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It dawned on me during the recent saloon brawl at the University of Texas over exactly when and on whose terms President William Powers would leave office that the nation’s top research universities could succumb to the rule of self-interested and unaccountable mobs. Texas joins a growing list of public universities where governing boards have tried to remove presidents—one of the few duties that virtually every state assigns to boards—only to find themselves demonized as cabals. It can’t be a cabal if you are the public authority designated to make those decisions. What began in 2012 as a media spectacle–triggered by the short-lived firing of University of Virginia President Teresa Sullivan and fueled by Twitter and Facebook campaigns worthy of Tahrir Square—has become trendy as the number of legitimate governance decisions undone by academic vigilantism has tacked alarmingly upward.

The Texas case is notable because there is pressure coming from two directions. Heavy-handed political influence from conservative allies of Governor Rick Perry, who are unconvinced of the need for a research mission at UT-Austin and want the university’s Board of Regents to force the flagship university to abandon—or at least starve—it, has so damaged the board that one of them is under investigation for possible impeachment. On the other side, faculty and student groups who want Powers to stay have taken to the media to build public support for their case. Many of them were attending a symposium about online education when a deal that would allow Powers to remain in office was announced. The ensuing celebration was boisterous and probably helped the cause of those who are demanding the impeachment of Perry’s allies.

The dust-up with the Texas Board of Regents is only the most recent example of how difficult university governance has become. Even unremarkable commencement ceremonies came under assault earlier this year as a dozen high-profile speakers were disinvited by university administrators who bowed to pressure groups. What could have riled the unruly mobs? Among those who threatened the sensibilities of the Class of 2014 were IMF Director Christine Lagarde and a critic of radical Islam who had survived mutilation in fundamentalist Muslim East Africa. All were excoriated in public. Faculty groups, student newspapers, bloggers, and anti-defamers rose up in protest that views so divergent from their own should be expressed under a banner proclaiming truth or veritas, or something like that.

So much for academic diversity and the fearless band of heroes and martyrs that, Daniel Coit Gilman, the first president of Johns Hopkins—the first American research university—promised would “prosecute learning” regardless of consequences. It is probably not what John Adams had in mind in 1780 when he wrote in the Constitution of the Commonwealth of Massachusetts of the moral duty of society to cherish the interests of “seminaries of learning.” It does not cherish their interests to pay attention to the digital-age equivalent of epithets scrawled on subway walls. But that is what, increasingly, masquerades as academic governance. Unchecked, it is a trend that imperils ours, the best universities in the world.

Religious institutions aside, there are really only two ways to run a university. In Europe, universities are state-run affairs. Professors are civil servants, and Ministries of Education make all of the important decisions. University presidents and other administrators are chosen in faculty elections, but they are in truth labor leaders who are beholden to the narrow interests of professors, not to students or even to society. The sorry state of European research universities (despite a five hundred year head start, only eleven of the top fifty research universities in the world are European; thirty-one are North American) is a testament to the failure of that model.

American universities (especially public universities) were conceived differently with appointed trustees or regents who are accountable to society. In the U.S. system, boards have ultimate legal authority to choose top administrators, approve faculty appointments and guarantee academic freedom. Presidents are then given considerable autonomy in the day-to-day running of their institutions. That autonomy is shared with faculty members who are expected to make expert decisions about academic matters in a system of governance outlined in a 1915 declaration of academic freedom that marked the founding of the American Association of University Professors (AAUP). Autonomy is so ingrained that shared governance is sometimes willfully–almost comically–misconstrued to mean that administrators work for the faculty and that governing boards are at best irrelevant to a university’s mission.

In normal times it probably does not matter much, but these are not normal times. Forty million Americans owe 1.2 trillion dollars in student loans. One in seven borrowers defaults within two years of leaving college. Tuitions are rising at twice the rate of inflation while family incomes are flat. Americans have lost confidence that affordable, excellent college education is within their reach. Under pressure from both the left and the right, political correctness has become a bludgeon used to beat back the free exchange of divergent views on campus. Change is needed, and there are transformational ideas that can help universities get back on track. But, as former University of Michigan President James Duderstadt has pointed out, change will be slowest at the institutions where shared governance is strongest. The mobs could care less.

Who has the interest of society uppermost? Presidents are accountable, but most have careers to advance. They have powerful incentives to behave like stewards of the status quo. Not faculty. Many are deluded about the need for someone to be in charge at all. Not students themselves. They have even narrower interests and lack perspective. The AAUP’s 1915 declaration acknowledges that governing boards are responsible for society’s interests. Not all boards are good at that, and the bad ones should be replaced. It is not clear what led to the Texas Regents’ decision to fire William Powers. Conflicts with trustees can simmer for years before boiling over and leading to a president’s ouster. The publicly stated rationale for a firing is not always the real one, but Governor Perry’s fascination with a shortsighted agenda promoted by the conservative Texas Public Policy Foundation certainly played a role. As bad as those ideas would be for a great university, it is hard to argue that the long-term interests of institutions like the University of Texas are served by polling unaccountable mobs.

