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Sunday, May 24, 2020

Sunday, May 24, 2020

Why Public Universities Can't Take New Cuts: The Essential Charts

Should university officials be fatalistic about Covid-powered cuts to their core educational budgets?  Or should they work 24/7 on their state governments to keep their current budgets whole?

What about state governments? Should they cut higher ed yet again, as various governors are doing (New Jersey, Ohio), and as Gavin Newsom proposes in California?

This post investigates the budget case for a zero-cuts policy.  If your state's public colleges and universities have an ample base budget, you can make some temporary cuts to their state funding. If they are already bare bones, further budget cuts will cut educational quality.

0. Why The History?

There are lots of ways to use numbers as proxies for teaching and research quality.  Most are bad. A pretty good one for teaching is instructional expenditures per student. To help state governments understand quality, departments could establish a set of minimum practices, then cost them out.   Campuses could figure out what their budgets must be to meet these standards. But departments haven't been invited to build the budget that would meet their needs.  And the averages for instructional expenditure that have been used by my case study here, the University of California system, aren't reliable.

Instead, I'll use historical budget trends as quality proxies.  I do this for two reasons.  First, the history of the state's relationship to UC controls what the state thinks UC should have.  This is a strained history and it still matters.

Second, UC's budget history expresses the idea that public universities could and should be as good as elite private universities.  Public university students should be roughly equal to private university students. The same was to be true of their faculties.

Historical budgets expressed this aspiration for equality through public quality.  A detailed Senate report I co-authored identified this proxy for full quality as UC's 1990 budget. Strong budgets expressed the quality aspiration in reality as well as in theory.  For example, previous, higher levels of public funding for UC campuses had enabled most of them to become members of the American Association of Universities, a group of North America's strongest research universities. Nearly all did this while tuition was still very low and with negligible per-student endowments.  This taught an important general lesson: Great academic quality came as readily from public support as from private capital.

Quality wasn't just about prestige, but also about social effects.  Public universities were to educate students as well as private universities did.  There were always resource differences (though not today's resource abyss), so let's put it this way: students were not to have to accept lower cognitive benefits from their B.A. by getting it from UC Irvine instead of from Occidental College.  UCI students had more courses in large-lecture format, so UCI had also to be able to afford lots of small courses too.  Occidental College seniors could write a thesis that taught them how to produce as well as consume knowledge.  So UCI had to offer undergraduate research experiences.

The same was true in research: major public universities were  to be as good as the elite privates (Berkeley and Stanford, Urbana-Champaign and the University of Chicago, Chapel Hill and Duke, Rutgers and Princeton, etc.).  Public university doctoral and professional degrees needed to be roughly comparable to private university degrees--or at least not in different leagues. The idea was to have proverbial world-class research going on at several hundred research universities rather than mainly at eight Ivy League universities and another dozen or so wealthy equivalents. Public universities needed plenty of internal funds to support research.  It was a national priority to have millions of really good thinkers and hundreds of really good research sites. The dominant political culture assumed that these two things--widespread intelligence, abundant research--were essential for democracy, progress, and justice.

So to put the large public system on a clearly inferior resource tier was understood to be economically suboptimal and also unjust.  This was particularly clear in the wake of civil rights movements as economic inequality grew and many K-12 school systems became minority-majority--while generally giving the least funds to districts with the highest shares of Black and brown students.

How are state legislatures doing with keeping public universities in the mix? Here are some charts to show what's happened in California. They come in three sections: UC Core Revenues, the State's Point of View, and What UC Really Has Left.   They track funding from the turn of the century.

1. UC's Core State Revenues

Figure A looks at what's happened to the state's allocation to the University of California.  This is money that generally follows resident students.

In Figure A you'll see 3 lines. The blue line is a benchmark, tracking growth in state per-capita income.  This measures the strength of the economy as it exists in people's pockets.  It goes up 4-5 percent a year most of the time.  If a state wanted to fund an agency in an average way, it would make that agency's revenues rise at the same rate as per-capita income. In such a case, the legislature isn't treating it as essential or special, but just letting UC or CSU or public health or transportation grow with the state.

UC enrollment did not stay flat through this period, but increased by about 50 percent. The yellow line takes the per-capita income benchmark and corrects it for actual UC student growth.

