Recognizing Two Key Differences Between Funding Public Schools and Public Universities
The financing of public schools and public higher education are different in at least two key regards. One is the predictability in the number of students who enroll. Another key difference is the role that tuition, fees, and other charges play in financing the enterprise. These two differences have a great impact on the ability of school superintendents and public college presidents to manage their resources.
As a general matter, public school superintendents have much less flexibility than public college officials, both in determining the number of students they enroll and in their access to additional revenues beyond what governments provide. With regard to the number of students in school districts, they must enroll all students whose families live within their catchment area. These numbers typically do not vary appreciably depending on economic times. In addition, school superintendents must largely live within the budgets provided them through governmental sources. Importantly, those governmental sources of funding may or may not track directly with changes in enrollments. And the biggest obstacle may be that public school systems have little or no access to separate fees paid by students or families to supplement what is provided by governments.
By contrast, public college presidents and other officials generally do not labor under either of these two constraints. College enrollments vary over time depending on economic conditions, particularly at community colleges and graduate schools where tightness in the labor market may translate directly into more enrollments during recessions to the extent that institutions and programs have room to accommodate these additional students. In addition, colleges and universities can enroll more or fewer students depending on a number of other factors such as the prices they charge, the aid and discounts they offer to students, the extent of their marketing and recruitment efforts, and the severity or lack thereof of their course and program offerings. And perhaps most important, public college officials have the ability to charge for tuition and other fees which help to pay for their expenses of operation.
Public college officials and advocates often say that increasing tuition and other student charges are the only option they have when governments cut back on funding for a wide range of services including higher education during recessions or at other times government funds are tight. The reality, though, is that public college officials have a number of options to respond to funding cutbacks. When funding tightens, college officials can cut costs as school superintendents often do. But they have other options that school superintendents do not, including raising their prices for in-state residents to deal with reductions in government funding to maintain their own budgets. They can also bring in more non-resident students who typically cover more of the full freight than resident students to help fill the gap.
Public colleges and universities also always have the option of increasing the enrollments of in-state residents. One of the curious features of higher education finance is that increasing the number of students enrolled increases tuition revenues even without raising the prices charged to these students. This scenario can result in reduced spending per student which is often derided as a sign of diminished government support. But the fact is that enrollment flexibility enables colleges to move forward and provide quality education to their students in the face of reductions in government support. It is also interesting to note that increasing the number of students can have the same effect on tuition revenues as raising prices. A 10 percent increase in enrollments without raising prices has the same impact on revenues as a 10 percent increase in prices without increasing enrollments.
There is one important caveat to note in this discussion: there are instances when enrollment growth in higher education does not result in commensurate additional resources for the institution. One such instance occurs when institutions do not retain the tuition they collect and instead these revenues are turned over to state or local governments for re-appropriation. In this case, the relationship between tuition revenues and funding is in the hands of government and not institutional officials.
Another instance is when government funding is not proportional to enrollments. For example, a state may well place a cap on funding that does not take into account enrollment growth or, more commonly, the state may not have enough appropriated funds to cover the growth in enrollments in a given year. This often happens during recessions when state funds in general are curtailed while enrollments tend to rise. This was certainly the case after the Great Recession of 2008–09 when funds per full time equivalent (FTE) student dropped by 25 percent in real terms over a five-year period. In any case, when the growth in enrollments are not matched by an increase in resources then public college presidents find themselves in the same situation that school superintendents find themselves.
The problem with most free-tuition proposals is they would have the effect of putting public college officials in the same seat as school superintendents for two related reasons. First, they remove using tuition and other charges as the safety valve when government funds are lacking. Second, it fails to recognize that once the funding is fully in the hands of the government, the link between enrollment changes and funding changes has been removed. The reality is that free tuition structures would not require governments to fund in line with enrollments. For various reasons, state officials may decide that institutions can do with less per student than would have been provided when students and their parents were paying tuition. In my view, this is a fundamental weakness in most free college proposals.
There is a better way to achieve the objectives of achieving greater equity without resorting to free tuition or even tuition freezes. That way involves states tying tuition at public institutions to the average family’s ability to pay those college charges. This can be done by having institutions set their tuition within a range as a proportion of state GDP per capita. This will achieve greater affordability for the broad range of students. The way to achieve greater equity is to ensure that enough financial aid is made available so that tuition is covered for students from families with below average resources. In the case of the US, this might also require that Pell Grants be made into a program that covers living expenses so that students from families with less resources can pay for their collegiate living expenses.
The other necessary condition for this approach to work is for states to modify how they allocate funds to institutions to ensure that these allocations reflect the policy priorities rather than simply reward the institutions that already have the most resources. This can include a number of steps including setting up contracts with public institutions that guarantee full funding in combination with tuition revenues if the institutions enroll target numbers of in-state residents. It also would require states using normative costs — what it ought to cost to educate a student — in allocating funds to institutions rather than relying on what institutions report they spend. And states should use some funds to pay institutions for degree completions rather than enrollments as well as paying more for economically disadvantaged graduates.
In sum, free college proposals threaten to put public colleges and universities in the same box as public schools. That would be unfortunate because having these public options in their tool box are one reason America’s colleges are among the best in the world while America’s public schools have not.
Arthur M. Hauptman is a public policy consultant specializing in higher education finance. Contact him at email@example.com.