Section 1: Addressing Current Financial Challenges

Public Higher Education

Higher education has long been described as the “balance wheel” of state budgets. Public colleges and universities are different from other state agencies: they have their own revenue streams, they can adjust their program offerings, and they have some control over employee salaries. As this report will make clear, their budgets are not infinitely flexible, but they are more flexible than the budgets of most state institutions. Accordingly, the states tend to increase their contributions to public higher education when the economy is strong, and cut their contributions when the economy is weak.

Despite modest increases in 2013 and 2014, state support for public higher education per full-time equivalent student remains nearly 30 percent below spending in 2000, after adjusting for inflation using the State Higher Education Finance cost adjustment. Source: State Higher Education Executive Officers (SHEEO) Association, SHEF: FY 2014–State Higher Education Finance (Boulder, Colo.: State Higher Education Executive Officers Association, 2015).

Higher education remains the third-largest priority in state general-fund budgets (the portion of the budget financed primarily by taxes). But at 9.4 percent of general-fund state expenditures, it is a distant third behind elementary and secondary education at 35 percent and Medicaid at 19 percent. Over the past twenty years, and especially since the most recent recession, states have dramatically reduced their funding for public higher education. Although spending increased slightly in 2013 and again in 2014, these increases do not begin to make up for the preceding cuts: after adjusting for inflation, spending per full-time equivalent (FTE) student in 2014 was nearly 30 percent below the spending level in 2000. During the same fourteen-year period, state general-fund spending on Medicaid, K–12 education, and corrections increased by 52 percent, 15 percent, and 14 percent, respectively. In short, state spending on higher education remains at a historic low, even after most states have recovered from the worst effects of the recession and have begun to restore spending in other categories.

Higher education has fallen as a share of state budgets, while Medicaid has risen. Source: National Association of State Budget Officers, State Expenditure Report (various years, 1990–2014) (Washington, D.C.: National Association of State Budget Officers, 1991–2015), http://www.nasbo.org/publications-data/state-expenditure-report/archives.

Public Research Universities

The decline in state support represents a fundamental challenge that strikes at the core missions of these institutions. Is public higher education truly open to the public? Can high school graduates afford to attend their state’s postsecondary institutions? If they can afford to attend, what kind of education can they expect to receive?

These are the basic questions common to all of public higher education. But for the nation’s public research universities, the challenge is even more complicated.

Public research universities—Carnegie-classified as Very High and High Research Activity public universities—enroll the best students in every state: 87 percent of entering first-year students at these institutions are from the top half of their graduating high school class.⁵ They educate a large portion of our nation’s population: 3.8 million students, including almost 900,000 postbaccalaureate students (master’s and doctoral students, as well as students pursuing law, medicine, and dentistry), are enrolled annually in public research universities.⁶ They also initiate much of the fundamental research that drives scientific and technological discovery and grows local and national economies. Yet despite the crucial role they play in every state in the nation, public research universities have faced more severe cuts than public higher education overall, averaging a 34 percent drop in state support per FTE student from 2000 to 2012.⁷

Public research universities have absorbed the cuts to the best of their abilities, using all of their available tools—addressing inefficiencies, consolidating academic programming, tightening research budgets, and raising tuition. As a sector, they have risen to the financial challenge, but they are running out of options. Public research universities cannot continue to raise tuition without an accompanying increase in need-based financial aid. They cannot continue to cut academic programs without having an impact on the quality of the education they provide. They cannot further cut operations, maintenance, and other institutional support without impacting the quality of the research conducted in campus laboratories. They cannot expect that new efficiencies alone will make up the difference between what they have and what they need. In fact, they are leaner today than they have been in a generation.

Some state systems are faring better than others: in 2013, Alaska invested more than $27,000 per FTE student; Colorado, in contrast, provided only $220 for each FTE student.⁸ On average, state appropriations now account for only 18 percent of the total educational revenue per FTE student for public research universities, a dramatic decrease from 32 percent in 2000.⁹

Undoubtedly, the most effective and efficient solution to these challenges would be for all fifty states to recommit to the financial support of their public research universities—if not by reversing the cuts made over the last decade, then at least by increasing public higher education contributions over the next decade. Conceived as state institutions, serving state populations, driving state economies, governed by state-appointed or -elected boards, public research universities are fundamentally state entities; any solution to the challenges they face must begin with state governments. Otherwise, these institutions will lose the distinct character that has made them so important to the states and the nation.

