NORTH AMERICA: Univeristies in perpetual funding crisis
In the following article from the journal Academic Matters, authors Burton A Weisbrod, Jeffrey P Ballou and Evelyn D Asch - two economists who specialise in not-for-profit industries and a public policy researcher - answer this question by looking at universities in the United States and applying concepts from the worlds of economics and business.
The authors Burton A Weisbrod, Jeffrey P Ballou and Evelyn D Asch - two economists who specialise in not-for-profit industries and a public policy researcher - answer this question by looking at universities in the United States and applying concepts from the worlds of economics and business.
They treat higher education as an industry and they find that, in the United States, it has much in common with other industries: new firms enter the competitive market, unsuccessful firms merge or exit, firms strive to improve their credit ratings so they can borrow and expand, firms advertise and maintain their brands, and so on. Higher education's mixed forms of ownership - public, private not-for-profit and private for-profit - are unusual but not unique: the hospital sector in the US shows a similar diversity of ownership forms, and many other industries have public and private firms in competition.
The authors argue that the revenue universities earn from performing their core missions can never be enough to cover their costs, and so universities must turn to non-core activities that bring in more revenue than they cost. (Private for-profit universities are an exception, since they have no reason to adopt a core mission that is not profitable.)
The missions of public and not-for-profit universities are not always explicit and measurable, but typically they include educating students, carrying out research and providing services to the community outside the university.
Students' education does not pay for itself because most students cannot afford to pay tuition that would cover the full cost. Basic research does not pay for itself because by definition it adds to the common pool of knowledge without producing results that can be patented or commercialised. Community service, by almost any definition, does not generate revenues commensurate with the time and resources devoted to it.
From these premises the authors explore university behaviours whose frank or not-so-frank purpose is to generate additional net revenue to support the mission. Universities maximise tuition revenue by setting a high sticker price and then awarding financial aid to attract a mix of students suitable to their mission - much as airlines charge different fares to different customers on the same plane.
Public universities devote resources to lobbying for higher government grants, while seeking to minimise associated performance requirements that would impose costs beyond what the university was planning to do anyway. Not-for-profit universities devote resources to seeking donations - while again trying to minimise new performance requirements. Universities seek corporate support for research while attempting to avoid corporate distortions of the university's research programme.
An important corollary, which the authors attempt to substantiate empirically, is that the behaviour of public and not-for-profit universities is in some ways similar to that of for-profit universities - not because the former are seeking to please shareholders, but because every university, regardless of ownership, has an incentive to cut costs where this frees up funds that can be redirected to serving the university's mission.
For example, the authors find that public, not-for-profit and for-profit institutions face similar incentives in making the choice to substitute part-time faculty for full-time tenure-stream faculty. Each class of institution tries to substitute lower-cost faculty wherever this can be done without impinging on its mission.
The main difference among institutions is that for-profit institutions do not see research as part of their mission, while other institutions need to retain full-time faculty to the extent that this is required to fulfill their research mission. (The authors allow that students may be less willing to pay high tuition if they are taught largely by part-timers, but they observe that, within a wide range, students seem largely indifferent.) Using admittedly limited evidence, they find that the use of part-timers is highest in departments where the pay gap between full-time and part-time faculty is greatest.
To cite another example, the authors show that, even among public universities, the competition to be perceived as a high-quality institution causes resources to be used to attract students with high academic standing in secondary school. Financial aid "is increasingly going to attract superior students who would surely attend one school or another anyway, instead of making attendance possible for more low-income students who might not go to college at all without financial aid."
The authors attribute this to a distinctive feature of higher education, which is that the quality of the buyer at least partly affects the quality of the seller. Good students attract almost-as-good students, creating additional revenue and potentially allowing the education mission to be carried out at lower cost than if less-qualified students were admitted.
Similar arguments are made to explain university behaviour across a range of activities.
The authors find that universities of all ownership types are increasingly likely to charge different tuition fees for different programmes, based on what they think students will pay. New professional programmes are created that in effect are luxury goods: the higher the tuition, the more students are attracted to them. (In extremis, such programmes are overloaded with expensive features and are marketed like the late Hummer.)
Residences and student centres are built that provide well-off students with the comforts of home. Resources are devoted to public relations and branding, the pursuit of research grants, the solicitation of donations, professional lobbyists, international recruitment and continuing education, all on the premise that the extra costs will be more than offset by the new revenues that are attracted. The authors explore the economics of inter-collegiate athletics and find that universities can gain net revenues by having top-ranked teams in football, men's basketball - and not much else.
The problem, the authors argue, is that seeking new sources of net revenue almost always places universities in an ethical tension of some sort. "The pursuit of revenue is a double-edged sword - indispensable for financing the social mission but a danger to the mission at the same time."