College presidencies are derailed all the time. There were dozens of firings last year. Hundreds of people who represent unpopular points of view made commencement addresses. So why such a ruckus over a Texas firing or Christine Lagarde’s commencement invitation from Smith College? Mobs have become well-heeled Internet marketing experts. It is no accident that supporters of William Powers were in contact with Teresa Sullivan’s supporters at The University of Virginia, where the art of demonizing and isolating board members was perfected. It is only a matter of time before roving bands of torch-waving villagers realize that by storming the gates they can impose their interests and the well-armed mobs start roaming the Halls of Ivy.

The result will be the steep descent of the best American universities into a soup of international mediocrity when global leadership is needed. The contract between academia and society is strong in this country. It was renewed in President John Bascom’s 1879 “Wisconsin Idea” that spoke of the university’s duty to reach into every family, and Rafael Reif’s soaring 2013 MIT inaugural that warned of the dangers to society of driving an economic wedge between universities and the American public. It is diminished every time a mob is rewarded for undermining legitimate authority. Universities are a national treasure to be cherished, and strengthening the quality of their governing boards also strengthens the social contract. Mobs like to attack strong boards as corporatist, but there is nothing corporatist about acting to ensure that institutions are healthy and vibrant. There is no sport in using Twitter to amplify personal attacks on trustees and administrators. It is a celebration of mob rule.

As I was writing Abelard to Apple, I became increasingly skeptical that accreditors could  get it together.  I suppose there is an argument to be made that the federal and state governments need a rudimentary ability to separate clearly reputable educational institutions from store-front operations. That was the original motivation for the current system of accreditation, but the accreditation industry wants so so much more.

The industry wants to measure quality, for example.  And if — as is almost always the case — your institution comes up a little short, they are happy to sell you quality improvement consulting services.  It’s a case of mission creep run amok.  Accreditation when stripped to its core mission is costly, intrusive, and largely ineffective. Highly regarded and and influential undergraduate programs are nudged toward the mean. Clearly ineffective and dishonestly marketed for-profit programs are rubbers-stamped so that they can offer federal aid to their students.

The case I make in A2A is that the very idea of accreditation is based on a world view in which higher education is like manufacturing.  In this view, universities are like factories and accreditors are the quality control department.

Every time I see another incursion by accreditors into a space beyond their core mission, alarms go off.  So when I I saw this statement by AAUP and the Council for Higher Education Accreditation that ties accreditation to academic freedom (and therefore tenure) I came out my chair.

AAUPCHEAFINAL

Let’s imagine a best-case outcome for this exercise in mission creeep:

  • accrediting teams will get to evaluate processes that exist to protect academic freedom
  • negative tenure decisions will be subject to review
  • there will be pressure to adopt proactive rules that guarantee the outcome of decisions that are best made on a case-by-case basis
  • there will be lots of expensive documentation requirements
  • everyone will figure out how to work around the system.

The key  AAUP/CHEA proposal is:

Affirm the role that accreditation play in the protection and advancement of academic freedom.

Beyond the traditional role of ensuring that academic governance is transparent and free from undue external and political influences, I think that accreditation’s role in the protection of academic freedom is marginal. If the “accreditation community” wants to think about the future, how about this:

How can we make our core mission relevant in a world that has moved beyond the regulated, paper-based quality control methods of the factory floor?

OK, so it’s one thing to know what forces are driving tuition increases.  It’s another thing to know where money is being spent.   That is a problem of different proportions because universities do not report their spending in neat categories like

  • cost of scaling beyond capacity
  • making up for lost subsidies
  • cross-subsidies with loss leaders

And, as The Delta Project’s Jane Wellman is  fond of pointing out,  there is no category representing value that ends up on a student’s diploma.

It’s not a completely satisfactory approach, but you can look that the “Where does the money go?” in question in two ways.

The Accounting View

As I pointed out in a previous post, overall spending has not substantially increased — even as tuition has risen.  What has increased is spending in the following categories:

  • institutional grant aid
  • public service and research
  • energy
  • facilities
  • contingent faculty
  • residence hall operations
  • groundskeeping
  • online
  • admin
  • bookstore
  • general staffing
  • financial services

These are interesting categories because increases in these areas generally compensates for decreased spending in others.  Take contingent faculty, for example. Increased spending for part-time or adjunct professors compensates for an overall reduction in tenure-track faculty. Contingent faculty carry  a completely different cost platform.  In many cases health care costs can be trimmed by reducing the number of full-time faculty. adjunct professors do not require expensive startup packages. Capital requirements also change, because office and lab demands are not the same.

