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Business Officer Magazine

The Value-Added University

What’s the financial value of a public institution to its community? Conduct an economic impact study to make your case.

By Heather A. Kelly and Allison M. Walters

Investors of any stripe want detailed information regarding return on investment. Of course, that holds true for individual states with substantial financial investment in public colleges and universities. A 2001 National Association of State Universities and Land-Grant Colleges report, “Shaping the Future: The Economic Impact of Public Universities,” notes, “Although it is impossible to quantify all the various benefits of a university’s presence in a state, it is important to remind public officials and taxpayers of the return on their investment in public higher education, particularly during periods of economic uncertainty.”

By conducting an economic impact study, administrators can more effectively lobby for additional resources—resources that will directly and indirectly benefit local and state businesses. This type of study provides campus leaders with quantifiable data about how student, faculty, staff, and institutional expenditures affect the surrounding economies. The data, then, engender a powerful tool for campus leaders: information that supports their rationale behind budget requests and strategic plans.

Pinpointing the Study’s Parameters

The state legislature wants to know how the university contributes to the state’s overall fiscal health. Essentially, the answer to this question helps justify the university’s existence as well as the state appropriations. The University of Delaware’s Office of Institutional Research and Planning conducted a study in 1999 to determine the economic impact that student, faculty, staff, and university expenditures have on the local Newark community and on the state. We replicated the study in 2003, administering a survey to students, faculty, and staff on the Newark campus as well as to local businesses. Using the responses from these groups, we sought to determine the full effect that expenditures by these cohorts have on the local and state economies.

Any time we conduct a new study, our research includes outreach to professional colleagues at other institutions to review previous efforts. We examined economic impact studies conducted elsewhere that illuminated the economic effects of transmitting and discovering knowledge and ideas, conducting pure and applied research, and developing new technologies and industries. Some of these studies estimate the short- and long-term effect on the labor market, but we focused on studies investigating the long-term economic impact created when an institution purchases goods and services from within its local economy.

Our 1999 study borrowed Southeastern Louisiana University’s survey instruments and incorporated additional variables. Even though the survey instruments provided primary data on the direct expenditures of students, faculty, and staff, we also needed to obtain secondary data on the university’s direct expenditures and revenues. That secondary data came from university departments including conference services, dining services, athletics, special events, and purchasing.

Table 1.  Annual Expenditures Spent
by the University of Delaware and Its Community
  Estimated Spending in Delaware Per Year Percent Change since 1999 Overall Economic Impact Percent Change since 1999
Student Expenditures 194,350,948 35.9 349,831,706 28.8
Faculty and Staff Expenditures 119,191,776 26.1 214,545,197 19.5
University Purchases 94,893,449 51.0 170,808,208 43.1
Total Economic Impact 408,436,173 36.0 735,185,111 28.8

The method we used is based on the Caffrey-Isaacs model developed for the American Council on Education in 1971. Also known as the ACE method, it is the most widely used approach to determine an institution’s economic impact. The ACE method generates a series of impact indicators on the basis of simple, linear cash-flow formulas.

The first step is to identify the college community’s expenditures, both direct institutional spending to vendors and local spending by students, faculty, and staff. We excluded from student expenditures the direct payments to the institution for tuition, housing, and food. We then applied a regional economic multiplier to the total impact of local spending by the institution, students, faculty, and staff. (The Caffrey-Isaacs model does not distinguish between the expenditure impacts of resident and nonresident students.)

Behind the Findings

The mean monthly student income from all sources after taxes in 2003 was approximately $1,380, which was 35 percent more than the mean monthly income found in the 1999 economic impact study. Total mean monthly student expenditures in Delaware were approximately $1,060. Student expenditures ranged from housing to entertainment to medical and dental services. Students spent about 77 percent of their monthly income in the state.

We arrived at the annual expenditures for each category by multiplying the mean monthly expenditure by the student headcount for each term by the number of months in each term. Total annual expenditures were the sum of these categories. In 2003, estimated total annual expenditures in Delaware by the overall university student population were $194.4 million. Students’ total mean annual expenditures in Delaware were 36 percent higher in 2003 than in 1999.

In 2003, total mean monthly faculty and staff household expenditures in Delaware were $2,730. Faculty and staff expenditures included housing, retail purchases, and education and tuition. The estimated total annual expenditures by the Newark campus faculty and staff population were $119.2 million. Faculty and staff total mean annual household expenditures were approximately 26 percent higher than expenditures reported in the 1999 study.

In both studies, local businesses reported that they employ current university students as well as alumni. Many businesses stated that university students, faculty, and staff are frequent customers and loyal patrons. Because of these relationships, business owners made many of their decisions regarding product offerings as well as timing of sales and promotions based on university clientele.

Some businesses valued university students as a pool of quality candidates for seasonal part-time positions as well as full-time positions after graduation. One business noted that it was grateful for its relationship with the university and for students fulfilling internship requirements with them. Respondents indicated that the university and its community were an asset to their business, with several businesses attributing their success solely to the university. Survey responses described how the university enhanced Newark through the “cultural enrichment it brings to the community.” Others pointed out that the advantages of a university town made Newark a “nice community” that felt “more alive” during school sessions.