The tensions are not limited to the well-known issues involved when corporations seek to set university research priorities or to gain exclusive access to research results. In the authors' view, they also apply to universities when they seek government operating grants: even so-called unrestricted grants are usually tied to requirements to enrol a specified number of students or meet other government-determined standards which may be at odds with the university's self-assigned mission. There is no revenue solution that allows a university to be an island.
The strength of the book is that it offers a fresh way to explain university behaviour that might otherwise seem puzzling. Universities expand into a range of new activities to subsidise core missions that would otherwise be at risk. No enterprise - public or private - can endure for long if it cannot pay its bills. (As a former Ontario university president liked to put it: "We are not-for-profit - but we are definitely not for loss.")
The authors' insights are backed by original research that attempts to provide an empirical test of their theoretical arguments. Where possible they use data that reflect a large sample of the United States' 4,300 degree-granting institutions. In a number of places they simply test whether there is a statistical relationship between a cause and a predicted effect - leaving the reader to wonder whether a more thorough analysis would show the relationship to be more complicated.
The focus on revenues is the book's strength, but for some readers it will also be the book's greatest weakness. The expenditure side of the story is largely missing. Attention to expenditures would shed additional light on why universities behave as they do.
Significant additional revenues are required each year simply to allow universities to continue to do what they are already doing. Inflation in US higher education averaged 4% per year in the decade ending in 2009, compared with a Consumer Price Index of 2.7% - reflecting inflation in salaries, benefits and non-compensation costs.
This fact puts a different perspective on universities' revenue-seeking activities: universities are not seeking simply to subsidise unprofitable missions (as Weisbrod et al argue), but to subsidise missions that become more unprofitable every year. University administrators face the challenge of finding additional revenues every year simply to pay for inflation that is well above the Consumer Price Index.
An additional challenge is to pay for expanding university missions. The authors rightly point out that university missions tend to be vaguely worded, and their origins are often lost in the sands of time. Few mission statements make it clear what the university is not trying to do, and so the temptation of mission creep is strong. Mission creep leads to expenditure creep. Additional activity - admitting more students, performing more research or pursuing new mission-related activities - adds cost growth on top of inflation.
The problem of funding mission expansion applies especially to US states where, as in Canada's Ontario, university missions are largely self-assigned. Yet there are important exceptions. In some states a higher education board, or the state government itself, assigns missions to universities so as to ensure that public needs are served and unnecessary mission expansion is avoided.
For example California, Minnesota and Wisconsin - all of whose public universities are widely admired, despite recent funding cuts - focus most of their universities on undergraduate education and professional programmes, while authorising only a few to pursue high-cost PhD programmes and advanced research. California and Florida require every public university to set aside seats for qualified students who transfer from community colleges - providing wide access at less cost for undergraduate students, and making it impossible for any university to seek to distinguish itself by turning away such students.
Rather than confront the potential benefits of centrally coordinating universities' missions so that collectively they serve the public purpose, the authors advocate that each university should diversify its revenues as much as possible - "so no single source can exert extreme influence on the college or university".
The roots of the authors' distrust of for-profit funders are understandable, but their basis for distrusting elected governments is less clear. Having criticised universities for their vague mission statements, the authors might have been more open to the possibility that a public coordinating body might help to focus each university's mission. They might also have considered whether their proposal to insulate the university from external influences could have the unintended effect of opening the university to undue influence from internal constituencies.
Like many of the US states, Ontario faces the challenge of deciding on the appropriate relationship between university autonomy and public coordination of higher education. The provincial government believes it has invested heavily in higher education (which it has).
Universities believe that their revenues are inadequate to fulfill the missions they wish to pursue (which they are). Voters have, in four consecutive elections, elected governments that have pledged not to raise taxes - with no change in direction in sight. The question of whether each university should continue to choose its own mission and struggle to earn adequate revenues to pursue it is likely to become more pressing.
* David Trick is president of David Trick and Associates, consultants in higher education strategy and management, and a part-time instructor in the Department of Politics and Public Administration at Ryerson University. He is the co-author (with Ian D Clark, Greg Moran and Michael Skolnik) of Academic Transformation: The forces reshaping higher education in Ontario, published in 2009 by McGill-Queen's University Press.
* Mission and Money: Understanding the university, by Burton A Weisbrod, Jeffrey P Ballou and Evelyn D Asch was published by Cambridge University Press, New York, in 2008.
* The review "Definitely not for Loss" was recently published by Academic Matters, the journal of the Ontario Confederation of University Faculty Associations. It is republished with permission from the author and the journal.