Fixing the Broken Financing Model

In the title of a recent paper, David Breneman, a regarded higher education economist, asks: “Is the Business Model of Higher Education Broken?” While he objectively weighs the pros and cons of his question, we answer emphatically, yes!

Put simply, the way in which America finances public colleges and universities, which serve over 70 percent of college students nationally, is severely and irreparably broken and needs to be changed. Without a new model, public higher education will fail its principal purpose of providing broad college opportunity, especially to low- and middle-income students and an emerging population of new Americans. Moreover, without a new funding rationale that has transparency and predictability for all funding partners, these colleges will lose the public trust – a critical element in sustaining the American democratic experience through education.

Public colleges can achieve the dual goals of public and private benefits only by demonstrating equity and fairness regarding who goes to college; legitimacy for who pays and how; and responsibility for how colleges account for educational outcomes and sustaining the public trust.

The solution as we see it should include a new public service corporation model that creates private partnerships; produces new revenue to replace lost public financing; protects and enhances the core educational enterprise; and, thereby, generates greater transparency, accountability and public trust that will support a sustained investment in public colleges.

The Problem

There is widespread evidence, in addition to opinion, that the longstanding model for financing public colleges that has seemed to work so well in many states for decades, now seems, even with an expected economic recovery, to need radical change. (See the soon-to-be-published “A New Model of Financing Public Colleges and Universities,” in On the Horizon.) Comprehensive regional public colleges and universities have been financed principally by state governments and tuition revenue, with a significant amount of funding supplementing these two main revenue sources through state and federal student financial aid.

But it is no longer a viable policy to assume that many states can sustain being the principal funding source for public colleges and universities. Neither can we expect to sustain public colleges by continuing to shift the cost of the enterprise to students and families, thereby pricing many out of college, or alternatively leaving citizens with loan repayment burdens far into the future. While state appropriations as a share of total government spending have decreased steadily for nearly two decades, tuition at public colleges has increased by over 300 percent during the same period. In New Jersey, for example, state funding accounts for only about 30 percent of total public college spending in 2010, down from 60 percent nearly 20 years ago.

National studies project that state revenues are not likely to recover until 2014 or 2015, largely because of entrenched unemployment. Few states are as bad off as California, Illinois, New Jersey, and New York, ranked among states in the worst financial position for many years, with their long-term debt commitments outpacing new revenue. Moreover, states’ structural budget problems virtually guarantee disinvestment in higher education as this is likely to remain a discretionary budget item for the long term. Those who desperately want to find a new model for shared responsibility for public college finance will be poorly served by the continuing misperception by others that higher education can be fixed as a whole or fixed by first changing traditional “academic culture.”

We must recognize that there are many different types of higher education enterprises, that student and service markets are mature and well-defined, and are local and regional, not national in scope. Accordingly, seeking a unified theory for financing public higher education will be unproductive. Instead, different models for financing these enterprises and their accountability which fit different types of institutions serving different types of students, will lead to more effective policy and educational outcomes.

A Possible Answer: Public Service Corporations

We propose, as a long-term strategy to remedy the problems of diminishing state financial support, that comprehensive public colleges and universities should create public service corporations as a new important means of realigning shared financial responsibility. This will help address the thorny matter of continuing ineffective regulatory intrusion, and help to increase incentives to create new revenue streams to reduce the burden on tuition to replace lost state funds.

“Public service corporations” — that is, corporations created to perform a civic function — are familiar to readers of Reinventing Government, which referred to them as “quasi-public or private corporations.” Applying this concept to public higher education might sound like a daring new idea, but institutions based on this model already exist and are succeeding in some states; for examples, note Oregon Health Sciences University and charter colleges such as St. Mary’s College of Maryland. They are publicly owned organizations that are independently governed by their own boards of directors. While they are free from most state controls, as a rule they are evaluated by the state and must meet certain state-set audit performance goals.

The new public service corporations, foreseen by practitioners such as the former Maine Chancellor Terrence MacTaggart and Dave Frohnmayer, former president of the University of Oregon, would complement traditional institutional governance structures (boards of trustees). Allowing institutions to create autonomous public-private service corporations would help colleges acquire, lease, sell, and manage goods and services and real property; provide means of entering into agreements with private corporations by pledging college assets; and receive services related to purchasing, construction, risk management and other required financial services.

