Compressed Budgets & Shifting RevenuesA Primer on Policy Alternatives and Options Gordon M. Groat, M.Sc., R.C.P. University of Arizona
2 Introduction The phenomenon of dramatic tuition increases has far reaching ramifications in the fieldof Higher Education. Analysis of seminal literature highlights the cyclical nature of the fundingmechanisms and the policies, which actuarially control the revenue streams that are critical to theongoing operations necessary to fund the institutions as we have come to know them. In 1990,The Pew Higher Education Research Program on Policy Perspectives (June, 1990) discussedformer Secretary of Education William Bennett’s angst over the public discussions concerning thecosts and prices of Higher Education. The focus in 1990 had shifted from price to expenditure--from what students and theirfamilies pay, to what colleges and universities spend. In the tradition of an economic cycle ofinflation and recession, the most recent discussions on this topic have noticeably returned to theconcern over the out-of-pocket costs imposed upon students and their families. Over the past fiveyears, the tuition at our countries public colleges has risen at an annual rate of slightly greaterthan 4 percent. However, for 2002-2003, many of the public colleges are projecting increasesdouble digits in the (Morgan, 2002). College Board’s data (www.collegeboard.com) depicts thefollowing increases in tuition and fees: At 4-year private institutions, tuition and fees average $18,273 ($1,001 more than last year’s $3,725 – a 5.8% increase) At 4-year public institutions, tuition and fees average $4,081 ($356 more than last years $3,725 – a 9.6% increase) At 2-year private institutions, tuition and fees average $9,890 ($690 more than last year’s $9,200 – a 7.5% increase) At 2-year public institutions, tuition and fees average $1,735 ($127 more than last year’s $1,608 –a 7.9% increase)
3 These trends have a dramatic impact on the image of Higher Education administration’sability to control costs, growth and revenue. It is the intent of this paper to investigate the policiescurrently in place at the University of Arizona in an effort to ascertain potential modifications orchanges that may be necessary to minimize the historical cycle of these tuition increases and gaingreater control of our own destiny. A thorough review of both historical and current literature shall provide us with a broadspectrum of policy modifications and enhancements, which have been implemented to minimizethe volatility and dependence upon state governments and their constituents. Through thisassortment of alternatives, it is our intent to provide a detailed recommendation of the currentpolicies and regulations as they relate to the University of Arizona, and the tuition dilemma thatwe currently face. Problem Formulation Tuition increases have been a part of the education landscape for over thirty years(Ehrenberg, 1999). Tuition levels have been rising, on average, by 2 to 3 percent more than therate of inflation ever since the turn of the century. Ehrenberg (1999) cites that a number of forcescontinue to place upward pressure on tuition costs. “These include the aspirations of academicinstitutions, our “winner take all” society, the shared system of governance that exists in academicinstitutions, recent federal government policies, the role of external actors such as alumni, localgovernment, the environmental movement and historic preservationists, periodicals that rankacademic institutions, and how universities are organized for budgetary purposes and select andreward their deans.” In order to gain a better understanding of the “costs” of higher education it is critical that
4we have a working understanding of the definitions associated with this topic. According to thedefinitions stated by the National Commission on Costs in Higher Education (1998), terminologyused in this paper means the following: Cost per student: The average amount spend annually to provide education and related services to each full-time student equivalent (FTSE) Sticker Price: The tuition and fees that institutions charge Net Price: What students pay after financial aid is subtracted from the total price of attendance. Financial aid comes in the form of grants, loans, work study General Subsidy: The difference between the cost to the institution of providing an education (cost/student) and the tuition and fees charged to students (sticker price) For students currently attending, or prospective students and their families, the rising cost ofeducation leads to an endless number of debates and discussions. Is it cost prohibitive to attendthe University of Arizona as an out-of-state student? Will the tuition in my home state increasefaster than an out-of-state school such as the University of Arizona? How do the tuition increasescompare to the increases amongst peer institutions? What value does an education from theUniversity of Arizona carry? In order to address these concerns, our investigation of the pricing policies and strategies shalldelve into the actions taken by institutions and states, which have the greatest investment into ourown Universities supply base. It is our goal to investigate the critical policies affecting the rapidcost increases and develop options for controlling these costs in an effort to develop a concisestrategy and positioning statement with respect to the University of Arizona’s tuition dilemma.
