If you asked most college and university presidents where does a dollar of tuition go in their school's budget - how is it partitioned and used - they would be very hard pressed to tell you. It actually is not such an easy question, but it suggests that leaders of these great educational institutions are often less than stellar experts on finances and consequently are not terribly adapt at how to cut costs to limit the growth of tuition and fees at their universities. I have known many presidents and provosts of top tier universities and colleges, some who are actually quite able leaders, who are virtually innumerate - many cannot read a balance sheet, analyze a budget with any sophistication, or understand a spreadsheet. And many have little interest in learning to do so. At their peril, they leave these "dirty" - non-academic - matters to their financial green eyeshade lieutenants. This should not altogether surprise us since most academic leaders were not selected because of the financial or budgetary skills.
What, then, are some of the reasons for the rising costs of higher education that lead to increases in tuition beyond the level of inflation? Let me provide you with a blueprint of some of the cost factors, concentrating here on two structural features of universities: the increasingly complexity of the institutions and demands made on them by parents, students, and the larger American society; and their "company of equals" governance structures.
Before enumerating some of these, I want to emphasize another fact about the way most universities and colleges build their budgets. Perhaps the most perverse reason for higher tuition costs is that institutions of higher learning rarely, if ever, zero-base their budgets. They annually look at marginal increases in costs of recruiting faculty, of administrative services, of auxiliary services (such as the cost of maintaining a residence hall), of increases in salaries, of the cost of debt service on buildings or other projects, of cost of legal service, among many other expenses. They then look at their various sources of income: from last year's tuition; from returns on their endowments; from the overhead attached to government research projects; from current use gifts by alumni and other benefactors, such as grateful patients; from returns on licensing of intellectual property; and from other sources of university revenue. If there is a shortfall in income relative to expenses, the university simply "solves" for tuition rather than try to cut expenses to bring the budget into balance. It calculates that it will take some specific increased percentage in tuition to balance the budget and sets that as its tuition rate - or comes as close to that number that they believe the market will bear and that won't place them at a competitive disadvantage relative to the schools they compete with for students. This is a terrible way of going about funding the activities of the university, but it is done with surprising frequency.
If that is one egregious cause for higher tuition and costs, there are other less transparent sources for rising expenses at universities that contribute significantly to the rising price of education. Consider a few. The state and federal government is driving up prices by burdening universities and colleges with useless and often-stupid compliance requirements. There are now a huge number of compliance requirements that the government sets for universities beyond those that are important and worthwhile. Entire armies of employees work on complying with these requirements - many of which have dire threats attached to non-compliance. It is bureaucracy run amok. Not long ago, one very distinguished president of a major university calculated that if he could eliminate the mindless state and federal compliance requirements, he could cut almost a full point off of his university's annual tuition increases. But rather than reducing reporting requirements, government regulations seem to endlessly increase at universities, and upward spiraling costs is one consequence.
If one takes a close look at university and college budgets over the past few decades, one may be surprised to find that the rate of increased expenditures has been far greater for administrative offices - and new ways of supporting students and faculty members - than the growth in expenditures associated with the faculty and the basic educational needs of the university. It is true that library and technology costs have escalated, in part because the publishers of core scientific journals hold a virtual monopoly and can charge exorbitant prices for leading journals. There is now an open rebellion against some of these practices, but the cost factors associated with libraries and computer technologies, as well as smart classrooms, have gone up far more rapidly than the general cost of living. So, it is not "academic free agency" that is driving the cost of college education up. It turns out to be the other relatively new features of universities that were unknown fifty years ago.
Part of this increased cost is associated with the perverse assumption that students are "customers," and since, the mantra goes, the customer is always right, what he or she demands must be purchased. So, now we have a campus office for every teenage growing pain that we can think of. The best spent money is probably on psychological counseling, but the number of offices that focus on student activities, athletics and athletic facilities, summer job placement, and out-sourced dining services that use the likes of Dean and Deluca, to say nothing of the dormitory rooms and suites that only the Four Seasons can match, lead to an expansion of administrators and increased cost of administration. In short, the universities and colleges are competing increasingly for being the most luxurious home-away-from home that you can imagine. This drives up costs - but for services that parents and students often demand, or are used by the college or university to lure prospective students away from their educational rivals.
Universities have become very litigious places. Everyone who feels poorly treated in hiring, salary increases, promotion decisions, and the quality of their office relative to their peers, threatens to sue the university. And an alarming number actually carry out their threat. Consequently, the staff of lawyers has escalated to the point where universities are running small law firms - and the costs associated with those firms, including litigation, have sky-rocketed over the past few decades. When faculty members or others used to threaten to sue Columbia, I would tell them to join the long queue and that I'd see them in a few years. We never lost cases accusing us of discrimination in a tenure decision, but we settled more than our share of essentially nuisance suits for some hefty sums because it would have cost a lot more to litigate them. Indeed, lawyers are playing an increasingly central role in university decision-making, and not always a good one. They tend to be risk averse. It is easier for them to avoid defending matters that don't threaten core educational principles than to risk losing the cases at a hefty cost. Nonetheless, the cost of the legal staff and outside legal work at universities has grown dramatically over the past several decades, contributing to the cost of tuition.
