Overview of System Higher Education Financing in US

Robert K. ToutkoushianJune 4, 2013

My Background

Professor of higher education at the Institute of Higher Education, University of Georgia (US)

Specialize in economics, finance, quantitative research methods

Worked as research analyst for U Minnesota, U System of New Hampshire

Consult with institutions and state governments on finance-related issues in education

Overview of Presentation

First presentation: overview of system higher education financing in the United States Philosophical issues in funding higher education How does US society pay for higher education? The role of data in examining funding policies

Second presentation (tomorrow): overview of institutional higher education funding in the US Funding from the perspective of individual institutions

Philosophical Issues in Funding

Higher education is a resource-dependent service

Cost of higher education is paid by individuals Students / families pay through tuition and fees Other individuals pay for higher education through

taxes that are used by government to cover some portion of cost

Question: Who should pay for this service?“Benefits received principle”: Each entity

that benefits from the service should pay a portion of the cost equal to their benefit

Higher Education Pricing

Economist Gordon Winston offered the following description of pricing in higher education:

Price = Cost – Subsidy Price = what students/families pay Cost = what institutions have to pay to provide services Subsidy = all non-student revenues (government,

donors)

Question: How large are higher education benefits for students and society?

Private Benefits from Higher Education

On average students / families personally benefit when they acquire more education

Financial (“market”) private benefits include: Access to better jobs tied to degree attainment Higher lifetime earnings, higher spousal earnings Lower unemployment rates

Non-financial (“non-market”) benefits may include: Greater understanding of the world Entertainment Social and personal development

Public Benefits from Higher Education

Do others in society benefit when some individuals go to college?

Argument: If all benefits are private, then the cost should not be subsidized

Governments do not subsidize most of the goods and services that individuals buy because the benefits are solely private in nature

In US, there is debate as to whether benefits from higher education are mostly private or public

Arguments for Government Funding

Goal of government: Raise quality of life of citizensGovernment may intervene in competitive markets

when: Service is a “public good” (non-excludable, non-

rival) Examples: national defense, fireworks displays If we let others pay for it…creates the “free rider

problem” Government mandates that taxes be used to pay

for public goods Basic research at universities can be thought of

as a public good produced by higher education

Arguments for Government Funding

Government may intervene in competitive markets when: Service creates “spillover benefits” to others in

society Examples: home improvements, education Positive benefits from education include higher

standard of living, lower crime, more active citizens

Students only consider private benefits when making education choices, and thus less education would be produced than desired

Government provides funding to change student behavior (reduce price paid by student leads more to choose education)

Measure of Return to Higher Education

Public Institutions Private Institutions

Graduates Non-Graduates

All Students

Graduates

Non-Graduate

s

All Students

Private Return            

NPV (0%) $1,246,937

$42,719 $842,040 $1,210,044

$34,868 $930,916

NPV (3%) $523,571 $12,155 $352,651 $488,013 $4,198 $376,657

Ratio (0%) 18.85 3.64 17.98 12.33 2.45 12.69

Ratio (3%) 8.88 1.74 8.41 5.79 1.17 5.91

IROR (0%) 18.1% 5.7% 17.1% 13.7% 3.7% 13.7%

Social Return            

NPV (0%) $1,621,370

$43,599 $1,096,526

$1,619,007

$48,081 $1,245,146

NPV (3%) $658,898 $2,963 $444,886 $656,040 $7,180 $505,995

Ratio (0%) 13.07 2.25 12.88 12.84 2.58 13.17

Ratio (3%) 6.16 1.08 6.01 6.02 1.23 6.14

IROR (0%) 14.4% 3.4% 13.9% 14.1% 4.0% 14.1%

Estimates of Financial Benefit to Students from Pursuing a Bachelor’s Degree in the United States, 2011 (US$)

Notes: Values in parentheses denote assumed discount rate for time preference. NPV = net present value of discounted benefits minus costs. Ratio = ratio of discounted benefits to costs. IROR = internal rate of return (non-discounted benefits and costs). Calculations assume that the student is 18 years old and retires at age 65. Gross private benefits include the gain in post-tax incomes over the person’s time in the labor market. Gross social benefits use pre-tax incomes in their calculations. Net benefits subtract the average tuition and fees at 4-year public institutions less average grants and scholarships less government revenues that are used for offsetting instructional costs. It is assumed that the student works part-time during college and earns 10% of the income that could be earned if working full-time.

