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One of the strongest arguments for shoring up the nation’s public universities, increasing graduate offerings, and expanding the role of expansive research plans in determining institutional priorities is the effect that investments like these have on America’s ability to innovate. It’s an argument that rings true, but as facts accumulate, it is beginning to look like public universities are not doing much to secure the future of innovation in the United States.

The nation’s supply of scientists and engineers is fed by a pipeline that extends from the undergraduate programs of colleges and universities to the graduate programs that educate the next generation of PhDs.  The massive investment in research at public universities should have had some impact on the health of this pipeline, but it has not.

A couple of weeks ago, I cited a depressing  CCAP ranking of universities that placed many of the country’s most highly respected research universities near the bottom of value-oriented rankings.  Now there is a new survey from UCLA’s Higher Education Research Institute that adds more details to this portrait of failed priorities.

On a per capita basis the schools whose undergraduate programs are responsible for the most PhDs in the STEM (Science, Technology, Engineering, Math) disciplines are the ones that are also highly regarded by students and alumni for the value they deliver.  There are only three public institutions in the top fifty: UC Berkeley (39), William and Mary (45), and a surprisingly strong 15th place showing for tiny New Mexico Tech.  Who is at the top? Caltech is number 1.  Private research universities like MIT, Princeton, and Chicago are also in the top ten. But so are schools with virtually no research funding.  Harvey Mudd is ranked number 2.  Reed, Swarthmore, and Carleton — all liberal arts colleges — are among the top ten as well. Many in the top fifty are small, but there are a couple of  large institutions like Berkeley (35,000) and Cornell (21,000).  About half enroll between 10,000 and 15,000 students.  All are highly selective, but so are the most of the public universities that are members of the AAU.

In a recent post, I asked “Why universities do research?”  This data makes the question even more pointed. The largest consumers of federal research dollars should be directing their energies to insuring the health of the STEM research pipeline.  All of the schools in the top fifty manage to do it — some with little or no help from the federal government.  So it makes perfect sense to ask what is going on at the other institutions.  I have my own ideas — and I talk about them in my book — but I am also interested in hearing your thoughts.  Is this another indication of a damaged pipeline?

In Where’s the money….? I described for you the Department of Education’s assessment of the financial health of the nation’s private universities:

The U.S. Department of Education issues a regular report on the financial health of  degree-granting colleges and universities.  It is a sort of test of financial strength.  When I started tracking the course of these institutions for my book, there were about a hundred non-profit colleges  that failed the test.  By 2008, that number had risen to 127.  The Chronicle of Higher Education has just reported that 150 non-profits now fail the Education Department’s test.

Now we have picture of the toll that the financial meltdown and runaway expenses are exacting on America’s public institutions as well. Moody’s Investor Services has just issued its report on the liquidity of public universities: “U.S. Public University Medians for Fiscal Year 2009 Show Tuition Pricing Power Amidst Rising Challenges.”  The report is available only to Moody subscribers, but Goldie Blumenstyk, writing in today’s Chronicle of Higher Education, summarizes the key findings as follows:

The median level of debt for 200-plus public institutions rated by Moody’s—$176.9-million as of the end of the 2009 fiscal year—has grown by 31 percent over four years. That’s notably greater than the rate of revenue growth (25 percent), total financial resource growth (15 percent), and enrollment growth (13 percent) during that same period…For the first time, colleges’ debt per student ($13,665) exceeded their financial resources per student ($12,893).

As a consequence, operating margins are at or near all-time lows for public institutions and are negative for many.

Tuition is rising at many public universities, but the cost to students is not being converted to increased educational value.  In many cases, tuition increases simply service expanding debt obligations. While the liquidity of top-ranked public research universities is worse than their private top-ranked counterparts, the public medians have the ability to convert a larger share of their assets to cash in the near term.  What Moody’s doesn’t say is where the liquid cash comes from.

The lack of transparency in public funding of higher education matters.  A public university has a public budget, and we all know that in most states funds slosh back and forth between spending categories without regard to the rules of arithmetic that most of us have to live under.

One large eastern state delayed paying university employees until the start of the next fiscal year.  Another one routinely delays most raises until the start of the next calendar year.  Still another allows cash to flow freely between major athletic programs and major academic obligations in the hope that a great athletic season might generate enough private donation to repay internal mortgages. Cost-sharing contributions are shifted, research cost recovery is murky, and personnel obligations are sometimes backloaded for months and years.

Even in good times, generating cash for operations in a public university is an exercise in juggling future payments.  With zero operating margins, administrators are the unlucky Monopoly™ player who has just landed on Park Place and realizes that the only way to pay the rent on the three hotels is to mortgage all of his properties. He spends the rest of the game hoping that he can keep his meager wages. Hope is not a strategy.

That is why the ability to raise tuition is so powerful.  But, as Moody’s new report makes clear, tuition increases are like passing GO.  New tuition dollars fill budget gaps. They do not change a university’s finances. It is only a matter of time before students figure that out and go for the e-pill.