Reframing the Discussion about Tuition Increases: Some Insider Perspectives By Katherine Johnston, Nancy Suttenfield and Bethany

Piersol Commentaries on tuition increases at Americas colleges and universities frequently appear in the media with attention grabbing headlines, using words like skyrocketing, dramatic, and runaway, that cause great alarm to parents, students, elected officials, and the public. As a result, the belief that college has become prohibitively expensive is shared across class and race lines, among Americans of all levels, by those who went to college and those who didnt, according to an article published by Karin Fischer in the May 15, 2011 Chronicle of Higher Education. As parents write their fall tuition checks, we offer some unemotional explanations (not excuses, defenses, or accusations) to de-mystify some key reasons for tuition increases. Our analysis, based on our combined 60 years of managing university budgets -- in both public and private universities -- excludes charges for other non-instructional expenses like housing, food, recreation, and athletics. To begin, tuition is the cost to student or parent. The full cost of delivering education is actually more than the tuition because state appropriations, endowment income, fund-raising and/or other miscellaneous revenues also pay a share of the cost. Few answers have been provided to the publics legitimate questions about why tuition continues to increase more rapidly than the cost of other services, and, more importantly, household income. Lets reframe the discussion using plain talk and facts. Most observers compare increases in tuition with the Consumers Price Index (CPI), which has increased by an average of 2.7 percent annually from 2001 to 2011. According to the College Board, tuition and fees at public four-year colleges and universities increased by an additional 5.6 percent per year, on average, over the general inflation rate for the period. So, why are tuition increases averaging 8.3 percent, or more than triple general inflation? First, university expense budgets are different from a household budget. The CPI measures price changes for typical goods and services purchased by urban households, including food, gasoline, fuel oil, electricity, medical care, housing, and transportation. Households spend most of their budget (63 percent) on housing, food, and transportation. While universities purchase some of these same goods and services, a university budget includes expenses for the delivery of education such as faculty, administrative, clerical and service employee salaries; health care premiums and retirement contributions; laboratory equipment; library books; utilities, and maintenance of heavily used facilities. Typically, a university spends around 70 percent of its budget on salaries, wages and fringe benefits for faculty and staff. Another major driver of costs over the last 20 years is related to the explosion in the need for hardware and software technology for instructional and administrative uses.

Second, public and private education institutions alike have experienced significant reductions in other income over the last ten years. In 2009-10, government appropriations a primary source for state colleges and universities -- were 19 percent less on an inflation-adjusted per full-time equivalent student basis than a decade ago. In a no tax increase environment, higher education now competes to a greater extent with other high priority public programs such as safety, Medicaid and other services. Thus, a larger share of the college budget has been gradually shifted from governments (i.e., taxpayers) to tuition payers. A primary source of revenue for private universities investment income has also decreased considerably. Similar to the average investor, declines in the market have significantly affected both the value of university portfolios as well as earnings. And, while endowment values have rebounded in 2010 and 2011, tuition increases were required to offset declines during the down years. Third, universities lack much of the flexibility to reduce costs that is found in other industries. In the commercial world, when market demand and revenue weaken during a recession, management reduces labor costs. Why dont universities do the same? One answer is that demand does not necessarily decrease in fact, enrollments generally increase in times of economic recession. In the ten-year period from 1998 to 2008, enrollments in colleges and universities across the country increased by 32 percent (Chronicle of Higher Education). And from 2006, before the financial collapse that caused the recession, to 2010, enrollments grew from 1.9 million to 2.1 million, an increase of 6.8 percent (National Clearinghouse Research Center). Fourth, over the past 20 years, new laws and regulations added requirements known as unfunded mandates. These mandates often have good intentions, such as requirements to protect student health records, increase campus safety and accessibility for disabled people, and add homeland security measures. But, there are often significant compliance costs (and, many have significant technology components) associated with these mandates, and their cost reaches into parents pocketbooks. Fifth, universities have been affected by the same increases in health insurance premiums and utility expenses as the average American household and other industries. Between the years 1999 and 2009, average health insurance premiums increased by 131 percent (based on a survey conducted by Kaiser Family Foundation and the Health Research and Educational Trust). And, since compensation represents a large expense to universities and, like other employers, on average pay 74 percent of the cost of health insurance (San Francisco Chronicle), the impact on the university compensation budget exceeds general inflation. And, finally, ensuring sufficient pools of financial aid for students who demonstrate need presents a significant challenge for colleges and universities. About 79 percent of first-time, fulltime undergraduates received financial aid in the 2008-9 year, up from 76 percent in 2007-08 and 73 percent in 2006-07. As the high unemployment rate continues, more students and parents must depend on grants and loans to cover educational costs. When grants and loans are not enough to cover the cost, institutions discount the tuition price. Not providing this assistance would preclude multitudes of students from attending college. The downside, however, is that net income to support instructional expenses is reduced unless tuition is nudged up a little more for those students who receive no financial aid.

Can colleges and universities, like corporations, reduce expenses when their income erodes instead of increase their prices? Most definitely. However, consider the primary distinctions between corporations and universities. A business has a primary goal, simply put, to make money. The universitys primary goal is to produce and disseminate knowledge for the good of our society. Corporations usually invest in talented analytical staff whose responsibility is to improve the efficiency of operations for increased shareholder return regardless of the economic climate. Since universities do not have a profit motive, their approach is aimed at protecting the academic programs from under investment and pruning activities that are not core to providing education, research and public service. Ultimately, colleges must assure that expenses that are essential to the delivery of instruction, including related unfunded mandates, are covered. A more important question to consider is do students and parents get a reasonable return on their tuition investment? If the measure is strictly financial, the answer is a resounding yes. In a report issued by Georgetown University in May 2011, a full-time worker with a Bachelors degree can expect to earn 84 percent more over a lifetime than a worker with only a high school diploma. Robert B. Archibald and David H. Feldman subsequently concluded in a June 2011 article in Inside Higher Education that in 2010 less than 18 percent of college graduates between the ages of 25 and 40 earned less than the median income of people in the same age range whose education stopped with a high school degree compared to 28 percent in 1980. In our experience, university boards and senior administrators do not make pricing decisions lightly. At the end of the day, even with new mandates and other expense categories that rise at above average inflation rates, our leaders press for innovation and quality improvement to assure that the overall university experience is the best possible for the dollar. Two of the authors, Johnston and Suttenfield, are former university CFOs (University of North Carolina-Chapel Hill, Wake Forest University, Georgia State University, the Academic Health Center of the University of Minnesota-Twin Cities) and with Piersol serve as principals of the Auxilium Group LLC, a small consulting firm that assists colleges and universities with financial planning and budget analysis.