This brings us to a second way of tracking dollars: what behaviors result in large shifts in spending priorities.

The Behavioral View

Behaviors are interesting because you can imagine controlling them.  Here are the behaviors that institutions report as affecting their current spending priorities.

  • Making up for lost revenue
  •  Lost productivity
  •  Capital expenditures
  •  Cost of non-core activities
  •  Administrative bloat
  •  Giving it away
  •  Compliance
  •  Health Care and other costs of an aging workforce
  •  Unquantified “quality”
  • Overshooting markets like internationalization
  • Stealing revenue  from academic programs
  • Operational inefficiency
  • High cost of materials
  • inappropriate skills utilization

There are others of course.  Stanford president John Hennessey has recently pointed to labor costs tied to the professorate drive cost increases, but I can’t find anyone who will show me a price increase that is due to increased faculty costs.

I can find examples of capital projects where initial funding plans have collapsed. Few of these projects are drop-dead institutional requirements.  There are a fair number of vanity projects and many examples of non-core activities like athletic practice facilities or mixed-use facilities that were once thought be revenue-producing opportunities but for which a real market never materialized.  When funding profiles change dramatically, one response might be to re-evaluate the need for a new building, but that rarely happens.

This is a true money pit.  There are really only three sources of discretionary revenue: tuition, government allocations, and private gifts. One way to make up for lost revenue is to increase income from other sources.  In most cases, this means tuition.

Critics seem hell-bent to fabricate exotic reasons that college tuition is rising. “It is a market response to free-flowing federal dollars”, say some.  “It is a conspiracy,” say others. “Declining productivity!” say those who are convinced that college professors are overpaid and underworked.

The 2011 annual spending report of the Delta Project on Postsecondary Education Costs, Productivity, and Accountability — the last annual report issued by Delta before it sadly closed its doors last spring — makes it clear that easy answers are likely to be wrong:

There is much public discussion and concern over rising tuition but much less attention to the intricate relationships among tuition and revenue sources–particularly state and local appropriations in the public sector — and spending.

Take the issue of lost appropriations, for example. It is true that from 1999 to 2009 tuition at public research universities rose at a much higher rate (56%) than the 32% increase at their private counterparts.  These increases are almost entirely explained by the loss of state appropriates, as opposed, say, to increased spending.

All other factors are incidental. Nor does the rate of increase tell the whole story, because private universities are starting from a much higher base for their sticker prices the average dollar increase at the private institutions was three times that of the private universities.  The situation is much worse at public community colleges which have seen the greatest increase in enrollment. This is because, when it comes to tuition, even small changes in enrollment headcount have a big effect on prices. And that is where capacity comes into play.

Private universities have been able to keep their increases in check because they do not accept as many students as they could otherwise afford.  The increasing enrollment pressures have been absorbed by community colleges, and public masters and research universities. Students, who cannot afford to attend private institutions flock to quality public universities.  These are the very institutions that have not added capacity over the last forty years.

It is seductive but entirely false to think of higher education as a single sided market — that is, a system in which there is a supplier of goods and services to a customer who is willing to pay a price determined by the marginal cost of production.  That is not higher education.  Higher education is a multi-sided market, a collection of stakeholders with often competing interests and cross subsidies that make it difficult to determine fair pricing schemes.

Local newspapers were a multi- sided market,  in which extremely profitable classified advertising subsidized news, subscriber fees, and print advertising.  It was a system that worked well until Craig’s List came along an undermined the whole value proposition that supported local news.  The result was rapidly dropping classified ad revenue, rapidly increasing print ad rates followed by a corresponding drop in demand for print ad, and ultimately a cash crisis in which subscribers fled to other media for their local news.  Newspapers were slow to recognize that they were a three-sided market. 

Higher education is taking the same path, and that is significant because it helps explain why the lack of capacity in American universities lies at the root of cost increases.

Success in a multi-sided market is determined by platform success in which a single horizontal layer allows many stakeholders to share common services at a total cost that is less than the cost of offering those same services in a vertically integrated business.

A multi-sided business without a scalable platform eventually succumbs to the nonlinear costs of growth.  Not only do the various services have to work out pairwise agreements with the other services, but individual stakeholders must also do the same.  As the number of stakeholders grow the overall cost of providing services grows in proportion to the ad hoc arrangements needed to keep everyone happy.

Universities have not invested in platform scalability for at least the last fifty years. Their processes and structures are locked into a set of capacity assumptions that are falling by the wayside. And they are rewarded for growing in a market where students seeking value are fleeing lesser institutions for those that are already overcrowded.

The obvious losers are the second and third tier institutions who desperately need students.  These are the schools that offer the steepest discounts. So steep that they cannot sustain them without falling into the financial danger zone I have talked about before.

The other losers are the students who are driven to higher quality by increasing prices.  Which institutions are they?  They are the very universities which have not added capacity but which have incentives to continue growing.

