Leadership within public higher education, policymakers, and researchers alike will find Public No More to be a sober and well-grounded guide to what lies ahead for universities across the nation.
About the Author
Andrew J. Policano is the Dean's Leadership Circle Professor and Dean of the Paul Merage School of Business at the University of California at Irvine. He is widely recognized for his innovative leadership, which spans twenty-two years in three deanships.
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PUBLIC NO MOREA New Path to Excellence for America's Public Universities
By Gary C. Fethke Andrew J. Policano
Stanford University PressCopyright © 2012 Board of Trustees of the Leland Stanford Junior University
All right reserved.
Challenges, Solutions, and Themes
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof. —John Kenneth Galbraith
The belief that higher education should be funded by society dates back at least to the fourth century BCE, when Plato's Academy offered free admission to selected students—a philosophy that prevailed throughout most of history. Today we face a different and challenging environment, with collapsing government budgets and rising tuition revenues. The emphasis of Public No More: A New Path to Excellence for America's Public Universities is that the long-standing dependence on state subsidies that facilitated low tuition and easy student access to public higher education is unsustainable. We view the recent cuts in public university funding as permanent and their consequences, both for higher education and for society, as profound. Public universities can either recognize and confront major strategic challenges or face prolonged financial stress, deteriorating quality, and eventual competitive decline.
To retain both access and quality, many public university systems are dramatically increasing tuition and fees to high-income students while providing an internal subsidy to low-income students. In effect, external market forces and internal reallocations are replacing state financial support. The inevitable outcome of these forces is that the traditional high-subsidy–low-tuition model, which helped to create the premier system of higher education in the world, is on a steady path toward extinction. Its emerging replacement will feature high tuition for some, high aid for others, and substantially reduced public support. The consequences will be less discretion in subsidizing inefficient programs, regardless of their appeal to basic notions of academic taste and fairness.
While public financial support, along with the award of an exclusive franchise, has led to a level of academic research, open inquiry, and scientific investigation that is the envy of the world, it has also acted to isolate public universities from competition and has engendered a sense of privilege and entitlement. Greater reliance on tuition revenue, better-informed and more selective students, rapidly emerging national and international competition, and stunning new technologies present a different reality. The question is not whether public universities will adjust to reflect this new reality—because they must; rather, it is whether they can react quickly, successfully, and sensibly enough to sustain their competitive position as premier providers of instruction and research.
One of the major impacts of increased market competition is to drive the prices of products of given quality toward average cost, thereby reducing operating margins and forcing a relentless quest for operational efficiency. Competition is a healthy force; countries with open markets, well-developed institutions for the protection of private property, and transparent legal processes have the most innovative and dynamic organizations. Vibrant economies provide the highest levels of sustainable economic growth and productivity. However, there are also the apparent downsides to enhanced competition. In particular, individuals and organizations that are threatened and displaced by existing or new rivals will not welcome competitive pressure; they will typically resist the implications of competition both politically and economically. For these reasons, the critical choice confronting public universities is whether to compete aggressively in the new environment or to retrench and do everything possible to resist competition and to avoid making needed changes to practices and processes.
Some public university leaders deny the implications of this new funding reality and continue aggressive lobbying of their state legislatures to return to the high-subsidy model. Often, they feel empowered in this by a conservative faculty and staff governance process that promotes strong resistance to change. Although some level of advocacy is important and can be effective, demands on state and federal funds and the lack of appetite for additional taxation offer little hope that future needs can be funded through traditional public sources. Excessive lobbying, accompanied by denial of a permanent problem, has the potential of distracting university leaders from refocusing on needed strategic adjustments. More important, attempts to block impending competitive forces by resistance and delaying actions are self-defeating.
As increases in tuition revenue replace state subsidies as the main funding source for public universities, the vitality of the research enterprise is threatened. In the traditional funding model, a significant fraction of research activity was supported by block grants from state governments, which financed both reductions in faculty teaching loads and a significant portion of the required research infrastructure. These grants were also used to sustain an extensive and nontransparent system of internal cross-subsidies. With this support structure, the subsidy helped to develop the defining features of distinctive public universities, which are based on the concept that teaching and research are complementary and that research-intense universities provide a challenging, high-quality learning environment. To continue to fund their research mission, public universities have implemented less expensive ways to deliver the curriculum, including increased use of adjunct and part-time faculty, compressed pay, and increased class sizes. However, these cost-saving instructional initiatives threaten to erode educational quality and value and thereby to precipitate a negative reaction from students who become less willing to pay if they perceive a reduction in value. If dissatisfied students choose to go elsewhere, efforts to spread resources and sustain cross-subsidies by reducing quality can be self-defeating.
