Can the University of California Be Saved?

Deep cuts by the California legislature are devastating the best public university system in America, and with minor variations the same theme is playing out in all states. Let’s take a look at this all-too-common pattern, using California as an example:

1. States cut their appropriations to campuses because state treasuries don’t have enough money. State treasuries are depleted because job layoffs, globalization and a weak economy translate into lower tax revenues, and because K-12 education, federal entitlements (Medicaid), roads, prisons, health care, and an aging population always take preference in the state budget over higher education.

2. State universities try to compensate for cuts by proposing big tuition hikes, up 44% in California, to $10,301 for undergrads.

3. Students and parents cry foul at the big proposed hikes, accusing the university of “balancing the budget on the backs of students, year after year.”

4. Controlling authorities (in California, the Board of Regents), spooked by the public outrage and political cost of the proposed hikes, scale them back to below what the universities really need to cover costs and maintain services.

5. Meanwhile, elected officials, responding to constituency pressures to “do something” to rein in college costs, force more regulations and controls on the universities. In California, the state Senate would prohibit pay raises at UC and Cal State to ensure that “top execs are not living high on the hog while the students are unfairly suffering.”

6. Whacked both by this twin blow to their revenue base and the added burden of government controls, campuses respond by laying off employees, closing classes, freezing salaries, expanding class sizes, eliminating services, deferring maintenance, and replacing regular faculty with part-time "contingent" teachers.

7. And as we move to the next budget cycle, the same scenario, with minor variations, plays out again. Why? Because none of the fundamental forces that are stressing state treasuries are going away.

8. Now, fast forward a decade or two, and what was once a university system that set the standard for the world will have deteriorated into higher education’s version of a failed inner city school, sustained on life support from the state, a grim vestige of its former glory, and a refuge of last resort for students without other choices.

9. And finally, many thousands of middle class students, unable even to afford the tuition charged by these now-depleted state universities, abandon their dream of gaining the education they need to make better lives for themselves and their families.

And so the question – and this is the question that should be on the mind of every public university president, trustee, governor, and state legislator – is whether it is possible to break out of this discouraging cycle?

To me, the answer is yes, but doing so requires acknowledging five economic facts of life about the current public higher education funding model. Under the current system:

1. Public universities have lost control of their revenues, which means that their income does not depend on their performance. Revenues are determined by state legislatures (or controlling authorities) who set appropriation levels and regulate tuition charges. Thus these key revenue sources carry few financial incentives for institutions to prune weak or unneeded programs, enhance efficiency and productivity, stay focused on mission, and be innovative and responsive to student needs.

2. Government subsidies are necessarily episodic, varying from year to year in accord with the legislative timetable. This unpredictability hampers thoughtful financial planning, and in times of cutbacks leads to sudden undifferentiated retrenchment that reduces quality.

3. Over the years, state cutbacks have not only driven up tuition charges, but have exacerbated an academic culture of defensiveness and resistance to change. Shrinking resources have in many states led frustrated professors, contingent faculty, and teaching assistants to form unions and dig in their heels to protect themselves against deteriorating working conditions.

4. History shows that legislative efforts to rein in campus spending and increase accountability have been counterproductive, resulting in a regulatory burden on universities that has raised costs, expanded bureaucracies, stifled creativity, and handicapped initiatives by individual campuses to excel and distinguish themselves academically.

5. Government appropriations to campuses, combined with the public university tuition model – which charges all state residents the same amount– indirectly subsidize wealthy students who do not need help. As noted by William Bowen, Matthew Chingos, and Michael McPherson in their recent excellent book, Crossing the Finish Line, the price sensitivity to tuition is very low for high income students. In other words, high tuition does not dissuade upper income students from going to college, but it can kill the dreams of low and even middle income students.


Thus, breaking the dismal cycle that is driving the nation’s public universities into the ground entails abandoning the financial model that no longer works, and replacing it with one that (a) rewards schools for controlling costs and improving their performance, and (b) uses scarce taxpayer dollars more efficiently. To me, three things must happen.

First, public universities should be weaned off their public subsidies. Subsidies are unearned income. They discourage healthy competition and lead to bad insitutional habits, like focusing on lobbying and image managment, rather than improving performance and being responsive to student needs. Furthermore, in good times, state appropriations exacerbate campus inefficiencies because universities always ratchet up their expenditures to match any increase in state funding.

Second, universities should start charging differential net tuition (as is done at private universities), so that upper income students pay a bigger fraction of their educational expenses. Doing so would free up dollars that could be redirected to lower- and middle-income students, greatly improving their college affordability, without significantly impairing the affordability of upper income students. Treating students from all socioeconomic brackets identically is not the same as treating them all fairly.

Third, public campuses should be given control over their own destiny, especially the freedom to set campus-specific tuition levels and admission requirements. In a competitive market, the laws of supply and demand will do a much better job at reining in college costs than the unwieldy hand of the state legislature.

My suggestions do not mean that states should privatize public universities and get out of the higher education business altogether. I still see a key role for government. I personally favor redirecting state higher education dollars into need-based scholarships for state residents. Naturally, universities would have to make up for the resulting loss of public subsidy by raising their tuition charges, but with the subsidy now residing in the hands of students, they would see no average loss of revenue.Furthermore, armed with their new scholarships, students would see no average increase in the cost of their college education.

Under this scenario, universities would have to compete with each other for scholarship-laden students, in order to keep up their revenues. Those schools that offered the best value, affordable prices, and responsive and innovative curricula would finally have an opportunity to make money and improve themselves. Those that failed to meet the challenge would suffer enrollment declines; they would quickly learn to measure up or eventually shut their doors.

Strong medicine? Perhaps. But the alternative is to accept passively the gradual decline of the educational system that a large majority of the American population depends on to better their lives.