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Presidents of Indiana’s public universities were called before a panel of lawmakers in September and asked to justify increasing tuition significantly over the past decade.

Since 2002, lawmakers said, tuition costs have grown from 12 percent of an average family’s budget to 19 percent. "It is much harder to send your kid to school today than it was 20 years ago," said state Rep. Jeff Espich, a Republican lawmaker who chairs the budget committee, in the hearing. As a result of the public pressure, Indiana State University reduced its planned tuition increase for in-state students from 3.5 percent to 1.5 percent last week.

And the Indiana presidents aren’t alone. Lawmakers in several states, including California, Michigan, and Florida, have asked university presidents to justify why tuition increases – many times double-digit percentages – are necessary. The presidents' response, time and time again, has been to point the finger back at lawmakers.

Since the economic recession began in 2008, state revenues have not kept pace with state funding obligations, resulting in budget shortfalls in most states and cuts to most state services. When states cut appropriations to higher education institutions in the past, colleges and universities made up the difference through tuition hikes and belt-tightening. Both lawmakers and university leaders kept quiet, knowing that appropriations would return and that large tuition increases would likely be followed by smaller hikes.

But with states still slashing budgets, and economic forecasts still looking grim, and a fourth unpleasant budget cycle on the horizon, the politics of tuition hikes are changing. Colleges and universities are starting to look for financial, policy, and political solutions that could help them escape the double bind that forces them to choose between decreased per-student spending on one hand and higher tuition on the other. And while states and universities blame each other for what is often a higher cost for a lower-quality product, higher education observers argue that both are at fault for breaking down the traditional partnership responsible for funding higher education, with neither side willing keep tuition low and affordable.

“States at times are happy to deregulate tuition, because they can turn around and criticize the institutions, and they don’t want fingerprints on it,” said Joni E. Finney, a professor with the University of Pennsylvania’s Graduate School of Education, who studies the public finance of higher education. “They can blame the colleges. And the institutions are happy to be able to have authority and flexibility; they just have to take the criticism. Both are culpable. There’s a partnership in terms of who pays and what’s a fair share, and it’s falling apart.”

Funding a 'Public Good'

Public colleges and universities rely on two primary sources of revenue to finance undergraduate education: state appropriations and tuition. While other sources, such as investment income, contracts, grants, and gifts generate revenues at some institutions, that money is generally earmarked for uses other than instruction. Such sources of revenue are also more common at large flagship research universities than other types of public institutions.

“When you look at the bottom line, there are two major sources of funding for the educational mission, and only two major sources,” said Michael A. Boulus, executive director of the Presidents Council, State Universities of Michigan, a group that advocates on behalf of the institutions and has tried to emphasize the idea of higher education as a public good.

State appropriations made up the largest chunk of revenues for public universities for much of those institutions’ histories. For example, in 1972, state money accounted for about 75 percent of the cost of educating a university student in Michigan. But that position has been sliding over the years, even before the current downturn, as institutions grew other revenue streams, such as private giving and investment income. At research institutions, federal and private grants have also started to comprise a large chunk of the budget. State appropriations made up about 12 percent of the University of Michigan's budget and about 35 percent of Michigan State University's budget in 2009.

But the main reason why state funding has shrunk as a component of institutional budgets across the country is because of tuition increases. Per-student state funding didn’t drop significantly until states started grappling with the effects of the economic recession that began in 2008, but tuition has increased at about two times the rate of inflation since 1989. Many states, which previously set tuition costs at the legislative level, have given institutions the authority to set their own price.

When appropriations decline, only tuition remains a viable funding stream for undergraduate education, many public university presidents argue. When state lawmakers cut appropriations, institutional leaders face what seems to be an unpleasant choice. They can raise tuition to maintain or increase spending levels, but they risk public and political backlash and could make education too expensive for some groups. Or they can hold tuition steady, cut spending in certain areas, risk a decline in quality and potentially lose faculty members who are offered higher salaries at other institutions.

Tuition hikes at most institutions do not account for lost appropriations. In 2009, the first year institutional budgets began to show the strain of the recession, net tuition at public research universities increased $369 per student while per-student state and local appropriations dropped $751, according to the Delta Project on Postsecondary Education Costs, Productivity, and Accountability. At public master’s institutions, net tuition increased $225 per student while per-student appropriations dropped $590. The result is that many universities ended up charging students more but spending less.

Data from public university systems in Indiana and California, two states where institutions have come under scrutiny for tuition hikes, show that increases in net tuition revenues since 2008 have not made up for spending cuts. Between the 2007 and the current school year, state support per student for the University of California system dropped an estimated $4,700 per student. In the same time period, net tuition revenue per student only increased an estimated $3,500.