It is growth that comes at nonlinear costs.  There are no easy ways for most institutions to subsidize or cross-subsidize those costs, so they are passed on to students.

Next:  Where does the money go?

What is Driving Up the Cost of College?“, asked the question that many outside and inside academia want to know the answer to — especially this time of year as families contemplate writing college tuition checks that over four years will top $200,000   According to a recent Pew poll, the majority of Americans believe that a college education is becoming unaffordable and want to know why. Facile explanations are easy to come by, but there are few that match the facts.

So what’s going on?  Much of the popular discussion of tuition increases is based on three  “facts” that  are not true.  They may be easy to toss off on editorial pages or cable talk shows, but they are myths.

Myth 1: The rate of college tuition increases is abnormally high.

If you listen to many commentators, college tuition is hyper-inflationary.  In fact, students at many public campuses have seen tuition and fees double over the last decade, and–as the stubbornly persistent effects of the recession strain family budgets–become increasingly unaffordable.

Affordability is a real problem and prices are on an unsustainable path, but it is not the case that we are in the middle of some hyper-inflationary bubble.

In normal times, tuition rises at roughly twice the rate of inflation.  From 1958-1996 that averaged somewhere near 8%.  For most of those years, the increases were offset by increased spending for financial aid and by general growth in personal income, which hid many of the most serious consequences of this rise in prices.

Recent years are different, some argue. Let’s take a look at that claim. Annual inflation for 2011 was 3.16%, but that actually understates inflation for the months in which trustees and legislative committees approve tuition increases. The  annual rate of inflation for the last three quarters of 2011 was just under 3.5%.

Private institutions  raised their prices last year, but the rate of increase was actually in line with inflation.   2011-2012 tuition increases at nonprofit private institutions averaged around 4%.  For-profits increased their prices  3.6%. When it comes to holding the line on prices, these institutions actually performed much better than historical trends.

Public universities raised their prices at the much more dramatic rate of 8.6%, 20% above historical highs of the decade 1992-2001.

In short, the only increases that are above historical highs are at public universities, but only by a relatively modest amount.

Myth 2:  Easy availability of Federally-backed student loans is driving tuition increases.

This is a myth with many political consequences, but there is very little evidence that it is true.

The theory behind this myth is that a free market will cause prices to rise in proportion to a market’s ability to pay those prices, and the widespread availability of federal loans affects a student’s ability to pay.  The often unstated political corollary to this theory is that the students who are least able to pay are also the ones who are least likely to complete their degrees and pay back the loans.

In reality, the part of the higher education market that has control over its prices has been demonstrably immune from any such affect.

Less than 40% of all Federal aid is in the form of student loans (the rest is used for Pell grants and merit-based support).  These loans are distributed to public, non-profit and for-profit institutions, but for-profits tend to get a disproportionately large percentage of these loans.   These are the institutions that have raised their fees the least.

The remaining loans are distributed to nonprofit and public institutions, but since non-profits have also had historically low tuition increases, all of the factors affecting tuition would have to be concentrated in the sector that has the least flexibility in setting its own prices — the public colleges and universities. And as we have seen prices when viewed as a multiple of consumer price increases have risen only 20% faster than historical averages at these institutions.

Public institutions cannot retain earnings, so costs would have to have risen in proportion to loan availability, but that has not been the case.  Costs at public universities have been constant for several years.

So why have prices increased? In fact, total state support for public institutions dropped 7.5% in 2011-12. The total increase in tuition can be attributed to making up for lost income. Federal loan availability may be correlated with tuition increases but there is no reason for believing it is a cause.

Myth 3: Tuition rises because of declining productivity.  Professors are earning more and teaching less.

Productivity is not easy to measure in academia, but one thing is certain: unproductive professors are not a contributing factor to rising tuition.

One popular measure is the average ratio of students to faculty in general education courses.  This number has risen significantly at public universities whose state budgets have been squeezed.  In many industries this would be the very definition of increased productivity, which would mean that rich professors are skimming the cream off the top of rising revenues.

That is not true.  Faculty salaries have been stagnant at public colleges for almost a decade.  Many large state institutions have resorted to hiring part-time or “contingent” faculty to satisfy increased demand, which further depresses average annual compensation.

Another  measure of productivity is the number of courses taught per semester.  This number has been on a slight decline for over a decade, which might indicate that prices are going up even as productivity is decreasing.

However, the decline in average teaching load has been most noticeable at schools that are building sponsored research programs.  As I have pointed out in prior posts, sponsored research seldom pays for itself, so a decline in teaching loads represents, not  a productivity decrease, but rather a shifting of costs from academic programs to another income producing activity but one which often fails to cover even its own costs.

Next:  Three Reasons that Tuition is Rising: Capacity, Capacity Capacity