Overview of System
Higher Education
Financing in US
Robert K. Toutkoushian
June 4, 2013
My Background
 Professor of higher education at the Institute of
Higher Education, University of Georgia (US)
 Specialize in economics, finance, quantitative
research methods
 Worked as research analyst for U Minnesota, U
System of New Hampshire
 Consult with institutions and state governments on
finance-related issues in education
Overview of Presentation
 First presentation: overview of system higher
education financing in the United States



Philosophical issues in funding higher education
How does US society pay for higher education?
The role of data in examining funding policies
 Second presentation (tomorrow): overview of
institutional higher education funding in the US

Funding from the perspective of individual institutions
Philosophical Issues in Funding
 Higher education is a resource-dependent service
 Cost of higher education is paid by individuals
 Students / families pay through tuition and fees
 Other individuals pay for higher education through taxes that
are used by government to cover some portion of cost
 Question: Who should pay for this service?
 “Benefits received principle”: Each entity that
benefits from the service should pay a portion of the
cost equal to their benefit
Higher Education Pricing
 Economist Gordon Winston offered the following
description of pricing in higher education:
 Price = Cost – Subsidy
 Price = what students/families pay
 Cost = what institutions have to pay to provide services
 Subsidy = all non-student revenues (government, donors)
 Question: How large are higher education benefits for
students and society?
Private Benefits from Higher Education
 On average students / families personally benefit
when they acquire more education
 Financial (“market”) private benefits include:



Access to better jobs tied to degree attainment
Higher lifetime earnings, higher spousal earnings
Lower unemployment rates
 Non-financial (“non-market”) benefits may include:
 Greater understanding of the world
 Entertainment
 Social and personal development
Public Benefits from Higher Education
 Do others in society benefit when some individuals
go to college?
 Argument: If all benefits are private, then the cost
should not be subsidized
 Governments do not subsidize most of the goods and
services that individuals buy because the benefits are
solely private in nature
 In US, there is debate as to whether benefits from
higher education are mostly private or public
Arguments for Government Funding
 Goal of government: Raise quality of life of citizens
 Government may intervene in competitive markets when:

Service is a “public good” (non-excludable, non-rival)
 Examples: national defense, fireworks displays
 If we let others pay for it…creates the “free rider
problem”
 Government mandates that taxes be used to pay for
public goods
 Basic research at universities can be thought of as a
public good produced by higher education
Arguments for Government Funding
 Government may intervene in competitive markets when:

Service creates “spillover benefits” to others in society
 Examples: home improvements, education
 Positive benefits from education include higher standard
of living, lower crime, more active citizens
 Students only consider private benefits when making
education choices, and thus less education would be
produced than desired
 Government provides funding to change student
behavior (reduce price paid by student leads more to
choose education)
Estimates of Financial Benefit to Students from Pursuing a Bachelor’s
Degree in the United States, 2011 (US$)
Measure of Return
to Higher Education
Public Institutions
Private Institutions
Graduates
NonGraduates
All Students
Graduates
NonGraduates
All
Students
NPV (0%)
$1,246,937
$42,719
$842,040
$1,210,044
$34,868
$930,916
NPV (3%)
$523,571
$12,155
$352,651
$488,013
$4,198
$376,657
Ratio (0%)
18.85
3.64
17.98
12.33
2.45
12.69
Ratio (3%)
8.88
1.74
8.41
5.79
1.17
5.91
IROR (0%)
18.1%
5.7%
17.1%
13.7%
3.7%
13.7%
NPV (0%)
$1,621,370
$43,599
$1,096,526
$1,619,007
$48,081
$1,245,146
NPV (3%)
$658,898
$2,963
$444,886
$656,040
$7,180
$505,995
Ratio (0%)
13.07
2.25
12.88
12.84
2.58
13.17
Ratio (3%)
6.16
1.08
6.01
6.02
1.23
6.14
IROR (0%)
14.4%
3.4%
13.9%
14.1%
4.0%
14.1%
Private Return
Social Return
Notes: Values in parentheses denote assumed discount rate for time preference. NPV = net present value of discounted benefits
minus costs. Ratio = ratio of discounted benefits to costs. IROR = internal rate of return (non-discounted benefits and costs).
Calculations assume that the student is 18 years old and retires at age 65. Gross private benefits include the gain in post-tax
incomes over the person’s time in the labor market. Gross social benefits use pre-tax incomes in their calculations. Net benefits
subtract the average tuition and fees at 4-year public institutions less average grants and scholarships less government revenues
that are used for offsetting instructional costs. It is assumed that the student works part-time during college and earns 10% of the
income that could be earned if working full-time.
Forms of Government Funding in US
 In US, state governments have primary responsibility
for managing higher education systems
 Federal (national) government


