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Business Officer Magazine

Out of Sync

Growing student demand, shrinking public funding, entrenched institutional spending habits-no wonder higher education's business model is missing a beat. A better rhythm would emphasize improvements in public policy, with simultaneous attention to institutional behaviors.

By Jane V. Wellman

*The Great Recession has exposed fault lines in the financing of U.S. postsecondary education that have been forming for the past 20 years, born of a chronic mismatch among growing student demand, shrinking public funding, and expanding institutional spending habits. The result: annual increases in revenue at nearly double the rate of inflation. 

Unlike previous recessions, which ended before institutions had to get serious about restructuring costs, the depth and length of this downturn forced budget cuts well past the point where one-time fixes could fill the gap. From the best-funded private research universities to the community colleges, no constituency is being spared. And everywhere, a new consensus seems to be forming that the "cost models" are out of sync with financial realities and, therefore, unsustainable. It's likely we'll require entirely new approaches to paying for higher education in the future. 

What's Your Opinion? 

This issue of Business Officer features two companion articles on the contentious but critical topic of college costs. "Out of Sync" shares an individual perspective about the evolution of the higher education business model and how it may change in the future. "Perfect Pitch"  offers suggestions for effective communication that clarifies the cost issue for various constituencies.

We hope you'll have suggestions or opinions on this topic you'd like to share with readers. Send your comments to Business Officer at

To find enduring solutions to our broken cost models, we need greater clarity about the nature of the problem we face. Following is some historical context explaining how we arrived at such discord—and what institution and public policy leaders can do to get back in tune with reality.

Fractured Conversations About Costs

Unfortunately, greater consensus about the nature of the problem isn't likely to lead to agreement about solutions, because various stakeholder groups perceive the root causes of the cost problem differently. The public sees the problem one way, policy makers another, faculty and staff yet another. (See Figure 1, "Stakeholders at Odds About College Costs, Budget Solutions.")

Students and their parents see tuition and fees going up without end, even as they are getting less access to courses and faculty. Public policy professionals believe higher education already has plenty of money but needs to do more to cut costs and increase productivity. Faculty members believe that costs cannot be reduced without harming quality.

Public college presidents see no way out of the "iron triangle," or the zero-sum connection among access, spending, and quality; their solution is to return to annual increases in public funding of higher education.

And private college presidents want to end the arms race, beginning with turning back the clock on the seemingly endless appetite for capital expansion and tuition discounting—the practice of using a portion of tuition and fee revenue to fund institutional grant programs. (At four-year private colleges and universities, the average discount rate for first-time, full-time freshmen was 42.4 percent in 2010).

Figure 1

Pinpointing Public Policy Failures

The reality is that our public policy environment is so unstable that sustained attention to postsecondary finance is highly unlikely in the next few years.

To examine the nature of the problem, we must first recognize that it includes failures in public policy as well as failures in the market and management. Fixing one area doesn't fix the other. But chipping away to find improvements in public policy—with simultaneous attention to institutional behaviors—may get us on a more constructive path.

Three public policy issues that need improvement include:

Lack of goals for postsecondary education at both the state and federal levels. Our policy problems are shared by the states and the federal government. The issues begin with incoherence about goals for postsecondary education and whether or not the nation needs to be increasing access and degree attainment to the levels called for by the Obama administration.

President Obama's goal is to return the country to first place in the world in postsecondary education attainment rates. By the year 2020, the administration wants to see 60 percent of the population attain some type of a degree, compared to our current attainment levels of around 30 percent. Although generally embraced by several prominent foundations and their grantees, the goal prompts a good deal of debate about what it should mean and whether it is realistic or appropriate. As a result, the goal is not being used to anchor state or federal funding policies, nor has it been embedded into state or institutional plans.

Meanwhile, the funding reductions in public higher education are so severe that we are actually reducing capacity for access and degree attainment.

Instability and decline in state appropriations to public institutions. Another obvious public policy problem relates to the system of state funding for public higher education (see Figure 2). The 20-year pattern of volatility in state funding-with periods of increases followed by sharp declines-has been corrosive to public institutional capacity to manage resources, plan academic programming, and modulate growth in dependency on tuition and fee revenue. While most of the focus is on the absolute decline in public funds—a troubling problem in and of itself, to be sure—the lack of predictability in funding from year to year is actually more debilitating.

Figure 2

Over-regulation with regard to state fund management and federal over-reaching in financial aid programs. In many states, the revenue problems are exacerbated by outmoded state budget and fund management practices, which further undermine institutional ability to manage resources and to improve efficiencies.