The red line tracks the state's actual general fund allocation in nominal dollars, not corrected for inflation.

Figure A: State Funds for UC in Nominal Dollars, Compared to Per-Capita Income Benchmark, and Benchmark Corrected for Enrollment Growth

The story is clear. The state's allocation to the University of California fell far behind state income growth.

If UC's state funding had kept up with state per-capita income (blue line), its 2019-20 allocation would have been $6.6 billion--not the $3.7 billion it actually got.

If UC's state funding had kept up with this benchmark corrected for 50 percent enrollment growth (yellow line), its current-year allocation would be $10 billion--nearly 3 times more than it received.

Sometimes people explain this low state allocation by saying the state population just doesn't have the money. That's not true.  The state population had the money to spend on higher education, but spent it elsewhere.  2017-18 was the first year that UC got a higher state allocation than its allocation in 2001-02 ($3.28 billion).  (2007-08 was the sole exception, at $3.39 billion.)  And remember that these nominal dollars don't reflect cumulative inflation, which has been around 46 percent.

In other words, for twenty years, the State of California has gotten all UC enrollment growth and all of its cost increases for free.

On to another chart. Sometimes people say, "well, the whole public sector has been falling behind."  That's also untrue.

 Figure B: Adding California State Budget Growth to Figure A

The purple line is the California state budget (right-hand scale).  State government--health, corrections, transportation, K-12 education, etc--has grown at around the same rate as personal income.  California doesn't have an exceptional government, measured by growth rates.  It has an average-growth government--except for higher education, which state government has held down below other agencies.

2. The State's Point of View

State officials will often say that Figures A and B are misleading because they leave out UC's other revenues, especially tuition.  The state has in the past claimed that student tuition is actually state funding.  The more plausible claim is that UC tuition hikes have offset state funding cuts.

In a January 2013 UC Board of Regents meeting, a state official made the point this way:
The possibility of increased funding right now: it doesn't exist. . . .There is no significant amount of money to backfill previous cuts. We've made roughly $900 million in cuts and you've increased fees $1.4 billion dollars. The [fee] increases were disproportionate to the level of disinvestment by the state. 
He was accurately using Department of Finance data to say that UC had $500 million more in gross tuition revenue than the amount of the 2011-12 cut.  The official was state Assembly Speaker John A. Pérez.  Pérez, who helped install the UC tuition freeze, now serves as chair of the UC Board of Regents.

To represent the state's understanding, Figure C adds a green line that shows UC core educational revenues.  These are about a quarter of UC's total budget (no medical centers, auxiliaries, or extramural grant funding ("direct costs").   The main revenue sources are state general funding, but now with various kinds of tuition added in (resident tuition, non-resident supplemental tuition, abbreviated as NRST, which mostly international students, and also the state funds that go to UC via the Cal Grants program that eligible students use to pay some of their tuition.  1/3rd of gross resident tuition is "return-to-aid," meaning that it cannot be used as operating revenue because it is converted into financial aid. There's also some indirect cost recovery funds and other bits and bobs that the core uses.  Take a look.

Figure C: UC Gross Core Revenues, Including Various Forms of Student Tuition and Related Funds

The green line is a lot better than the red.  UC gross core revenues grow faster than the income benchmark. Core revenues (mainly state funding plus various tuition streams) do a somewhat decent job of keeping up with enrollment growth at the benchmarked level (the yellow line).

You might be wondering about the widening gap between the yellow and green lines in recent years: it reflects the "surge" of unfunded or underfunded resident students the state forced UC to take to make up for the previous growth in non-resident enrollments.  This is a key source of the deficits many UC campuses were projecting even before the SARS-CoV-2 pandemic.

So here, it looks like the state has a point. UC's educational core has much better revenues than the state general fund calculation (Figures A and B) suggests.

This does not change the fact that the state has been free-riding for growth and upgrades on students (via their tuition), and also on other UC revenues.

But it looks like UC's gross core revenues have at least kept up with state income growth, and slightly beaten inflation.

3. What UC Really Has Left

Here's the problem with the state's point of view: while it was cutting or eroding the general fund allocation, the state also decided not to pay for lots of other things. The two biggest unfunded costs are (i) capital projects and (ii) that part of total compensation known as the University of California Retirement Program (UCRP).

