State policy

Massachusetts Should Tax Harvard

Can you believe that the State of Washington actually wants to tax Microsoft? Doesn’t Washington realize that by taxing Microsoft it risks pushing the company to move its headquarters to a lower tax state? And even if Microsoft doesn’t pay taxes it still contributes to the state in many ways by, for example, promoting knowledge creation. Washington wants Microsoft to pay huge sums in taxes just because Microsoft earns astronomic profits. But Microsoft earned these profits through diligence and intelligence. Does Washington really want to punish Microsoft for its hard-earned success?

Washington State, of course, does tax Microsoft. And if Microsoft tried to get out of paying all taxes many college professors would curse the firm for displaying such naked greed. But Harvard University, the Microsoft of the educational world, feels itself entitled to tax exemption.

Some Massachusetts legislators want to tax rich colleges. Under their proposal, as reported on Inside Higher Ed, Massachusetts colleges would pay a 2.5 percent tax on all assets over $1 billion. (The idea is part of a broader push to question whether some colleges with hefty endowments are inappropriately hoarding wealth while continuing to raise their tuitions sharply.) Nine schools, including Harvard and Smith College (my employer), are wealthy enough to be subject to the tax.

The tax would harm higher education in Massachusetts. But almost all taxes inflict harm. Taxing software companies, for example, reduces their output and increases their prices.

Kevin Casey, Harvard's associate vice president for government, community and public affairs, opposes the tax and was quoted in The Boston Globe as saying, “You'd be taxing success here.” But almost all taxes are taxes on success. For example, I just wrote an economics textbook. If the book sells well it will greatly increase my income and so cause me to pay higher Massachusetts taxes. Massachusetts, therefore, would tax my textbook success. But if you want the wealthy to pay more in taxes than the non-wealthy, then you must support taxing financial success.

Kevin Casey also believes that the tax would harm Massachusetts by damaging “stable bedrock institutions." But organizations such as Microsoft could also use this "bedrock institution" argument to argue for their own tax exemption.

Richard J. Doherty, president of the Association of Independent Colleges and Universities in Massachusetts, correctly pointed out that the tax would damage one of the strongest parts of the Massachusetts economy. He said, “It's like Florida taxing oranges.”

Florida, however, does tax its orange industry. A state that didn’t tax its most successful industries would have to impose higher taxes on less successful businesses and so would further impede these businesses’ fortunes.

Taxes are like poison. Taking a lot is fatal, but exposure to small quantities only moderately harms health. The best way for a government to tax, therefore, is for it to spread around its tax poison broadly so no entity must consume too much of it. If Massachusetts is determined to collect a certain amount of taxes from organizations (such as corporations), then it will do less harm if it forces all organizations to pay a little than if it mandates that a subset pay a lot.

A tax on elite colleges would reduce inequality. Students who attend top schools have vastly higher lifetime incomes than other Americans do. And even if the tax reduced financial aid and so increased student borrowing, it would still reduce inequality because those who graduate from elite schools with large debts are much better off financially than are their peers who do not attend college.

The Harvard economics professor Greg Mankiw has suggested that the tax could cause Harvard to move to another state. But whenever a state taxes a business it risks causing the business to flee.

Colleges, I suspect, are far less likely than businesses are to leave a state because of adverse conditions. Yale and the University of Chicago would surely pay a hefty tax to turn their crime-ridden neighborhoods into versions of Stanford’s Palo Alto. Yet both these schools stay put, even when nearly any similarly situated multi-billion-dollar business that sought to attract the best and the brightest (and often the richest) would have long ago moved to more pleasant surroundings.

In his blog Mankiw also writes of how another Harvard professor thinks his institution should act if taxed: This professor proposes that “Harvard can decide to no longer accept the children of Massachusetts residents.” Well, just imagine the reaction if Microsoft, in its anger over being taxed by Washington state, even joked about boycotting all Washington customers.

Although I support taxing rich colleges, I believe there are better ways of doing it than through imposing a wealth tax on endowments. As Mankiw wrote to me, many economists believe it inefficient for governments to tax savings. I would prefer if Massachusetts imposed a sales tax on tuitions. Such a tax might appeal to politicians who don’t begrudge elite colleges their huge wealth but do feel the schools should spend more of their capital on students by, for example, charging low tuitions.

James D. Miller
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James D. Miller is an associate professor of economics at Smith College and the author of a new Principles of Microeconomics textbook.

Ensuring That States Support Higher Ed

As summer reaches its mid-point, selected high ranking U.S. House and Senate members continue to work on finalizing massive legislation to renew the Higher Education Act, which has already gone through seven extensions this year. One of the few primary issues still being debated is the “State Commitment to Affordable College Education Amendment,” commonly known as the “Maintenance of Effort” provision. The provision seeks to hold states accountable for maintaining certain levels of tax support for higher education, and I believe it is essential for the future of public higher education.

The maintenance of effort provision, which was advanced by Rep. George Miller of California, Rep. John Tierney of Massachusetts and supported by members of both parties on the U.S. House Committee on Education and Labor, is premised on the fact that the most significant factor impacting the rapidly rising cost of college education for nearly 80 percent of the higher education population has been the relentless decline in commitment on the part of most state governments to maintain requisite levels of public funding. The result of this long-term decreasing commitment has been that in many states, as state appropriations have dwindled, public university tuition and fees have skyrocketed. This trend has effectively shifted the burden of funding higher education from the general public to the student.

What Representatives Miller, Tierney and other bipartisan members of the House Education and Labor Committee have figured out is that billions in new student aid dollars will have little effect on the expansion of educational opportunity if state legislatures continue to consistently reduce their fiscal commitment to higher education. Essentially, MOE is a first step in holding states accountable for retaining given levels of appropriations for their own students. The perversity of the present system is that as state legislatures lower their fiscal effort or do not provide adequate support for increasing student populations, tuitions and fees subsequently rise, and as a result most federal student aid programs are tapped at higher levels further indebting ever more students and with greater average debt.

Many state officials have become savvy about the process. In fact, I was told by a very high ranking member of the state legislature in Kentucky a couple of years ago that he did not need to provide additional tax support for public universities since the institutions themselves had the ability to increase their own student tuition and acquire the funds through the federal tuition-based aid programs. This “supplanting” of state support with federal tuition-based program support occurs more readily when state economies are bad or simply when legislators, by whim or fancy, refuse to provide the appropriate levels of public tax support, knowing full well that public universities will in response raise student tuition and fees to provide essential funds.

As a consequence, additional fiscal burdens are placed directly on students and indirectly on the federal government to offset what states fail to provide. This has been a pattern over the last three decades as increases in state legislative appropriations have been unreliable and state institutions are sent scrambling for needed revenues. The maintenance of effort provision has the potential to place pressure, through the secretary of education, to better stabilize state appropriations by means of federal disincentives through the use of Leveraging Educational Assistance Program funds and other programs, or incentives when new federal funds are made available in the future.

Supporters of the MOE provision include the American Association of State Colleges and Universities, which represents the majority of public universities nationwide, and numerous national student organizations. Opposition to the inclusion of the MOE Amendment is spearheaded by the National Governors Association and Council of State Governments, who have the obvious interest in seeing that billions in funding should continue to flow freely without strings. This no-strings approach is, of course, extremely attractive to states that continue to reduce their commitment to public higher education by shifting the financial responsibility away from themselves.

Strong opposition also resonates from the “states’ rights” element that insists that the federal government should not have such fiscal leverage over states. Leading this charge is Sen. Lamar Alexander of Tennessee, who as U.S. secretary of education favored the elimination of the Department of Education and represents a state that is constantly last, or near last, among the 50 states in its tax effort to support public education at virtually all levels.

Legislators, such as Senator Alexander, who argue that states should receive federal funding without a corresponding fiscal commitment to higher education actually perceive that this anti-state tax effort strategy is good public policy. Unfortunately, in this system, the students are the ultimate losers as college affordability declines and federal direct student aid dollars are increasingly rendered less effective.

Many opponents of this amendment also insist that the MOE provision is precedent setting and represents a new dimension of federal encroachment in state sovereignty. In fact, concerns about the federal government holding states fiscally accountable is not new and has been a staple of education and welfare legislation for many decades. In 1965 the Elementary and Secondary Education Act carried with it a maintenance of effort provision that forbade states to supplant their own funding with federal dollars. Over the last four decades, these supplanting provisions have been upheld and enforced by federal courts on numerous occasions. Medicaid, and other federal funding measures operate in similar fashion making it difficult for state legislatures to cut funding without federal fiscal consequences.

In summary, maintenance of effort is an essential component for ensuring that states are held accountable for their funding of higher education. This amendment, if used effectively by blending both fiscal disincentives and incentives, will make states think twice before cutting higher education appropriations and should have an attendant effect of better stabilizing state higher education finding. The true winners will be, of course, the students, but in the broader context the spillover beneficiaries from state fiscal stabilization and enhancements to higher education will be the entire social and economic system.

