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November-December 2008

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The Higher Education Funding Disconnect: Spending More, Getting Less

The rich and famous are much in the news these days—colleges and universities that is, the ones with endowments in the hundreds of millions or more and whose run-up in assets has raised questions about their non-profit status from both state and federal lawmakers. The U.S. Senate Finance committee wants to know, for example, why institutions that are reported to average 20 percent annual increases in the market value of endowments of $500 million or more still need to raise tuition and fees every year. And the Internal Revenue Service is preparing for intensive audits of more than 400 institutions, looking at revenue-generating activities housed within them and how those activities fulfill the public or charitable purposes of the institutions. Meanwhile, legislation has been proposed in Massachusetts to levy state taxes on the Commonwealth’s wealthiest non-profit private institutions.

Media and policy attention to the wealthiest sector of higher education might cause the public and policy makers to think that most colleges and universities are awash in money—and looking only at the Ivy League and the biggest public research universities, it would be hard to argue that they’re mistaken. But the focus on revenue masks the bigger story in higher education finance in America, which is a story of growing gaps between rich and poor institutions, greater clustering of low-income students in poorly financed institutions, and disinvestment in teaching. Any one of these trends by itself would be disturbing; the three together spell real trouble for our future capacity to reverse America’s decline in postsecondary performance. 
Consider the following:

The rich are getting richer, and the poor are getting poorer. 
There is growing stratification within higher education: rich institutions are getting richer, poor institutions are getting poorer—and poor students increasingly are ending up in the institutions with the least to invest in their success (see Figure 1). The largest enrollment growth in the last decade has been in public two-year colleges, which disproportionately enroll low-income, Hispanic, and black students. Nationwide, only 7 percent of students are enrolled in institutions that spend $25,000 or more on them per year—in contrast to the over 45 percent where spending is below $10,000 per year.  Inequality by itself might not be an issue if it weren’t for the compounding problem: historically, students in public community colleges face long odds against completing a baccalaureate degree, and nationwide, transfers from two- to four-year colleges are declining. 

Prices are rising, but spending on students is not.
College tuitions have grown by 2 to 3 percent per year above inflation for the last 15 years—beating almost every other major commodity (now behind the rise in fuel prices, but more even than health care). Higher prices don’t translate to increased revenues in the public sector, however—there, tuition dollars are replacing declining state support. Fifteen years ago, every tuition dollar in public community colleges was matched by $3.70 in state and local appropriations. By 2006, that had dropped to $2.20 (see Table 1). Similar declines occurred in public four-year master’s and research institutions, where state funds are now a minority of all revenues. Even so, state subsidies per student are still highest among public research universities—an average of $7,574 per student in 2006—than either in public master’s institutions ($5,763 per student) or public community colleges ($6,622) (see Figure 2). 

Spending for educational and related services is down.

Across higher education, the proportion of spending for educational services is declining over time (see Table 2). For example, public research universities’ total revenues increased by 11 percent between 2002 and 2006, while spending on education and related expenses grew by only 1 percent. In community colleges, educational spending suffered absolute reductions during this time. 

Among private institutions, the decline is a relative one because of higher spending beyond instruction, despite annual increases in instructional spending averaging 2 to 3 percent per year above inflation. Among all types of public institutions, it is a real decline, due to the use of part-time and non-tenured faculty—which allows institutions to cut instructional spending even when giving some high-flying faculty superstars compensation packages that rival those for Division I football and basketball coaches. There is no sector in higher education where spending for faculty and other departmental educational expenses is more than half of operating expenditures, not even in those whose primary mission is teaching rather than research. And since these measures count spending for the portion of faculty salaries dedicated to unfunded (“departmental”) research as “instructional,” the real situation is likely to be even worse than the numbers imply.

Changes in functionality accompany revenue shifts.  
As state budgets are being cut, institutions are scrambling to find new revenue sources. But very little of the new money (other than tuition) is used to educate students. Spending is growing instead where the new revenues are: outside of the instructional programs, in federally funded research, hospitals and clinics, public service, and auxiliary operations. These aren’t bad things—knowledge creation and community service are important for our economy and for local communities—but no one actually decided they were higher priorities than spending on teaching and degree production.

And it’s not immediately clear why these functions need to be performed by public and non-profit private colleges and universities rather than by business and industry or even the non-profit service sector—which is why the IRS is interested in learning more about what higher education revenues pay for. This is an important inquiry about the distinction between public and private purposes and what it means to be a non-profit entity. It’s unfortunate, though, that the terms of the conversation are likely to be defined by auditors rather than by higher education’s leaders.