While freeing public colleges from arcane state “command and control” mechanisms for purchasing, contracts and construction, the new corporations can provide an appropriate level of public accountability. New Jersey’s comprehensive public colleges and universities are well on their way to achieving these objectives independently and through several pieces of legislation recently implemented and others currently under consideration.

Public service corporations affiliated with the institutions should not be confused with current auxiliary corporations or university foundations, or seen as simply the next step in “privatization” of public colleges. Generally, they are formed for the public purpose of promoting the public welfare of the people of their state by enhancing excellent, affordable, accessible, and accountable public higher education — although not necessarily delivering that education.

Characteristics

We propose a new conception — and a new level of autonomy — for public service corporations that support public higher education. We suggest that public service corporations can stand alongside public colleges and universities and their boards of trustees. Rather than confusing or adding on top of traditional academic governance structures, public service corporations would provide greater transparency, and focus on non-education-related business. Traditional governance structures would remain in control of the institution’s academic operations. These new organizations need to be created to achieve, in short order, a new financial model, instead of doing so incrementally.

The public service corporation should have the following powers and protections:

• the authority to enter contracts for goods and services;
• the authority to enter contracts for construction, and to finance and oversee capital projects to allow it to maintain the institution’s physical plant;
• the authority to raise revenue for the institution, including through grants, appropriations, rents, income, profits from investments, securitization of assets, and proceeds from the sale of revenue bonds, which it must have the authority to issue;
• exemption from federal and state taxes, and from antitrust law. Both of these exemptions are important for the public service corporation to be able to enter joint ventures or other business alliances or partnerships with private businesses; and
• entitlement of its directors to representation and indemnification from a state’s tort claims fund for judgments entered against them for actions taken in the course of performance of their statutory responsibilities.

Under our reconceptualized notion of the public service corporation, accountability can be achieved within or outside of a traditional higher education system or centralized coordinating body. Instead, the board of trustees of the institution itself can devise and measure the performance goals for public service corporations entrusted with helping the institution achieve its mission and serve the citizens of its state.

The purpose of the public service corporation that we envision is to supplement, not supplant, the role of traditional trustee governing boards. Beyond enhancing administrative flexibility and new revenue possibilities, the public service corporation should provide even greater transparency for new unrelated business income, thereby helping to protect and enhance the core educational enterprise.

The public service corporation should not only provide for greater flexibility and financial accountability, by helping to free institutions from government regulation that inhibits progress, but also provide the impetus for greater institutional accountability regarding the educational product. Public service corporations can make clearer where revenue comes from, and what it pays for. Forms of successful public service corporation entities abound at public and private research universities, for example, those related to research institutes and health science centers, which explicitly bifurcate education from research and health care functions. However, such enterprises are less well-developed at comprehensive public colleges, still largely controlled by state regulation, or system offices.

The public service corporation, in itself, cannot guarantee financial or educational success of public colleges. But it is emerging as a solution as public institutions face growing pressure to achieve, simultaneously, the goals of access, affordability and service. If such new organizations are created to play a larger role in shared responsibilities for financing public colleges, it will be critically important for the publics that they serve to understand their function, and support the value that they add.

In summary, the benefits of a new model for financing public colleges, one that adds public service corporations, include the ability to:

• Focus squarely on the core business of public institutions – that is, serving the public good and the educational needs of 21st century students.
• Promote institutional support that is student- and mission-focused, based on recognition that different types of institutions serve different types of students, in different parts of the country, given the unique role of public colleges in America.
• Create new, explicit and viable public-private partnerships that help to replace the failing existing model to sustain the core educational business.
• Focus creatively on operating non-educational business-related functions as stand-alone revenue-generating enterprises, not only to enhance revenue, service innovation and entrepreneurialism, but to build new partnerships that promote educational mission, educational productivity, quality and public service.
• Provide predictability and equity for all partners, while engaging and promoting accountability, transparency, and public trust as an important outcome measure for the investment.
• Provide for continuous assessment and strategic alignment of resources and educational priorities within the context of mission and broader regional, state, and national needs in an environment of global providers, thereby helping to keep American public colleges global leaders.

This relationship between the institutional governing board, our citizens, and the public service corporation is essential to ensure that public colleges are accountable for serving the public interest of 21st-century public higher education.