The University of California system has tripled tuition costs over the last decade. In 2009, the system adopted a 32 percent increase. Last year, after several rounds of cuts, students ended up paying about 17.6 percent more.

Patrick Lenz, the system’s vice president for budget and capital resources, said he can recall only one tuition hike that matched a state cut dollar-for-dollar. That was in July, 2009, when administrators increased tuition 9.6 percent on top of a previously approved 8 percent increase to compensate for a last-minute state cut. Lenz said the system made that because institutional budgets had already been set. “How would we manage it otherwise?” he said.

Holding States Responsible

Because funding has dropped significantly during the past four years, and because lawmakers and the public have ratcheted up scrutiny and criticism of tuition increases, convincing lawmakers to restore traditional levels of funding has become a top priority for many presidents and chancellors.

They have peppered lawmakers and the public with data about how the formula has changed, trying to shift responsibility away from the university making the tuition increase to the lawmakers, who they say are forcing their hand. A fact sheet given to students and families at the University of Washington explaining a recent tuition increase notes the decline in state funding first thing. "The University of Washington and all Washington public institutions have seen a gradual decline in state funding over the past 20 years with a dramatic drop in the past few years," the statement reads. "State investment in the University of Washington has decreased by 50 percent since 2009." Tuition at the University of Washington has more than doubled since 2000.

“I think states are just as culpable, if not more so,” Finney said of tuition increases. “In the end they’re responsible for public higher education.”

Public colleges and universities are also looking for leaders with skills that could help restore funding, leading to the selection of numerous former politicians to university leadership posts in recent years. When the Texas A&M University Board of Regents named former state legislator and comptroller John Sharp the system’s president in August, they cited his experience working with lawmakers and his potential to secure state funding as a major reason for his selection.

But despite the emphasis on communicating issues to the legislature, many presidents' efforts are falling short. For one, many lawmakers argue, the money just isn’t there. According to the National Council of State Legislatures, states face a collective shortfall of $91 billion for the 2012 budget year. And state legislatures, many of which came under control of Republicans during the 2010 elections, are reluctant to raise taxes.

When University of Wisconsin system President Kevin P. Reilly said this year that it was time for the state to reinvest in higher education, lawmakers shot him down. "That ignores reality," Mike Mikalsen, a spokesman for state Rep. Steve Nass, told "No one sees the economy turning around anytime in the near future, so massive reinvestment in the university system is not going to occur. If anything is going to happen first, if the state comes up with any resources, the top goal is to deal with K-12 because that is the obligation of state government."

That sentiment is becoming more and more widespread, higher education leaders say. Because more people see higher education as a private good, because state funding now makes up a relatively small portion of total institutional funding, and because universities have so many revenue streams that it’s hard to blame one for a decrease in quality, lawmakers are finding it easier to divest in higher education or place it lower on the priority list, higher education leaders say.

Boulus of the Michigan presidents’ council said his job is to make the case day-in and day-out that education is a public good worth investing in. Michigan ranks near the bottom of the list when it comes to per-student state spending.

Despite his efforts per-student appropriations decreased almost $3,000 between 2001 and 2009. With such a small percentage of the budget coming from the state, individuals have argued that the institution should just separate from the state, since that would free it from some restrictions and reporting requirements. Boulus said that would not happen. “We are a public good,” Boulus said. “We should be state-supported. We want to be state-supported. But we’re getting closer to just being state-located. We may verge on being state-abused.”

In August, California higher-education leaders sought to re-establish state appropriations increases as a regular component of their funding model. They set out a plan by which the University of California’s budget would increase by a certain amount each year, with, ideally, half coming from appropriations provided by the legislature and half coming from tuition increases. If the state kicked in, tuition hikes would increase about 8 percent annually. If the state did not, tuition hikes would be closer to 16 percent annually.

The plan would have done two things. First, it would have removed volatility from the funding equation. Lenz said the system was tired of having to adjust institutional budgets because of delays in the state budgeting process. It will likely have to do the same thing this year, as lower-than-expected revenue projections could trigger another $100 million cut for both the University of California and California State University systems midway through the school year.

Second, the system’s plan could have shifted some of the public blame for tuition increases to the state. If the system and the public expect an increase in state funding, and the state fails to deliver, it would then have to shoulder some of the backlash against the tuition increase. Lawmakers would be celebrated for staving off large tuition increases. Lenz said it would not be unreasonable to expect appropriations to increase about 8 percent a year.

