A smarter way to pay for higher education

Full story in Seattle Times

By Edward J. Ray
Special to The Times
(October 10, 2004)

State support for public higher education has declined steadily throughout the United States over the past 30 years. The decline has occurred in so-called blue states as well as red states and it has accelerated in the past 10 years.

Five years ago in many states, state funds paid for 60 percent of the instructional cost to educate a student at a public university, while students picked up the other 40 percent. Today, these figures are reversed. Inevitably, tuition rates have risen in response; to the point where some in Congress are calling for tuition caps and other controls.

The purpose of this commentary is to suggest one way that universities can help governors and legislators address this issue of declining state support for public higher education.

While the primary cause for rapid tuition increases has been the precipitous decline in state support, the shift at the federal level from providing financial aid in the form of grants to providing loans has exacerbated the problem. Students are not only paying more to attend college, they; and their families; are going deeper into debt to do it.

This decline in state funding has proceeded despite widespread recognition of the social and economic value of public higher education. In my past position as provost at The Ohio State University and in my current position as president at Oregon State University, I have yet to meet a legislator who did not understand that state support for higher education is an investment in economic development and social progress in the state and the nation. Similarly, I never met a legislator who was happy to reduce funding to higher education.

Oregon Gov. Ted Kulongoski aptly summarized the dynamics at work in many states when he noted that he had worked with six previous Oregon governors, all of whom argued that the state needed to do more to support higher education, even as the budgets were cut.

Encouragingly, Kulongoski has reconstituted the Board of Higher Education in Oregon, and he has committed his administration to begin reinvesting in higher education. The newly constituted board consists of exceptional business, labor, education and community leaders who are committed to seeing that objective realized. Already, key legislative leaders have met with board members and others to begin setting an agenda for higher education next legislative session, even though new funds will be hard to find.

It is reasonable to ask those of us in higher-ed administrative positions what we can do to contribute to an effort to reinvest in public higher education. We can start by addressing some of our own shortcomings. The foremost of these is our inability to tell legislators and the public where the money goes.

In discussions with state legislators in both Ohio and Oregon, I'm told that voters are resistant to providing additional revenue to support higher education, in part because these voters do not have a good understanding of where the money goes. Legislators lacking good answers from higher-education officials are in turn frustrated because they have little solid information to share with their constituents. Furthermore, the harshest critics of university financial and management decisions are often our own faculty, staff and students.

Declining public support inevitably means higher tuitions. Trends in access to education are deeply disturbing. Yet, the debate in Congress on the reauthorization of the Higher Education Act is mired in discussions about setting federal limits on the rate at which state universities can increase tuition yet remain eligible for student loan programs!

My proposed remedy for public universities is very simple:

First, establish an inclusive strategic planning process that realistically describes where you want to go and what you want to do;

Second, open up the financial books to all interested parties; and

Third, eliminate the traditional budgeting process that merely adds equal increments to historic funding across the board for all units at the university.

The budget process should be grounded on a well-articulated strategic plan and it should distribute revenues as earned, and assign costs as incurred, to academic units and support units in a predictable and transparent way. This "distributed budget process" should reward successful efforts based on three goals:

  • To provide instructional and support services in areas that are in high demand by students and employers;
  • To leverage external funding for cutting-edge research and outreach; and
  • To recognize exceptional and creative activity of all kinds.

How do we achieve the plan I suggest? Openness and transparency are the most important steps, for they encourage the kind of rational budget process described above. An open, inclusive discussion within the university community; among administrators, faculty, staff and students; has to look realistically at the strengths and weaknesses in each academic program and support service.

This institutional conversation must ensure all voices are heard and common aspirations for the future articulated. Once the internal conversation can be summarized coherently, it is useful to share a draft of the strategic plan with external stakeholders who can provide fresh perspective on the medium- and long-term goals of the university and the credibility of the implementation strategies.

I was directly involved in this process at Ohio State, and my colleagues here at Oregon State engaged in almost two years of discussion to develop the elements for a strategic plan. Thanks to that preparatory work, we were able to complete our strategic plan within my first six months in Corvallis.

The strategic plan then guides the budget. The budget is simply a tool to achieve organizational objectives. It is not an end in itself.