The Funding Problem
Despite a spate of reports decrying the “dysfunctional” state of the financing system for higher education (the one critique from the Spellings Commission on the Future of Higher Education that didn’t get much push-back from the higher education community), we still don’t have a coherent or consistent diagnosis of what the funding problem is, much less what to do about it.  To develop one, we need to shift our attention from revenue generation, tuition, and financial aid to how the money gets spent in higher education and how that spending either does or does not support teaching and learning. We also need to expand the analysis, which often focuses on private colleges and research universities, to include the institutions where most of the students go—public master’s and community colleges.  

Ultimately, of course, this isn’t just about money: the funding problem in American higher education is as much about focus and priority as it is about revenue. Looking at spending patterns, one has to conclude that our highest priority in higher education is to increase not student learning but revenues, in order to expand institutional activities such as research, management of hospitals, or auxiliary enterprises.

That is not the path that we should be taking if we are serious about increasing educational performance. Our country’s future economic success will depend on our ability to generate human capital. Whereas we used to be number one among OECD nations in young adults’ attainment levels, by 2005 we had dropped to number 10, mostly because other countries have been increasing their performance while we have rested on our laurels. 

And cuts in spending on instruction are deepest in the institutions that serve the majority of first-generation and low-income students, many of whom arrive at college with learning and skills deficits that require developmental attention before those students can get to college-level work. So the spending patterns exacerbate the big problem in American higher education: the achievement gap that keeps far too many of our first-generation and low-income students from getting into or through college.

We are never going to have the degree attainment increases we need unless we get serious about getting more students to graduation, and that won’t happen unless we close the achievement gaps. And that won’t happen until we make improvements in student success our highest fiscal priority. To focus intently on student learning, teaching, and degree attainment, institutional and policy leaders need to connect the dots between spending and results and make spending on teaching and learning their first priority. 

Institutional Actions
Do we have a clue about how to do this? The short answer is yes, we do. But it requires serious commitment to a change agenda from institutional and policy leaders, and most haven’t yet made such a commitment. But taking cues from those who have, it is clear that such a change includes 1) setting sharp-edged goals for degree attainment, 2) looking at spending and aligning it with those goals, 3) improving degree productivity by focusing on ways to reduce excess credits and shortening the time to degree, 4) improving  public accountability for costs, and 5) improving governing board oversight of spending. Examples of places where this work is being done follow. 

Setting goals for increased degree attainment based on public needs rather than institutional interests.
We need to begin by establishing the public agenda for higher education, one that is equally relevant to public and non-profit private institutions. Currently, institutions have every incentive to build market position by increasing admission selectivity and extramural revenues, even if this means diverting resources from meeting public needs for low-income access and improved degree-attainment levels. To guard against this, leadership at all levels needs to define the public agenda for higher education not just as research and economic development but in terms of access, degree attainment, and learning outcomes. 

This requires attention to clearly defined goals and outcome measures for access and degree attainment, as well as for learning, and public accountability systems that monitor progress toward meeting those goals. This seems obvious, but it’s a far cry from the usual measures of performance, which are success in meeting fundraising goals, increasing admissions selectivity, and moving up the U.S. News and World Report or National Research Council food-chain.  

Where is this work being done?  As one example, look at the National Association of System Heads (NASH) “Access to Success” initiative. NASH is comprised of the presidents and chancellors of the nation’s public multi-campus systems. “Access to Success” is a voluntary collaboration, supported by the Lumina Foundation as part of the “Making Opportunity Affordable” initiative, in which system heads set “stretch” goals for degree attainment and hold themselves accountable for meeting those goals.

Not all of the NASH leaders have chosen to participate, including some of those heading the most prestigious public university systems in the country, but the ones who have count among their membership systems that collectively serve over two million students and produce over one-third of the nation’s baccalaureate degrees awarded to students of color. If they are successful in this work, it will make a big difference in national performance.

The participating NASH system heads have made a commitment to halve achievement gaps separating low-income and first-generation students from the rest at every point in the postsecondary continuum, from enrollment to certificate and degree attainment. This multi-year initiative is organized around several subgroups that are focused on different parts of the agenda: financial aid (how to use it to increase access and success goals), remedial/developmental education (how to use it to reduce attrition and cut credits and time to the degree), and cost management (how to analyze spending and relate it to performance). The CEOs meet periodically to work on common issues, share successes and failures, and compile a collection of strategies that make a difference in improving performance.

A specific example of what has been accomplished by a public institution can be found at the California State University at Long Beach (CSULB). CSULB is a large, urban, public master’s-level institution, with total enrollments in 2008 nearing 37,000. It is one of the most diverse institutions in the country: 26 percent Hispanic, 23 percent Asian/Pacific Islander, 6 percent African-American, and 30 percent white in 2006. In just the last 10 years, it has grown by almost 10,000 students, and although tuition went up by nearly 76 percent (while state appropriations per student declined), one-third of the resulting revenue was invested in need-based aid to protect access. Consequently, the proportion of students eligible for Pell grants grew from 22 percent to 35 percent. Graduation rates increased at the same time, from just 31 percent to over 52 percent, despite growth in remedial needs from entering students. One could argue that the institution can and should do more to increase those numbers, and its leaders would agree. But that level of progress in just 10 years is truly admirable.