Forms of Government Funding in US

In US, state governments have primary responsibility for managing higher education systems

Federal (national) government Funding to students based on financial need – 50% Funding to institutions for research – 50%

State (regional) government Funding to institutions for operations (“block grant”) --

90% [Funding leads to lower prices] Funding to students based on need (“need”) – 5% Funding to students based on performance (“merit”) –

5%

Effect of State Government Funding on Price

Demand

Supply

PNR

PR

E

Price

Enrollments (E)

State Government Appropriations

Tuition Revenue

Nonresidents pay PNR

Residents from state pay lower price PR

Subsidy only used to lower price for state residents

ENR

Higher Education Funding

States in the US use a variety of approaches to determining how much funding to provide higher education institutions:

1. Formula to meet planned expenditures (Georgia)

2. Formula to keep pace with peer institutions3. Formula to reward institutional performance4. No formula – Funding levels determined

through political process each year

Example of Expenditure Approach

Students = 10,000Credit Hours = 300,000Faculty Needed = 375Faculty Salary Expenditures = $26,250,000

Assumptions in funding formula:

1. Institutions need one faculty member for every 800 credit hours taught

2. Target faculty salary = $70,000/faculty member

Cost is affected by (a) assumed ratio of credit hours to faculty, and (b) target faculty salary

Funding is based on number of faculty positions needed, providing the government with some oversight on expenditures

Illustration of Peer Funding Model

Peers Tuition + State Funding / StudentA $20,000B $19,000C $18,000D $17,000E $16,000F $15,000G $14,500H $14,000I $13,500J $13,000

Target Percentile

$/Student for Target

Total Revenue Tuition Funding

State Funding Needed

50th = $15,500 $310,000,000 $200,000,000 $110,000,00075th = $17,750 $355,000,000 $200,000,000 $155,000,000

Suppose that a public institution has 20,000 students and charges $10,000 tuition

Ten peer institutions (A through J) from other states are chosen

Values show revenue from tuition and state funding per student

Total revenue needed to reach target (20,000 students x target revenue/student)

State funding needed to reach target after subtracting tuition revenue

Tuition funding (20,000 students x tuition rate)

Performance Funding in the US

About half of states have experimented with performance-based funding in US

Most have allocated only a small percentage of funding (exception: Tennessee)

Georgia is moving to performance-based funding

Challenge: How to identify appropriate measures of performance

Challenge: When funding is small percentage, may not provide much incentive for change

17

Tennessee Higher Education Commission

Example of Performance Funding: University of Tennessee Knoxville

Outcome Data Scaled Data WeightWeighted Outcome

Students Accumulating 24 hrs (Scale=1) 4,477 4,477 2% 90 Students Accumulating 48 hrs (Scale=1) 4,671 4,671 3% 140 Students Accumulating 72 hrs (Scale=1) 4,673 4,673 5% 234 Bachelors and Associates (Scale=1) 3,742 3,742 15% 561 Masters/Ed Specialist Degrees (Scale=0.3) 1,534 5,112 15% 767 Doctoral / Law Degrees (Scale=.05) 403 8,053 10% 805 Research and Service (Scale=20,000) $118.8M 5,938 15% 891 Transfers Out with 12 hrs (Scale=1) 794 794 5% 40 Degrees per 100 FTE (Scale=.02) 17 831 10% 83 Six-Year Graduation Rate (Scale=.04) 64% 1,612 20% 322