5 Criteria Selection Six specific alternatives have been selected from a multitude of both historical and currenttopical literature. These alternatives each represent potential methods to reduce the dependenceon State revenues and follow the principle of, “Resource Dependence Theory” (Slaughter, Leslie,1997). “Resource dependence theory suggests that as unrestricted moneys for higher educationconstrict, institutions with a national system will change their resource-seeking patterns tocompete for new, more competitively based funds. To respond to new opportunities, institutionswill have to shift away from basic research toward more applied science and technology. Further,they will likely increase tuition and become more active in expanding sales and services whilelowering labor costs”. The alternatives, which appear to have the most viable opportunity toallow the University to regain control of their financial solvency are as follows: Establish income threshold Increase aid: low tuition/low aid, high tuition/high aid Decrease burden imposed by state and federal administrative requirements Change or alter state constitution Limit number of incoming students through academic thresholds Advocate tiered plans: incoming freshmen pay more than existing students, varies by degree, ranking…etc
6 (Table 1) Decrease Admin. Alternatives Establish income Alter State Increase Aid Burden imposed by Tiered Plans Increase Selectivity Criteria threshold Constitution states and agencies Favors low income Increase due to Increased by Favors low students, has been on inferred increase in Cost to Students No cost to students program or year No Cost income students decrease for last 30 quality thru entering University years * selectivity Increased lattice cost due to non- Lose revenue in Possibly significant Increased Decrease institutional standardization aggregate but Institutional costs Direct Benefit indirect costs due to Revenue discretionary funds with obvious increase on per lobbying efforts implications for student basis increased revenue Potential benefit to May shift current Revenue Potential to Must be combined Public Svc. Community Maintain low SES maintain existing admin. Efforts to redirection maintain or with income Outreach category students programs outreach projects opportunities increase outreach threshold program Additional revenue Potential to boost Academic Capitalism Should decrease More strategic, focus streams // possible research budgets Research Not Applicable // Aid should enhance direct cost of on science & redirection through tuition research research activities technology opportunities redirection Relative percentage equal Potential Place increased Maintain the integrity Graduate research Opportunity to across graduate disaggregation of emphasis on graduate Grad vs Undergrad of commitment to may be positively enhance graduate and graduate program students and their graduate students impacted subsidization undergraduate tuitions research programs Income thresholds fall within the scope of key groups that shall continue to havesignificant priority with our nation’s educators. The emerging groups that will meet with thepolitical favor are students coming from low-income families and underserved groups. Thisstrategy leverages the argument for equity while seeking to support traditionally underservedgroups. A peer institution, the University of Texas, has proposed as series of policies whichprovide significant protection for this group. Or, according to (Potter, 2003), “The University ofTexas System’s Board of Regents last month proposed free tuition for all Texas students fromfamilies with annual incomes below the state’s median income of $40,860 in 2001.” Theproposal by Texas, called the “Texas Compact” proposes that lawmakers’ relinquish their tuitionsetting power to colleges. The University of Arizona has spoken to these issues and the ArizonaBoard of Regents currently supports the same policies.