In parallel with developing the strategic plan, the administration must provide an understandable summary of the sources and uses of financial resources for all parts of the university and share that information with everyone in the university, including students. That exercise will often lead to surprising discoveries of "givers and takers." Some units generate funds that are distributed to others. Some units have grown to rely on funds generated elsewhere.

For example, at Ohio State we learned that Arts and Sciences was generating net revenue; tuition and state instructional support that exceeded the budget provided to Arts and Sciences; and that these excess revenues were being internally transferred to support professional colleges such as dentistry and law. In effect, our undergraduates were subsidizing post-graduates in professional programs.

This analysis helped us realize that our own internal rules for establishing tuition rates for the professional programs set their tuition rates too low. That made the professional colleges dependent on the rest of the university for financial support.

Additionally, we found that other internal policies restricted the ability of some colleges to undertake entrepreneurial activities such as technology transfer, business partnerships, online course and degree offerings, and the licensing of new products, making these colleges more dependent on revenue generated elsewhere in the university.

The truth did not set these programs entirely free, but it did help us institute changes that made them more successful in generating resources to support their own programs.

Many public universities have implemented versions of the distributed budget process I have suggested here, beginning with Indiana University. Each university needs to decide how to change its budget process to most effectively support its strategic plan. Once the historical budget process is opened to the university community, my experience convinces me, there will be support for some form of the distributed budget model. There also will be an appreciation for the fact that current budgets are not distributed in a way that is consistent with the objectives of the strategic plan.

At Ohio State, we developed a process for rebasing budgets across colleges. Traditionally, university budget processes are formulaic in that, by and large, every unit in the university enjoys the same percentage increase; or suffers the same percentage decrease; in the funds available to them.

Rebasing a budget requires the systematic calculation of how revenue is generated from instruction, research and other activities in each part of the university and the corresponding costs of instruction and support activities. The decision to rebase budgets takes that information into account along with a college's or unit's quality, potential, centrality to mission and relationship to the university's strategic plan.

This budget restructuring is not an end in itself; nor is it simply a means to reduce costs. While a new "base budget" should correct inequities in the allocation of resources that have arisen over time, it is fundamentally a means to support the university's strategic direction. It creates financial incentives for colleges and units to create new courses, programs, services and collaborative initiatives that meet the goals of the strategic plan. Inevitably, it implies the transfer of resources from some colleges to others that are better positioned to contribute to the university's strategic direction. And, it requires the elimination of activities that simply do not meet institutional needs.

At Ohio State, rebasing the budget entailed a series of tough, sometimes unpopular decisions. It also required that we stick to these decisions steadfastly. We are having that discussion at Oregon State now.

Since budgets for every unit in the university increase and decrease from the moment a new budget is put in place, everyone must understand how increases and decreases in their budgets are related to their own revenue-generating and cost-saving actions.

One simple model is to distribute a fixed percentage; such as 75 percent of all increases and decreases in revenues, or savings in costs; to the units that generate them and retain a portion of these new revenues or savings for critical central services, such as admissions and grant administration, and for targeted investments that advance the strategic plan.

For example, a college that realized $100,000 in new revenue might receive 75 percent of the income, while 20 percent would be used to improve centrally provided common services and 5 percent would be directed to strategic priorities.

Central investments in such operations as the research office, student recruitment and support services, and other functions, should also be made in an open and transparent way and support the objectives of the strategic plan. There needs to be a mechanism to review central costs and adjust them appropriately over time.

My own bias is to require the academic colleges to have explicit budget-distribution models that are developed in consultation with faculty and staff and that make annual budget allocations within each unit open and transparent. That is the only way I know to get the revenue-generating and cost-saving incentives down to "street level" where they can have the most significant impact.

In summary, I believe that open and transparent budget processes can help to demystify how universities use their state, tuition and other funds to advance their academic and outreach efforts. By providing clear evidence that our own internal budget allocations are driven by incentives to leverage state and tuition dollars as effectively as possible, we will build legislative and voter support for higher education.

In addition, by developing a strategic plan through an inclusive and open dialogue within the university and by adopting a transparent budget process that rewards responsiveness to student needs and holds units responsible for their costs, we will reduce complaints from our harshest critics; our own faculty, staff and students.

Edward J. Ray is president of Oregon State University in Corvallis.