Total 3,933

Total Weighted OutcomesAvg SREB

Salary Subtotal3,933 x 89,643 = 352,557,624

M&O, Utilities + 74,135,800 Equipment + 17,876,600

Performance Funding + 21,992,400

Grand Total Calculation 466,562,424

Outcomes Model Summary - UTK

For Illustration Purposes Only

Role of Data in Financial Analysis

Crucial to collect data on regular basis about higher education finance issues

US government requires institutions to submit specific financial data annually

Also many private entities collect & disseminate data

Data are made available via reports (Digest of Education Statistics) and databases (IPEDS)

Enables tracking of trends, comparing institutions, making projections, testing hypotheses, conducting simulations

Revenue Category All Levels 4-Year Public 2-Year Public

Net Tuition and Fees $5,884 (19%) $8,302 (19%) $2,253 (16%)

Grants and Contracts $4,580 (15%) $6,935 (16%) $1,044 (7%)

State Funding $6,155 (20%) $7,970 (18%) $3,430 (24%)

Auxiliary Revenues $2,306 (7%) $3,500 (8%) $513 (4%)

All Other Revenues $12,702 (40%) $16,568 (38%)

$6,900 (49%)

Total $31,627 $43,275 $14,140

Revenues/Student for Public Colleges, 2010-11 (US$)

• Average cost of education at 4-year public institutions is over $43,000 (US$)

• On average, students in the US who attend 4-year public institutions pay about 20% of total cost

Source: National Center for Education Statistics, Digest of Education Statistics 2012.

Observations:

1. Average tuition rates in public and private not-for-profit institutions have tripled since 1980-81 (even after adjusting for inflation)

2. Tuition rate increases have almost always exceeded inflation by several percentage points

Rising Price of Attending College

Comparisons of State Funding

Selected States

State Funding in FY12 (US$)

Funding per $1,000 US in Personal

Income

Funding per Capita

National Rank

Wyoming 337,988,717 12.47 595.73 1st

North Carolina

3,914,552,032 11.25 405.614

Georgia 2,635,156,774 7.47 268.55 16

Kansas 739,612,189 6.31 257.67 20

Minnesota 1,283,690,000 5.38 240.06 25

South Dakota 181,016,376 4.98 219.79 30

Virginia 1,624,026,722 4.36 200.39 35

Nevada 473,148,326 4.69 173.95 40New Hampshire

82,697,778 1.36 62.7550th

Totals72,098,316,37

05.60 231.85

$72 billion (US) spent by state governments on higher education

Large variation across states:

high = $595/person low = $63/personavg = $231/person

Source: Grapevine (research center at Illinois State Univ.)

Conclusions

Much debate about the “right” share of costs that should be borne by students and governments Student benefits are sizable and more readily

estimated Societal benefits are difficult to measure Some elected officials contend government share is

too high, education advocates contend government share is too low

Important to understand that it takes resources to provide higher education services Someone has to pay the cost of the service Ultimately, citizens pay the cost either directly or

indirectly

Conclusions

Data are an essential tool in analyzing education financial issues of interest to policymakers

Data in US show that: Students pay only a fraction of the cost Student share of costs paid is rising Large differences in financial support by state

governmentsTo examine these are other questions, need

to implement a system to collect higher education data on a regular basis and disseminate the data widely

Contact Information

Email: rtoutkou at uga.edu

Institute of Higher EducationUniversity of GeorgiaAthens, GA 30602 USA

Instructions for Small Groups

Spend next period in small groups discussing selected questions and issues related in some way to higher education finance

Can use topics listed on next slide or your own topics

Appoint someone to keep notes on main observations, and someone to report back to the larger group after the break

Goal: Provide larger group with wider perspectives on issues facing southeastern European higher education systems

Possible Topics for Small Groups

How do southeastern European nations compare to the US in system-level higher education financing?

How can HEISEE examine higher education finance issues in the region?

How might the integration of Croatia into the European Union affect its higher education system?

What concerns exist in Croatia about the move to performance-based funding for higher education?

How can Croatia and other nations in the region provide adequate support for research?