Funding to students based on financial need – 50%
Funding to institutions for research – 50%
 State (regional) government
 Funding to institutions for operations (“block grant”) -- 90%
[Funding leads to lower prices]
 Funding to students based on need (“need”) – 5%
 Funding to students based on performance (“merit”) – 5%
Effect of State Government Funding on Price
Price
State Government
Appropriations
Nonresidents pay
PNR
Residents from
state pay lower
price PR
Supply
Subsidy only used
to lower price for
state residents
PNR
PR
Demand
ENR
Tuition
Revenue
E
Enrollments (E)
Higher Education Funding
States in the US use a variety of approaches to
determining how much funding to provide higher
education institutions:
Formula to meet planned expenditures (Georgia)
2. Formula to keep pace with peer institutions
3. Formula to reward institutional performance
4. No formula – Funding levels determined through
political process each year
1.
Example of Expenditure Approach
Assumptions in funding formula:
1. Institutions need one faculty member for every 800 credit hours taught
2. Target faculty salary = $70,000/faculty member
Cost is affected by (a) assumed ratio of credit hours to faculty, and (b) target
faculty salary
Funding is based on number of faculty positions needed, providing the
government with some oversight on expenditures
Illustration of Peer Funding Model
Peers
A
B
C
D
E
F
G
H
I
J
Suppose that a public institution
has 20,000 students and
charges $10,000 tuition
Tuition + State Funding / Student
$20,000
$19,000
$18,000
$17,000
$16,000
$15,000
$14,500
$14,000
$13,500
$13,000
Ten peer institutions (A through
J) from other states are chosen
Values show revenue from
tuition and state funding per
student
Target
$/Student for
Total
State Funding
Percentile
Target
Revenue Tuition Funding
Needed
50th =
$15,500 $310,000,000 $200,000,000 $110,000,000
th
75 =
$17,750 $355,000,000 $200,000,000 $155,000,000
Total revenue needed to
reach target (20,000
students x target
revenue/student)
Tuition funding
(20,000 students x
tuition rate)
State funding needed to
reach target after subtracting
tuition revenue
Performance Funding in the US
 About half of states have experimented with




performance-based funding in US
Most have allocated only a small percentage of
funding (exception: Tennessee)
Georgia is moving to performance-based funding
Challenge: How to identify appropriate measures of
performance
Challenge: When funding is small percentage, may
not provide much incentive for change
Example of Performance Funding:
University of Tennessee Knoxville
Outcomes Model Summary - UTK
Outcome
Students Accumulating 24 hrs
(Scale=1)
Students Accumulating 48 hrs
(Scale=1)
Students Accumulating 72 hrs
(Scale=1)
Bachelors and Associates
(Scale=1)
Masters/Ed Specialist Degrees
(Scale=0.3)
Doctoral / Law Degrees
(Scale=.05)
Research and Service
(Scale=20,000)
Transfers Out with 12 hrs
(Scale=1)
Degrees per 100 FTE
(Scale=.02)
Six-Year Graduation Rate
(Scale=.04)
Data
Scaled Data
4,477
4,477
4,671
4,671
4,673
4,673
3,742
3,742
1,534
5,112
403
8,053
$118.8M
5,938
794
794
17
831
64%
1,612
Total Weighted Outcomes
3,933
Avg SREB
Salary
89,643
=
Subtotal
352,557,624
M&O, Utilities
Equipment
Performance Funding
+
+
+
74,135,800
17,876,600
21,992,400
For Illustration
Purposes Only
x
Grand Total Calculation
Tennessee Higher Education Commission
Weight
2%
3%
5%
15%
15%
10%
15%
5%
10%
20%
Total
Weighted
Outcome
90
140
234
561
767
805
891
40
83
322
3,933
466,562,424
17
Role of Data in Financial Analysis
 Crucial to collect data on regular basis about higher




