The Economics of Higher Education

Tatiana MelguizoAssistant Professor

University of Southern California

Sao Paolo – BRAZIL International Seminar

April 6-8, 2010

Outline

• Overview of the Structure of Higher Education in the U.S.

• The California Master Plan

• Community College Funding

Overview of the structure of postsecondary education in the U.S.

• Types of postsecondary institutions– Public and private (non-for-profit or profit)

• 2-year colleges• 4-year colleges (Research, Comprehensive,

Liberal Arts)• Outputs (degrees, research, service)• Revenues (endowment, tuition, grants and

patents, community-collaboration)• Revenue and output are not connected

Expenditures and Enrollment• Total expenditure in education is about $200

billion or 3 percent of Gross Domestic Product (GDP).

• Total fall enrollment (2007) graduate and undergraduate students about $18.7 million (US DOE, 2009).

• Total number of public and non-for-profit private institutions about 6,680 (US DOE, 2009).– Public 2,028 (13.5 million)– Private non-for-profit 1,864 (3.6 million)– Private for-profit 2,788 (1.4 million)

High tuition- High aid• High tuition – High aid model (efficiency and equity)

– Traditional public finance theory argues that public goods that consumers will buy in the absence of subsidy is inefficient use of public tax dollars

– Tax dollars should be distributed by need• Un-intended consequences

– Diminish quality of public institutions– Decrease enrollment of students in public four-year– Not guarantee high aid– Deny the appropriateness of higher education for the

public good

x

The Flow of Funds

EconomyAvailable

State and Local Govt. Funds

FederalGovernment

DonorsFoundationsCorporations

Tax Policy

Appropriations/GrantsStudent Aid

Tuition

Scholarships &Waivers

Research and Other Grants (Restricted)Student Aid (Restricted)

Gifts

Income

••••

K-12CorrectionsHealth CareOther Govt.

Higher Education

Students Institutions

CALIFORNIA

California Master Plan

• California Master Plan in 1960 created a three-tier system– University of California (UC) (10 campuses)– California State University (CSU) (23

campuses)– California Community College (CCC) (110

colleges)

California Community Colleges

• The CCC are a about $7 billion enterprise serving about 1.7 million students

• They are open access• They are inexpensive compared to other two-

year public colleges in the country• The CCC serves a substantial majority of African

American and Latino students – 39% Latinos in CCC compared to 19% UC– 9% African American in CCC compared to 4% UC

CCC serve the majority of the students in the state

Full-time-equivalent students in California Higher Education, 1970-08

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1970-71

1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

Year

Num

ber UC

CSU

CCC

The CCC has the lowest expenditure per student, FTES

State and Local Revenue per FTES for California Higher Education, 1970-2008

0

5,000

10,000

15,000

20,000

25,000

1970

-71

1972

-73

1974

-75

1976

-77

1978

-79

1980

-81

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

UC

CSU

CCC

The funding for CCC has remained constant in the last forty years

State and Local Revenues for California Higher Education, 1970-2008

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1970

-71

1972

-73

1974

-75

1976

-77

1978

-79

1980

-81

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

Year

Cons

tant

dol

lars

200

8

UC

CSU

CCC

They are inexpensive

Two-year CollegesAverage Undergraduate Student Costs, Fifty State Comparison 2007-08

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

2007-08

CCC serve a large percentage of racial/ethnic minorities

Enrollment by Race and Ethnicity, 2006-2008

36.08

3.93

18.7

33.69

11.17 8.78

38.4634.65

05

1015202530354045

Asian/PacificIslander

Black Latino White

Perc

ent

UC

CSU

CCC

Sources of Revenue

• Two main sources that account for about 75% of the revenue:– State general fund (about 45%)– Local property taxes (about 30%)

• The other 25% comes from:– Student enrollment fees– Lottery– Other– Federal

CCC System Sources of Revenue, 2007-08

Source: California Community College Chancellor's Office (2008)

CCC District General Fund Revenues, 2007-08

3%

58%

39%

Federal State Local

Regulations

• Proposition 13 (1978) (That year the revenues went from 66% to less than 20%)

• Proposition 98 (1988) Guarantees funding for K-14

• Accountability Reporting for the Community Colleges (2007)

How do the state allocate resources to districts?

• The districts receive funds based on a Full-Time Equivalent Student (FTES)– FTES for standard full-term courses(Census enrollment)x(15)x(17.5) 525– The state funding for FTES in 2008/09 was

$4,564.83– The state uses Program Based Funding

(PBS)

The current funding for CCC is inadequate and unequal

• The formula was designed to produce adequate levels of funding and reduce funding inequalities. In reality it has failed to do so.

• The current funding is not adequate:– The state average funding level is about half of what

the state deems appropriate. The “percentage of standard” in 2002-02 was 54.2% statewide. For example: The stated FTES in that year was $4,472 but the average rate received was $2,424

• The current funding is not equal:– The funding shortfall does not affect all districts

equally, leading to inequalities in the system

Negative incentives of PBF• Districts do not invest in high cost programs (i.e.,

nursing).• The incentive is to expand low-cost programs (i.e., large

credit classes with part-time adjuncts).• Districts don’t have incentives to provide non-credit

courses such as English as a Second Language (ESL) and GED, if it is at the expense of the credit courses.

• The scale factor increases inequalities. The smallest districts received a boost of 25% in their program allotment. Those small but close to the cut-off the increase was 0.8%

Summary

• The funding structure of higher education has important implications on the mission of postsecondary institutions

• Institutions need to be market savvy and mission centered (Zemsky, 2004)

• The economic crisis and global pressures are re-shaping institutions. Institutions need to adapt if they want to survive in this permanent changing world.

THANK YOU!melguizo@usc.edu

http://www-rcf.usc.edu/~melguizo/