F. King Alexander
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F. King Alexander is president of California State University at Long Beach.

College vs. Employment

In forming a strategy to deal with the severe economic downturn, President-elect Obama and his evolving brain trust of economic advisers should recall the largely successful and innovative efforts by federal and state governments to avoid a projected steep post-World War II recession -- in particular, the key role given to higher education.

Beginning in earnest in 1944, many leaders in Washington and in the state capitals throughout the nation worried about a return to Depression-era unemployment rates -- President Roosevelt included.

There are many reasons that the expected deep recession eventually turned into the beginning of an economic boom in the US after the war, including high saving rates during the war with the result of unanticipated and pent-up consumer demand. But another reason was proactive efforts to mitigate feared unemployment rates, to support industries with growth potential, and to fund yet another round of infrastructure development and expand public services.

One of the most important salves that came out of that era of policy making, one that provides a guide for our present predicament, was the embrace of large-scale investments and innovative policies by both federal and state governments to promote greater access to higher education.

The famed GI Bill, for example, was not simply an effort to open new opportunities for deserving returning veterans -- many of whom had delayed their education or needed new skills to enter the job market. The unprecedented investment by the federal government in providing grants for college had another important purpose: to reduce projected unemployment rolls and, at the same time, help restructure the U.S. labor market by producing a more skilled labor force.

State governments acted as a partner in that macroeconomic strategy. Under the leadership of Gov. Earl Warren, for instance, California expanded markedly the physical capacity of their public higher education systems by establishing new campuses, hiring new faculty, eventually creating their own scholarship programs to supplant the GI Bill, and subsequently reaping tremendous economic and social benefits from the investment in human capital.

The Role of Higher Education in National Economic Recovery Today

That basic strategy of expanding funding for individuals to attend a college or university and to get a degree, and funding the expansion of higher education institutions, is a key component thus far missing in the national debate over the route to economic recovery.

Expanding higher education funding and enrollment capacity may be as important as any other policy lever to cope with an economic downturn, including funding for infrastructure. Any new federal initiative to boost access could also be designed for an immediate impact on the economy.

The overall educational attainment of a nation is, in fact, much more important today than some 60 years ago. Broad access is increasingly viewed as vital for socioeconomic mobility and demand for higher education generally goes up during economic downturns. Individuals who lose their jobs, or fear low prospects for employment in declining economies, see a university or college degree as a means to better employment prospects.

In some significant measure, it is likely that enrollment demand will go up, particularly in the public higher education sector, because tuition costs are generally much lower than in the private independent and for-profit sectors. We are already seeing evidence that many students who had planned to attend private or out-of-state public colleges will turn to cheaper in-state options.

Yet most state and local governments are in the midst of wholesale cutting of their budgets, the initial rounds of large and succeeding cuts to their public higher education systems.

Some 75 percent of all students in the U.S. are in public institutions. Feeling the effects of repeated cuts in budgets, many multi-campus public systems are threatening to cap or event lower enrollment despite growing demand -- including the California State University system, one of the nation’s largest four-year university systems.

To make ends meet, places like CSU simply cannot afford more part-time, let alone full-time, faculty to teach the classes -- this despite a 20 percent increase in freshman applications over last year. In the face of this significant rise in demand, CSU plans to cut its enrollment by some 10,000 students. That would mean a net 10 percent cut in total freshman admitted for 2009-10 over this academic year. Most CSU undergraduates are in their mid-20s, meaning some sizable number of students will be displaced, forced into an eroding labor market.

CSU’s planned limit on enrollment is in reaction to successive years of major budget cuts, including a mid-year cut of some $66 million and probably larger cuts next academic year. CSU already took a $31.3 million cut earlier this year.

The ten-campus University of California system might follow suit. Adjusted for inflation and enrollment growth, state funding on a per-student basis at UC has fallen nearly 40 percent since 1990 -- from $15,860 in 1990 to $9,560 today in current, inflation-adjusted dollars. The UC president and the Board of Regents have made preliminary threats of a similar reduction to that of CSU in freshman admissions that would equate to a 6 percent overall reduction in the universities' system-wide undergraduate enrollment.

Admittedly, such threats in the past have acted as negotiating positions with the state legislature and governor. But these are not ordinary times, and this is not an ordinary recession.

The net effect of any enrollment caps in the public four-year institutions is a seemingly unrealistic expectation that California’s community colleges will act as a buffer, absorbing the spill-off of students denied admission at UC and CSU and the general rise in demand for higher education. That won’t happen.

California’s community colleges are already facing initial cuts of $332.2 million. There will be no additional funding for expanding the community colleges, with one estimate that more than 250,000 students will be turned away -- the colleges will be cutting the number of part-time lecturers in the midst of unprecedented demand for classes. I sense that that number will be much larger without a proactive mitigation.

A similar cascading scenario will occur across the nation. Millions of students are already flocking to community colleges and public universities at a time of midyear cuts that are forcing colleges to lay off faculty members and cut classes; many higher education institutions are already freezing enrollment.

In New York, Gov. David Paterson faces a large budget deficit and plans midyear cuts of some $348 million in the budget for the State University of New York’s 64-campus system and the City University of New York. This comes on top of some $196 million in cuts made earlier in this fiscal year. All of this will have an impact on access and enrollment rates.

After a long period of declining public financing for higher education on a per student basis, most public universities and colleges have little room to yet again do more with less. State budget cuts for higher education already in the works will undoubtedly have a negative impact on student access rates for this academic year. But the largest impact will come in 2009-10 when tumbling state budget allocations will correspond with rising demand for higher education.

Beyond bonds for construction, most states, like California, have severe limits on borrowing. Most must provide balanced budgets under their state constitutions. Some may raise taxes to cover growing real and projected deficits; but most will cut deeply into public expenditures, including education.

Public university and college systems in California and other states are no longer interested in pitching in to expand enrollment without the resources; now they are pushing back under the rubric of self-preservation. Every institution is increasingly sensing that they are on their own, and not part of a collective effort to serve a state, to serve a nation. No one that I am aware of has modeled the potential impact of this cascading effect of the disparate actions of state governments, multi-campus systems, and individual institutions cutting budgets and cutting enrollment.

The traditional lever of public college and universities to help cope with declining state and local revenues is to raise tuition and fees. However, I sense that we are at a point where significant fee increases, matched by rising unemployment rates and continued constrictions in credit markets, will cause a huge, artificial downward pressure on the ability of students to enroll in all types of institutions -- from community colleges to major selective universities. Further, additional tuition revenue will likely not cover the added cost of expanding classes and campus infrastructure required to meet enrollment demand.

Would it be smart to constrict access to higher education just when unemployment rates are potentially peaking?

U.S. Lags Behind Other Nations

The U.S. is already lagging behind many international competitors in the number of students entering and, even more importantly, graduating with a college degree. Less than two decades ago, America had the highest rate not only of students who entered a college or university, but also of those who then actually earned a bachelor’s degree or higher. Now the U.S. ranks a rather meager 16th in the percentage of young people who get a degree – behind Australia, Iceland, New Zealand, Finland, Denmark, Poland, the Netherlands, Italy, Norway, the United Kingdom, Ireland, Sweden, Israel, Hungary, and Japan. Indeed, and sadly, the U.S. is one of the few OECD nations in which the older generation has achieved higher rates of education attainment than the younger generation.

Here is the gist of the problem: too few students who graduate from high school; too many part-time students; too high a proportion of students (nearly 50 percent) in two-year community colleges, most never getting a degree; too many part-time faculty; an absence of long-term goals at the national level and by state governments regarding higher education access and graduation rates; and to date no well-conceived funding models to assure quality.

This is a problem that needs national leadership. The U.S. continues to grow in population. Today, the U.S. enrolls about 19 million students in degree-granting colleges and universities. If current participation rates remain flat, and states and federal governments don’t cut further the budgets for higher education, we would grow by about 2.5 million students over the next 15 years. But if the U.S. were to match the progress of our economic competitors and expand access to its growing population, one study indicates it would need to grow by more than 10 million students.

The deleterious effects of further and large-scale cuts to higher education, combined with modest improvements to an already inadequate financial aid system for low- and middle-income students, would pose a triple hit for the U.S.

First, access and graduate rates would decline in the near and possibly long term, depending on the depth of the economic collapse and the actions of government. The U.S. already has the highest percentage of part-time students among those enrolled in higher education when compared to economic competitors -- not by choice largely, but a result of personal economic necessity. This indicates the fragility of current access rates.

Second, unemployment rates would climb higher and probably have disproportionate effects on working- and middle-class students

Third, depending on the actions of other economic competitors, most of whom have concrete national policies to expand higher education access and graduation rates (the U.S. has no such policy), the U.S. will accelerate its international decline in overall educational attainment.