When the federal government entered into an informal contract with universities after World War II to outsource our national research effort to the universities, it agreed to cover the full overhead costs of that research. Overhead consists of the cost of paying for laboratory facilities and the work at the university that is directly linked to the government sponsored research. Under Congressional pressure, the idea of full-cost reimbursement was violated almost before the principle was adopted. Today, the government negotiates reimbursement rates for research conducted at university laboratories. Government auditors "live" at the universities and their hands are held by a group of administrative personnel whose specialty is to negotiate indirect cost rates on government contracts and grants. I don't know of any university today that receives close to full-cost reimbursement for government-sponsored research - some of which leads to discoveries that have completely altered out lives. So, contrary to widespread belief, the research enterprise actually costs more money than it generates at major universities. The result is that either through gifts to the university or through tuition, research is being subsidized at these great universities. It may be what makes great universities preeminent but it is not contributing to a positive bottom line.
Then there is the disinvestment in higher education by the state governments. In the past few years, certainly since the financial tsunami of 2008, governments have cut annual state budgets by as much as 20% per year. This can have a devastating effect on the cost factors at the university since 20% cuts at the margins often involve cuts in university professorial salaries, job loses, mandatory furloughs, and non-competitive salaries for faculty and students. The effect: increases in tuition for both in-state and out-of-state students.
Universities have traditionally been like 19th century independent farmers who were unwilling to collaborate or share resources - whether they be tractors and bailers in the case of the farmers, or academic programs and the teaching of obscure languages at universities. In fact, the great universities have done relatively little to develop cooperative rather than competitive strategies for costly operations that could reduce their expenses.
The lack of institutional self-confidence about their mission often leads to homogeneity of programs among our universities because each of them is afraid not to be a "full-service" educational provider. This is expensive because the nation, in fact, does not need the current number of advanced doctoral programs and some of costly professional programs that second and third tier universities offer. They also don't always need very expensive professional programs at private universities that are being done at lower costs and with equal quality at public institutions. Educating Ph.D.s, for example, is expensive, and unless the doctoral students are simply being exploited to teach undergraduate students instead of using full-time faculty members, then there is very little value added to having second-rate programs sustained. Few universities evaluate carefully the cost factors associated with Ph.D. programs of limited quality that at the end of the day are expensive and produce individuals who become part of the increasingly large pool of unemployed Ph.D. degree recipients. Cutting some of these programs could lower overall university costs.
In short, the concept of death has come very late to our universities. These pillars of higher learning have a distorted conception of the "life cycle" of academic departments, specialties, institutes, and centers at research universities. We have a marvelous sense of fertilization; we are experts at gestation and early development; we know about maturation and full expansion; but we refuse to confront dying and death. The academic way of death is traditionally through atrophy at a Darwinian pace. We rarely consider the idea of a full life course - of what should be associated not only with a beginning but with an end. And this is so because we have neither the rules that permit for orderly governance of choice nor the conceptual frameworks to guide those choices. Moreover, without clear, agreed-upon criteria, many academic leaders, looking at the hostile consequences of "boldness" among some of their brethren, see, quite accurately, that making significant changes in the face of limited faculty opposition often leads to larger-scale faculty opposition, and potentially to a loss of personal authority and legitimacy.
One illustration will suffice to give you a feel for the governance problem. The newly appointed president of a prestigious school of education took a year to evaluate some 40 centers at the school that had been operating for some time. After the review was complete - one year later - he spoke to the assembled faculty. He said he had reviewed all of the 40 centers and he found one in particular that as far as anyone could tell had done absolutely nothing for over two decades, and yet was costing the school thousands of dollars in space and related administrative costs. He announced his plan to close the center down, to which a tall, lean, and somewhat elderly member of the faculty rose from his seat at the back of the room and said to the president: "Ah, give it a chance!"
I have also known many presidents and provosts who are superb with numbers and who can analyze data extremely well. They often operate very tight ships and seek to understand the complexity of the revenues and expenses of universities in great detail. There is a huge institutional advantage to having such people at the helm, assuming they have the other god-like qualities required these days of academic leaders.
I will post a separate entry on the phenomenon of "academic free agency" and its consequences for our universities.
Research that is sponsored by foundations almost always requires substantial university subsidization. A typical foundation may pay 15 to 20% or less of direct research costs for overhead expenses.