education finance issues
US government requires institutions to submit
specific financial data annually
Also many private entities collect & disseminate data
Data are made available via reports (Digest of
Education Statistics) and databases (IPEDS)
Enables tracking of trends, comparing institutions,
making projections, testing hypotheses, conducting
simulations
Revenues/Student for Public Colleges, 2010-11 (US$)
Revenue Category
All Levels
4-Year Public
2-Year Public
Net Tuition and Fees
$5,884 (19%)
$8,302 (19%)
$2,253 (16%)
Grants and Contracts
$4,580 (15%)
$6,935 (16%)
$1,044 (7%)
State Funding
$6,155 (20%)
$7,970 (18%)
$3,430 (24%)
Auxiliary Revenues
$2,306 (7%)
$3,500 (8%)
$513 (4%)
All Other Revenues
$12,702 (40%)
$16,568 (38%)
$6,900 (49%)
$31,627
$43,275
$14,140
Total
• Average cost of education at 4-year public institutions is over $43,000 (US$)
• On average, students in the US who attend 4-year public institutions pay about
20% of total cost
Source: National Center for Education Statistics, Digest of Education Statistics 2012.
Rising Price of
Attending
College
Observations:
1. Average tuition rates in public
and private not-for-profit
institutions have tripled since
1980-81 (even after adjusting
for inflation)
2. Tuition rate increases have
almost always exceeded
inflation by several
percentage points
Comparisons of State Funding
Selected
States
Wyoming
Funding per
State Funding $1,000 US in Funding
in FY12 (US$)
Personal
per Capita
Income
National
Rank
337,988,717
12.47
595.73
1st
North Carolina
3,914,552,032
11.25
405.61
4
Georgia
2,635,156,774
7.47
268.55
16
739,612,189
6.31
257.67
20
1,283,690,000
5.38
240.06
25
181,016,376
4.98
219.79
30
Virginia
1,624,026,722
4.36
200.39
35
Nevada
473,148,326
4.69
173.95
40
82,697,778
1.36
62.75
72,098,316,370
5.60
231.85
Kansas
Minnesota
South Dakota
New
Hampshire
Totals
50th
$72 billion (US)
spent by state
governments on
higher education
Large variation
across states:
high = $595/person
low = $63/person
avg = $231/person
Source: Grapevine
(research center at
Illinois State Univ.)
Conclusions
 Much debate about the “right” share of costs that
should be borne by students and governments



Student benefits are sizable and more readily estimated
Societal benefits are difficult to measure
Some elected officials contend government share is too high,
education advocates contend government share is too low
 Important to understand that it takes resources to
provide higher education services


Someone has to pay the cost of the service
Ultimately, citizens pay the cost either directly or indirectly
Conclusions
 Data are an essential tool in analyzing education
financial issues of interest to policymakers
 Data in US show that:



Students pay only a fraction of the cost
Student share of costs paid is rising
Large differences in financial support by state governments
 To examine these are other questions, need to
implement a system to collect higher education data
on a regular basis and disseminate the data widely
Contact Information
 Email: rtoutkou at uga.edu
 Institute of Higher Education
 University of Georgia
 Athens, GA 30602 USA
Instructions for Small Groups
 Spend next period in small groups discussing
selected questions and issues related in some way to
higher education finance
 Can use topics listed on next slide or your own topics
 Appoint someone to keep notes on main
observations, and someone to report back to the
larger group after the break
 Goal: Provide larger group with wider perspectives
on issues facing southeastern European higher
education systems
Possible Topics for Small Groups
 How do southeastern European nations compare to




the US in system-level higher education financing?
How can HEISEE examine higher education finance
issues in the region?
How might the integration of Croatia into the
European Union affect its higher education system?
What concerns exist in Croatia about the move to
performance-based funding for higher education?
How can Croatia and other nations in the region
provide adequate support for research?