UC at tipping point, in pursuit of a new funding model

Like many other public universities, the University of California (UC) system is in a long transition from an era with relatively robust state subsidisation and low tuition and housing costs to the new world of public disinvestment, increasing operating costs, a focus on funding from students and their families and relatively new income sources.

The ability of research-intensive universities to navigate this paradigm shift will significantly influence the nation’s socio-economic mobility rates and economic strength.

In the post-Great Recession era, some states may find that their economic competitiveness depends on a return to greater levels of public investment in their higher education systems. Some states will never return to that model, convinced that education is more a private than a public good, or a cost they can no longer afford to fund at historical levels. Which path will California take?

Approaching a tipping point?

Reflecting the findings of the recent report Approaching a Tipping Point: A history and prospectus of funding for the University of California, my co-author and I argued that the California government needs to seriously reinvest in public higher education, and, as the world’s fifth-largest economy, that it should be able to manage this.

The University of California is a multi-campus system of 10 research intensive campuses that collectively are the world’s premier university system. UC Berkeley is often ranked as the top public university in the world, with UCLA and UC San Diego also in the top 10; the other campuses are all successful campuses as well.

UC has a mandate to provide access to the top 12.5% of high school graduates – a social contract that dates back in one way or another to the 1920s. California is growing in population. But how can UC grow without the resources?

Demand for access is already outpacing the university’s capacity to enrol more Californians and there is no clear funding model. California is projected to grow from 40 million to nearly 49 million residents by 2040.

Unless there are substantial unexpected demographic changes, UC would need to grow at a similar rate as in the past to maintain its social contract in admissions. This is particularly important if California hopes to mitigate growing income inequality and to expand access to underrepresented minorities.

Even under the best of circumstances, however, it seems unlikely that California’s state government will find the money for the UC to grow and maintain its historical quality. There are simply too many competitors for state funds – including growing entitlement programmes, prisons and the astronomical costs of healthcare in the US.

For UC, the only realistic path is a more diversified income portfolio that includes an increase in state funding on a ‘workload-based funding’ (consistent funding on a per student basis) and new revenue streams.

In exploring a revised funding model, the report focuses on alternative ways to approach future enrolment growth, options for administrative and management efficiencies, and, most importantly, pathways for revenue generation.

The following focuses on the policy options related to tuition and financial aid – a contentious topic that is often viewed as the third rail of university finances. The discussion is specific to UC, California, and more generally in the US. Yet it may provide ideas – many old, some new – for creative thinking regarding revising or expanding the funding model for universities in other parts of the world.

Reconsider tuition and fees

What should students and their families pay in tuition and fees to help partially cover the cost of a UC education? In the US, and elsewhere, there is significant concern regarding the impact of rising tuition and student debt levels.

There are also misunderstandings about the relation of the ‘sticker’ price at a UC campus and what students actually pay. UC has pursued what I have called a ‘progressive tuition model’ – increasing tuition fees but using a third or more of the income for financial aid for low-income and middle-class students.

The counter-intuitive fact is that under this model, and with substantial increases in tuition fees, the number and percentage of low-income students increased. Particularly in societies with substantial disparities between the rich and poor, like California, a low tuition fee also represents a substantial subsidy for more wealthy students.

The ability to increase tuition fees will likely be a decisive factor in UC’s ability to create a more stable funding model. Yet the pursuit of the progressive tuition model has been constrained by politics. UC gave in to pressure by lawmakers for a five-year freeze of in-state undergraduate tuition fees beginning in 2014, and then only allowing for UC to increase tuition fees at the rate of inflation beginning in 2017-18.

This was good politics for the current governor who maintained that tuition fee increases limited access despite analysis to the contrary and the historical record. Limiting tuition fee increases also creates significant constraints on UC’s ability to seek additional revenue and, in the end, may lower access because UC cannot grow in enrolment without new revenue sources.

As we argue in the report, UC’s tuition fees and UC’s financial aid model needs to be revisited. How can UC progressively seek additional tuition revenue? The first two options noted below are likely marginal new sources of income; the third and fourth, however, could result in substantial new revenue.

• • Differential tuition by field – One option is the establishment of a differential tuition and fee structure for upper division students in certain fields (STEM fields) where expenses and projected lifetime incomes are higher. Many universities in various parts of the world are already setting tuition rates in this manner.
  
  
• • Differential tuition by campus – The university community has debated the idea of allowing different tuition fees among the UC campuses as a path to relieve the system’s financial strains. One argument is that market demand, and value in the labour market, would allow higher tuition rates at, for example, Berkeley and UCLA.
  
