A Better Option

March 9, 2010

The recent protests in California and elsewhere reinforce how politically difficult it is to cap enrollments and raise tuition when dealing with cutbacks in state funding for higher education.

The intensity of the protests in California also raises questions about why officials there did not make the less difficult decision of maintaining or increasing enrollments without raising tuition fees, or raising them modestly. This is a strategy that more public and institutional officials across the country and around the world should consider as they deal with continuing shortfalls in public funding for higher education.

To understand fully the decision calculus, it is helpful first to recognize that those who run educational systems and institutions at all levels face serious challenges in responding to cutbacks in government funding. And we need to understand that public higher education officials have more options in addressing these challenges than do public school system administrators.

For school systems, government is typically the principal source of revenues accounting for almost all of their budgets. Moreover, new students often are seen as a drain on resources as any growth in students typically is not matched by more public funds. This is especially true during recessions when governments have much more trouble meeting the many demands on their resources.This explains why public school systems must increase class sizes, cut programs and/or reduce staffing in response to government cutbacks in funding.

Public higher education systems and institutions share this characteristic with public school systems – namely, increases in government funds are unlikely to match the growth in the number of students during recessions when government resources are strained.

But in two other critical respects, the economics of public higher education are strikingly different from the pressures that engulf public school systems. One is that public higher education has a major revenue source that public school systems do not – tuition fees. This means that increases in enrollments at public colleges and universities will result in more revenues that may or may not offset the reductions in government funding.

The other related difference is that enrollment in higher education is not compulsory and enrollment trends are far more variable than for public school systems, where at least in the short term the number of students varies within a relatively small range. Enrollments in public higher education, by contrast, tend to swell during recessions as job prospects are much more limited and more people decide to go back to school rather than stand in the unemployment lines. The question and the challenge for public higher education officials is whether this enrollment growth is viewed as an opportunity or a burden.

These economic realities also lead to two common misunderstandings about how public higher education is financed. One has to do with the relationship between spending per student and enrollments. How much institutions spend per student often is regarded as a relatively fixed amount of money. As a result, not enough attention is paid to the effect that changes in enrollment can have on per-student spending figures. For example, rapid enrollment increases brought about by recessions tend to drive down spending per student, as tuition fee revenues do not increase enough to offset the slowdown in government funds.

The other misunderstanding that clouds the public discourse on cost recovery is that the debate typically focuses on how tuition fees may affect demand -- namely, that the lower the price, the more that people will demand to enroll. But the reality is that tuition fees do not just reflect demand. They are also key in defining supply – the lower the fees, the fewer seats can be provided at any given level of government funding. Conversely, higher fees will produce more seats for any given level of public funding. The traditional (over)emphasis on demand considerations contributes to the view that lower fees will result in more access. But the data suggest the opposite – countries that charge higher fees often have higher levels of participation because of the larger number of seats that are made available.

Four Options

With these economic realities as context, let’s recognize that four basic strategies are available to public higher education officials in dealing with government cutbacks.

One of the four – capping enrollments and cutting costs – is revenue-neutral or -reducing.

The other three – changing the mix of enrollments, increasing tuition fees for existing students, and increasing enrollments while maintaining fees at current levels – are all revenue-increasing. It is worth considering the strengths and weaknesses of each approach and their likely effects on the key indicators on quality, access and productivity.

Capping enrollments and cutting costs is public higher education’s equivalent of public school systems hunkering down to weather the recession storm. A recent survey by the Association of Public and Land-Grant Universities suggests that many states and systems have employed this strategy. Its biggest plus is that it is budgetarily responsible – it makes sure the system has enough money to pay its bills. Of the four strategies, it also may have the best prospect of maintaining quality in the face of cutbacks.

But it has the tremendous drawback of being politically damaging on key dimensions as it has the painful consequence of reducing access to higher education as well as cutting staff. Given these realities, it is worth asking why public higher education officials would engage in this strategy before fully exhausting all revenue enhancement possibilities.

Changing the mix of enrollments entails increasing the numbers of non-resident (international or out-of-state) students, who typically pay much higher fees than resident students. The chief benefit of this strategy is that it usually increases revenues more than the costs of providing the education to these students. It also has the potential to increase the quality of the student body to the extent that the non-resident students are as good as or better than the resident students who otherwise would have been admitted.

The main drawbacks of this approach are that it is politically damaging and unfair in that access would be denied to a group of students from families who vote and who paid the taxes that allowed the public institutions to exist and grow. It also does little to improve productivity and may well decrease it in the form of higher spending per student.

Increasing tuition fees for existing students is the most tried and true response when governments cut their support for higher education. It is the most direct and obvious way for institutions to balance their budgets by increasing their cost recovery rates. It has the further benefit of enabling public institutions to maintain quality at current levels or improve them. But it tends to reduce access for students who cannot afford the higher prices, especially if not enough financial aid is provided to offset the tuition fee hikes. It also does little, if anything, to reduce costs per student or increase productivity.

Increasing enrollments while maintaining current tuition fee levels seems to be the least utilized of the four budget balancing strategies, despite having the advantages of increasing access and improving productivity.

The critical questions that must be addressed in considering whether to utilize this strategy are: Will enrolling more students lead to lower quality? Do current fee levels cover the marginal cost of enrolling more students? And do institutions have the capacity to accommodate additional students?

The answer to these three key questions will differ in the short term (relying on existing facilities and staff) and the long term (recognizing the potential for expanding physical and human capacity), but if current tuition fee levels are greater than the marginal costs associated with enrolling more students, such as hiring more faculty or leasing additional space, this strategy makes a great deal of economic sense.

The fact that so few systems in the U.S. and around the world seem to choose this strategy in the face of much more painful choices may mean that officials have determined that quality would be compromised and/or marginal costs are higher than current fees. Or it may be that institutional rigidities, lack of a fundamental understanding of marginal costs, or political considerations led to decisions that were unjustifiable on the basis of the economics.

In the case of California, it seems that both internal and external politics played a major role in the decision to cap enrollments and increase fees.

When enrollments are capped, it may mean the internal pressures from entrenched faculty who do not want their teaching loads increased or to be required to teach more students per class may well have outweighed the external pressures from students and others to maintain current fee and enrollment levels.

It also may be that systems officials were reluctant to let the politicians know that they could deal with government funding cutbacks by increasing enrollments and increasing teaching loads. Gov. Arnold Schwarzenegger’s recent decision to protect the budgets of the University of California in the future would seem to justify this political calculation, although future governors may not be as accommodating.

Institutional or system officials obviously must decide how to respond to government cutbacks in funds based on their assessment of their own particular set of conditions. But the potential benefits of increasing cost recovery rates by adding numbers of students rather than, or in addition to, raising tuition fees should be an important consideration in their decisions, and should not be left off the table entirely.

Bio

Arthur M. Hauptman is a public policy consultant specializing in higher education finance issues.

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