A Happier Scenario

Another and much happier scenario, however, would be that the federal government, in partnership with state governments, view higher education as a vital component for economic recovery and long-term prosperity -- on par with new investments in infrastructure and stop-gap measures to stabilize housing and credit markets.

How to adequately assess options and their costs and benefits is a complicated question. For example, what would be the potential impact of greater, or lower, access to college on, for instance, unemployment rates?

At the same time, the incoming Obama administration must decide among a growing number of economic recovery initiatives, each with their own interest groups and heartfelt supporters. Everyone has his or her hand out. Weighing the benefits and costs of competing demands for federal tax dollars will be increasingly difficult.

An exploratory Commission on Higher Education, not unlike what President Harry Truman formed in 1946 but with more urgency, and possibly an initial budget overseen by the new secretary of education, could provide a larger vision and contemplate a range of options -- big-picture analysis that the myopic Spellings Commission simply ignored in its fixation with creating new accountability regimes. Accountability is not an end, but a means, and that was seemingly lost on Education Secretary Margaret Spellings, the commission’s leadership, and a cadre of higher education pundits.

President-elect Barack Obama has repeatedly noted the importance of raising educational attainment rates, and improving the quality of education in the U.S.. The Obama campaign did offer a number of important policy initiatives related to higher education. These included greater reliance on direct loans from the federal government (instead of subsidizing private bank loans), a long-overdue simplification of federal financial aid forms by linking applications to tax filings, marginal funding for community colleges to create more job- oriented programs, indexing Pell Grant maximum awards to the rate of inflation, and offering a one-time refundable tax credit of $4,000 to a student who agrees to 100 hours of public service over two years.

These are all good ideas. But they are simply not enough in light of mega-trends in the economy and America’s underperformance in education.

1. Short-Term

Short-term and immediate policies could include significant directed subsidization via state governments of their public higher education sectors relative to projected near term enrollment demand -- to essentially stop states or major public universities from capping enrollment or turning away large numbers of students. Federal Pell Grants for low-income students, already severely underfunded relative to demand, could be increased significantly in the amount awarded and the number of students receiving aid.

Resources for direct loans could be substantially expanded and made more generous with the possibility of a one-time grant for middle-income students to attend a participating public or accredited private institution that would also receive a small federal allocation. In return, these institutions would promise to reduce tuition for students enrolled in the federal program -- perhaps by 5 percent for publics, and 10 percent for selective privates. Such programs, like the GI Bill, helped to galvanize the higher education institutions in the nation, public and private, into understanding their distinct and significant role in real and anticipated hard times.

Another idea might be to tie federal unemployment compensation with access to an accredited higher education institution -- perhaps targeted to certain groups as an option.

Any infrastructure investment initiative should also focus a portion of its portfolio to support public college and university building programs that expand enrollment capacity, like classrooms, or meet research and faculty needs -- such as offices and research labs. Such a program would reflect the federal government’s brief but important investment in university and college building programs during the mid-1960s and could require matching funding from state governments or private enterprise.

There is always the question of whether to fund the individual students or institutions. Past federal policy has focused on funding of grants and loans to individuals. But there is urgency to venture, at least on a temporary basis, into funding key and largely public institutions -- the main providers who have explicit public purposes.

2. Long-Term

Long-term goals need to assess the overall health of the U.S.’s still famous, but strained, higher education system and what national and state goals might be conjured. In states with projected long-term and large population growth, like Florida, California and Texas, there has been no coordinated assessment of actual enrollment capacity. Can they grow to meet ambitious efforts to increase educational attainment levels? What would constitute a “smart growth” approach to capacity building?

Cost containment in higher education, particularly among selective institutions, and how to finance public higher education is also an important long-term policy issue that needs a macro-view. But the vast majority of public higher education, I would argue, is vastly underfunded, and not, as many critics like to crow, overtly inefficient.

What alternative models are there for financing public higher education? A national consideration of alternative funding models could help guide states, and public and private institutions, toward a funding scheme that aligns with a national goal for educational attainment. This could include providing states with guidelines and models of best practices. Issues related to fees and tuition in public colleges and universities, for instance, are almost hopelessly mired in state politics, and often misguided analysis on affordability.

For good and bad, the U.S. higher education system has been relatively stable over the past 50-plus years, subject to only marginal efforts at reform and reorganization. Stability is important for institution-building and focusing on the quality of what institutions are designated to do within their respective state network of public and private colleges and universities. But the lack of innovation and serious consideration of the overall fit of the current system with current and future economic and socio-economic mobility needs of society is already proving to be a significant problem for the U.S. -- one among many.

States should not be left on their own to reinvigorate and use their higher education systems to mitigate the economic downturn or to, essentially, chart the future labor force and, ultimately, competitiveness of the US. Simply stated, they are not now capable of charting aggressive and enlightened policies related to higher education like they did in the now very distant past. As noted, they are hampered by growing and competing demands for the tax dollar including health care, prisons, and they face significant limits on their ability to launch a spending program suitable for meeting rising enrollment demand.

Further, states generally lack a broad understanding or concern regarding issues related to national competitiveness and the larger problems of growing social and economic stratification. Arguably, now is the time for strategic period of federal government investment, targeted to individual students and supporting colleges and universities.

What will other nations do with their network of universities and colleges in the midst of the unprecedented turn in the global economy? The jury is out. Perhaps a few nations, and in particular their ministries of education, have grasped the role of higher education for mitigating the severe economic swing we are experiencing now. They will redouble their efforts to expand the role of higher education during the economic downturn, or at least protect that sector from large cuts in funding.

Those nations that resort to uncoordinated and reactionary cutting of funding, and reductions in access, will find themselves at a disadvantage for dealing with impact of the worldwide recession, and will lose ground in the race to develop human capital suitable for the modern era.

Like the Roosevelt and later Truman presidential administrations, the incoming Obama administration should more fully integrate higher education policy into its economic recovery strategy. The U.S. is at a critical juncture in effectively combating the severity of the economic downturn, and higher education will either be an important mitigation, or a large-scale drag on economic recovery. What is missing thus far is the national leadership that can do something proactive.

John Aubrey Douglass
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John Aubrey Douglass’ most recent book is The Conditions for Admissions: Access, Equity, and the Social Contract of Public Universities (Stanford Press). He writes about global trends in higher education. A version of this paper was published by UC Berkeley’s Center for Studies in Higher Education in its on-line Research and Occasional Paper Series.

History We Can't Afford to Repeat

For the 11th time since World War II, boom has turned to bust in our economy. Recession brings change in both the public and private sectors, as industries and government are forced to rethink how and to whom they deliver products and services. The current recession will be no exception.

Higher education’s response to economic downturns, however, has changed little. States and their colleges and universities have used the same strategy in every recession of the past generation, doing less of the same -- reducing access, cutting programs and services -- and charging students and their families more. During each of the last three recessions, average tuition and fees at public colleges and universities have climbed nearly 25 percent, and enrollment has fallen in two of these recessions.

Choosing retrenchment over reform has helped to make college more expensive and less accessible and affordable. Since the last recession of 2001, the U.S. has fallen to tenth in the percentage of young adults with a college degree, the share of income needed for the poorest family to pay public college expenses after financial aid has jumped from 39 percent to 55 percent, and student loan borrowing has nearly doubled.

The world surrounding higher education has changed significantly since the last recession, in ways that make a repeat of past behavior riskier than before.

Eight years ago, the knowledge economy was still developing, and the Baby Boomers -- our best-educated generation -- were still in the prime of their working lives. Today, half of the fastest-growing jobs require education beyond high school, and the first of the Baby Boomers will reach retirement age in just two years. This means that millions of college-educated workers will be needed to fill new and existing jobs, and our current completion rates won’t meet that need.

Eight years ago, two-thirds of Americans believed that success in the work force didn’t require a college degree and a majority thought that qualified students could get to and through college. Today, more than half of Americans say that a college education is essential, and two-thirds say that eligible students are being shut out of college. The public’s demand for access to higher education and their confidence in colleges’ and universities’ ability to deliver it are on a collision course.

Despite these warning signs, we’re already seeing history repeat itself. Lawmakers in Florida are moving to allow every public university to increase tuition by as much as 15 percent per year despite widespread public opposition. Three of the nation’s largest public university systems -- the University of California, California State University, and Arizona State University -- are proceeding with plans to cap or cut enrollment amid rapid growth in their states’ college-going populations.

How do we break this cycle and redefine higher education’s response to financial crisis? It will require strong leadership at the state, system, and campus levels, focusing on priorities, productivity, and innovation.

