UV Letter - Managing the Transition from Public Good to Private Good

UV Letter - Volume 1, #3

If you've read anything about public higher education in the past month or two, chances are it was about budget cuts.

While those of us in higher education are well aware of this fact, it bears repeating: fully 70% of the 18 million students enrolled in higher education programs across the U.S. are enrolled in state- subsidized institutions. This means the unprecedented fiscal crisis most states are experiencing is having a dramatic impact on the full range of state postsecondary institutions: community colleges, far-flung state university systems, and even flagship campuses.

Higher education is on the chopping block these days for a simple reason: for most states, it's the least bad choice. Faced with the need to cut billions out of the state budget, lawmakers employ the following calculus: When taxes go up, that impacts 100% of the population; when K-12 funding is cut, that impacts a high percentage of the population; but cutting higher education impacts a relatively small segment of the population.

As Richard Vedder, Director of the Center for College Affordability and Productivity has noted: "Legislatures are starting to rethink higher ed. If they have a choice between funding for the elderly or subsidizing the upper-middle-class kid to go to college ... subsidizing the middle-class kid to go to college is a lower priority."

The clarity of the logic notwithstanding, the magnitude of this year's cuts have been difficult to stomach. Half of all states slashed higher education funding in their FY 2012 budgets. In years past, state systems were able to increase out-of-state tuition to make up for cuts. No longer. Now, double-digit tuition increases for in-state students have become the norm and there is no margin left.

Here's a quick review of the most prominent systems under fiscal strain:

State System Cuts Tuition Increase
- University of California
- California State University
- California Community Colleges
- $650M
- $650M
- $400M

Florida $1b 15%
University of Texas $440M 9%
North Carolina System $414M 17%
Washington State $300M 14%
Arizona State University $198M 20%
University of Wisconsin $125M 6%
Penn State $70M 4-5%

Some institutions are resorting to fees outside the tuition bill in order to continue current operations in the face of budget cuts. Indiana University-Bloomington has added a $180 "temporary repair and maintenance fee" this fall, a fee that will double next fall. At Southern Illinois University, freshmen will be charged a one-time $150 "matriculation fee" for "orientation." And while tuition at Georgia's public universities will only increase 3% next year, with fees it's actually a jump of 9%. The increase stems from a new "special institutional fee" of $1,088. At Georgia Tech, fees will now total $2,370—about a quarter of the total charge, $9,652.

Other institutions are working on attacking spending at the margins. At Texas Tech, English faculty have had their office phones removed. University of Wisconsin-Eau Claire has sold its vans that were used for field trips and athletic events. Faculty at University of Colorado-Boulder now have to take their trash with them when they leave. And Eastern Oregon University has drained its indoor pool.

It seems as though the only institutions that have really attacked expenditures are those with no other option. As with many trends, this one also begins in California. The California State University system slashed $174M in salaries and 2,500 jobs last year, and plans to do more in 2011. Total compensation paid to employees will decline approximately 15% from 2010 to 2012.

One might also argue that the California systems are in the process of restructuring. UC Davis has eliminated three bachelor's degree programs; UC Santa Cruz has done the same. Humboldt State has closed its nursing program. UC Riverside has postponed opening a new medical school. UC estimates that across the state, it has saved $155M over the last three years by eliminating or consolidating programs. However, California universities are creating programs as fast as they're closing them: UC's five-year plan calls for launching 42 new undergraduate programs and five professional schools while closing only 15 programs and withdrawing another 57 from the planning process. So while Berkeley has taken the step of eliminating a bachelor's degree in physical sciences and environment sciences, students may still major in environmental sciences, and this only occurred after no student opted for that major in the past five years.

So it's clear that even in California, public universities have not yet thought deeply about what degree programs they will offer when the state effectively exits its historic subsidizing role and they must compete on an even playing field with private institutions.


One operating principle we strongly believe will come to the fore over the next decade is one raised by the Obama Administration during the recent Gainful Employment controversy targeting private sector institutions: Return on Investment. Considering a college degree as an investment, what return is generated by that degree in terms of higher earnings over a lifetime?

There is no question that some programs generate significantly higher returns than others; engineering majors are 12 of the top 15 earning degree programs in terms of starting salary. But because not even the most reform-minded governor is interested in getting involved at the institutional or departmental level (for example, mandating faculty resource shifts from romance languages to computer science), policy makers have been focused on the investment side rather than the return.

So Governor Perry in Texas has set a goal of developing the $10,000 bachelor's degree. At this price, it's hard to envision a scenario in which a completing student won't have a compelling return on that investment, even if she majors in French.

But a key factor that policy makers might consider is that tuition represents only half the cost of earning a bachelor's degree. According to a recent study by the Brookings Institution, the average U.S. student spends $48,000 on tuition, but incurs an opportunity cost of $54,000 by going to school and not working full-time. (These numbers are from 4 years ago, so no doubt tuition is higher and the opportunity cost may be slightly lower now.)

The point is clear: if state universities are unable or unwilling to reallocate their resources to high-ROI programs, they would take a major step to improving ROI for all students by delivering programs—even French—in a way that not only permits, but also encourages students to work full-time while earning a degree. In a future newsletter, we will discuss how universities might rethink program delivery. (Hint: technology is involved.)

While the traditional American university model of 18-year-olds sequestering themselves in a country club-like environment for four years will continue at elite private institutions and a select number of public flagships, the vast majority of state universities will be facing these existential questions over the next few years as higher education continues on its inexorable path from public good to private good. And as the dream of becoming the "Harvard of ________ (fill in the blank for the region)" recedes on the ebbing tide of state dollars, a new goal should become apparent for state universities: ROI for students. How quickly they grasp this and how they respond will play a major role in determining the success of their institution, and their state's economic competitiveness.

University Ventures Fund invests in universities and service companies in areas where rising demand and shrinking supply create rapidly growing market and student service opportunities.