7 Increasing aid is a consequence of the trend in decreasing state government support asadministrators increasingly feel that tuition hikes are the only way to regain lost money; however,they also feel that increasing tuition will also have the effect of making education more accessibleto financially disadvantaged students. According to University of Arizona Provost George Davis,as a result of the 2003/2004 tuition increase, “there will be an $11 million increase in financial aidfor undergraduates and a $2.6 million increase in financial aid for graduate students in the draftedproposal (Raz, 2003, ¶. 9)..” This shifting of tuition revenue to support low income students hassome literature to support the idea. “The Targeted Subsidy Model” (Hearn and Longanecker,1985) can be interpreted to state that, rather than waste financial resources subsidizing everystudent, even the ones that could and would pay to attend the same university with a substantiallylarger tuition than the one they currently pay, to the detriment to the university; by using thisstrategy, increasing tuition substantially is more efficient in assisting low-income students. Anincrease in tuition that affluent students can afford to pay can be used to subsidize financiallydisadvantaged students. Hence, from this perspective, financial assistance is “targeted” to thosethat actually need it and can therefore more effectively help them because more funds are nowavailable to do so. Reduction of the Administrative Lattice will reverse a trend that resulted in the increaseof administrative personnel. The more discretionary income an institution generated, the greaterthe investment in additional administrative personnel. The tendency to solve problems by addingto the administrative lattice further supported the increased growth and cost burden associatedwith this strategic business unit. As the lattice of administrative function at our nation’suniversities have experienced significant growth during the years 1975 and 1985, academicsupport personnel increased 60 percent while faculty numbers only increased by an average of
8less than 6 percent (Pew, 1990). Several phenomenon have contributed to the expanding latticeand the increased costs associated with the growing administrative functions. Increased regulation and external micromanagement: These two phenomenon have resulted in increased burden upon the institutions attempts to comply with the addition of alternative revenue streams. Consensus Management: Increased participation by quality circles has resulted in decreased accountability and productivity. This managerial strategy oftentimes protects the organizational status quo. Expansion of Administrative Entrepreneurialism: Higher Education has not demonstrated the ability to apply the principle of growth by substitution. Many new problems are investigated separately: new groups are formed, new administrative functions defined. Tiered tuition in the State of Arizona has been the topic of some discussions designed tocapitalize on the demand surplus for certain programs. This would effectively price certainprograms at a higher rate than others. A second form of this strategy that is being implemented istiering the tuition by charging incoming students more than returning students. The higher priceis imposed on each new class, so that after four years, students in all four classes will be payingthe new, higher rate (Morgan, 2002). This policy is designed to lessen the impact upon currentstudents yet retain the increased earnings of higher tuition rates for entering freshmen. Severalmajor institutions have initiated these programs including The Ohio State University, Universityof Illinois, Purdue, and Texas A&M (Hebel, 2002). Indiana and Penn State Universities have alsopursued this policy and many institutions with tiered tuition policies have offered various formsof financial aid to alleviate the difference in tuition to those students unable to pay the difference. Initial plans at the University of Arizona include exploration of tiered tuition based onprogram demand while gradual tuition increases will be implemented throughout the universitystudents, those enrolled and those entering. Support for students unable to pay the increased
9tuition has been pledged by the University of Arizona’s President. The Arizona Board of Regentshas given permission to the University to explore these options and also to recommend that tuitionbe raised. Constitutional change to permit tuition hikes in the State of Arizona have also been thesubject of significant debate. Some argue that because the Constitution of the State of Arizonamandates regarding education provides that “the instruction furnished shall be as nearly free aspossible” (Arizona Constitution, 2003). The tuition increases being explored in the late 1990sdrew the attention of lawmakers who asked if the Arizona Board of Regents, in fact, may haveviolated the constitution’s promise of “nearly free” tuition. The Attorney General ruled in favor ofthe Arizona Board of Regents statutory authority to raise tuition in 1999. The Attorney Generalin 1999 was Janet Napolitano, the same Janet Napolitano who is now the sitting Governor of theState of Arizona. Changing the constitution is an arduous process that is not likely to receiveneither legislative nor gubernatorial support in the short term. An identical dispute concerning constitutional guarantee is being debated by the Board ofGovernors of the University of North Carolina system. Despite a Constitutional guarantee of freetuition “as far as practicable”, the Board has agreed to raise in-state tuition 8% next year, and willallow the states 16 campuses to impose additional increases that range from $100 to $400(Morgan, 2002). The majority of the additional revenues will be directed to pay for the 5,800additional students expected in the fall. Increasing the selectivity of the University of Arizona through a reduction in the numberof students accepted into an institution of higher education necessitates a delicate balance ofseveral factors. A decision on size-its total enrollment-will influence non-tuition income perstudent (Winston, Yen, 1995). An example of this is that by restricting an institutions student