Setting priorities involves hard choices. We believe that in the current financial crisis, ensuring accessible and affordable undergraduate education must be the highest priority. States should not cut higher education disproportionately compared to other state services and rely on students to make up the difference through tuition hikes. Colleges and universities should share resources to ensure that every eligible student can enroll, and redirect resources from high cost, low need graduate and research programs to undergraduate instruction. Both should make financial need the top priority for their student aid funds.

We see encouraging signs on this front. Governors in Maryland, Michigan, and Missouri have proposed shielding higher education from cuts in exchange for tuition freezes. In Pennsylvania, Gov. Ed Rendell has proposed a bold effort to increase need-based aid for students attending community and state colleges.

Gauging and increasing productivity is also a must. State, system, and campus leaders need to look at how money is being spent and the results of that spending, rather than simply focusing on revenues. They must also set clear expectations for institutions to regularly review these data and use them to reform or eliminate high cost, low performing programs and reinvest the savings in areas consistent with state needs and priorities.

There are positive developments in this area as well. The National Association of System Heads is working with public university systems in nearly 20 states to better measure and manage costs as part of a broader push to improve participation and completion rates for underrepresented students. One of the participating systems -- Mississippi Institutions of Higher Learning -- has changed its budget development process to include a focus on institutional spending, not just campus wish lists.

The third -- and perhaps most important -- element is innovation. Our colleges and universities are renowned for the innovations that they bring to other fields, but they focus relatively little on their own reinvention. Many promising initiatives, including dual high school/college enrollment and course redesign, operate on marginal dollars in good times and are the first to be cut when budgets tighten.

Here again, some states are showing leadership. Policy makers in Indiana, Ohio, Tennessee, and Texas are exploring new funding models that would include real incentives for retaining and graduating students, not just enrolling them.

Recessions are inevitable, but our responses to them are not. Policy makers and higher education leaders who once again decide to do less of the same and charge more for it will tell us that they had no other choice. But we know that just isn’t true.

Patrick M. Callan and Robert H. Atwell
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Patrick M. Callan is president of the non-profit, non-partisan National Center for Public Policy and Higher Education. Robert H. Atwell is president emeritus of the American Council on Education, serves on the National Center’s board of directors, and chairs the board of directors of the Delta Project on Postsecondary Costs, Productivity, and Accountability.

Saving Public Higher Ed

Our nation’s system of public higher education is in crisis. Unprecedented funding cuts give us several reasons to be concerned: First, about 70 percent of American college students attend public colleges and universities, which means more than 12 million students may be directly affected. Second, many public institutions produce a wealth of valuable research that serves as an engine for both regional and national economic growth.

Less well known is that the crisis in the publics has the potential to undermine the high quality of American higher education as a whole. While state budget cuts may appear to be aimed at the publics, we will all be poorer if our renowned system is allowed to falter. As a result, everyone in the academy -- even those of us in private institutions -- should be thinking of ways to revitalize public higher education.

While there is talk in academic circles of various reforms, two specific changes would go a long way toward helping public institutions strengthen their positions: revamping public university governance, and establishing a progressive tuition structure.

A diversified model

Anyone who spends time outside the U.S. knows that American higher education remains the envy of the world. One of the characteristics that distinguishes our system from others is that the U.S. does not have a centralized approach to higher education. There is no government minister who provides a uniform curriculum or one national research agenda.

The American system is decentralized, which allows for a diversity of approaches and a significant amount of experimentation and innovation. It also fosters healthy competition. Small schools compete with large schools; publics compete with privates; comprehensive universities compete with liberal arts colleges. And there is spirited competition within these groups.

The result is an educational richness not found in other parts of the world. Some liberal arts programs specialize in teaching great books, while others excel in music and the arts. Other institutions become known for their scientific or technical degrees. There are different learning models as well, ranging from traditional classroom education to experiential learning, which involves the integration of classroom study and real-world experience.

There is no one-size-fits-all -- our students are free to choose from a wide range of educational models best suited to their learning styles and future aspirations.

The same dynamic is present in research. Although federal support for university research is a key component -- and there are certainly government research priorities -- there is ample room for faculty- and institution-driven initiatives. Myriad government and private funding sources provide support for a range of different priorities and possibilities. Some institutions are powerhouses in energy or life sciences, while others focus research efforts on economics, agriculture or urban issues.

A threat to our leadership position

Like most competitive models, the American approach to higher education works best when there is a degree of equilibrium within the system -- robust peer groups that force creativity and innovation. When a substantial sector of the group is weakened, disequilibrium is introduced, which threatens the competitive dynamic.

This is what we’re seeing today as the nation’s public institutions struggle financially. Nearly 40 percent of the nation’s colleges and universities are public institutions -- a substantial share of the overall system.

It is certainly true that private institutions have not been immune from the current downturn. We’re all aware that endowments have plummeted, fundraising is flat, and demand for financial aid has increased, putting additional pressure on strained budgets. But the public crisis appears to be both broader and deeper, with the potential to be with us for years to come.

The state of California provides the starkest example. This year, $800 million in funding cuts have forced furloughs of faculty and staff in both the UC and Cal State systems. This means that classes will become even more crowded and faculty members -- already stretched thin -- will have less time to work closely with students.

There will also be an increase in the number of students turned away. The UC system alone (not including Cal State schools or community colleges) is planning to reduce freshman enrollment by 6 percent. In a system of 220,000 students this amounts to more than 13,000 people who will be denied access.

The pain is by no means limited to California. Across the country -- from Michigan to Wisconsin to Virginia -- states are facing revenue shortfalls and making significant cuts to higher education. Even $825 million in federal stimulus -- the portion targeted for all of higher education -- is not enough to offset the extensive cuts made by state governments.

The timing could not be worse. President Obama has underscored what those of us in higher education know to be true: the nation’s economic prosperity is dependent on our system of higher education. The president has noted that jobs requiring a college degree are growing at twice the rate of jobs that require no higher education.

It is the quality of the American system that will develop the human capital needed for our economy to recover and prosper over the long term.

Opportunities for change

Of course, with every crisis comes opportunity. The current situation can pave the way for public higher education to gain some much-needed flexibility and autonomy. By unshackling these systems from some state-mandated controls, they can be revitalized and continue to play an essential role in ensuring the success of American higher education.

We will see a range of innovations such as three-year degree programs, the concept of “cyber campuses,” and more nonresidential education. Each has the potential to reduce costs or generate revenue -- or both.

More fundamental changes will be needed. Two in particular will give public institutions greater control over their own destinies. The first will be effective in the short term, while the second will empower public institutions to introduce and support long-term innovations:

  1. Progressive tuition: We are seeing many public systems raise fees as one way to shore up their finances. But this regressive approach runs the risk of reducing access for those already struggling to pay for college. Another option would be for publics to raise tuition, while providing more need-based financial aid. By pledging that students from families earning under a certain amount -- say $100,000 -- can attend at no cost (and those above a certain threshold would pay on a sliding scale) public colleges can generate valuable revenue, while maintaining the all-important mission of access.
  2. Reform governance: Board members at public institutions are primarily political appointees. While most are knowledgeable and dedicated, the political process by which they are appointed often results in a divergence of views and priorities. Allowing presidents, chancellors, and existing board members to appoint trustees -- standard practice at most private colleges and universities -- would strengthen the ability of public boards to play a strategic role in guiding their institutions.

More than ever, the country needs higher education to do what it does best: develop human and intellectual capital, and be the engine of progress for the nation. The future of American higher education -- and indeed the nation -- will depend on our ability to maintain a vibrant, diverse and competitive model of higher learning.

Both private and public institutions are critical in this endeavor and must be empowered to succeed.

Joseph E. Aoun
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Joseph E. Aoun is president of Northeastern University.

Calling the 'Inertia Busters'

Education Secretary Arne Duncan delivered a tough message to state colleges last month: Despite the cascading effects of the recession falling hardest on state governments, states should not expect the federal government to provide stopgap money to maintain business as usual. Duncan advised states to get creative.

Lumina Foundation for Education agrees. To increase the percentage of Americans with high-quality degrees and credentials to 60 percent by 2025, as President Obama aims to do, the nation needs quantum improvements in productivity.

We believe states must lead the way. In our experience working in and with state government, the first and hardest step toward productive creativity is penetrating inertia. When the going gets tough, there is comfort in the status quo. Working with HCM Strategists, a public policy consulting firm, we have made $9 million in grants to states as a testament to creative, courageous state leaders, and a talented, fresh team of “inertia busters.”

The “inertia busters” embody the skill set we believe is necessary to promote and deliver on the state higher education policy changes this nation needs.

This means assembling a team that included a former chief of staff to a governor, Jimmy Clarke, who knows how to run interference for politicians; a grass-roots advocate for change Ellyn Artis; a higher education faculty member Mario Martinez; and a director of a federal regional education lab, Rob Muller.