Public research universities are increasingly reliant on tuition and fees in the wake of cuts in state appropriations. Data shown represent public research universities that are members of the Association of American Universities. Source: Council on Governmental Relations Costing Committee, Finances of Research Universities, June 2014 Version (New York; Washington, D.C.: Council on Governmental Relations, 2014).

Each public research university has a responsibility, implicit in its relationship with the state, to serve a student population that is as broad and diverse as possible. Over a lifetime, a college graduate (from either a public or a private institution) can earn as much as $1 million more than a person with a high school diploma.¹⁰ Public research universities have been particularly effective in spreading this opportunity to students from underprivileged backgrounds, immigrant families, and families for whom higher education (and its benefits) would otherwise be unattainable.¹¹

For this reason, the single most important higher education program that any state can pursue is the provision of comprehensive financial aid to low income, in-state undergraduates. California’s Cal Grant and Indiana’s 21st Century Scholars programs offer two successful models that could be replicated elsewhere. These programs support students who meet requirements in certain need- and performance-based criteria, including family income and minimum grade point average. Cal Grant offers up to $12,240 per year per FTE student, which can be used for a variety of expenses, from tuition and housing to books and meal plans.¹² The 21st Century Scholars program covers four years of full tuition costs at Indiana public colleges and universities or partial tuition at approved private universities in Indiana for qualifying students. Such programs are critical for individual students, but they also greatly strengthen the social and economic fabric of local communities, states, and regions.

Source: National Center for Education Statistics, IPEDS [Integrated Postsecondary Education Data System] (U.S. Department of Education, Institute of Education Sciences), https://nces.ed.gov/ipeds/; The Institute for College Access & Success, College InSight, http://www.college-insight.org; and National Center for Education Statistics, 2011–12 National Postsecondary Student Aid Study (NPSAS:12) (U.S. Department of Education, Institute of Education Sciences).

Maintaining the Public Trust

Regulatory Reform All universities—public and private—face a steadily proliferating set of regulations. The cost of compliance with these regulations is particularly onerous for public research universities facing decreasing state funding. Researchers at Vanderbilt University have found that among thirteen institutions, the cost of compliance with local and federal regulations ranges from 11 to 25 percent of research expenditures, and from 2 to 8 percent of nonresearch expenditures. In response to this regulatory burden, the National Academies have recommended that Congress establish a commission to review all regulatory requirements on universities and to reduce unnecessarily burdensome regulations. Such an effort is well overdue and would be a significant show of federal support for U.S. public higher education, and for public research universities in particular. Source: Vanderbilt University, The Cost of Federal Regulatory Compliance at Vanderbilt University: An Assessment of Federal Regulatory Compliance Costs at 13 Institutions in FY 2013–2014 (Nashville, Tenn.: Vanderbilt University, 2015).

By serving student populations that mirror the broader demographics of their states, public research universities hold public faith. Maintaining the trust of taxpayers is a responsibility that all public research universities share. They must continuously prove to be credible stewards of the public’s confidence as well as its funds. And so any attempt to attract new financial support, for example, from the private sector or philanthropists, must honor this relationship.

Historically, public research universities have proven to be honest and self-critical partners with business, government, and other donors. In recent years, they have examined and reexamined their budgets to find substantial cost savings, and many institutions have been successful in refining their cost structures. The University System of Maryland’s Effectiveness and Efficiency Initiative yielded $356 million in savings during its first ten years, and the University of Pittsburgh’s cost saving efforts through aggressive price negotiations with suppliers have saved more than $120 million over the past five years.¹³ However, all will need to continue these efforts in the years ahead, especially if public research universities hope to attract new funding and develop new academic and research programs.

One way for public research universities to sustain fiscally responsible practices, and to exhibit their restraint to taxpayers and potential partners, is to establish annual cost and efficiency targets. Even as public funding of higher education is diminishing, public scrutiny is increasing, driven primarily by concerns over rising tuition. Public research universities are being asked to serve more students and provide more services with less funding; thus far they have succeeded on both counts. But as they seek to cut costs and realize other efficiencies, they must be vigilant. Public confidence, as well as institutional vitality, will be strengthened by the establishment of reasonable goals to limit spending, followed by a clear and transparent attempt to report on such goals to students, parents, alumni, local media, federal and state legislators, and key figures in the executive branch of state government.