10 body, it will protect its per-student endowment income; if it had twice as many students,other things being equal, it would have half as much endowment income per student. Winstonfurther elaborates on the issue of demand in his 1999 article titled Subsidies, Heirarchy and Peers:The Awkward Economics of Higher Education. In this article Winston states “colleges exercisecontrol over whom they sell to by generating excess demand and then selecting the students withthe characteristics they most desire from the queue.” In relation to the U of A’s current budget problem, one policy alternative to remedy itsdecreasing finances can be seen in terms of cutting costs by becoming more academicallyselective. This could potentially help the U of A reduce its costs because it would arguably givethe administration more control over some of the factors that contribute to its costs. Support forthis proposition can be interpreted from the ABC Bulletin #3 in regards to President Likins“Focused Excellence” plan. According to it, the relatively open admissions standards that theuniversity has established resulted in shortages of classes, residence hall rooms, and lab space.The current policy demonstrates very little discretion in quality control, and we find ourselvesadmitting students whose academic profile almost guarantees frustration and failure in thisacademic environment (ABC Bulletin #3, 2002) By becoming more academically selective, the University of Arizona will be able to exertgreater control of its costs by admitting fewer, academically superior students who would then bein a better position to graduate. A second benefit would be the reduced impact on limitedresources such as faculty and facilities. Lastly, the increased selectivity will bolster the University of Arizona’s reputation as acenter of excellence. Selectivity, as applied to higher education focuses on the ratio of applicantsto admissions, test scores, and high school grades is one of the most significant and sought-after
11descriptions of a institution of higher educations quality. Excess demand occurs when thedemand from students is significant at a given price relative to supply (Winston, 1999).Therefore, selectivity requires the simultaneous generation of demand and the restriction ofsupply. This could also significantly help the U of A in the future as it could attract even betterstudents, and having an increase in supply of better students could give the U of A more power inincreasing its tuition via revenue. Policy Recommendation A thorough review of the historic literature demonstrates since the middle 1980’s, federaland state government financial support for higher education has seen a significant decline(McPherson & Shapiro, 1998). In order to gain control of this negative cycle it is imperative thatthe University of Arizona takes several critical steps that address both the short and long termfinancial requirements as defined by the State of Arizona Constitution. As cited, several stateshave challenged the constitutionality of “free tuition” to mean within reason and not completelyfree of charges. In light of the dramatic reduction in our state’s revenues, as a result of theextended economic downturn, it seems logical to suggest a dual-pronged policy that shall addressboth the short term and long-term requirements to eliminate the economic cycle, as well as reduceour dependence on state resource dependency. Short term (2003 – 2004): The immediate crisis requires that the University ofArizona and the Board of Regents develop and implement a policy that fulfills two criticalobjectives. First, the Universities in Arizona need to raise new tuition revenues to support bothexisting and the new students expected to enroll in the fall of 2004. Secondly, the simplicity ofthe program (see Table 2) clearly demonstrates to the general public that our states universities