Their role was to promote and advance innovative ideas and strong leadership. As constructive critics and fierce advocates, the inertia busters helped open the door for elected officials to seize the incredible moment for change posed by the confluence of a deep recession and ambitious national degree attainment goals. By simply focusing on the change that is needed now, this team busted inertia in several ways.

1. Maintaining momentum in the face of leadership change. If the economy weren’t enough bad news, Arizona reeled after the White House took Gov. Janet Napolitano and the two education committee chairs left office. Enter an inertia buster, Darcy Renfro, who used her strong policy reputation in Arizona and legal skills to lift up the Board of Regents’ leadership while energizing a new crop of leaders. Arizona’s ambitious agenda promises a new funding model and an array of innovative ways to get Arizonans bachelor’s degrees at much lower costs.

2. Asking states the critical questions so new policies engage institutions. Maryland and Wisconsin are states where policy solutions start with institutions. Greg Nichols, a former state higher education exec, encouraged Maryland’s review of 40,000 student transcripts to understand at which colleges and in which courses productivity was most affected. Now, the community and independent colleges will join with the University System of Maryland to redesign the top 24 introductory courses and turn these courses into money-saving, student-excelling models for the entire state.

In Wisconsin, Rob Muller encouraged the institutions to identify the state policies that stand in the way of their efforts to promote swifter student progress toward a degree.

Advisers Nate Johnson, Jeff Stanley and Amy Sebring have campus level and state government experience that helped their state teams in Tennessee, Ohio and Texas, respectively, grapple with how to design and use powerful new funding incentives for course and degree completion. All three states are now poised to be national models for how campuses and legislators learn and work together to align spending with completion goals.

3. Pushing states to take the hard steps now, when resources are down, versus waiting for a sunnier day. Like most states, budget straits left Montana and Indiana struggling to maintain the most basic services. Inertia busters Judy Heiman and Jeff Stanley saw opportunity in this crisis.

Judy’s experience in the governor’s office and legislature in states on both coasts and Jeff’s career on Indiana’s campuses and state higher education commission afforded them a unique perspective to affirm the importance of a potentially unpopular change.

Both states used funds from the federal American Recovery and Reinvestment Act to make higher education more cost-effective now. For example, Montana halted all new construction and used federal stimulus dollars to develop a university portal and online infrastructure that will serve far more students with high-quality courses that are available more hours and in more places. Indiana used stimulus funds to expand its share of total state funding dedicated to completion incentives.

The contribution of the inertia busters and seed grants are small in proportion to that of elected leaders who deserve the ultimate credit for the work to date. Governors and state legislators will continue to take the heat and muster the courage to change deeply embedded policy and practice.

But the “inertia buster” difference maker is so important that we are commending this role to others looking to promote state policy change.

Kristin D. Conklin and Suzanne Walsh
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Suzanne Walsh is a senior program director at Lumina Foundation for Education where she leads the foundation’s productivity work. Kristin Conklin, a founding partner of HCM Strategists and principal lead for Lumina's state productivity grants, has spent 15 years working on college readiness and success with state and federal policy makers.

The Politics of Disappointment

Recent headlines have been full of disappointment for Americans, particularly regarding institutions that affect their daily lives. First it was the banks who argued that they were “too big to fail” in asking for a federal bailout and then proceeded to award obscene bonuses to their executives. Then it was the automakers, who made a mockery of the maxim “what’s good for General Motors is good for the country” when CEOs of the “big three” took corporate jets to Washington to plead for their own rescue package.

Now, it seems, higher education is joining the list. As colleges and universities hike tuition and cap enrollments while pleading for billions of federal dollars, we have new evidence that public disappointment and disillusionment with higher education are building rapidly. Through new opinion research conducted by our organization, the National Center for Public Policy and Higher Education, and Public Agenda, the American public is sending messages that colleges and universities and state and federal policymakers cannot afford to ignore. These messages include:

Alma mater has become Higher Ed, Inc. While most academics bristle at the admonition for higher education to run more like a business, that is exactly what’s happening in the public’s view, and they’re not sure they like it. We were surprised enough when more than half of Americans voiced the belief three years ago that colleges and universities are more interested in their bottom lines than in providing a good education for students. We have been even more surprised -- and dismayed -- to see that figure jump almost 10 percentage points in just three years.

Let’s be clear. The public is not saying that they do not want higher education institutions to focus on efficiency and effectiveness. In fact, they believe colleges and universities could educate more students with the resources they have. When they see tuition rates outpacing the average family’s paycheck even in times of economic distress, or read stories about excessive compensation of college presidents or about universities bailing out athletic programs while furloughing faculty, it isn’t hard to see how people might be just a bit skeptical about higher education’s priorities.

We can walk and chew gum when it comes to balancing access, quality and cost. In some of our earlier research, we uncovered a pervasive belief among college presidents that cost, access, and quality are locked in a zero-sum game, one that we dubbed “the iron triangle.” Expanding access means either increasing costs or sacrificing quality, containing costs requires limited access or skimping on quality, and so on. As in previous recessions, we are seeing this belief in action in the states, as some of our largest public college and university systems are freezing or rolling back enrollment and/or hiking tuition in the name of preserving quality.

The problem is that a growing majority of Americans just don’t buy that line of argument. More than half of those surveyed agree with the statements that colleges could spend less and still provide a quality education and that colleges could serve more students without hiking prices or damaging quality. These numbers have held steady over the past three years, which is not surprising, given that most people are experiencing significant changes in the workplace due to the recession, international competition, and technological change. They have not seen evidence of parallel innovations in higher education, and they’re wondering why.

We can’t live without higher education, but can we live with it? Simply put, people are feeling trapped. The “squeeze play” -- the combination of beliefs that higher education is essential but that many qualified students are being shut out -- continues and the majority agreeing with both of these statements has reached record highs. This trend is likely to continue as the economy continues to punish the undereducated most severely, and the fiscal slump prompts more tuition hikes and enrollment caps in the face of severe national economic distress. As the squeeze on students and families intensifies and confidence in the altruistic mission of colleges erodes, higher education’s position in the competition for public resources when the economy recovers may be seriously undermined.

So what does this mean?

For colleges and universities and their advocates in Washington, the message being sent by the public is clear. Spending time and money explaining why higher education is essential to the nation’s future is not the answer. Our data show very plainly that the American people get it when it comes to the need for higher education. But those same data also depict a public that is quickly becoming increasingly skeptical of the leadership and management of colleges and universities.

Rather than acknowledging the public’s concerns, some higher education lobbyists and advocates instead criticize the public as uninformed. While the average American may not understand the details of the higher education enterprise, the point is that the American people are anxious, frustrated, and not convinced that colleges and universities are being managed in ways that are consistent with their values. A PR campaign will not fix that. In this case, actions truly will speak louder than words.

For policy makers at the state and federal levels, these numbers represent a signal that voters are increasingly interested in what they are doing and will do to keep higher education affordable and accessible. The answers will not be easy in this campaign season, with the federal stimulus tapering off and many states facing severe budget shortfalls.

The inconvenient but unavoidable truth is that the time has come to talk about real changes in how higher education is funded and delivered.

Patrick M. Callan
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Patrick M. Callan is president of the nonprofit, non-partisan National Center for Public Policy and Higher Education.

Fixing the Broken Financing Model

In the title of a recent paper, David Breneman, a regarded higher education economist, asks: “Is the Business Model of Higher Education Broken?” While he objectively weighs the pros and cons of his question, we answer emphatically, yes!

Put simply, the way in which America finances public colleges and universities, which serve over 70 percent of college students nationally, is severely and irreparably broken and needs to be changed. Without a new model, public higher education will fail its principal purpose of providing broad college opportunity, especially to low- and middle-income students and an emerging population of new Americans. Moreover, without a new funding rationale that has transparency and predictability for all funding partners, these colleges will lose the public trust – a critical element in sustaining the American democratic experience through education.

Public colleges can achieve the dual goals of public and private benefits only by demonstrating equity and fairness regarding who goes to college; legitimacy for who pays and how; and responsibility for how colleges account for educational outcomes and sustaining the public trust.

The solution as we see it should include a new public service corporation model that creates private partnerships; produces new revenue to replace lost public financing; protects and enhances the core educational enterprise; and, thereby, generates greater transparency, accountability and public trust that will support a sustained investment in public colleges.

The Problem

There is widespread evidence, in addition to opinion, that the longstanding model for financing public colleges that has seemed to work so well in many states for decades, now seems, even with an expected economic recovery, to need radical change. (See the soon-to-be-published “A New Model of Financing Public Colleges and Universities,” in On the Horizon.) Comprehensive regional public colleges and universities have been financed principally by state governments and tuition revenue, with a significant amount of funding supplementing these two main revenue sources through state and federal student financial aid.

