22 August 2012

The Myth of College Costs Increasing Faster than Inflation

UPDATE Aug 30: Darin Toohey, a faculty colleague here at CU, just pointed me to a great letter of his to The Daily Camera from last January making similar points.

There is a common misunderstanding out there which makes it difficult for state universities to explain to the public the dramatic effect of state government budget cuts.

The public sees the price of an education reflected in the tuition, the amount that students or their families pay to attend the university. But the price of an education does not reflect the cost of an education. The reason for this is that state governments subsidize in-state students to attend their public universities. Thus, the total cost of an education is reflected in the tuition plus the state subsidy.

The state subsidy is typically hidden and out of sight, meaning that people assume that the tuition (and increases in it) are a reflection of the increasing costs of an education. In a situation where state support is diminishing, tuition must be increased to compensate or costs must be cut or both.

Let me illustrate these dynamics with the case of the University of Colorado, where I am a professor.
So over the 10 years the price of tuition went up by 293% -- inflation only increased 27%. This is a big increase, and certainly increases the burden on those who pay the tuition. However, over that same period the inflation-adjusted cost of delivering that education went down by 14%. How can this be? The simple answer is that the state has cut its subsidy per student by 60% (closer to 70% after inflation), transferring a large portion of the costs of an education from the state to the student. In Colorado at least, state university education is being privatized.

From this perspective, the University of Colorado should be applauded for its efforts to keep costs down over the past decade. This is a message that university administrators should advertise far more widely.

21 comments:

The Right Wing Professor... said...

I presume when you mean 'state budget cuts', you mean budget cuts to higher ed., not absolute budget cuts. Looking at Colo. state govt. budget expenditures, it seems state spending was $11.78 bn in FY 2001, but rose to $20.0 bn in 2011. The fraction allocated to education has stayed almost constant (24% in 2001; 23% in 2011). I presume this means subsidies to K12 are squeezing out higher ed.. I also note that health, pensions and welfare increased from 22%, 12% and 9% of the total in 2001 to 23%, 16% and 16% in 2011.

This is the pattern we see here in Nebraska. Medicaid expenses and K12 state subsidies have exploded, and higher ed. has gotten squeezed. The overall state budget has increased, but higher ed. gets an ever smaller fraction. The teachers' union is pretty powerful :-).

John M said...

Interesting way of looking at the data.

How would you respond to this way of looking at the data?

2001: total expenditures/total students $26,200
2011: total expenditures/total students $37,700

Compound annual growth rate: 3.7%
CPI over same period: 2.4%

If cost per student had increased at same rate as CPI, total expenditures/total students in 2011 would have been ~$4400 lower.

This obviously reflects funding from sources other than tuition and state subsidies.

Data for calcs here:

http://www.colorado.edu/pba/budget/currfundsbudget/index.html
http://www.colorado.edu/pba/records/enrl1877/intro.htm

Roger Pielke, Jr. said...

-2-John M

Thanks for the comment, but I'm not clear on what you are presenting. The expenditures in the instructional budget should match up with the revenues that I presented. perhaps you have mixed in some non-instructional budget (e.g., research)?

Thanks!

Mark B. said...

The observation - not myth - that college costs are rising faster than inflation has been seen over decades now. And it includes both public and private institutions. So while it may be true this year that states are cutting subsidies, that does not acount for the increases over the last twenty years. I was hearing about this topic when I started college in the early 1990s.

Please explain why costs went up faster than inflation before the current budget cuts - a topic well covered in the media for a generation - and why private school costs have gone up FASTER than public schools over the same period. Obviously, private schools are not affected by state budget cuts in the same way.

John M said...

Roger,

As I said, this obviously reflects funding other than state subsidies and student tuition, but my point is to look at a simple metric to try to get at how responsibly CU deals with its overall budget.

It's sort of like evaluating a stock with corporate metrics like sales/employee or free cash flow, which are less easily manipulated than metrics like adjusted earnings or return on shareholder equity.

But if research is the reason for the increased rate of spending per student, it doesn't seem to be offset by increased levels of federal grants.

http://www.colorado.edu/pba/budget/currfundsbudget/revhistory.html

It would of course be helpful if there was budget information from CU with a little more granularity.

Roger Pielke, Jr. said...

-5-John M

Thanks, but it looks like you are mixing apples and oranges. The CU "overall" budget includes money for research which has nothing to do with teaching (or even academic salaries). In fact, federal research funds by law cannot be used for these purposes.