12are in desperate need of financial revitalization. Previous single-digit rate increases have neitherreduced demand nor alerted the public of the impending financial shortfall. Long term (2004 – 2009): This multiple year policy must provide a more comprehensive,cohesive strategy that expands beyond simply increasing revenue. The long term plan must focuson both price and expenditure and will have long reaching implications concerning the overallviability of the University of Arizona and the states higher education system. Based on thesecriteria, it is suggested that several of the recommended alternatives are incorporated to produce apolicy that takes into consideration the complex nature of the public they are seeking to serve. i. Establishment of an income threshold. ii. Decrease administrative burden associated with grants and research and ensure a commensurate decrease in the administrative lattice. iii. Initiate tiered tuition programs beginning 2004/2005. iv. Increase selectivity commensurate with peer institutions. The development of the multi-faceted approach to our recurrent financial situationemploys several states “Best Practice” policies and programs. It is critical that a public educationprogram is instituted concurrent with the introduction of this policy. Public sentiment mustunderstand and support the strategy both prior to its introduction and throughout its life cycle. Constraints The Arizona Board of Regents has raised tuition and it is critical to note that the largestpercentage increase in 2003/2004 tuition will be shouldered by Arizona residents with the largestburden falling to resident graduate students. The real price, however, has not been significantlyincreased in dollars. A comparative analysis of tuition levels with the listed peer institutions from
13the states where the University of Arizona draws the highest number of out of state studentsreveals some data comparisons. The leading states where Arizona drew the Fall 2002 incomingclass are California, Illinois, Texas, and Washington.(figure 1) Source: University of Arizona Decision and Planning Support (DAPS) Prior to the 2003/2004 tuition levels, the University of Arizona was highly competitivewith the peer institutions from those states where the University of Arizona incoming classemanated from. In the case of Berkeley, it was only a few hundred dollars more for tuition at theUniversity of Arizona and hence, a comparison of external economic factors might be a largefactor. Factors such as the cost of living would be a component of these factors. In some othercases, it was actually less expensive for a student from Illinois to pay out of state tuition than topay their own in state tuition. This difference is compounded for those students selecting high
14 demand programs at institutions with tiered tuition, such as is the case in both Washingtonand Illinois. (TABLE 2) 2002 / 2003 Entering Freshman Tuition at the University of Arizona and Selected Peer Institutions Public or In State Out of State Name Private $1,802.00 $6,187.00 Public University of Arizona $5,502 $13,009 Public U. Cal. Berkeley $5,055 $16,124 Public * University of Washington $6,748 $15,352 Public * University of Illinois Source: collegecosts.org * Tiered Tuition Rates Apply Once the University of Arizona raises the tuition to the expected levels for 2003/2004 –these differential gaps will be narrowed, and all else being equal, this policy may shift theperceived economic value of enrolling as an out of state student in a negative manner. (Table 3) Arizona Board of Regents Planned Tuition for 2003-2004 ASU/NAU UA Undergraduate Increase Total tuition & fees Increase Total tuition & fees Resident $1,000 (39.9%) $3,593 $1,000 (39.9%) $3,593 Nonresident $1,000 (9.1%) $12,113 $1,250 (11.3%) $12,363 Graduate Resident $1,200 (47.8%) $3,793 $1,250 (49.8%) $3,843 Nonresident $1,200 (10.9%) $12,313 $1,500 (13.6%) $12,613 Source – Arizona Board of RegentsThe prospect of the addition of tiered tuition at the University of Arizona could further narrowdifferential gaps and effect cost changes that could negatively impact the willingness of out ofstate students to leave their state as the cost savings could narrow or disappear altogether. Thenarrowing financial incentive must be offset by both cost of living differentials as well as ongoing
15value through policies of increased selectivity and those designed to have a positive effect uponrankings. Reduction of the administrative lattice poses a second constraint to improving the overallefficiency of our institution. Reduction of staff and services when accompanied by increasedtuition has the potential to present the image of a poorly run institution. The reversal of this 30-year trend must be well strategically implemented thru a cost-benefit analysis to ensure maximumsavings concurrent with the least interruption in services. The third significant constraint to the successful implementation of our long-term strategyfocuses on the competitive nature of higher education in the United States. Competinginstitutions are in nearly identical situations and are making many of the same policy changes asare being proposed in this paper. Therefore, in order to differentiate the University of Arizona, itis critical that we present ourselves as a highly selective school so as to negate minor differencesin tuition and living expenses. Also, the University of Arizona may also feel constrained by theCarnegie Classification where it enjoys status as both a Doctoral/Research University –Extensive, and the status of being a Research 1 institute according to the classifications. Loss ofthe status of either one of these prestigious rankings may not be acceptable to the leadership of theUniversity of Arizona and may not be well received by the Arizona Legislature and Governor. Implementation and Evaluation With the analysis complete, it is time to turn our attention to the development of strategicmarketing programs. Crucial to the success of these policy changes is the communication to theappropriate target audiences (Armstrong & Kotler, 2003). While not all-encompassing, the stepsnoted below shall serve as key tools by which to evaluate both the implementation andperformance of our strategy.