But it is no longer a viable policy to assume that many states can sustain being the principal funding source for public colleges and universities. Neither can we expect to sustain public colleges by continuing to shift the cost of the enterprise to students and families, thereby pricing many out of college, or alternatively leaving citizens with loan repayment burdens far into the future. While state appropriations as a share of total government spending have decreased steadily for nearly two decades, tuition at public colleges has increased by over 300 percent during the same period. In New Jersey, for example, state funding accounts for only about 30 percent of total public college spending in 2010, down from 60 percent nearly 20 years ago.

National studies project that state revenues are not likely to recover until 2014 or 2015, largely because of entrenched unemployment. Few states are as bad off as California, Illinois, New Jersey, and New York, ranked among states in the worst financial position for many years, with their long-term debt commitments outpacing new revenue. Moreover, states’ structural budget problems virtually guarantee disinvestment in higher education as this is likely to remain a discretionary budget item for the long term. Those who desperately want to find a new model for shared responsibility for public college finance will be poorly served by the continuing misperception by others that higher education can be fixed as a whole or fixed by first changing traditional “academic culture.”

We must recognize that there are many different types of higher education enterprises, that student and service markets are mature and well-defined, and are local and regional, not national in scope. Accordingly, seeking a unified theory for financing public higher education will be unproductive. Instead, different models for financing these enterprises and their accountability which fit different types of institutions serving different types of students, will lead to more effective policy and educational outcomes.

A Possible Answer: Public Service Corporations

We propose, as a long-term strategy to remedy the problems of diminishing state financial support, that comprehensive public colleges and universities should create public service corporations as a new important means of realigning shared financial responsibility. This will help address the thorny matter of continuing ineffective regulatory intrusion, and help to increase incentives to create new revenue streams to reduce the burden on tuition to replace lost state funds.

“Public service corporations” — that is, corporations created to perform a civic function — are familiar to readers of Reinventing Government, which referred to them as “quasi-public or private corporations.” Applying this concept to public higher education might sound like a daring new idea, but institutions based on this model already exist and are succeeding in some states; for examples, note Oregon Health Sciences University and charter colleges such as St. Mary’s College of Maryland. They are publicly owned organizations that are independently governed by their own boards of directors. While they are free from most state controls, as a rule they are evaluated by the state and must meet certain state-set audit performance goals.

The new public service corporations, foreseen by practitioners such as the former Maine Chancellor Terrence MacTaggart and Dave Frohnmayer, former president of the University of Oregon, would complement traditional institutional governance structures (boards of trustees). Allowing institutions to create autonomous public-private service corporations would help colleges acquire, lease, sell, and manage goods and services and real property; provide means of entering into agreements with private corporations by pledging college assets; and receive services related to purchasing, construction, risk management and other required financial services.

While freeing public colleges from arcane state “command and control” mechanisms for purchasing, contracts and construction, the new corporations can provide an appropriate level of public accountability. New Jersey’s comprehensive public colleges and universities are well on their way to achieving these objectives independently and through several pieces of legislation recently implemented and others currently under consideration.

Public service corporations affiliated with the institutions should not be confused with current auxiliary corporations or university foundations, or seen as simply the next step in “privatization” of public colleges. Generally, they are formed for the public purpose of promoting the public welfare of the people of their state by enhancing excellent, affordable, accessible, and accountable public higher education — although not necessarily delivering that education.


We propose a new conception — and a new level of autonomy — for public service corporations that support public higher education. We suggest that public service corporations can stand alongside public colleges and universities and their boards of trustees. Rather than confusing or adding on top of traditional academic governance structures, public service corporations would provide greater transparency, and focus on non-education-related business. Traditional governance structures would remain in control of the institution’s academic operations. These new organizations need to be created to achieve, in short order, a new financial model, instead of doing so incrementally.

The public service corporation should have the following powers and protections:

  • the authority to enter contracts for goods and services;
  • the authority to enter contracts for construction, and to finance and oversee capital projects to allow it to maintain the institution’s physical plant;
  • the authority to raise revenue for the institution, including through grants, appropriations, rents, income, profits from investments, securitization of assets, and proceeds from the sale of revenue bonds, which it must have the authority to issue;
  • exemption from federal and state taxes, and from antitrust law. Both of these exemptions are important for the public service corporation to be able to enter joint ventures or other business alliances or partnerships with private businesses; and
  • entitlement of its directors to representation and indemnification from a state’s tort claims fund for judgments entered against them for actions taken in the course of performance of their statutory responsibilities.

Under our reconceptualized notion of the public service corporation, accountability can be achieved within or outside of a traditional higher education system or centralized coordinating body. Instead, the board of trustees of the institution itself can devise and measure the performance goals for public service corporations entrusted with helping the institution achieve its mission and serve the citizens of its state.

The purpose of the public service corporation that we envision is to supplement, not supplant, the role of traditional trustee governing boards. Beyond enhancing administrative flexibility and new revenue possibilities, the public service corporation should provide even greater transparency for new unrelated business income, thereby helping to protect and enhance the core educational enterprise.

The public service corporation should not only provide for greater flexibility and financial accountability, by helping to free institutions from government regulation that inhibits progress, but also provide the impetus for greater institutional accountability regarding the educational product. Public service corporations can make clearer where revenue comes from, and what it pays for. Forms of successful public service corporation entities abound at public and private research universities, for example, those related to research institutes and health science centers, which explicitly bifurcate education from research and health care functions. However, such enterprises are less well-developed at comprehensive public colleges, still largely controlled by state regulation, or system offices.

The public service corporation, in itself, cannot guarantee financial or educational success of public colleges. But it is emerging as a solution as public institutions face growing pressure to achieve, simultaneously, the goals of access, affordability and service. If such new organizations are created to play a larger role in shared responsibilities for financing public colleges, it will be critically important for the publics that they serve to understand their function, and support the value that they add.

In summary, the benefits of a new model for financing public colleges, one that adds public service corporations, include the ability to:

  • Focus squarely on the core business of public institutions – that is, serving the public good and the educational needs of 21st century students.
  • Promote institutional support that is student- and mission-focused, based on recognition that different types of institutions serve different types of students, in different parts of the country, given the unique role of public colleges in America.
  • Create new, explicit and viable public-private partnerships that help to replace the failing existing model to sustain the core educational business.
  • Focus creatively on operating non-educational business-related functions as stand-alone revenue-generating enterprises, not only to enhance revenue, service innovation and entrepreneurialism, but to build new partnerships that promote educational mission, educational productivity, quality and public service.
  • Provide predictability and equity for all partners, while engaging and promoting accountability, transparency, and public trust as an important outcome measure for the investment.
  • Provide for continuous assessment and strategic alignment of resources and educational priorities within the context of mission and broader regional, state, and national needs in an environment of global providers, thereby helping to keep American public colleges global leaders.

This relationship between the institutional governing board, our citizens, and the public service corporation is essential to ensure that public colleges are accountable for serving the public interest of 21st-century public higher education.

Darryl G. Greer and Michael W. Klein
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Darryl G. Greer is the chief executive officer and Michael W. Klein the director of government and legal affairs for the New Jersey Association of State Colleges and Universities, a nonprofit higher education policy advocacy organization to advance and support public higher education in New Jersey.

21st Century Snake Oil?

Texas is the latest state to jump on the higher education “performance funding” bandwagon, joining a group of other states that see this shiny technocratic strategy as the solution to the many problems surrounding higher education.

Despite the title of this article, I’m not opposed to the core idea: it obviously makes more sense to fund universities (the issues for two-year colleges are often quite different, so I’m leaving them out of this discussion) on the basis of course completions than on the traditional one of enrollments. Adding additional focus to outcomes by counting graduates in some way could also make sense, though the inputs and assessments would have to be fairly weighted -- not easy to do.

The problem with performance funding isn’t in the formulas; it’s in the unreasonably exaggerated expectations for results.

The promoters of performance funding — let’s call them the resultari to save space — are good and capable people with laudable goals whose belief that performance funding will effect major change in higher education appears to stem from two basic assumptions: 1) university leaders are inept managers; 2) both university leaders and faculty care too little about quality and success in undergraduate education.

Examining the Assumptions Behind the Push for Performance Funding

At their core, the assumptions of the resultari stem from a belief that universities suffer from internal contradictions, ones that inevitably flow from the self-interest of both faculty and administrators. Their view is that faculty are too focused on their research and that faculty and administrators are too often intent on enhancing institutional prestige through such things as unneeded programs (principally in the graduate and professional areas). These self-interested emphases, the resultari argue, distract from the real business of the university — graduating as many students as possible with the highest levels of learning and at the lowest possible cost.

Specific manifestations of this alleged administrator-faculty malfeasance include: a general unwillingness to make use of data on productivity and learning, innocence of where money is actually spent, lack of accountability for attrition, a resistance to using technology, and a failure to measure student learning. Performance funding, we are told, will change all this because it will force priorities back to where they should be. And then, when the death grip of administrator-faculty self-interest is wrested from the helm, the ship of higher education will steer a new and better course.