In contrast to previous practice, UC now has to build its own buildings with a combination of University-based borrowing, private donations, and internal operating revenues.  This is the case both on the campuses and at the medical centers.  The state acknowledged the situation with legislation, AB 94, that allows campuses to use state funding to pay interest on debt.  That isn't additional money, just permission to use existing funds for debt that the state used to pay.  Three familiar symptoms are chronic student overcrowding, inadequate office and research space, and campus disrepair across the UC system.

The "pension holiday" from 1991-2010 was also a payment holiday for the State of California, which saved many billions of dollars over the years.  The state is the only beneficiary of that ill-advised break that has not started to make payments again.  Thus the employer contribution to UCRP comes out of UC operating funds as well. 

Figure D deducts employer pension costs and capital projects costs from UC's gross core revenues. There are many ways to calculate both, and I tried nearly all that I could think of, in consultation with several other longtime budget observers.  This figure uses a UCOP report (without the underlying data) for UCRP costs (Display XIX-6, p 159).  Capital projects costs were based on campus-by-campus calculations of operating revenues allocated to capital projects in each individual year.  This variant, Figure D, shows the highest net revenues of all the methods, so you should see it as a best case for the state's funding practice.  Watch the green line.

Figure D: UC Net Core Revenues (Core Revenues with Endowment Revenues, minus Employer Share of UCRP Contributions and Campus Funds Used for Capital Projects)

Most of the tuition revenue gains in Figure C are canceled by the state's withdrawal from capital projects and by its non-contribution to pension costs. UC revenues have not kept up with the income benchmark.  In some years, net core educational revenues are close to the flatlined state general fund allocation.

The University of California comes into the Covid crisis with net core educational revenues that are well below historic quality norms.  There's no educational surplus lying around to cut.

 4. The Insufficient Base for 2020-21

The anticipated Covid state cuts would be the fourth major round since 1990. But these would be the first without UC's traditional revenue rescue, large tuition hikes. (Existing UC reserves are a separate matter that are outside my scope here.)

The first time the big cuts came, University of California officials saw them as a one-time event.  That was 1992-95.  The second time the state cut general fund support for UC and CSU, UC had a plan, which was large tuition increases.  That was 2002-5.  The compact the two systems signed with Gov. Arnold Schwarzenegger, in 2004, didn't just permit tuition increases of 7-10 percent each year, but required them.

The third time state cuts happened, 2008-12, the high tuition plan was in place.  But high tuition didn't make it through the cuts cycle.  The student protests of fall 2009 and then again in fall 2011 effectively ended tuition increases on resident undergraduates. Jerry Brown removed Tuition Plan A, tuition hikes on resident undergraduates. UC then refocused on Tuition Plans B and C: increasing non-resident supplemental tuition (NRST), especially by taking more international students, and growing Self-Supporting Graduate and Professional Degree Program tuition, where UC academic units create for-profit (mostly masters) programs that can charge high tuition to residents and non-residents alike. The regents capped Tuition Plan B in 2017, and Plan C does not generate enough net returns (net of labor and facilities costs, often uncounted) to serve as a revenue fix.

As you can see in Figure D above, UC's net revenues have stagnated for 20 years, have not kept up with the income benchmark, and are far behind enrollment growth.

State cuts and quiet general fund erosion have already lowered UC quality. They have lowered it specifically for the most economically and racially diverse population in California memory.  Sacramento's funding practice gives much less per-student educational funding to today's students-of-color majority than it gave to their majority white predecessors a generation ago--even after we count revenues from tripled in-state tuition.

This losing battle has taken place in a state that has seen one of the most intense accumulations of wealth in recorded history.  We don't expect Google and Apple to support high quality higher ed for all. But we do expect state government to do that.

Any state revenue cuts now will directly cut UC quality again.  This time, the damage may be irreversible.  State government must now reverse the chronic underfunding policy of recent decades. It must keep UC (and CSU) whole for the sake of the state.


Figure E: Version 2 of Figure D--UC Net Core Revenues (Core Revenues with Endowment Revenues, minus Employer Share of UCRP Contributions and Campus Funds Used for Capital Projects)

Many thanks to Minh Hua, the RA with inexhaustible spreadsheet stamina.


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