Taking the “State” Out of State Universities: June 2011

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Tight budgets have lawmakers considering options that could change the face of public universities.

By Julie Davis Bell

It’s a fact: Higher education budgets are cut when times are tough, but restored when times get better.

Unlike most other state budget areas, higher education has a built-in mechanism to adjust to budget cuts—tuition. But this most recent recession lasted longer, the cuts were deeper and tuition sky-rocketed. As states enter the fourth straight year of severe budget cuts, lawmakers, college presidents and students know this is a defining moment. Fundamental changes in the way we fund and run our public universities must occur if we're going to continue to offer high quality education to all kinds of students.

There is an important new conversation brewing. Can states continue to afford higher education? How important is it to maintain a public system? Why can’t higher education be run more like a private business?

As legislators face the reality of little to no more public money for higher education, they are exploring options. These include partially or completely privatizing public universities, reducing regulations, creating voucher systems and funding institutions based on performance.

States currently provide nearly $80 billion to support higher education through appropriations and financial aid to students. Amounts vary by state. In Vermont, for example, students pay nearly 70 percent of the cost of their education through tuition while in California, students pay only about 26 percent of the cost, with the balance made up by the state. (That formula would change under the proposed budget in California.)

In most states, that balance is shifting dramatically: Only 25 years ago state appropriations, on average, paid for 78 percent of the cost of college. Now their share is down to 60 percent.

That’s no surprise to parents and students. Tuition and fees at four-year, public universities, on average, in just the last three years went from $6,185 to $7,605 today, a 22 percent increase, according to the College Board. That does not include room and board.

Legislators feel the pain, too.

“We’re trying to have quality higher education systems with fewer resources,” says Representative Dan Branch, who chairs the Texas House Committee on Higher Education.
He suggests fiscal pressures, along with K-12 reform and the digital revolution, are converging to make this a very interesting time for higher education. “The fiscal pressures also create innovation. This is the lemonade in all this.”

More Private Than Public? 

Is this trend slowly draining the “public” out of public education?

Many college presidents would say yes. They argue state funding levels have decreased so significantly in the last decade that colleges and universities are more private than public. If funding continues to decrease, they say, these institutions would better operate privately or at least with much more autonomy. Such an arrangement would free them of the rules that accompany accepting public dollars.

“States may not be able to provide the funding we need, but in the short term they can relieve institutions from burdensome bureaucracy that will help them operate more efficiently,” says Bruce Benson, president of the University of Colorado. “Likewise, institutions must do their part to ensure they are operating efficiently and effectively.”

Benson suggests even though state support of public higher education is plummeting, “allowing institutions to back into becoming private is bad public policy. Stronger higher education has a direct correlation to a state’s economic, social and cultural health.”

Branch introduced legislation to study the “unfunded mandates” states place on institutions and consider how to deal with them. “We get push-back from the universities that they have to fill out too many reports, so I said, ‘Fine, give me some specifics.’ I want to look at those inefficiencies.”

It’s an interesting debate. On the one hand, a newly designed higher education system built around market principles could make sense for states. Institutions would theoretically become more efficient and competitive as they market themselves to potential students.

Richard Vedder, director of the Center for College Affordability and Productivity, argues government subsidies to higher education are excessive given the results.

“Our policies have neither solved income disparities nor increased higher education opportunities for our poorest citizens,” he says. “The correlation between higher education spending and economic growth has not, in fact, been positive but negative.”

Increasing social benefits have not occurred, he adds. “For example, crime rates have not fallen and volunteerism is not dramatically increasing,” Vedder says. “In addition, institutions are inefficient and students are taking longer to finish.”

Education always has been one of the most important state responsibilities. States play a significant financial and policy role in supporting K-12 education, and a significant but lesser role in supporting higher education.

The Public Mission

Public colleges have a mission to provide high-quality and relatively low-cost education to a wide range of students, to actively participate in public service and to prepare talented workers for jobs in the state. So legislatures are reluctant to give up their funding and oversight roles. State support for colleges and universities sends a clear message that higher education is viewed and valued as a public good, not just a private benefit.

Many feel passionate the state must maintain its role of financial support and oversight. Left on their own, they fear institutions will operate more like private businesses, charging high tuition to attract only the students they want. They will lose all incentive to serve low-income students and to be responsive to state needs and interests.

Public universities with the most to gain from proposals to privatize are those that are highly selective, have ample fund-raising experience and the management skills necessary for reduced regulation, says David Breneman, a professor who specializes in the economics of education at the University of Virginia. Less selective colleges with limited fund-raising potential and weaker management structures have little to gain and much to lose.

“The blunt fact is that there are many more of the latter than the former,” he says. “A likely result of these market-driven policies will be increased social and economic stratification among students attending highly selective public colleges and their less-selective counterparts, a further blow to the policy objective of equal educational opportunity.”

Options Abound

There is, of course, already a system of private higher education in the United States. What distinguishes it from the public system is its lack, or reduced level, of state funds and regulations.

These institutions charge whatever they wish for tuition and accept only the students they want. Although private institutions have significant outreach and financial aid for low-income and minority students, the average student at a private institution is from a higher-income family that is able to afford the hefty average $26,000 a year tuition.

Talk about privatizing public institutions is emerging in the states, but no one has a clear view of exactly what it means. While no state has formally “privatized” its public higher education system, officials are looking at new and different designs that retool the balance between funding and accountability. The theory is that, if the state provides less funding, institutions should expect more autonomy and less red tape. This balance may be difficult to find.

  • Texas lawmakers in 2003 transferred their right to set tuition to the institutional governing boards and, in return, schools agreed to meet certain standards in the areas of access, excellence, community service, organizational efficiency and productivity.
  • Colorado lawmakers in 2005 created the Colorado Opportunity Fund that provides every student with a “voucher” to be used toward college costs at any Colorado institution. Students pay the balance between the value of the voucher and the tuition at the college they choose.
  • The Virginia legislature in 2005 agreed to impose fewer regulations on personnel, purchasing and capital projects on the University of Virginia and the College of William and Mary, and established charter universities that control tuition levels but pledge to provide significant need-based student financial aid. Ohio Governor John Kasich is pursuing a similar model.
  • Oregon is examining a plan to finance the University of Oregon through state bonds and private donations. In addition, the president of the university has suggested the state issue $800 million in new bonds and commit to covering the debt service for 30 years. During that time, the university would raise private money to match the bonds and build an endowment to sustain the university.
  • South Dakota is studying how the state delivers postsecondary education, how it compares to other models, and what difference it makes to the state’s economy.

About half the states already have some form of performance funding. States set goals for colleges, such as increasing completion rates, and link funding to the institution’s success in meeting those goals.

While early performance funding programs were relatively small—about 5 percent to 10 percent of total state appropriations—new programs in Indiana, Ohio and Tennessee will eliminate enrollment-based funding and move to a 100 percent performance-based system. Performance contracts between the state and the university detail what the state will provide and what performance the university must demonstrate.

Legislators are working hard to improve college completion rates and the productivity of the system. Changes made in the next few years to the level of state support to public higher education, however, will have the most dramatic impact of all policy decisions on the shape of higher education for the next generation of students.

“We’ve got to figure out better ways from a student engagement and cost standpoint to deliver higher education,” says Branch. “The best prognosticators can’t tell us what higher education will look like 20 years from now. But we know we’ll deliver education in materially different ways. We need to be open to these new models.”

Julie Davis Bell directs NCSL’s Education program.