A History of Recent Times

If we accept the resultari’s assumptions, then they are certainly right about the profound impact that performance funding will bring. But are their beliefs about the state of the university correct? Let’s look at what’s happened in public higher education in the past few decades.

First, the resultari often cite as an illustration of inept university management the fact that tuition — even after declining state support — is increasing faster than inflation. There are many flaws in this argument, not least the point, recently cited in these pages, that it ignores basic economics: in a knowledge economy, the cost of all services that rely on highly educated individuals has been going up relative to that of the manufactured goods and other fruits of unskilled labor that comprise so much of the CPI market basket. And, compared to many businesses, higher education has less ability to improve productivity through outsourcing and automation.

Second, the problem of misplaced faculty and administrative priorities is mostly in the past, especially the 1970s and to some extent the 1980s. But universities have undergone radical internal changes in the last 30 years. I saw fine scholars turned down for promotion because of ineffective teaching at the university where I worked (Ohio State) as early as the late 1970s. I know from conferences, etc., that we weren’t atypical. The professoriate’s sense of entitlement, largely generated by the faculty shortages of the 1960s, has long since worked its way through the system. Today’s younger group of faculty is highly attuned to the importance of student learning, and even at major research-focused universities, this aspect of the job garners a significant proportion of their energy and creativity.

I’ve worked with several dozen presidents in both Ohio and South Carolina, and haven’t met one in the last 15 years who didn’t have student success as his or her highest priority — this statement most specifically includes leaders at large public research universities. And it isn’t just talk: these presidents have and are following up with incentives, programs, and rigorously balanced promotion and tenure criteria.

While the big and small universities changed early, it’s true that some mid-sized institutions continued to be a problem well into the 1980s, and in a few cases into the 1990s. Far too many of these institutions suffered the reign of what I call Louis XIV presidents (l’université, c’est moi), who focused on building prestige in the form of doctoral and professional programs that were typically of indifferent quality. But my observation is that this plague of academic locusts has passed and now shows up as just the occasional grasshopper.

There are several reasons why the Louis XIV presidents have met the fate of Louis XVI: state systems have woken up to issues of quality and duplication and cracked down — in many cases drawing public attention to the weak success of the doctoral and professional graduates in the job market; and trustees, often benefiting from the good advice of the Association of Governing Boards of Universities and Colleges, have learned to be vigilant. There was a time when the chairman of the English department could look around the table at a faculty meeting and say, “Damn! There are more than 20 of us now! Let’s offer the Ph.D.!” and see the dream quickly and easily realized. No more (though the unfortunate consequences of many of these earlier decisions linger).

Like generals whose philosophy is shaped by the last war, the resultari appear to be busy preparing to do battle with the universities of the 1970s and ‘80s. Unfortunately, once we’ve constructed the computer-derived version of the Maginot Line, with its walls of data and turrets of formulas, we’ll peek over the top and see there’s no one there.


Another dimension of the misplaced priorities category, according to many critics, is that universities show their lack of appreciation for undergraduate learning by failing to measure it, particularly in general education.

I certainly agree that colleges and universities have been terribly deficient in assessment. We’ve operated on the “infectious disease” principle — the faculty are critical thinkers, the students are in contact with them, so…

No matter how you view the issue, higher education’s “take our word for it” approach as an answer to questions about student learning is unconscionable. That being said, I strongly believe that standardized testing isn’t a solution but a new problem. It’s an approach that creates powerful contradictions and also flies in the face of experience — notably, we know from the history of quality management that the “inspect the product at the end of the line” approach is certain to fail. I won’t attempt to recap the extensive literature in this area. My bottom line is that rigorous, improvement-focused, campus-level, non-standardized assessment (and reporting) is critical — and sufficient.

Ever More Data?

A core part of the performance funding push, and one that I find especially alarming, is the relentless, almost ritualistic, advocacy for more and better data. It seems that American education bureaucrats generally suffer from OCD (Obsessive Computational Disorder). A part of the problem in the higher education world is that the “more data” argument is being pushed by folks — I call them the datarati — who have spent their lives with numbers and, like the man whose only tool is a hammer and who therefore thinks everything looks like a nail, they naturally see data as a primary solution. But getting human-based data down to the decimal point is not necessarily a good investment, and this leads us to another problem of expectations.

Education datarati purport to draw their inspiration from business. One source is the late Harold Geneen, CEO of ITT, who is famous for saying that it didn’t matter the kind of business, if you knew the numbers inside out, you knew the company inside out. Geneen may have made other contributions to business, but this observation is on its face nonsense.

If you had applied Geneen’s thinking to IBM in the mid-‘80s (as its leaders did) you’d have seen an incredibly strong business numbers-wise but failed to notice that a major shift in technology was soon to bring the company to the brink of bankruptcy. There are lots of other business examples of this data-centric blindness. A modern government illustration is the recent federal Race to the Top competition, where data systems count for 9% of the total score but “turning around the lowest-achieving schools” gets only 10%.

Based on extensive personal experience, I find the allegation that universities don’t use data amazing. In the fat years of the ‘60s and to a certain extent the ‘70s, there were certainly gross inefficiencies resulting from lack of attention. But, after waves of budget cuts in recent decades, my observation is that presidents and senior staff are very knowledgeable about where the money goes and about where efficiencies can be found, and they do care deeply about attrition and do assign responsibility for it.

How about those longitudinal data systems, ones that will allow for the tracking of students from K-12 through college? I agree these are likely to have some value. But I strongly suspect the probable impact of these systems is seriously (albeit unintentionally) oversold. Why?

The longitudinal data approach anticipates a system that will be able to tell us, for example, that Mme. Maron’s 11th-grade advanced algebra class at Hogwarts High is turning out students who are weak at college algebra. So far so good, but I suspect that in most cases when the Datarati Swat Team arrives at the school they’ll find that leaders were already well aware that Mme. Maron was a concern. Thus, the second issue, which is that it will be much easier to find the sources of problems than to resolve them. An automobile manufacturer detecting faulty parts can force suppliers to revise their practices and, if that doesn’t work, go to another firm. But, as we are reminded nearly every day in the papers, it’s not so simple with teachers (quite often because it’s not really their fault).

I also believe we are seriously underestimating the cost of these new data palaces. Projects to connect disparate information systems have an amazing ability to always cost more than initially projected — usually a lot more. And that’s just putting them in place. I’ve not seen evidence that people are thinking carefully about the long-term costs of maintenance and analysis. There’s no denying there can be value in the systems, but balancing that against true costs isn’t being done.

Like the resultari, the datarati are winning. My office is now making its first hires in two years and they will all be for a federally funded longitudinal data system. After years of bleeding vital staff positions, this project is not anywhere near the top of our priority list. Worse, when the federal dollars are gone, the first of any new state monies will likely have to go to maintaining the effort. In short, the new data system will be the devourer of rational priorities; I’m thinking we’ll call it Grendel.

Failure to Use Technology

Another issue to consider is whether more use of technology will sharply lower the cost of instruction and in consequence, as a great many reformers argue, contain costs and make higher education much more affordable. The idea of transformational change through technology is certainly an appealing one, but is it based on solid fact or does it contain an important amount of wishful thinking? Unfortunately, I think it’s the latter. I’ll cite three reasons.

First, instructional technology buffs have a habit of using “new” as an explicit or implicit modifier. But the reality is that the technology that’s around today has been there for quite a while. Faculty were using computers to offload drill from the classroom 35 years ago and such use has been pervasive for at least a decade and a half (remember that the Web and HTML have been around for this long). Given the history, and the fact that today’s technology is better but not dramatically different, we don’t have evidence to support the idea that breakthroughs in transforming learning and productivity through technology are on the horizon.

Carol Twigg, head of the excellent Course Redesign effort at the National Center for Academic Transformation, argues that the potential is there with existing technology, but laments that faculty want to keep technology as an adjunct to instruction and will not take the major steps needed to allow it to lower costs. Twigg knows the topic better than anyone else, so I won’t dispute her conclusion about faculty reluctance. On the other hand, I really don’t buy the idea that their recalcitrance simply reflects a desire to preserve their own jobs. Instead, I think the faculty are generally right in seeing limits on replacing people with machines.

This leads to the second point about technology — the human side. Talk to people who deal with students and they’ll tell you there’s a psychological breaking point — most people like to work directly with other people and don’t want to do everything on the computer. Highly motivated adults are certainly an exception (and I’m helping to develop programs based on that belief). But it’s not the same for undergraduates. For example, a recent study showed that three-quarters of those surveyed believed that “online courses are not as appropriate for traditional-age college students, who they believe are better served by classroom courses.”

