I'm following up my last post by arguing that the affordability of access to nonprofit higher education is eroding under pressure from the re-balancing of the proportion of institutional revenues away from public sources and toward private sources. The consequence of that re-balancing is the need to increase productivity in nonprofit higher education.
“Cost” and “price” are seldom used with clarity in higher education. Costs might refer to institutional operating expenses, for example, or might instead refer to the tuition expense borne by students (as net price) or by taxpayers (as public investments in student grants and institutional subsidies). Confusion arises because public and, to a lesser extent, private nonprofit higher education tend to conflate revenues and expenses as “the budget.” The distinction between revenues and expenses, while clear in for-profit higher education, therefore deserves elaboration in nonprofit higher education.
The annual, recurring revenues collected by higher education and used to pay annual, recurring operating expenses derive almost entirely from some combination of two public and two private revenue sources:
- Public revenues directed to an individual student in the form of a tuition grant, such as a Pell Grant or a Hope-like scholarship grant
- Public revenues directed to an institution in the form of enrollment subsidies, typically via a per-student-FTE formula.
- Private out-of-pocket investments in tuition and fees by a consumer (a student or the student’s family or employer, for example)
- Private earnings from a charitable investment fund, such as an institutional endowment or a private scholarship fund
The revenues available to higher education, however, are being rebalanced away from public tuition grants and public per-student subsidies and toward private consumer and charitable revenues. For example and as documented elsewhere in this blog, the inflation-adjusted national average of per-FTE state funding for public higher education is at a 25-year low and trending downward. Also documented is the recent projection that the proportion of state revenues allocated to higher education is also trending downward in response to state revenue trends projected to create structural revenue shortfalls in every state by 2013. Similar trends are evident at the federal level.
At current per-student expenditure rates, the revenue re-balancing trend increases higher education’s dependence on consumer and charitable revenues. Relatively few institutions, however, have direct control of enough recurring charitable revenue to cover a meaningful percentage of their operating expenses. If these relatively “unendowed” institutions—most institutions—compensate by increasing per-student out-of-pocket revenues to cover constant or increasing per-student operating expenses, then they will compromise affordability of access. Their alternatives are to 1) reduce expenses on a per-student basis in proportion to declines in public revenues, or 2) bet that public revenues on a per-student basis will increase (contrary to the aforementioned trends strongly suggesting otherwise).
Indeed, higher education is currently lobbying for increased public per-student revenues—larger Pell grants, in particular—and that is reasonable according to the Commission’s recommendations. Lobbying may be more politically effective, however, if undertaken in parallel with systemic efforts to reduce or stabilize operating expenses on a per-student basis. In any case, prudence suggests that most institutions begin a systemic effort to reduce or stabilize per-student expenses in the interest of maintaining the affordability of access.
For most institutions, then, the challenge of maintaining or improving the affordability of access is the challenge of stabilizing or reducing operating expenses on a per-student basis, while simultaneously maintaining or improving the quality of academic outcomes. When improved simultaneously, effectiveness (in achieving measurable quality norms) and efficiency (in per-student operating expenses) amount to increased productivity. The national affordability of access imperative and reasonable policy expectations for more transparent accountability, taken together, are creating an imperative for transparent productivity. The affordability of access will increasingly depend not only on accounting for operating expenses on a per-student basis, but also on reducing them while simultaneously and measurably improving quality outcomes.
“Per-student” has been used here to signify the importance of various numerical ratios that represent averages in which the denominator is total student FTEs, total student headcount, total credit hours granted, total course enrollments, total number of students taking a test, total graduates, or other such aggregations measured over a period or snapshot in time, such as a term, an academic year, or a drop/add date. Such ratios can be useful in establishing a dialogue that focuses, not on absolute expense reductions, but on strategies for tracking and improving institutional productivity over time.