How did they do it? By setting goals for access and degree attainment and investing time and attention in strategies that help students succeed:

• requiring freshman advising before class registration, along with summer orientation for freshmen and transfer students;
• creating learning communities for at-risk students needing developmental preparation in math and English;
• increasing the number of academic advisors and reaching out to undeclared students with career as well as major advice;
• stepping up attention to enrollment and schedule management to ensure that all first-year students could enroll in required courses; and
• closing down or consolidating under-enrolled courses. 

A program (“Partners for Success”) was instituted to ensure that every first-generation student was placed with a faculty mentor. And messages about the importance of graduating and not dropping out were displayed on banners all over the campus that proclaimed “Graduation Begins Today,” while the university communicated with parents as well as students about the economic realities of not graduating.

CSULB also has the advantage of being part of the California State University system. It thus benefits from system-level interventions designed to improve productivity, focus on learning, and enhance public accountability. Under the leadership of CSU Chancellor Charles Reed, the number of credits required to complete the baccalaureate degree was reduced to 120 units—a decision made because system leaders realized that the campuses couldn’t demonstrate that the extra credits resulted in more learning. The system requires institutions to monitor learning outcomes directly and indirectly through instruments such as the Collegiate Learning Assessment and the National Survey of Student Engagement. And the Board regularly monitors campus progress toward system-level goals to increase access and degree attainment. 

Show me the money: Using cost data to align spending with priorities. 
Thomas Meredith, chancellor of the Mississippi Board of Trustees of State Institutions of Higher Learning, has changed the nature of the cost conversation within Mississippi by using spending data to help align spending to priorities. Instead of the traditional budget review starting with institutional “wish lists,” the Board now uses the process to present each university with an assessment of spending in the major functional areas, benchmarked to other Mississippi institutions and to appropriate comparison groups nationally. It has used those data to raise questions with presidents about areas that appear to be out of line, either on the high or low side.  

The Board has also instituted a system-level review of spending for administrative and support functions. As a result, it has been able to make a number of significant reductions in spending in areas such as energy and purchasing. It also went through a “barnacle-scraping” exercise, in which it identified institutes and centers that had initially received state funds as part of a matching grant commitment from an external funder, but where the external funds had disappeared while the state funding remained. 

Increasing degree productivity by reducing inefficiencies in educational production and looking at credits (and time) to the degree.   
Several public institutions are paying more attention to credit accumulation and time to the degree as key ways to increase learning productivity by getting students to their degree goals in less time and at less cost to the student and the institution. The University of Wisconsin (UW) system is just one example. Between 1994 and 2004, the system was able to decrease credits accumulated for the bachelor’s degree from an average of 145 in 1994 to 135 in 2004, for a savings in the per-unit cost of the degree of 7 percent. The savings to the state from these increases in productivity opened up an additional 12,000 seats in the UW system. The reduction in credits also meant that students were able to complete their degrees in less time, shaving the better part of one semester off their time to the degree. The direct savings to the students from not having to pay the additional semester of tuition and fees was close to $3,000 per student—well above the cost of (for instance) a 5 percent tuition increase and more than half the amount  of the maximum Pell grant for the neediest students.  

Improving public accountability for spending.
Starting in 2000, the University System of Maryland (USM) Chancellor William Kirwan instituted a system-level “effectiveness and efficiency” initiative (known as “E&E”) designed to tackle the perception that its campuses were not paying enough attention to fiscal stewardship. Working closely with the governing board and in constant consultation with faculty and staff councils, system leaders were able to set system-level goals to 1) optimize the use of resources, 2) protect quality, and 3) expand capacity. 

To date, the initiative has:

• increased teaching loads across the USM by 10 percent;
• limited funding for baccalaureate degree programs to 120 credits (unless there is a requirement from a licensing agency or a specialized accreditor for more);
• required all students to earn 12 units through some type of off-campus work—for instance, earning credit by an examination such as Advanced Placement, international study, or distance learning;  
• increased capacity in the comprehensive institutions rather than in the more expensive research university; and
• centralized shared services such as audit, construction management, and real estate development. 

The system estimates a total of $40 million was saved and strategically reallocated in the last three years alone—enough to mitigate tuition increases for resident students over this time. The E&E effort has helped to persuade the legislature and governor that the system takes its stewardship of resources very seriously; as a result these political leaders have been willing to fund additional enrollments. And last year, when Maryland faced a budget deficit that threatened mid-year cuts, the governor used the example of the need to protect higher education as part of his argument for a tax increase. Maryland is an example of a place where transparency about spending has directly paid off in increased public credibility for higher education and a growth in state support when other states were reducing funding or raising tuitions.