Some of the surveyed businesses noted the positive relationship they have cultivated with the university by participating in its social and cultural events as well as taking advantage of its educational and networking opportunities. Respondents also said they thrive on the additional business generated by visitors drawn to Newark because of the university and its events.

Revenues and expenditures. The university’s largest source of operating revenue in FY99 and FY03 was tuition and fees. In addition to operating revenue, the university generated revenue through special events and activities. For example, during FY02–03, approximately 70 percent of the events hosted by Clayton Hall (Newark campus) were external—meetings and events sponsored by corporate, government, nonprofit, religious, social, and educational organizations. These external events generated $1.9 million in revenue.

Conference facilities in Wilmington and Lewes also hosted external events and generated $780,000 in combined revenue. In addition, approximately 284,000 people attended intercollegiate athletic events, concerts, and tradeshows at the Bob Carpenter Center on the Newark campus during FY03. Seven events were especially attractive to the community at large; approximately 28,300 individuals attended those seven events, generating $467,500 in revenue.

During fall 2003, the university employed 3,600 faculty and staff members on the Newark campus and compensated these employees $193 million. In FY03 the university purchased $94.9 million in products and services through Delaware vendors, which accounts for 56 percent of the university’s overall purchasing (a 51 percent increase from 1999). This in-state spending figure is about $32 million more than it was for FY99 when purchases from Delaware vendors accounted for only 41 percent of the university’s overall purchasing.

The big picture. Clearly the expenditures of students, faculty, staff, and the university have a substantial economic impact on the state of Delaware. These direct expenditures create a multiplier effect, where employees and businesses make subsequent (indirect) purchases after receiving paychecks and profits from the revenue of the initial (direct) purchases. Table 1 summarizes the estimated overall economic impact of student, faculty, and staff direct expenditures and university purchasing.

During 2003, the university and its community spent $410 million in Delaware—a 36 percent increase of total expenditures since 1999. These estimated expenditures are more than four times the state operating appropriations level ($100 million). The university’s estimated overall economic impact is approximately $735 million—almost a 29 percent increase over the 1999 study.

The economic impact is also evidenced in the creation of additional jobs for businesses that provide products and services to the university and its community. According to the Bureau of Economic Analysis, approximately 20 jobs are generated for each additional $1 million of output. The estimated spending from students, faculty, staff, and the university therefore supports 8,170 jobs in Delaware.

Survey Methodology

The economic impact study questionnaires in 1999 and 2003 were administered to students, faculty, and staff on the Newark campus as well as local businesses during the fall semester. To ensure that the study methodology had validity, we consulted with a number of economics professors on campus prior to the first survey, and we also conducted a pilot test.

Students. The student questionnaire went to 2,800 undergraduate and graduate students in 1999 and to 2,600 students in 2003. The original student data set contained 688 surveys in 1999 and 618 surveys in 2003, reaching response rates of approximately 25 percent and 24 percent, respectively.

Faculty and staff. We administered 1,820 faculty and staff questionnaires on the Newark campus in 1999 and 1,940 in 2003. The original faculty and staff data set contained 938 surveys in 1999 and 781 surveys in 2003. The faculty and staff response rate was approximately 52 percent in 1999 and 40 percent in 2003.

Businesses. We sent the business questionnaire to the owners and managers of 270 local businesses in the Newark area in 1999 and 330 local businesses in 2003. The targeted businesses were located on Main Street and within a five-mile radius of the university. Although all of the businesses that received surveys in the 1999 study were contacted again in 2003, some additional businesses in the latter study included hotels, motels, and automotive sales. The business response rate was approximately 33 percent in both survey years.

In accordance with the ACE method, the economic impact model used in this study applied a regional economic multiplier to the total student, faculty, staff, and university expenditures in the state of Delaware to determine the induced economic impact. Similarly, an employment multiplier is also applied to direct purchases to estimate the university’s impact on job creation within the state.

A Tool That Touts Influence

With public institutions competing for scarce financial resources at the state level, leaders must present a clear picture of how their institution benefits the state, regional, and local economies. After our 1999 economic impact study went public, the Wilmington News Journal quoted Ronald G. Parr, the state’s vice president of business and finance: “If [lawmakers] know you are a major economic player, they’ll tend to be more responsive when you request things because they know you are contributing to the economic health of the state.” In the same article, Dave Hollowell, University of Delaware’s executive vice president, said, “You go down Main Street right now and all of these signs say ‘welcome back, students’ because all of the businesses are glad to have them back spending money again.”

Comparing the 1999 and 2003 studies, the University of Delaware’s impact on the local and state economy generated a significantly greater return in 2003. Since the 1999 economic impact study, both direct and indirect expenditures by students, faculty, staff, and the university itself have increased within the local economy.

We must be vigilant in preparing for changes in the fiscal environment. An economic impact study can produce valuable data that will help the institution better understand—and communicate—its bearing on the local and regional community. As a result of our two studies, administrators acquired a vital tool for communicating the economic and social value of the institution to the local community, state officials and policymakers, and other government agencies.

HEATHER A. KELLY is the assistant director, andALLISON M. WALTERS is an institutional research analyst, in the Office of Institutional Research and Planning at the University of Delaware, Newark.