The relevant budget is the one highlighted in the graph at the top ... Thanks!

MattL said...

-6- Roger,

You mention some decoupling of research and teaching. But how does that relate to tuition? Is research solely funded sources other than tuition?

It's obviously important to you, but University of Colorado seems like an outlier as far as having tuition outpaced by inflation, no? Maybe you guys have managed to keep a lid on the number of administrative positions and the overall ratio between admin and teaching?

Roger Pielke, Jr. said...

-7-MattL

Thanks ... yes, research is solely funded by sources other than tuition, with the exception of 40% (typically) of a professor's salary (which is time expected to be devoted to research). (The balance is 40% teaching and 20% service, this is pretty typical at major research universities.)

CU may indeed be an outlier, I haven't looked. But I'd guess that many states are in similar situations.

Thanks!

Pasteur01 said...

Roger,

According to the references that John M provides the state budget for instructional expenses alone were:

2001-02 $176,107,337
2011-12 $384,301,892

One can only conclude that the increase in instructional expense at your campus has outpaced inflation over the term.

Roger Pielke, Jr. said...

-9-Pasteur01

Thanks ... you are looking at single line item in a larger budget. It would be a mistake to assert that this one line item represents the total costs of college. Thanks.

Pasteur01 said...

-10- Roger -

Instructional expense, which doubled in those 10 years, is the largest category in the budget. As a portion of the budget it has increased from 25% to 33%. It is the most relevant category.

That said, every category of the budget with the exceptions of Public Service, Institutional Support and Scholarships and Fellowships outpaced inflation. As a result the Total Expenditures outpaced inflation.

Hardly the stuff of fiscal restraint.

How did that happen?

- Compensation (particularly faculty) is usually the largest driver of the budget at a school. Your campus spent $120,210,404 on faculty salaries last year. That's an increase of 60% over the term that we are discussing. Given that total compensation reflect other benefits (i.e. healthcare) the case is probably even worse.


- While inflation was only .27 over that term professors' salaries (Full, Associate and Asst) on your campus increased by approximately 40%.

- The number of students enrolled in the fall has increased by 11% in that time while the number of professors has increased proportionally. That's OK news. However, the number of instructors has increased by 83%.

The really scary part? All of this is true despite a significant decrease in the numbers of professors and instructors over the last several years as a result of the budget cuts!

http://www.colorado.edu/pba/facstaff/facsal/

Roger Pielke, Jr. said...

-11-Pasteur01

Thanks ... you are correct that faculty salaries and health care have increased faster than inflation. As you are aware both are set by a market and the university is a price taker.

In fact, Colorado state universities consistently pay lower than average salaries compared to their national peers:
http://oira.unc.edu/faculty-salaries-at-research-and-aau-universities.html

One reason they can get away with that and maintain high quality is that Colorado is a very nice place to live.

Given the market for faculty salaries and healthcare, it makes the graph at the top of this page even more remarkable.

That said, people have choices in university education and if the value that we provide is not worth the cost, then people can vote with their tuition dollars. I suppose one benefit of the state's withdrawal from higher ed is that the market signals will be far easier to read.

Thanks!

Pasteur01 said...

-12- Roger

Apologies for beating the horse a bit more - I do have a larger point. But first there are several flaws in your analysis.

1. The data you cite for state subsidies are actually estimates from 2010-11 not 2011-12. I will assume the estimate is correct and work off of the numbers from that fiscal year.

2. In 2010 Boulder received $55M from ARRA for operating activities. The new math for "cost" under your model is tuition + state subsidy + ARRA. That ARRA subsidy is approximately $1836 per student ($55M/total enrollment fall 2010-11).

3. Let's take the stimulus money out of the equation. The school ran a surplus of $54MM in 2010. Eliminating the federal subsidy, the school ran a deficit of $1M. Underscoring that point, in 2011-12 the ARRA subsidy dropped to $5M and the school ran an actual deficit of $21M.

On the other hand, In 2001-2 the school ran a surplus of $23M. Shall I adjust that for inflation?

Roger Pielke, Jr. said...

-13-Pasteur01

Thanks, and no worries about the dead horse, it's complicated and worth discussing ...

1. Thanks
2. ARRA was not a subsidy of tuition or students, though it may have indirectly impacted state spending, see:
http://t.co/zFQfx0DQ
3. I have no doubt that the university is operating closer to the fiscal margin now than 10 years ago

Remember this post is about how much college _costs_ That is a somewhat different subject than how do universities spend revenues for everything that it does (research, athletics, entertainment, CU hospital, etc. etc.). Only a subset of these activities re related to the figure at the top of this post.