For example, in a number of major state systems, funds are still allocated in line-item silos, meaning that savings must be returned to the state rather than being available for reallocation. There are restrictions on carryforward policies and the use of funds from reserves. In Oregon, for instance, even if there are resources in tuition funds, the institutions can't spend them to hire faculty needed to teach classes; so, students pay the tuition and don't get the classes. In New York, tuition revenues are held by the state government and used to balance budgets in other state agencies.

The regulatory problem extends to the federal government, beginning with the student aid programs authorized under Title IV of the Higher Education Opportunity Act. The regulations surrounding Title IV go far beyond the purposes of the aid programs, to academic quality and accreditation. The recent effort by the federal government to require auditable time-based measures of the student credit hour is but one example of a solution that will hurt rather than help institutional efforts to improve learning productivity.  

Where Institutions Fall Short

We can't solve our cost problem exclusively by getting more revenues from state and federal resources-nor will we address it exclusively through institutional cost cutting. We must also address three areas that represent failures on the institutional side of the ledger-in both market and management:

Upside-down spending. Higher education is funded through a complicated number of cross-subsidies within institutions, where lower spending requirements in one area are used to generate resources that are spent on higher-cost programs. Historically, the pattern in most four-year colleges and universities has been to suppress costs in lower-division education—through large classes, use of adjunct faculty and teaching assistants—to create revenues to pay for higher-cost upper-division and graduate programs.

But the lower spending may be compounding the problem of early student attrition, as fully 60 percent of undergraduate attrition occurs in the first two years of college. (See Figure 3, "Percentage of All Dropouts by Cumulative Months Enrolled, Beginning Postsecondary Students 2003–04," a Delta Project survey analysis to be published later this year.)

Figure 3

In these years, greater investments in student coaching, intensive advising, and improving the effectiveness of developmental education could yield better student retention and learning outcomes. But it would require the institutions to make some choices to reduce spending on upper-division and graduate education—a choice most would rather not make.

Competition that increases spending unrelated to outcomes. One of the dirty little secrets of higher education finance is that competition has historically led to increased spending and mission creep, rather than to greater differentiation of products. Work many years ago by Williams College economist Gordon Winston vividly showed the consequences of what he called the higher education "arms race," caused by institutional competition for prestige associated with better-prepared students and faculty research. The devaluation of teaching over research and the incremental shift of institutional attention toward research drive costs upward, as faculty members seek lower teaching loads in order to do more research. More student aid is awarded based on academic merit, and fewer low-income students are served as a result.

Another major cost driver is the growing disparity in funding between the elite private research universities and pretty much everyone else. According to the Delta Cost Project report, "Trends in College Spending, 1998–2008," private research universities in 1998 spent on average $1.94 for every $1.00 spent by public research universities—a huge funding advantage that by 2008 had grown to $2.20 per $1.00. Yet, there is no evidence that the higher spending in private institutions actually paid off in increased value—whether that is measured by numbers of graduates or earnings of graduates or anything else.

As the public research institutions are moving more into the private markets, they will naturally benchmark their spending goals against their private competitors. So the arms race will likely continue.

Poor use of data about spending and performance. The culture of higher education has long equated quality with resources, measured by revenues rather than results. As an industry, we do a remarkably bad job of looking at spending and looking for evidence about areas where spending pays off in positive outcomes. Almost all higher education funding metrics are measures of revenues or total assets, which tell nothing about how resources are used within the institutions. But the focus on revenues perpetuates the endless search for resources, whether those funds go to pay for teaching or research or auxiliary enterprises. So the drift in mission—and the hunt for revenues—continues.

What Now?

Moving forward, we need attention on both sides of the equation—at public policy levels and within institutions. In an ideal world, the conversation would be sequenced, via rational and connected discussions about necessary changes in federal funding, improvements in state finance, reform of public budgeting, and institutional attention to spending and performance. 

The reality is that our public policy environment is so unstable that sustained attention to postsecondary finance is highly unlikely to happen in the next few years. But institutional leaders needn't wait for that eventuality to get on with the business of restructuring costs within their own institutions.

That means permanent, structural attention to holding down rates of spending increases, taking pressure off of tuition and fees, improving efficiencies, and paying attention to investing resources in the places that will make the biggest difference in improved student access and degree attainment. It also means much greater attention to internal and external accountability about resources and costs, and evidence that the institutions are working to control spending even as they are finding ways to invest in quality.

Cost management and accountability by themselves won't solve our funding problems, but they will help to build credibility in institutional leadership—necessary to support continued public investments if and when those once again become a political possibility.

JANE V. WELLMAN is executive director, The Delta Project on Postsecondary Education Costs, Productivity, and Accountability, Washington, D.C.