probably seek a line item in the state budget to provide a permanent funding source. But unlike the Yuma campus, he suspects that it will be harder to secure funding for the campus given the state's budget constraints and that lawmakers will need proof that the campus is a good investment before appropriating money for it. Even if the campus does prove successful, Haeger said, the state might not choose to support it.

While Haeger said Northern Arizona is probably done creating new campuses for the moment, Stanley at Arizona State said his institution is in talks with several other municipalities about potential new campuses.

Arizona municipalities are not only trying to lure the state’s public universities. A few years ago, Goodyear, a city outside Phoenix, asked private universities to set up shop. Franklin Pierce University signed a lease in 2008.

And Arizona cities are not alone in trying to get institutions to start branch campuses. New York City recently made headlines by offering land and up to $100 million in infrastructure improvements for a university willing to open an applied sciences campus in the city. Seventeen institutions responded to the city’s request, including Cornell and Stanford Universities, which proposed $2 billion campuses. The city is reviewing proposals and speaking with the institutions that submitted proposals, and city officials said they hope to announce a winner by the end of December.

Analysts from Moody’s Investors Service put out a report Monday saying that the number of private university branch campuses may grow significantly over the next 10 years. “Expansion strategies within the U.S. are likely to become a more common means of broadening educational opportunities, growing revenues, realizing economies of scale and enhancing brand reputation,” the report states.

Haeger said that municipal partnerships and other forms of collaboration in creating new campuses will be necessary for public universities looking to expand, given the high cost of starting a campus from scratch and the fact that state investment seems unlikely to return. “Universities are going to have to be far more innovative about bringing various partners to the table,” Haeger said. “In this instance, the city’s a partner and the students are a partner with the tuition they pay. It’s the only way it can be done.”

University administrators said the municipal incentives lend support to an argument they frequently make to lawmakers -- that colleges and universities are economic engines for states and regions and a worthwhile investment. But greater reliance on other funding sources could also remove some of the state’s responsibility for supporting public institutions. “I worry about concept of public education,” Haeger said. “When I talk on campus, I already tell people we’re a semi-public institution now.”


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