Four Not-So-Good-Options for Higher-Ed Funding

Few would disagree that college tuition is becoming an intolerant financial burden on middle-class families, and few would dispute that declining state support for public colleges and universities is at least partly to blame for tuition increases. What can be done to create a “stable and sustainable” funding model for public higher education in Virginia that can help stabilize tuition increases?

The State Council of Higher Education for Virginia (SCHEV) threw that question into the lap of its staff, and the staff has responded. In a presentation to SCHEV’s resources and planning committee yesterday, Finance Policy Director Dan Hix and two finance staffers laid out four options for purposes of discussion.

If the answer to Virginia’s higher-ed affordability crisis is to be found through increased revenue, then one of these ideas, or a mix-and-match combination of them, could well provide the solution. But, as I opine below, the drawbacks are severe. The solution to the higher-ed funding crisis lies on the cost side, not the revenue side.

Option 1: Increase General Fund support at the rate of inflation through the 2018-20 biennium with the understanding that tuition for in-state undergraduate students will increase at the same rate.

The obvious advantage of this idea is that it would provide a stable revenue source for Virginia’s public institutions over the next biennium. “This option allows all parties involved from the state, to institutions, to students and their parents to have a predictable annual increase in base support, thus allowing for improved planning,” states the SCHEV memo.

Assuming an average annual inflation rate of 2%, the plan would raise an additional $29 million from the state General Fund and $64 million in tuition revenue, for a total of $92 million.

An obvious drawback is the risk that the General Assembly would renege on its promises, as it has in the past, if state revenues don’t match forecasts. Another is that even if lawmakers could be counted upon to deliver, colleges and universities might not want to be constrained by an inflation-linked spending cap.

Option 2: Reduce state support for graduate education by changing the current funding splits from 37% from the state and 63% from tuition to 25% and 75% respectively, and reallocate the “savings.”

This approach approach would make higher education more affordable for undergraduate students at the expense of graduate students, and it would reallocate money from larger research universities to smaller, undergraduate-oriented institutions.

Reducing the state split to 25% would raise about $39 million to reallocate to undergraduate-oriented institutions. Politically, this option might have legs. Undergraduate students are more likely to come from Virginia; graduates are more likely to be out-of-staters. Any plan that benefits Virginia families will be popular with politicians and their constituents.

General Fund share versus tuition revenue, 2017-2018 school year. Click for larger image.

The drawback is that the impact would be highly uneven. Some institutions are much more dependent upon state support than others. Among research institutions, for example, the General Fund share ranges from 30% state support as a percentage of state support + tuition revenue at Virginia Commonwealth University to a mere 18% at the University of Virginia, as shown in the table at left.

Moreover, some institutions have a higher percentage of graduate students than others, and some have more research grants to help pay for graduate students than others. The plan would not simply create winners and losers, but lost revenue could be especially devastating to institutions lacking the market power to increase tuition revenue aggressively.

Option 3: Allow selected institutions to increase their share of out-of-state undergraduate students up to 50% of their total undergraduate enrollment.

This option recognizes that certain institutions — UVa, the College of William & Mary, and Virginia Tech most prominently — enjoy sufficient prestige in the higher-ed marketplace that they can increase tuition more aggressively for out-of-state students than they have in the past. The idea would be to allow them to increase enrollment for out-of-state students while not taking away any current spots from in-state students. Across the higher-ed system, out-of-state students pay 163% of their cost. The bigger “profit” from out-of-staters would enable the state to reduce its support by a like amount. SCHEV estimates that the shift would free up $270 million in General Fund revenue for reallocation to needier institutions.

The drawback of this option, as currently configured, is that there is nothing in it for UVa, W&M or Tech. The elite three institutions would increase their charges for out-of-state students but the profit would be distributed to other institutions. Indeed, they likely would regard this policy as a huge negative, for charging higher tuition would shrink the pool of applicants to draw from.

Option 4: Reduce state support for both undergraduate and graduate students at selected institutions by changing the current fund splits from an average of 41% from the state and 59% from tuition to 30% and 70% respectively, and reallocate the “savings.”