Thanks!

Pasteur01 said...

-14- Roger

All of the links you've provided show that ARRA was provided to offset state cuts, including cuts to subsidies. Your original link to historical state funding has this to say,

"[This graph] shows the impact of the federal stimulus dollars (ARRA) and how it has and will backfill state cuts to higher education. In FY 09-10, ARRA is backfilling nearly $382 million dollars in state cuts to higher education. The governor currently is planning to restore most of those cuts by FY 2010-11 and FY 2011-12."

This makes the federal government a third rate payer that is not reflected in your bar chart. Of note, the governor intends to restore most, perhaps not all, of the state contribution.

The chart on the third page shows that the total subsidy in 2010-11 was equivalent to 2007-08 or, by eyeball, about $6,000. The tuition in that fiscal year was $7,018 making the total around $13,000.

The "cost" at Boulder has increased at a rate exceeding the inflation rate.

Roger Pielke, Jr. said...

-15-Pasteur01

Thanks, interesting observation, I did not read it that way. Here is how it looks to me ...

Looking at the CU budget for 2010-2011:

http://www.colorado.edu/pba/budget/quickfacts/infocardfy11.pdf

It shows $15M in ARRA money, which is included in the "state funding" total. (I'll ask someone in the budget office to explain precisely, to remove any ambiguity.)

But let's just say that the $15M was added to the total shown in the graph above. With 20,000 in-state students (data: http://www.colorado.edu/pba/budget/quickfacts/infocardfy11.pdf) this works out to about $750 per student.

That doesn't really change the picture. But really, even taking your ~$6,000 per student (which I don't think can be right) it would show that costs grew at about the same as inflation over that period -- and if we await the 2012 budget, we'll be back below ;-)

Thanks!

Pasteur01 said...

-16-

Roger,

Indeed budgets are messy things. Particularly messy if you're analyzing the sausage while it's being made. The public data are incomplete for the fiscal years 2010 and 2011.

Referring back to the pre-ARRA years, 2007-08, we can agree that "costs" by your definition increased at a rate near inflation.

However, instructional costs and faculty salaries skyrocketed over that period. This strongly implies that there is yet another rate payer subsidizing in state residents' tuitions. Non-residents? Alternative revenue streams? Maybe the Budget Office can explain.

Roger Pielke, Jr. said...

-17-Pasteur01

"This strongly implies that there is yet another rate payer subsidizing in state residents' tuitions"

There is little uncertainty here -- it is out of state students filling the gap. Thanks

Pasteur01 said...

-18- Roger

I just saw the update and Darin Toohey's letter. Your point and his are more clear to me now.

- State subsidies have decreased dramatically;
- in state student tuition has increased at a pace exceeding inflation to offset the decrease in state subsidies;
- and the combination of the two has been on a trend slightly below inflation (according to Toohey's figures).

And the band plays on? Perhaps my confusion was rooted in an inability to decipher any good news from the numbers.

Expenses related to delivering an education have skyrocketed. Instructional expenses and the compensation analysis provided up thread make that clear.

You acknowledge that non-resident students are "filling the gap" between operating expense and revenues. Indeed their tuition has also increased at a pace exceeding inflation.

Over what term is it reasonable to expect that resident and non-resident tuition increases can exceed inflation rates?

Roger Pielke, Jr. said...

-19-Pasteur01

Thanks much ... in reply to your question:

"Over what term is it reasonable to expect that resident and non-resident tuition increases can exceed inflation rates?"

My view:

1. For in-state students that will occur when the state contribution reaches zero 9or effectively close enough)

2. For out of state students that will occur when the out-of-state applicant acceptance rate reaches 100%

Over course, a levelized market-rate tuition would address a lot of these issues ;-)

Thanks!

Pasteur01 said...

-20- Roger

Stony Brook and Boulder are different places. However, you might find the content and context of the convocation addresses delivered by Dr. Marburger in the late 80s and early 90s strikingly similar to recent history at your university and universities across the U.S.

Here is the one that he delivered in 1990.

http://dspace.sunyconnect.suny.edu/bitstream/handle/1951/49133/State%20of%20the%20University%20address%201990.pdf?sequence=1

His addresses for '91 and '92 may foreshadow the near term in public education in Boulder and across the U.S.

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