Significant challenges arise as universities attempt to sustain the longstanding goal of excellence in instruction and research in the face of declining public subsidies. What is necessary are new and effective positioning strategies that focus more narrowly on academic programs that can distinguish a university relative to existing and emerging rivals. Each public university must identify a unique strategy and invest in programs that align with it, and at the same time decrease resource allocations to programs that do not align. The obvious but rarely acknowledged implication is that the scope of academic programs will have to be reduced. Confronting this issue reveals the tension between the benefits associated with greater differentiation of each institution and the desire to offer broad products that are attractive to a large student base.
Ultimately, public universities cannot be all things to all people. Programs that offer neither distinctive features nor a coherent financial model and those not aligned with the intent or viability of the university face being downsized or eliminated. The essence of an effective strategy is that it provides a logically consistent framework for making challenging decisions in an uncertain environment. To protect and enhance the university's unique (distinctive) market position, top leadership must define a vision and then find the courage to enact these difficult choices.
Moving from subsidy to self-reliance presents significant challenges for public research universities. As increased revenue comes from tuition-paying students rather than from public support, students will seek out academic and professional programs that help them succeed in both life and the workplace, providing the return they expect on their investment in education. Some will not be satisfied with the assertion that what they need is a politically adjudicated liberal education that prepares them for life's intellectual challenges. Nor will they be especially supportive of the notion that their tuition should be diverted to support research and exclusive high-cost programs at the expense of their own instruction.
The traditional approach of setting a base tuition for resident undergraduates that applies generally to all programs and majors leads to various distortions, particularly because it ignores substantial differences in program costs as well as differences in student willingness to pay. A policy of increased tuition-setting discretion can recognize cost and student demand differences, hopefully in the context of a tuition structure that leads to minimal departures from efficiency standards. Education quality rises as student preparedness improves and as the resources devoted to educational quality increase. Like tuition, entry standards and the funds spent on programs are key decisions that must be made in the context of environmental opportunities and the university's aligned positioning strategy.
As shown in the Table 1.1, the new reality facing public universities requires many changes in the practices and processes used in the traditional structure. It is not clear that the required transformation is feasible for many of the institutions that constitute the current broad spectrum of public higher education. Moreover, a basic question is whether the transformation, even if possible, will be beneficial for society. The changes we envision will require a major shift in culture on the part of faculty and administration. While the main drivers of change are the permanent decline in the level of real public support per student and the unprecedented emergence of new competitors, the principle inhibitors of change are entrenched ideologies, resistant internal cultures, and budgeting and resource-allocation processes that are predicated on the once, but no longer, predictable receipt of public support.
The transformation from subsidization to greater self-sufficiency necessitates different strategic and operational models from those that have dominated at public universities throughout their history. The repositioning and re-evaluating of academic program scope recognize that greater importance must be given to societal needs and student demands. In the process, programs and services that have low demand, generate little revenues, or are too costly must be identified for the possibility of downsizing or elimination. The new model encourages productivity enhancement, entrepreneurship, and greater attention to relentless competitive forces.
We summarize a number of key themes that underlie the major tenets of this book:
1. Replacing state support with tuition revenue will require more emphasis on the efficient allocation of resources to achieve as much as possible with limited funds. The traditional appeal of fairness, where
2. The choice between greater efficiency and enhanced fairness (equity) seems to be the critical issue, but in fact there is only one option. Unless public universities become more efficient, they will not survive in their current form.
3. With a decline in direct state support, internal cross-subsidies that support high-cost, limited-access programs at the expense of low-cost, broader-access programs are going to be difficult to maintain. More specialization across public universities provides one answer, and public universities will have to make choices that limit program scope.
4. Increased market competition both reduces overall demand and increases demand elasticity. This will put pressure on the traditional positioning of public research universities. Increases in tuition elasticity will limit the ability to raise tuition, and reductions in demand will increase unit fixed cost.
5. Impediments to change are embedded in culture and traditional ways of doing things. The shared-governance structure of public universities is inherently conservative, internally focused, and discipline based. Needed changes cannot be implemented easily by a central administration that is directed by governing boards to achieve greater access and constrained to recognize faculty rights.
