(Editor's note: This Current Comment is excerpted from a commentary published May 15, 2006, titled "State College Money Should Follow Students, Not Lobbyists," and is being offered today in light of a recent national report on college affordability.)
Universities like to blame tuition hikes on stagnant state funding, but that doesn't hold water, since tuition increased at double-digit rates even when state aid was rising. For example, from 1992 to 2001 the average tuition at four-year Michigan public universities rose 59 percent, more than double the inflation rate. During the same period, appropriations grew 46 percent.
Why do college costs rise so much faster than everything else, and what can be done about it? As with health care, to a large extent the culprit is third-party payers that insulate universities from the competitive forces that have increased productivity and lowered costs in other areas of the economy.
Colleges have little incentive to cut costs, so they don't try very hard to do so. Faculty members receive ever-higher salaries (up 50 percent in inflation-adjusted terms since 1980) and ever-lighter workloads.
The number of administrators, service and professional staff per student grows steadily in a process a House Fiscal Agency analyst described as the "development of an administrative ‘lattice.'" At the University of Michigan, Michigan State University and Wayne State, there was an average of one nonfaculty employee for every nine students in 1977. By 2002, the ratio had increased to one for every seven students.
Two things could be done to improve the situation. First, the Michigan Legislature should shift to a "foundation grant" system similar to K-12 education, where the money follows the student. Second, lawmakers should equalize state spending so this per-pupil grant is the same whichever university a student chooses.
Currently, each university's state funding is determined by what amounts to legislative mud-wrestling. The colleges send their lobbyists into the appropriations pit, and each battles for a bigger piece of the pie. Decades of this process have created a bizarre range of state appropriations per in-state student, from a low of $3,887 at Saginaw Valley State University to a high of $15,369 at U-M-Ann Arbor in fiscal 2003. With tuition added, the annual cost per student ranged from $8,268 at Saginaw Valley to $23,369 at U-M-Ann Arbor.
Here's a key point: A university gets its money whether it has more students or fewer. If appropriations were equalized on the basis of how many students attend each school (rather than which has the best lobbyist), every Michigan resident who attends a state university would bring the school about $6,300 in additional funding.
What effect would this have on university costs? In competing for students, schools would sharpen their pencils and seek to offer either lower prices, higher quality or both. For example, Central Michigan University might entice students with annual tuition of just $2,694 (its total cost minus the $6,300 state "foundation grant"). U-M, in contrast, could claim that it may cost more, but its graduates earn more.
Schools that failed to attract enough students to cover their costs could do what private-sector enterprises do in a similar situation: Cut costs, or go out of business.
Consumers benefit from such incentives in delightful ways. Why shouldn't universities similarly seek to delight students (and taxpayers) with outstanding values?
The foundation grant could be phased in over several years and have safeguards to prevent universities from "gaming the system" by admitting a raft of students who have little chance of graduating.
U-M, MSU and Wayne State will complain that they are different because their budgets include research projects and medical schools. Whatever system is used, such programs should be separated into separate budgets and judged on their own merits, rather than co-mingled with operations funding. The result will be greater transparency.
Incentives matter. Under the current system, universities' incentives to contain costs are weak. If the universities were subjected much more directly to competition, costs and tuition would rise much more slowly. They might even — take a deep breath — come down.
Jack McHugh is senior legislative analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the center are properly cited.