Markets are great for allocating many of society’s resources, providing blue jeans, computers, lattes, auto repair and many of the products and services we consume regularly.
With an appropriate dose of public oversight, they can also provide more complicated things, like innovative telecommunications services, sound insurance policies and valuable real estate.
However, while market-like competition can be useful in providing more complicated public services, like education and health care, a little more understanding and thought is required when trying to impose market principles in these arenas. Some have argued in Colorado that allowing the market to distribute higher education is better than maintaining some public funding. But if we are going to talk about higher education in market terms, and consider privatizing our public universities, let’s understand how that market actually operates.
Suppose that you found you could buy a new car (we’ll call it the Buff) for $6,800, when other cars like the Pioneer and the Regis cost between $22,000 and $32,000. At first, you would probably think this Buff must be very low quality. But suppose objective, third-party research demonstrates that the Buff’s quality is in fact high, that it’s as good as or even better than most of the other cars on the market?
This is almost exactly the analogous situation with college costs: The University of Colorado and other state institutions offer a high quality education for one-quarter or less the tuition of local (and national) private institutions, and they produce this education at a much lower overall cost as well.
But wait, you say, this is not an “apples-to-apples” comparison – the state subsidizes public higher educational institutions to keep tuition down. Yes, it does, but due to Taxpayer’s Bill of Rights budget constraints over the past decade, higher education subsidies in Colorado have been slashed substantially, and are now only about $3,500 per CU student and in a similar range for other public institutions in the state. So, CU earns about $10,000 per student from the combination of tuition, the new college opportunity fund and the state’s direct contribution, and it educates students well and produces economically valuable research discoveries that benefit the entire state.
Approval of Referendum C means that higher education budget cuts should ease, at least for a few years, if a fair share of those funds actually flow to higher education, and hopefully tuition increases can also be moderated. So it’s a good time to take a reasoned look at higher education costs as we consider the direction and future of Colorado public higher education.
Since CU is Colorado’s largest state institution of higher education, let’s use it to consider the puzzle of how public institutions continue to provide a high-quality education at an operating cost far below their private competitors. This year, CU’s undergraduate annual tuition will be in a range from $4,400 to $6,800 (the higher figure including the new opportunity grant) for Colorado residents. How does the university charge a tuition that is less than 25 percent of the tuition charged at private colleges like the University of Denver, Colorado College and Regis University while still offering a education that’s considered as good or better by national ranking organizations like US News and World Report?
A decade ago, an important part of the answer to this puzzle was obvious: The state subsidized CU and other public institutions so that it could keep tuition low and affordable for in-state residents. That is the point of subsidized public higher education. But state higher education funding has been slashed. Direct state support now represents less than 10 percent of CU’s total budget and is also low at other state institutions.
Well, one might say that while private institutions have a high “sticker” price of tuition, many students get scholarships, loans and other support that reduce the gap between public and private tuitions. This is true to an extent, but it misses the point that CU also provides increasing amounts of aid for some of its students, both merit- and need-based.
Beyond that, CU and other state institutions actually spend less to educate the typical student than their private competitors, with administrative costs at CU running about 5 percent.
The other reasons CU, in particular, can compete so well in the emerging market for higher education are complicated. Part of it has to do with productive research activities that generate research grants from the federal government and private foundations. Much of this is focused on emerging science, technology and medical industries. This is part of why CU can argue that for every $1 in state subsidy, the economic activity generated by CU is $26 for the state of Colorado.
Another part of the answer, of course, is that CU Boulder, in particular, charges very high out-of-state tuition. About a third of undergraduates at Boulder are from other states, but these students pay about two-thirds of all undergraduate tuition. Other state public institutions also have a healthy reliance on out-of-state students that benefits Colorado residents as well.
Finally, CU generates some revenue from its endowment of more than $700 million endowment. That helps a little. But, private institutions tend to have the highest endowments, and the ones in Colorado have endowments, too. DU’s endowment of $200 million is about twice as large on a per student basis, as that of CU.
So, let’s review the evidence. Public universities like CU are supposed to be poorly managed public bureaucracies. High profile “management failures” have been highlighted over the past two years. Yet, we are asking them to survive with drastically reduced state support, and some politicians have questioned the need for tuition increases to replace lost state support. We are also asking them to continue to be accessible and affordable for state residents. And, so far, even with these constraints, CU has succeeded in surviving, and even thriving.
Advocates of privatization support their argument by suggesting that there is considerable fat and unnecessary bureaucracy in public universities, and that cuts and market-like incentives will force them to “get tough” and market efficient. But actually looking at the evidence suggests that this analysis is seriously flawed. In fact, most research on higher education confirms that by most economic measures, public institutions are consistently more efficient – in that they produce public knowledge and graduates at a much lower cost – than private institutions. And, although public university tuition in Colorado has gone up steeply in the last few years to try to offset state funding cuts, over the last 20 years the national increases in private tuition have exceeded the increases at public institutions. Furthermore, among public institutions across America, a January 2006 National Center for Higher Education Management Systems report placed Colorado’s state institutions third (behind only Utah and Massachusetts) in successful higher education outcomes per funding dollar.
Does Colorado really want to move further to privatize higher education? The approval of Referendum C hopefully will give us some time to pause and to consider more carefully the consequences of doing so. The evidence suggests that CU and other public institutions actually would compete very effectively in such an environment. But, given such flexibility, they would almost certainly raise their tuitions – there is a lot of room for increases below the current market price for private higher education. And, there’s a limit to how much public higher education can continue to reduce faculty, defer maintenance and not make capital investments. If we really want to distribute goods like higher education in the same way we do cars, we should be aware that markets tend to segment services – some folks will buy Mercedes at high-end prices, while many may be forced into higher education Pintos they can barely afford. Hopefully, with some help, CU and other colleges will be able to keep providing a high-quality product at a used-car price.
Paul Teske is a professor and Gabriel Kaplan is an assistant professor at the Graduate School of Public Affairs at
CU-Denver