“We’re not abdicating the ability of state to make an investment in higher education,” Lenz said. “We’re just trying to remove some of the volatility of a funding process that does not work when we’re trying to plan for students.”

The Board of Regents ended up rejecting the plan at its September meeting, saying the university should look at alternative funding streams before potentially placing so much burden on students. But next year's state’s budget picture is unclear, and there is still a chance that tuition could increase significantly.

Relieving States' Responsibility

Because tuition hikes have not balanced the funding equation, and because funding levels do not seem to be returning, some higher education leaders have advocated abandoning the traditional financing structure. “I don’t believe that public institutions can provide the quality of education they seek while serving a public mission without dramatically increasing tuition and then redirecting increased tuition to meet the financial aid needs of lower income students,” said George S. Bridges, president of Whitman College, a private liberal arts college in Washington. Before becoming president of Whitman, Bridges was a dean at the University of Washington.

Bridges has argued in speeches and newspaper columns for public colleges to adopt the high-tuition, high-aid model that many private colleges have employed. At many these institutions, total cost of attendance, including tuition, room and board, and associated fees, regularly runs higher than $40,000. Those colleges than discount the sticker price based on student need. The average discount rate in 2010, according to a survey by the National Association of College and University Business Officers, was 42.4 percent.

Bridges argues that the high-tuition, high-discount model helps remove the uncertainty that comes with state appropriations. The current low-tuition model also leaves potential tuition money on the table. “By setting tuition low, our state legislatures and public institutions are subsidizing wealthy people to attend public schools, and you have to question whether this is a wise practice,” Bridges said. Charging high tuition and then discounting that tuition based on students’ needs could result in lower tuition for many individuals.

While others have advocated higher tuition and aid for public institutions, Bridges is pushing a more extreme form of the model. He said the University of Washington should be charging no less than twice what it currently charges, about $10,000 per student.

The high-tuition model has its detractors. For one, the model has begun showing its own weaknesses, with some of the top institutions in the country beginning to wonder whether it is sustainable to charge such high tuition.

There are also questions about whether the model can sustain itself in the long run or on a larger scale, since it relies on the idea that some segment of the student body is going to be able to pay full tuition, something that many don’t think is realistic. “The model structurally forces you to have a big enough pool of high income students in perpetuity,” said Patrick Callan, director of the National Center for Public Policy and Higher Education. “It’s a delusion that perpetuates the myth that we can raise tuition forever. There is never going to be enough financial aid to make that model affordable.”

Others have advocated finding new revenue streams to fund educational operations, such as increased fund-raising and investment returns. John Ellis Price, founding president of the University of North Texas at Dallas, which is convening a commission to consider ways to provide an inexpensive degree, said he is open to new models of funding, such as an endowment-dependent model.

Finding Savings, not Revenue

While the discussion has centered on finding ways to sustain the current level of funding or return to pre-recession levels, some in higher education have advocated for adjusting institutions to the size of their budgets.

Institutions need to accept that the current funding levels are a “new normal,” Callan said. “It’s not going to get back to what people think of as the good old days.”

Callan and others argue that inefficiencies exist in higher education, with students taking too many courses and taking too long to finish, faculty members spending too much time out of the classroom, and administrators failing to adopt technologies that could lower the cost of producing a degree. “There are things universities should have been doing all along to become more cost-effective,” he said. “Because we haven’t done all of those things, we get caught even worse when we hit a recession.”

It should be up to lawmakers, Callan argues to restrict how much a college or university can raise tuition, thereby forcing colleges to think about what they can and should add and what they should cut. Some states have imposed caps on tuition increases. Michigan's governor prohibited institutions from increasing tuition more than 7 percent. The University of North Carolina system has a long-standing cap on tuition hikes, but the plan allows universities to propose an increase that exceeds the cap if they “demonstrate that tuition revenues are the only viable source of funds for addressing the need.” Institutions have exceeded the cap several times in recent years. Colleges and universities also say such caps tie their hands, particularly in the current environment when appropriations and investment income are often less than expected.

And while many faculty members and public research groups argue that administrative budgets are bloated and need to be slashed, the bulk of money spent at colleges and universities is tied up in the educational mission. “You really have to look at curriculum you’re providing for students,” Finney said. “You need to examine choices you’re providing and the array of programs available.”

Finney argues that balancing the funding equation will take buy-in from all stakeholders in public institutions, including trustees, administrators, faculty members, and lawmakers. Bringing them all to the table and getting them to accept that all have a responsibility in keeping costs down, and showing them how that can be done, she argues, is the best way to keep costs down. "It's a difficulty discussion," she said. "And it requires real transparency about the reality of revenues and what you're spending your money on."

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