Translation: Reduce state support for UVa, W&M and Tech and allow them to make up the difference by raising tuition. This option would raise $91 million for redistribution to other institutions, but Tech would have to increase tuition by 14.4%, W&M by 15%, and UVa by 23.6%.

The obvious drawback is that the state’s flagship institutions would go all Kim Jong Un in response to a policy that impacted them so negatively. Even to disinterested parties, the idea of dis-investing in the state’s strongest institutions and funneling funds to its weakest institutions might not seem wise.

SCHEV staff is acutely aware of the drawbacks of its proposals. “This is not an easy document and we are not entirely easy with some of the options included here,” states the memo. “However, if the next ten years are similar to the
last ten years for Virginia public higher education, our system is indeed in peril and options such as these may be necessary to save it.”

Bacon’s bottom line: Lawmakers can’t be relied upon to keep its funding promises, and all revenue-raising options have major drawbacks. For the most part, the options simply redistribute wealth between institutions, creating winners and losers. It’s not clear that the statewide system would be any better off.

In closing comments at yesterday’s meeting, newly appointed Council chair Heywood Fralin laid out his priorities for SCHEV. He wants Council members to have greater oversight of the Virginia Plan for Higher Education (the state’s strategic plan for higher ed). And he wants to focus on three pressing issues: (1) the restructuring of higher-ed funding, (2) tying higher education to economic development, and (3) finding ways to reduce higher-ed costs.

Finding cost savings is the great unexplored frontier. SCHEV does useful work in identifying opportunities for shared services, and it monitors higher-ed’s use of space to caution against overbuilding. But, as I argued in my four-part series on higher-ed accountability, SCHEV does not monitor faculty productivity, administrative overhead, or a host of other cost drivers.

While it would be unwise for SCHEV to begin micro-managing Virginia’s colleges and universities, I suspect there would be strong political support for SCHEV to collect data, establish benchmarks, and provide boards of trustees with analysis that they’re not getting from college administrations. The General Assembly should reallocate a couple million dollars from whatever additional sum it plans to give the universities next year and beef up SCHEV’s data-collection and analytical capabilities.

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7 responses to “Four Not-So-Good-Options for Higher-Ed Funding

  1. There’s a fifth option. Provide funding like we do for K-12 .. a specified amount for each student – multiplied by the total enrollment… with a twist…

    the amount of funding is done on a means-tested basis that awards full funding for those at the lowest economic tiers with graduated reductions as family income goes up.

    So .. schools serving richer populations would get less than schools serving less rich populations.

    And it would work in the aggregate like funding for K-12 does in that you start with the total amount the GA has allocated for funding and then you break it down by total enrollment into means-tested tiers.

    There is no way in hades that all taxpayers – even those that are taxpaying working poor should be having their taxes spent on families with 100K income to make their high-dollar College “choices” … “more affordable”.

    How did we get to this point? How can we do this for education when even for something as fundamental as health care – we DO means-test AND families with 100K in income do NOT “qualify” for taxpayer subsidies unless they have huge families… ?

    • An argument can be made that many of the students from higher income families may be better candidates for the most effective use of educational resources than many of the students from lower-income families. Of course, this is not universally true. Nor do I know how much weight it should be given. But I think it’s part of the discussion.

    • ” … the amount of funding is done on a means-tested basis that awards full funding for those at the lowest economic tiers with graduated reductions as family income goes up.”

      College students are adults, just like US Marine recruits at Parris Island. Maybe the Marines who are the children of less affluent families should be paid more than the Marines who are children of wealthier families.

      A college student is an adult who has been accepted into a n institution of higher learning. I could care less about the wealth of their parents. They should be offered loans not hand outs.

      • re: ” everyone offered loans”… well..not really… how much loan is determined in part by credit history of the student and his/her family, right?

        but this is not so much about that as tying to tie state funding to some kind of “affordability” standard.

        and “affordability” is different for people with different financial resources – which includes how much credit they qualify for.

        If you look at ObamaCare – the standard is up to 400% of poverty level and those at the lower end of the scale qualify for more help than those at the upper end and those over 400%max out.

        It’s similar to the earned income credit … you max out at about 40K.