16 Phase One: Identification of specific target groups is the first phase of implementation. Key audiences include tax payers, parents of students, state and local politicians, students and parents of prospective students. Phase Two: Develop the desired message that is to be communicated to each target audience. For example: Parents of prospective students will be interested on the institutional rankings and the return on their investment as indicated through career placement measurements. Phase Three: Identify channels by which to communicate the messages to the selected targets. Once again, parents can be reached via direct mail campaigns while students can be efficiently channeled thru mass media ranging from campus press to university radio/tv programming. Phase Four: Once these programs have been instituted, it is imperative that ongoing measurement and evaluation takes place. Key measurement parameters must focus on number of in-state and out-of-state applications, test scores of applicants, acceptance rate from each key state, rate increases amongst neighboring and peer institutions and institutional rankings. Phase Five: The introduction of these policies shall require that corrective action be taken to adjust the implementation strategy with the on-going dynamics of a competitive, dynamic market environment. Conclusion Several years ago Larry Leslie posed a question to our higher education finance class. Hisquestion was whom would we want as a decision maker at the University of Arizona in the eventof a budget crisis? Following a lengthy debate, it was decided that an individual with a
17background in finance or economics would be extremely valuable. Dr. Leslie calmly contradictedour recommendation and stated that a person with a background in the history of higher educationbudgets and finance would be especially important. This individual could share past events andteach us of the repercussions from previous actions. Simply stated, avoid past mistakes andimprove on earlier successes. The cyclical nature of revenue shortfalls at our nation’s higher education facilitiesprovides a vast array of literature, perspectives and history. Vast amounts of research must begathered as an institution prepares for a tuition increase in order to ascertain the relative impact onkey publics and constituencies. Clearly the University of Arizona must balance the need foradditional revenue against the actions being taken by both peer and competitor institutions.Failure to account for such strategic positioning can have dramatic repercussions in terms ofdecreasing enrollment, loss of revenue, and potential loss of taxpayer support. The Arizona state legislature has served notice to the states higher education institutions oftheir reluctance to support the current mission of higher education. Based upon this directive, thesuggested policy modifications account for two distinct phases in order to both survive andbecome more financially independent during this economic crisis. In the short term, it is criticalto increase revenue realized through tuition. The benefit of increased autonomy from the statessupport will allow the University of Arizona to establish their independence and forge a futuredestiny. The long-term policy strategy calls for the introduction of several, albeit intertwinedstrategic policies aimed to reposition the University of Arizona during the early stages of thetwenty-first century. Increasing selectivity concurrent with the establishment of income thresholdpolicies will simultaneously improve the value of our output and preserve a basic tenet in terms of
18maintaining access to lower income students. Critical to the success of these policies is theinherent flexibility in response to competitor’s own strategic decisions. It must be realized that the future success of our states institutions of higher educationcannot be guaranteed through adherence to these proposed policies. When this stage of theeconomic cycle concludes and state coffers return to a time of surplus revenues, it is critical thatthe University of Arizona maintains a budgeting and expenditure philosophy that prepares inadvance for the next economic downturn. The true test of these policies will be in their ability toovercome the long history of economic crisis and forge their own destiny in the face of otherinstitutions reactive programs and strategies.
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