Public research university employees, including the faculty and administration, should work together to develop and implement sustainable financial policies. Cost-cutting is most effective when it is a shared obligation. But ultimate fiduciary responsibility rests with boards of regents and trustees, who need to play a more active and prominent role in university oversight. A well-informed board can and should be an asset to public research universities adjusting to new funding models. As the Association of Governing Boards of Universities and Colleges has argued, “While boards are not the source of the governance challenges facing higher education, changes to boards and their structure can lead to improved leadership across higher education—in setting goals, in using data to evaluate performance, and in making strategic investments in ways that create value.”¹⁴ Boards can be most helpful if their members have a broad range of expertise, including experience running large and complicated organizations, and if their members serve as public champions of the institutions that they lead. Although institutional knowledge is of great importance in university governance, boards should also evolve over time as changing financial realities require new kinds of expertise.

Regional Partnerships

Efficiency targets and active board engagement on fiduciary matters are already standard practices at many public research universities. They help to strengthen the internal administration of large institutions, and they give the public confidence that public higher education is well run and careful with taxpayer dollars. In addition to these basic internal adjustments, public research universities should also pursue external efficiencies: combining resources, coordinating programs, eliminating duplicate course offerings, and saving costs among neighboring institutions or through regional alliances with similar institutions.

There are now several model alliances for public research universities to consider. The Committee on Institutional Cooperation (CIC) is among the most successful. Established by the presidents of Big Ten institutions in 1958 to share expertise, libraries, and specialized courses and to collaborate on innovative programs, the CIC has since grown to include fifteen Midwestern universities.¹⁵ On a smaller scale, the University of North Carolina, Chapel Hill has worked with Duke University to combine their history department offerings. Similarly, three academic institutions (the College of Engineering at Virginia Polytechnic Institute and State University, the Wake Forest School of Medicine, and the Virginia–Maryland Regional College of Veterinary Medicine) have established a joint graduate program in the Virginia Tech–Wake Forest University School of Biomedical Engineering and Sciences that gives students access to all three campuses, including courses, faculty, and facilities.

Such alliances are among the most effective and efficient ways for public research universities to reduce costs without reducing the quality of their educational programs—to do more with less. They help institutions expand their offerings to students through shared courses and research opportunities. They provide students with new opportunities for faculty mentorship, as well as the ability to attend intercampus conferences and research symposia and to collaborate with peers in diverse specialty areas. They enhance research programs by pooling talent as well as expensive equipment. And they signal to the wider population that public research universities are managing their investments not just on isolated campuses but across broad geographic areas.

Toward a New Financial Model

As important as it is for public research universities to maximize available resources, they will not be able to sustain programs, honor excellence, and ensure access without new sources of support. The traditional financial model for funding public research universities is now outdated. Any solution will require an infusion of new strategies, ideas, partnerships, and revenue streams—a new compact among the federal government, state governments, the students, corporations, foundations, philanthropists, and, of course, the universities themselves. Only with the active participation of these partners can public research universities attain the sustainable, stable, and comprehensive financial models that will enable them to support future generations of American students.

To make up for budgetary shortfalls, public research universities have in recent years relied more heavily on restricted funds, which are often easier to raise than unrestricted funding. Donors typically prefer to restrict their gifts to specific projects and activities, especially if they want to see that their contributions yield immediate, tangible results. However, these funds can rarely, if ever, be redesignated to cover general educational expenses, which remain the primary costs at every public research university. Tuition, as one of the only unrestricted sources of funding that universities receive, has thus grown not only as a percentage of total budget, but in real dollars. Along with student fees, tuition now constitutes more than one-half of the core educational support for public research universities.¹⁶ However, tuition can be stretched only so far. Public research universities must therefore develop new partnerships with the business and philanthropic communities that provide institutions with budgetary flexibility and financial stability, even as they reduce dependence on tuition increases. Funds that support the educational and teaching mission—through specific academic programs, teacher training, endowed faculty positions, or even workforce development strategies—will have the greatest impact on undergraduate and graduate tuitions, on the overall student experience, and on the university’s bottom line.

This strategy requires a new approach to fundraising. Private research universities have a long history of successful alumni stewardship, but at most public research universities, fundraising and development operations are relatively new. While a few of the nation’s largest public research universities anticipated the decline in public support and established robust development strategies, most are just now increasing their fundraising operations and beginning educational campaigns with their alumni. Of the seventy-seven institutions that responded to a Lincoln Project survey, 90 percent have recently completed or are in the early stages of launching a capital campaign. The University of Virginia, University of Texas at Austin, and University of California, Los Angeles have each successfully launched or completed $3 billion-plus campaigns. As a dramatic example, funding generated through development activities at the University of Michigan is now considerably larger than the state allocation: the university launched a $4 billion fundraising campaign in November 2013, and as of March 2016, nearly $3.2 billion had been pledged.