A third dimension of the potential of technology can be seen in the evidence about staffing. All of the college and university leaders I’ve talked to say that, with few exceptions, online courses are more expensive than the classroom equivalent because they require more instructor time, therefore cutting section size. This also appears to be the case in the for-profit sector, where institutions typically charge more for online education than for the classroom equivalent — about 30% more, in the case of the University of Phoenix. Leaders at this university told me the same thing as their public peers — in consequence of the large number of one-to-one vs. one-to-many communications that occur online, instructors can handle fewer students per section and costs therefore go up.

If you add these three things — 1) the already existing proliferation of technology in instruction; 2) the natural limits to human-computer interactions (in this vein I encourage people to read E.M. Forster’s powerful short story "The Machine Stops"); and 3) the fact that experience so far does not suggest technology will lower costs (indeed much of the evidence is in the opposite direction) — then it’s hard to be as sanguine as the resultari about more technology leading to sharply lowered costs.

Put another way: Will technology give us further improvements in learning while also helping to reduce costs? Sure. Will the change be transformational and make college notably more affordable for traditional undergraduates? No.

What Do Proprietary Colleges Tell Us?

Critics and supporters of higher education alike tend to forget that public and private colleges and universities aren’t the only game in town. There’s a growing for-profit sector. In considering the management/efficiency issue, what can we learn from them?

Let’s begin with an important question: Why don’t the for-profits compete on price?

The easy answer is that the public has an accepted price of what it is willing to pay for education, so the proprietaries are able to use savings from greater efficiencies to add to their profit rather than to lower their prices. It’s true that in luxury markets “low price” doesn’t compete well, or not totally (BMW and Lexus do advertise discounts). So, if higher education is presumed to be this kind of market, a low-price alternative probably wouldn’t work — even if you could show comparable learning outcomes (“Learn-A-Lot U — Just as Good as Harvard at Half the Price”).

But this argument has several flaws. First, while the for-profit sector has long been doing well for investors (with the usual market hiccups in stock prices), I haven’t seen evidence that they are making the kind of profits that, if applied to cost reduction at public institutions, would equate to significantly lower tuition — even in the face of lower state support. Again, remember this kind of change is what some are saying we would get if only public universities would operate efficiently.

Second, the for-profits compete against each other to a significant extent, and it would be natural for someone to lower prices at least temporarily to grab market share (as the luxury vehicle makers do). At least that would be true if someone did in fact have much lower costs.

Third, you really ought to see price competition in the lower part of the market — technical programs — where luxury effects don’t apply. But it’s not there. Indeed, after several decades of working with the technically focused for-profit institutions, my observation is that a major part of their marketing sell is that they are “hands-on,” and that students will be able to work closely with accomplished practitioners. Emphasizing personal instruction by highly qualified individuals in a knowledge economy is not how you lower costs.


Here are some suggestions for resultari, datarati, et al.

Do go ahead and, over time and with appropriate care for balance, implement formulas that primarily reflect outcomes — especially course completions and, to the extent reasonable and practicable, graduation. This only makes sense; funding formulas should always have been constructed on outcomes. But…

Do not describe the change to outcomes as a major structural improvement in higher education that will bring great benefits to students and the public. If the formulas are carefully weighted to reflect the varying inputs — principally in terms of student preparation and background in education culture — we’ll find that, with few exceptions, differences between institutions will be very small and not statistically significant. Those using crude data to support winner-loser formulas point out that right now some universities are doing better than others in, for example, graduation rates. Of course. In part that’s a function of different inputs. If we have just a few simple measures to compare disparate entities, we’re going to get simpleminded results that won’t convince anyone — garbage in, garbage out.

Also, even after you control for inputs, variation will exist. In any environment with a lot of players it’s always the case that at any given time some are doing better than others. That’s not a reason to conclude, as resultari seem to do, that the ones doing less well are lagging because they really don’t care and aren’t trying hard. The punitive spirit of formulas designed to create winners and losers serves no one well, not least in the gratuitous damage to students at the allegedly “underperforming” institutions.

Do invest to improve performance. Universities are more deprived of spare funds than at any time in recent history, with the result that start-up monies for new faculty-led initiatives, such as rethinking strategies in general education, are almost impossible to find. State-level incentive programs, ideally ones that are peer-reviewed, could be used to further encourage faculty creativity in both improved learning and improved productivity (Lumina’s Tuning USA project appears to be a great example of what should be done). Investments of this kind will have the added benefit of setting a positive tone.

Do not add more data unless state and campus leaders agree they meet two key criteria: 1) Will the new information lead to better decisions in the real world?; 2) What is the opportunity cost — are there other things we could do with the money that would have greater impact? It’s curious that the “culture of evidence” crowd seems to think there’s little requirement to provide evidence for the value of new data before it’s gathered. A better approach for the datarati would be to shift gears, focus only on what can be shown to matter, and help us avoid creating a voracious new consumer of educational resources without any clear evidence of proportional benefit.

Finally, do change the tone. I agree that there are actions we can take to suppress the cost spiral — among the things that appeal to me are dropping uncompetitive doctoral programs, more shared and/or outsourced instructional and operating services, and in some cases even merging of institutions — but I don’t believe the best way to advocate for change is by implying that only the self-interested will disagree with me. We need fewer leaders of numerical lynch mobs and more people who are willing to offer a truly thoughtful challenge along the lines of, “We recognize these are good and capable people leading our universities and our faculties, and that they are going against some really tough problems. But, as with any organization, there’s more we can do and we have some suggestions.”

I can’t quantify the difference this change in tone would make, but I think it would be huge.

Garrison Walters
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Garrison Walters is executive director of the South Carolina Commission on Higher Education.

Mend, Don't End, State Systems

In this very chaotic and difficult budget year, where funding cuts in the neighborhood of 20 percent are becoming commonplace for higher education, another troubling movement is under way: to use the funding crisis to further dilute the public responsibilities of some of the country’s leading universities.

In the name of deregulation, a number of flagship institutions are seeking to be exempted from complying with state funding and personnel regulations, as well as to be allowed to live outside of the higher education governance systems in their states. They argue that they need this autonomy to compete in the national and international markets, and that their special status is justified because of the reductions in state appropriations.

They’ve got half of this right. Relief from obsolete and ineffective state controls is appropriate for all of higher education, not just a few of the research universities, and not just because of funding reductions. The myriad rules and regulations still operating in many states were developed in another time and place, before the universities grew into multi-billion dollar enterprises with hundreds of thousands of students and tens of thousands of employees.

Yet to this day, many states still require prior approval for purchasing, dictate line-item funding in silos, and maintain fund management requirements that perpetuate bad habits such as year-end spending sprees rather than building prudent contingency reserves. There is no question that these bureaucratic mandates hurt rather than help the institutions to be accountable for efficiency and effectiveness.

But this is no time to weaken the public responsibilities of the flagship institutions, to allow them to opt out of obligations to meet state needs. It’s true that state funds are now the minority of resources in research universities, and in some cases a very small fraction. But the disinvestment of state revenues hasn’t happened to the research universities alone; it has also hurt the regional institutions and the community colleges.

More to the point, the flagship institutions got to where they are through the state investments of billions of dollars over the last century and more, giving them a funding advantage over the other publics, in total revenues, in assets and often in state funding per student, an advantage they certainly aren’t offering to give up as part of the new privatized state they envision.

While system boards work imperfectly, their core purpose is more important now than ever before: to balance institutional aspirations with broader public needs, through planning, differentiation of missions, program review, and attention to student flow across institutions. Weakening the authority of higher education system boards will only serve to advantage the already privileged. The institutions will inevitably gravitate even more away from public needs, and toward institutional self-interest: selective admissions, merit rather than need-based aid, more research, and greater academic specialization. The teaching function and service to poor and working students and to underserved geographic areas lose out in this equation. This will accelerate the declines in educational attainment our country is already experiencing.

We have to increase college access and degree production for all students. To do that the relationship between state government and public institutions needs to be reestablished on a different basis. States need to mend their budgeting systems, to put greater responsibility for fiscal management in the hands of the institutions, and to focus their own attention on how to stabilize state subsidies to meet public priorities. Institutions need to do more to improve efficiency and effectiveness, and to generate savings to build investment pools for things that won’t be coming from "new money" any more.

Both sides need to get away from the year-at-a-time focus that is killing public institutions, toward more of a multi-year investment approach that recognizes that state funds are just one of the many sources of revenue that will be needed to accomplish public purposes. And everyone needs to do more to remove barriers between institutions that keep them from serving students well, not to find ways to drive them apart.

The regulatory and funding model for higher education needs to be mended, not ended.

Jane Wellman and Charles B. Reed
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Jane Wellman is executive director of the National Association of System Heads and executive director of the Delta Project on Postsecondary Costs, Productivity, and Accountability. Charles B. Reed is chancellor of the California State University System and president of NASH.


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