  But this option would raise serious policy issues related to UC’s ‘one-university’ model and potential inequities, and prestige, among the various campuses. UC’s historical strength is the unity of the various campuses in policy areas such as admissions, tuition and fees, and academic personnel policies and sharing revenue granted by the state.
  
  Moving toward a differential fee structure among the campuses would pose large challenges to this model that might only be mitigated by an agreement on revenue sharing among the campuses.
  
  
• • Explore a new pricing model – UC could consider a revised tuition pricing model that offers four (or so) tiered tuition rates for students depending on their family income, with university-sourced financial aid and state need-based aid directly reflected in the pricing. The purpose is to clearly state the cost of tuition to prospective students and charge differential rates to high-income students to generate additional income.
  
  Clarity of costs could enhance access to disadvantaged groups. It could also change the dynamics of often misinformed debates on the real impact of tuition fees on students and affordability.
  
  Because of the UC’s high return-to-aid rate, when an increase in tuition and fees is proposed, there is an assumption that it is an increase for all students, when only about 50% of students are affected.
  
  Explicitly raising tuition fees for high-income groups while, for example, maintaining or lowering the costs for middle and lower-income students, would change the contentious politics and symbolism of the tuition fee debate in California.
  
  
• • Reduce return-to-aid rates to boost operating income – Another less desirable option is to reconsider UC's tuition and return-to-aid programme. As noted, more than 33% of all tuition fees are funnelled into grants to lower- and middle-income students. Within the UC system, this amounts to an estimated US$700 million a year of financial aid at the undergraduate level. If one includes other sources of UC funding, including scholarships, the return to aid rate is closer to 41% (as measured at UC Berkeley).
  
  In-state students (at UC Berkeley, and likely similarly on other campuses) on average pay a net cost of only about US$2,500 each academic year – a relatively low cost when compared to similar public universities; almost half of all UC resident undergraduates pay no tuition fees at all.
  
  If UC is faced with continued disinvestment from state coffers, one policy option is to reduce this very high return-to-aid rate to, for example, 28% of undergraduate tuition fee income.
  
  This would generate more than US$100 million for UC’s operating costs to fund, for example, lower student-to-faculty ratios and a specific set of programmes that support undergraduate education.
  
  To help mitigate this redirection of income to academic operating costs, UC should seek other sources for undergraduate financial aid. This could include fundraising and possibly the creation of an endowment fund for this explicit purpose. Lawmakers could also be persuaded to increase funding for California’s Cal Grant Program and increase the total individual grant limit to mitigate tuition fee increases – essentially providing an indirect increase in funding to UC.
  
  Housing and living costs pose one of the greatest challenges to middle- and lower-income students and their families – a much more significant policy issue than tuition and fees. In modifying UC’s return-to-aid policies, it would be vital to secure additional and new sources to support the housing and other living expense for students. The state should find the political will to pass a bond act to specifically fund student housing or mixed housing near UC campuses.
  

The future of a public university

With systematic funding support by the State of California, UC managed to grow in pace with California’s burgeoning population and its increasingly complex social and economic needs. Can UC maintain its historical role in the most populous state in the US?

Past governors and lawmakers understood the value of UC and supported its broad mission and geographic expansion with consistent and predictable funding. In turn, UC helped shape California’s spectacular rise as one of the world’s most innovative economies. Clearly, that historical pattern of investment and support has dissipated.

A major conundrum for UC is that it has, thus far, navigated its financial troubles despite massive state disinvestment. UC’s network of premier universities has managed to do more with less state funding. This may have created a false sense, among lawmakers in particular, that it can continue to crowd more and more students onto its campuses without a significant boost in funding for operational costs or capital funding.

UC may well be approaching a tipping point beyond which it can no longer sustain enrolment and programme growth without severely eroding the quality of its academic programmes.

In the report, we pose two options: Because California’s premier university system has a high level of legal autonomy, its board and academic leadership could decide that it will no longer grow or grow only marginally. Or it could grow without the required resources. Here is a familiar conundrum, but with its own California characteristics.

John Aubrey Douglass is senior research fellow and research professor in public policy and higher education at the Center for Studies in Higher Education at the University of California, Berkeley in the United States, and the UC Berkeley PI of the Student Experience in the Research University (SERU) Consortium. His latest books include The New Flagship University: Changing the paradigm from global ranking to national relevance (Palgrave Macmillan 2016) and Envisioning the Asian New Flagship University: Its past and vital future (Berkeley Public Policy Press 2017). This article is an adoption of a chapter in the report Approaching a Tipping Point? A history and prospectus of funding for the University of California (August 2018) and a policy paper just published by the Center for Studies in Higher Education.