Net tuition is the published tuition minus any grants, loans, or other aid; in other words, it is the actual amount students pay to attend an institution. While auxiliary activities like housing management and food services are important components of universities, they are generally self-funding and do not contribute substantial revenue to the core operating budget of the university. Source: National Center for Education Statistics, IPEDS Analytics: Delta Cost Project Database 2000–2012, https://nces.ed.gov/ipeds/deltacostproject/.

These development activities must continue and expand in the years ahead, particularly to help raise unrestricted funds to support core educational activities. Public research universities should be transparent with donors about the challenges they face, and university development offices should help educate donors about how their gifts can have the greatest impact. Potential donors should consider providing core educational support rather than contributing to activities ancillary to the academic enterprise.

State and federal matching programs might also help leverage philanthropic donations, and would be especially welcome as potential sources of permanent university endowments. Such endowments serve three purposes: First, endowment income, combined with well-run annual campaigns, can make significant contributions to the operating and capital costs of the university. Second, endowments give public research universities additional flexibility to support student scholarships and financial aid. And third, prudently invested endowments provide a steady stream of income that serves as institutional insurance against the fluctuations of state appropriations and as a buffer against rapid changes in other revenue sources.

As state appropriations have decreased, restricted funds have grown as a percentage of total budgets at public research universities. While federal appropriations and revenues from state and local grants and contracts have increased since 2000, these are restricted to purposes specified in the original agreements and can rarely, if ever, be shifted to cover educational expenses. The net effect of a shift over time from unrestricted funds to restricted funds is a decline in the budgetary flexibility of public research universities.

These data exclude revenues from university health systems. For the University of Pittsburgh, “Other” includes rental revenue, patent and royalty revenue, faculty and staff newspaper advertising and subscriptions sales, and symposium registration fees. For the University of Colorado Boulder, “Other” includes facilities-rental and royalty income, and miscellaneous fees, fines, and charges for services (including application fees, library fines, and testing fees). Source: Office of Planning, Budget, and Analysis, University of Colorado Boulder; Office of Budget and Planning, University of Michigan; Office of the Provost, University of Pittsburgh; and Office of Planning and Budgeting, University of Washington.

States should also establish long-term funding goals, including targets for the growth of state investment in public higher education, to stabilize support and assist universities in long-term planning. Targets would vary by state, depending on the specific needs of public higher education institutions in each region. But a basic formula could be applied that steadily increases support in a way that tracks long-term economic trends such as inflation or family income growth in the state. Ultimately, public research universities are like every large enterprise: they perform best when funding is stable and they can plan their budgets and programs.

Recent innovations in science funding might also point the way toward greater financial stability for public research universities. In 2012, six foundations launched the Science Philanthropy Alliance, which set a goal of increasing private funding of basic-science (or discovery-driven) research, which is largely conducted at universities, by $1 billion per year.¹⁹ This effort is principally a response to the steady decline in the federal investment in discovery-driven research.²⁰ Foundations might consider a similar initiative to establish an alliance of private foundations for public research universities in response to the steady decline in state funding. Such an arrangement could take a variety forms. For example, an alliance of foundations could help establish a new national endowment for public higher education—similar to the American Cancer Society or the Nature Conservancy—that could become a trusted and secure instrument for subsequent charitable investments. Once such a fund is established, contributions could come from individuals, corporations, or venture capital and private equity firms, and the endowment could provide support to the states or directly to individual institutions.

If adopted, the recommendations described in this section would help public research universities respond to their immediate financial challenges, while also laying the groundwork for sustainable long-term funding. Many of these ideas have already been tested by universities around the country and have proven successful, yielding significant savings and new funding streams. In addition to these financial gains, each recommendation would also help renew the important compact between public research universities and the public. These institutions have been and must continue to be serious and conscientious stewards of the public’s trust. In return, the public should uphold its historical promise to support public research universities and the many services they provide—through state and federal contributions as well as private donations.

The recommendations described above are designed to help balance the delicate but critically important relationship between public research universities and the populations they serve, with the goal of preserving public research universities as we know them today. In the next section, we offer strategies to prepare public research universities to evolve and meet the societal demands of the future.