Involving the board in the conversation about spending and performance. 
One of the lessons from institutions that have been successful with this work is that it makes a difference if the governing board participates in the discussion about setting goals, monitoring performance, and communicating about results. Without such oversight, the board can easily become part of the cost problem by setting an agenda to increase revenues without paying attention to what they will be spent on. And involving the board in the conversation lifts it from a technical, inside-baseball discussion into a policy-directed one about spending in relation to strategic priorities.

Currently, most institutions—private as well as public—don’t do a very good job of engaging boards in discussions about spending. In 2005, the Association of Governing Boards of Colleges and Universities (AGB) collaborated with the National Association of College and University Business Officers (NACUBO) in conducting a national survey to discover the extent and nature of governing board involvement in cost oversight. They learned that although all institutions involve their boards in review of budgets, most spending reviews focus on subtopics (like faculty salaries or capital outlay) and not on spending in relation to performance.

Interviews with CEO’s and board officials revealed that these leaders worried that more board oversight of costs might mean sending volumes of spending metrics to the members and involving them in management decisions that aren’t appropriate to their role. As a result, the AGB is testing strategies for strengthening boards’ spending oversight that are a good fit with their role in strategic planning and ensuring public accountability. The association is concluding that improved cost management requires that boards move away from a focus on balancing the budget to setting and meeting long-term goals, discussing value and values, and using resources to meet strategic priorities over many years. 

The Policy Context
As important as this institutional work is, the college cost problem can’t be solved exclusively by colleges and universities acting on their own. We need to have parallel attention to costs and productivity at the policy level, beginning with a fresh look at historic patterns of funding higher education, from the higher subsidies that go to students in research universities to the budgetary incentives (or lack thereof) for increasing retention and graduation.

Unfortunately, there are fewer examples of engaged and effective change on the policy side than there are on the institutional side, because of a general public policy drift regarding higher education. States’ capacity to develop and implement policies for higher education is weaker now in almost every state than it was 20 years ago.

Meanwhile, the federal government took seven years to pass the latest Higher Education Act, which grew into an eleven-hundred-page monster that even the most ardent advocate has to concede lacks any coherent strategic direction for higher education.  When policy work does begin, it too often focuses on symptoms (tuition increases) rather than causes (privatization and spending priorities).

In the face of this policy vacuum, institutions that are in a position to do so are doing what comes naturally: pursuing revenues and prestige and increasing admissions selectivity. This may work reasonably well in the short term for some public research universities and master’s institutions with aspirations, but it is disastrous when it comes to increasing degree production and reducing attainment gaps.  

The good news is that there are a few states that have started to take on this challenge, and their work is about to be significantly leveraged by the Lumina Foundation’s “Making Opportunity Affordable” (MOA) initiative, the ambitious and unprecedented multi-year initiative designed to build states’ capacity to tackle costs and to increase higher education productivity. Eleven states have begun planning work for the initiative now and will be doing the diagnostic, and goal-setting work needed to anchor deeper work. Depending on its needs, each state will set goals for productivity increases as part of a strategy to increase degree attainment. They will also be evaluating how current state funding policies do or do not provide incentives to meet those goals.

So there’s some cause for optimism. For the first time in many years, there are more than a handful of institutional and policy leaders who are moving from analyzing the problem to doing something about it.  These leaders know that we’re not going to solve the higher education performance problem by worrying about the relative handful of institutions with huge endowments, although they’d dearly love for those universities to help slow down the arms race that threatens to cannibalize the industry. They also know that we’re not going to address educational performance by increasing institutional entrepreneurship in research and economic development. They are ready to focus instead on the intersection between access, degree attainment, and finance, as well as to hold themselves accountable for performance. It isn’t rocket science, but such an agenda takes leadership of the highest order.

Association of Governing Boards, What Boards are Doing (And Not Doing) in Reviewing Institutional Costs, available at:

National Association of System Heads, Access to Success, description available at

University System of Maryland, Efficiency and Effectiveness Initiative, information available at

University System of Wisconsin accountability reports, available at

Making Opportunity Affordable, information available at:

Jane Wellman is the executive director of the Delta Project on Postsecondary Costs, Productivity and Accountability, a non-profit organization in Washington, DC, whose mission is to develop better data and metrics to improve cost accountability and productivity in higher education. Previously, she served as a senior associate at the Institute for Higher Education Policy in Washington, D.C., vice president for government relations with the National Association of Independent Colleges and Universities, deputy director of the California Postsecondary Education Commission, and staff director of the California Ways and Means Committee.

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