        But with this issue – the argument is being made that the Middle Class should essentially be subsidized by State Funding to lower tuition.- apparently without regard to what Middle Class means.. and so yes.. we’re not talking about single “adults” when we talk about Middle Class.. we’re talking about kids of Middle Class and the idea that it’s the responsibility of taxpayers to provide them with “affordable” tuition.

        Then in other posts – and even in this one from TMT – the argument is made that students who are from lower incomes and maybe not as good academically may not “deserve” “affordable” tuition because they might fail and waste it.

        So the dozens of posts on this issue seem to be basically about forcing colleges to lower tuition to some “affordable” level for the Middle Class because the the State – it’s taxpayers have a right to demand it because tax dollars are given to the University and if the University won’t keep tuition “affordable”.. the State should intervene to determine why it’s not and take actions to make it “affordable” ..like reducing the number of administrators and professors…etc.

        These “ideas” are coming from folks who proclaim themselves to be fiscal conservatives, who hate regulations and believe the govt should not be forcing itself on businesses and the private sector in general.. but apparently it’s “ok” to tell Colleges how to operate..

        So do we REALLY want the govt to tell UVA how to operate or is that some sort of bluff.. to scare them into reducing tuition?

        😉

  2. I think this issue, like healthcare, is fundamentally a cost issue. The U.S. spends considerably more than other countries but are not getting the expected results or returns. The affordability issue in large part a consequence.

    Option 3 has worked well for the University of Michigan by some prestige measures. Not too long ago, they were less selective than say UVA and W&M by a number of measures, but now that is not the case, and they have gone up in rankings. They take about half from out of state, charge them more, and use the windfall to increase spending and merit aid. The way 3 is described would just be a burden on the Virginia institutions as they would 1) have to expand enrollment (to not take away in-state spots) and 2) not be able to keep and use the windfall in tuition. It is a mess from an incentive standpoint unless your goal is to ride those institutions into the ground. Option 4 is more of the same.

  3. In most situations where costs exceed what people can afford – people usually seek less expensive, more affordable options.. They make compromises between what they want and what they can afford.

    The last thing in the world anyone should want is for the government to step in and subsidize those who can afford – by making choices – without govt subsidies to .. then not do that and instead , rely on the govt to help them buy more than they can afford on their own.

    The entire concept is turned on it’s head by people who can afford a more modest option – but want more.. and are more than happy to have the govt step in to help them.

    The purpose of subsidies is to help those who can’t afford College at all without some help.

    It just boggles my mind that we have folks with 100K in annual income.. especting the govt to help them pay for the gold standard rather than making the tough choices most all of us have to make in our daily lives whether it is about what kind of place we can afford, what we eat.. our cars.. and indeed our own health care.

    People who make 100K in annual income can afford more modest College options .. I know people who earn less than 50K who managed to get their kids through UVA.. not without some sacrifices.. on both the parents and the kids part.. but they did it.. and they did it without their kids being in debt up to their eyeballs… nor major financial assistance..

    I know folks that ate beans and franks and whatever they could scrounge up in between school and their part time job and lived in a roach-infested one bedroom flat.. – that got through UVA… again.. without a subsidy and without longer term debt.

    I know people who went without health insurance..so they could help their kids get through college..

    And yet here we are talking about subsidizing people who make 100K and have employer-provided health insurance – advocating govt subsidies.. who opposed govt subsidies for people who don’t have health insurance..

    go figure.

  4. Larry, your argument could have been made by Karl Marx. “From each according to his abilities, to each according to his needs.” It suggests to me that we put every applicant on list ranked by family income and/or wealth and distribute college aid (or pay for health insurance) accordingly. The administrative costs would be staggering.

    I also see, perhaps, erroneously, a subtle argument that everyone should have an equal chance to be a brain surgeon. That doesn’t make any sense. Some have the ability to learn everything that must be learned to be a brain surgeon. Most don’t. Someone can ace every class, but not have a steady hand.

    And “yes,” lots of people need to sacrifice to get an education. After college most of my friends had good jobs. They bought a nice car. Had a nice apartment or even bought a starter house. They went on vacations. I went to law school; lived in a so-so apartment; drove a car without a radio; and never went on vacation. I was far from alone. And many other students lived worse than I did. I don’t worry about those who have to sacrifice.

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