ENDNOTES

5 Additionally, 61 percent of first-time, full-time freshmen come from the top quarter of their graduating high school class, and 35 percent come from the top fifth. See U.S. News & World Report, U.S. News College Compass (2015), http://www.usnews.com/usnews/store/college_compass.htm.

6 See National Center for Education Statistics, IPEDS.

7 National Center for Education Statistics, IPEDS Analytics: Delta Cost Project Database 2000–2012.

8 The variation in state appropriations for higher education means that states also vary greatly in their relative reliance on appropriations versus net tuition revenue. Alaska and Wyoming, which provide high levels of state support for public higher education, rely relatively little on net tuition. Colorado, New Hampshire, and Vermont, which provide relatively little state support for public higher education, rely heavily on net tuition. These differences reflect contrasting state philosophies about who should bear the costs of higher education: Vermont, for example, keeps tuition higher for those who can afford college and provides significant financial assistance for those who cannot. See Julie Davis Bell, The Nuts and Bolts of the Higher Education Legislative Appropriations Process, Getting What You Pay for Policy Brief (Boulder, Colo.: National Conference of State Legislatures and Western Interstate Consortium for Higher Education, November 2008), http://www.wiche.edu/info/gwypf/bell_appropriations.pdf. State education appropriations per FTE student at public research universities are derived from State Higher Education Executive Officers (SHEEO) Association, SHEF: FY 2014—State Higher Education Finance (Boulder, Colo.: State Higher Education Executive Officers Association, 2015).

9 Delta Cost Project, Trends in College Spending: 1999–2009 (Washington, D.C.: Delta Cost Project, 2011), http://www.deltacostproject.org/sites/default/files/products/Trends2011_Final_090711.pdf; and Delta Cost Project, Trends in College Spending: 2003–2013 (Washington, D.C.: Delta Cost Project, 2016), http://www.air.org/system/files/downloads/report/Delta-Cost-Trends-in-College%20Spending-January-2016.pdf.

10 1 That is, for every $100 invested in postsecondary education, a person will earn an additional $15 in income for every year of his or her working life. See Walter W. McMahon, Higher Learning, Greater Good: The Private and Social Benefits of Higher Education (Baltimore: Johns Hopkins University Press, 2009); and Adam Davidson, “Is College Tuition Really Too High?” The New York Times, September 8, 2015, http://www.nytimes.com/2015/09/13/magazine/is-college-tuition-too-high.html.

11 As stated earlier, 31 percent of all students enrolled at public research universities receive Pell Grants. The sizable enrollment of undergraduate students from low-income families reflects the mission of public research universities to serve all facets of U.S. society.

12 California Student Aid Commission, http://www.csac.ca.gov/.

13 Delta Cost Project, Trends in College Spending 1999–2009, 20; and University of Pittsburgh, The University of Pittsburgh—Cost Containment Efforts (Pittsburgh: University of Pittsburgh, 2012), http://www.provost.pitt.edu/CostContainment.pdf.

14 Association of Governing Boards of Universities and Colleges, Consequential Boards: Adding Value Where It Matters Most (Washington, D.C.: Association of Governing Boards of Universities and Colleges, 2014), 17.

15 These include the University of Chicago, the University of Illinois, Indiana University, the University of Iowa, the University of Maryland, the University of Michigan, Michigan State University, the University of Minnesota, the University of Nebraska–Lincoln, Northwestern University, Ohio State University, Pennsylvania State University, Purdue University, Rutgers University, and the University of Wisconsin, Madison.

16 Delta Cost Project, Trends in College Spending 1999–2009, 31; and American Academy of Arts & Sciences, Public Research Universities: Understanding the Financial Model (Cambridge, Mass.: American Academy of Arts & Sciences, 2016), 5–7.

17 Robert J. Birgeneau, Seth Garz, and Frank Yeary, Knowledge Made in America: A Private-Public Funding Model for Leading Public Research Universities (Berkeley: University of California, Berkeley, 2012).

18 Dean Karlan, John A. List, and Eldar Shafir, “Small Matches and Charitable Giving: Evidence from a Natural Field Experiment,” Journal of Public Economics 95 (2011): 344–350.

19 The Science Philanthropy Alliance’s founding members include the Alfred P. Sloan Foundation, the Gordon and Betty Moore Foundation, the Howard Hughes Medical Institute, the Kavli Foundation, the Research Corporation for Science Advancement, and the Simons Foundation.

20 Jeffrey Mervis, “Billionaires for Basic Research,” Science (ScienceInsider), February 27, 2015, http://www.sciencemag.org/news/2015/02/billionaires-basic-research.