Tuition And State Support

Preston Cooper from American Enterprise Institute has an interesting article on tuition and state support at the WSJ.  He has some interesting data from his new study but we think he or the headline writer is overstating with the title of What Causes High Tuition.  We are sure he is absolutely wrong about the competitive nature of state schools.

Let’s start with our basic agreement on the main point.  He uses data from 2004 to 2015. Our experience in Wisconsin during that period leads us to agree with Preston’s main point that the real reductions or lack of nominal increases in state subsidies was only tangentially related to tuition increases.  Preston puts it like this in the WSJ:

Colleges do tend to cut spending when state funding goes down. But the expenditures they cut are usually in areas unrelated to instruction, such as research and administration. When funding goes up, colleges largely plow that money into higher spending rather than return it to students through lower tuition.

Sidebar One: We think there might be a problem with aggregate data Preston uses.  Flagship campuses tend to be large financially in most state and tend to have the most flexibility whereas comprehensives tend to have less flexibility.  We would like to see the data on comprehensives only.  End Sidebar One.

Our experience was a little more complex.  One thing the legislature in Wisconsin liked to do was pit the students versus the faculty.  Thus, faculty salary increases would be the last item in the budget and be predicated on tuition increases.  Because there is a national or international market for new faculty, real reductions in state subsidies led to compressed inverted salaries for faculty.  Senior faculty, especially in business, are often paid less than new faculty.  Still the basic point that universities spend everything they can is valid.

We have bolded Preston’s major error in this paragraph:

Tuition goes up no matter what state legislators do. Public colleges, with state boundaries insulating them from competition, and generous federal student aid programs at their disposal, charge as much as they can get away with. Changes in state funding are largely irrelevant.

State boundaries do not insulate schools from competition.  The market for faculty and administrative talent is at least national.  The reductions in state subsidies put pressure on administrators to find creative ways to hire and keep new talent.

Sidebar Two: Old talent could leave but it is less likely.  The nature of defined benefit pensions and other post-employment benefits make the financial incentives less intense for senior faculty.  End Sidebar Two.

The in-state competition among schools is intense.  It is also intense within schools.  One crucial area of competition is for quality (in-state) students.  Quality students allow institutions (the university, college, or department) to meet state measurements like graduation rates and student credit hours per faculty (SCH/FTE) that can have an impact on funding.  Changes in SCH/FTE leads to reallocation of funding, changes in offerings, and changes in class size.

Quality students create the demand that allows institution-specific or major-specific increases in tuition.  A second area of competition is for quality out-state, usually international, students.  Out-state students pay full tuition that supports in-state students.  Failure to meet out-state targets can be a firing offense.  Preston doesn’t mention out-of-state tuition but it is a crucial budgeting item.  It follows its own cycle that doesn’t match US cycles.

The in-state competition among schools, colleges, and department may not as intense as the private sector but it is still intense.  We would suggest that the solution to state funding is to increase the rewards of winning and losing the competition for students and faculty by increasing support to the quality programs and reducing support to the failing programs.  In the state of Wisconsin that means having the administrators from Wisconsin System down to the individual campuses rather than the legislature making the tough decisions

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