6. There are numerous examples in public universities of independent programs that must adhere to market forces and seek efficiency and financial viability. Most of these units are "enterprises" that stand apart from the academic core, but there are also independent academic programs, like those in public business schools and other entrepreneurial units, that have attained financial viability without sacrificing quality and research productivity. These "public-no-more" programs provide one plausible forward-looking template.
Chapter TwoChallenges Facing Public Research Universities
The difficulty lies, not so much in developing new ideas, but in escaping from old ones ... —J. M. Keynes, The General Theory of Employment, Interest and Money
The Blame Game
A familiar pattern takes shape when state appropriations for public higher education are reduced. Universities raise tuition and admit additional students. Given strong enrollment demand, it is possible at public research universities to increase tuition by enough to replace lost public support, but it is not politically easy to do so as students and their parents (voters), long accustomed to subsidies, exert political pressure to restrain tuition increases. One politically sensitive argument is that qualified low- and struggling middle-income applicants are being shut out of higher education as tuition goes up. Student protests over higher tuition are supported by the same legislators who reduced the appropriations in the first place. Disliking rising tuitions, legislators sometimes turn on universities and assert that the main problem is not state budget decisions but wasteful spending of scarce taxpayer funds. At the same time, university leaders make appeals for a return to the golden years of high-subsidy–low-tuition programs of public funding—presumably the 1970s (see, for example, Miles and Evans ).
Adopting financially self-reliant strategies, reducing expenses, or eliminating nonviable programs are not the embraced alternatives. On the contrary, the reward for university leaders who do make such difficult decisions is usually a shortened tenure and reduced options for subsequent employment. Instead of laying out a vision and taking bold strategic steps, administrators often take the safer route of defending the core principles and social benefits of higher education. In appealing for additional subsidy support, they make extraordinary claims to persuade legislators of the high rate of return to the state's higher education "investment."
Unfortunately, the benefits are difficult to quantify and the arguments lack credibility. Few administrators can defend higher education by showing that it provides a greater return than health care, K–12 education, or job training. Meanwhile, legislators call for elimination of waste and a renewed focus on teaching. The result of this "volley the blame" game is a continuation of the status quo, endless appeals to restore state funding, reluctant adjustments in academic programs to keep costs from exceeding revenues, increased use of tuition to accommodate some of the loss of state funding, and gradual erosion of the vitality and quality of public research universities.
In this chapter we describe the evolving external educational environment and the tactical responses to it made by public universities. This information lays the foundation for later chapters on strategy and the actions necessary to sustain the quality and financial health of these universities.
Changing Environmental Factors
Public institutions are of fundamental importance to the quality of U.S. higher education. Guided by a broad and bold mission to create and disseminate knowledge, and ranging from two-year community colleges to comprehensive undergraduate and graduate research universities, they enroll over seventy-five percent of college students. Our primary concern is with the economic environment of universities that the Carnegie Foundation defines as "very high research universities" (referred to as "RU/VH"). These have been largely responsible for the global acclaim for public higher education in the United States. They also provide a range of benefits to their host communities, including medical services, technology transfer, and extension activities. Most are ranked in the top 100 nationally by U.S. News & World Report, although that particular ranking is dominated by the selective private universities also ranked by Carnegie as RU/VH. While our focus is on this category of schools, much of the analysis is also pertinent to many large, comprehensive (four-year) public universities.
Excerpted from PUBLIC NO MORE by Gary C. Fethke Andrew J. Policano Copyright © 2012 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Stanford University Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Part I Environmental Issues 1
1 Introduction: Challenges, Solutions, and Themes 3
2 Challenges Facing Public Research Universities 9
Part II Practices, Procedures, and Strategies 23
3 A Framework for Defining, Creating, and Distributing Value 25
4 Tuition Setting in Practice 49
5 Basic Financial Structure of Public Universities 67
6 Two Prominent Models for Resource Allocation: Central-Administration Management and Responsibility-Centered Management 80
Part III Policy and Analysis 107
7 Subsidies to Public Higher Education 109
8 An Efficiency-Based Subsidy and Tuition Policy 134
9 The Quality of Education 153
Part IV Culture and Governance 169
10 Cultural Impediments to Change 171
11 Templates for Change and Lost Opportunities 194
12 Public No More 213
References and Selected Bibliography 243