Public Higher Education at a Crossroads

05/04/2015 08:19 am ET | Updated May 04, 2016

When state revenues dip, those groups funded in areas where state officials have the most discretion often suffer more than other state-funded groups. It's expected.

At the top of the list for many state officials is public higher education. Governors and their education staffs often use the occasion to demand efficiencies, warn against corresponding tuition increases to offset state revenue declines, and propose new reporting, regulatory or funding mechanisms that will create reforms that these state leaders think are necessary.

While the goal is to create good out of a budgetary challenge, most of the reform efforts wilt as revenue returns to offset earlier public higher education shortfalls.

In one sense, the Great Recession behaved as we would expect with public higher education taking a hit early with flat or decreasing support from state government. While the percentage of state public university budgets funded by state governments has declined steadily in most states, for many of them their state government support still represents a sizable source of revenue. This is especially true for second- and third-tier public colleges -- often serving a disproportionate number of undergraduate students -- whose universities do not have large research operations and substantial endowments.

Two examples from among the many that could be chosen provide some insight into where public higher education sits today.

The University of Virginia announced last month that 800 UVA staff members have less than two months to decide whether to take an incentivized retirement package. The package would include offering nine months' salary and a $9000 health care subsidy to any qualified employee 55 or older with at least twenty years of uninterrupted employment with the state.

In a second example, Louisiana State University officials reported that they are drafting an "academic bankruptcy" plan to respond to a deep state budget crisis. Effectively, a bankruptcy plan would indicate that the viability of the entire system is threatened making it easier to shut down programs and lay off tenured faculty. Louisiana's higher education system faces an 82 percent funding cut that would bring state funding subsidies from $3500 per undergraduate student to $660 per undergraduate student per year. In response, Moody's lowered LSU's credit outlook from positive to stable based on these funding uncertainties.

Let's separate the politics out from the crisis. In almost every state, public higher education has a revenue problem. This must be addressed if America is going to continue to assure that its citizens have a viable educational path into the middle class. Forcing sudden, massive increases in tuition, fees, room and board as alternative financing puts public institutions at risk.

The facts are that colleges and universities - whether public or private - are facilities heavy and energy intensive, with almost unlimited and growing technology needs. They are white-collar employers with a high benefit structure. They also run expensive programs and a combination of staff and faculty levels makes them incredibly inefficient. Their sticker price, increasingly discounted whether in public or private colleges, sets them on an unsustainable path. After land, labor, and tuition discounting, there is little annual operating discretion left in college and university budgets.

Additionally, the demographics work against higher education. They face soaring student loan levels, declining federal and state aid, increasing consumer-fed competition, growing regulatory and assessment demands, and applicants pools fed by birth rates that are skewing toward low income families.

The challenges in Virginia and Louisiana may differ in scale but they point to the same conclusion. Operating models -- especially those fed by direct public subsidies -- no longer work, whether at public or private colleges. The collapse may be softer at endowed institutions with significant research operations but the effect is the same even if the intensity differs. These institutions have a political dimension and a cumbersome bureaucracy that is slow to respond and tied together in mind-numbing ways by endless ribbons of red tape.

For argument's sake, let's assume that the costs of labor, while they may be managed more efficiently, are taken off the table. In doing so, we mean to suggest a solution that is friendly to and supportive of faculty and staff. Let's also concede that Moody's and other rating agencies will limit unbridled access to the debt market, particularly since many institutions have reached or are approaching their debt capacity. Further, let's admit that most of these institutions cannot fundraise fast enough to make a real dent in the problem.

What's left for them to do? One possibility is to look at what colleges and universities do, that is, to match mission to revenue, taking steps to protect the educational purpose for which they are created. What are core assets -faculty, staff, academic buildings, programming - and how can they be best supported, where possible more efficiently? What are underperforming assets - non-academic real estate, parking, and other efforts such as on line programming - that can be repurposed within an operating budget to increase revenue to support undergraduate education?

Finally, what's a reasonable price to charge, what level of state support is needed, and how can federal student loans and debt vehicles fund a more efficient model that protects and builds academic program strength?

Sometimes less is more. One thing is certain - we have come to the end of an operational model that can no longer support and grow American higher education.