Privatizing for the Public Good?

Higher education is still being shaped by the economic downturn of 2001-2002, when state appropriations to public universities fell markedly. In response, some colleges pushed for greater autonomy, especially freedom to raise tuition and fees.

This process—sometimes called privatization—may well resume during the current recession. In the state of Washington, for example, where the government faces a $2.8 billion shortfall, lawmakers are considering a bill that would largely sever tuition from state control. In New York state, the legislature may give the entire state university system freedom to raise tuition and keep the proceeds rather than return them to the state.

Such potential shifts of control occur against the backdrop of a long-term trend in which state appropriations have become a smaller portion of the revenues of public universities, especially at flagship colleges. In 1991, state and local appropriations represented 72 percent of public universities’ total revenues; in 2008, that number had fallen to 64 percent. The actual appropriations aren’t appreciably lower, even when measured in real terms per full-time student. They fluctuate, but real appropriations in 2008 were similar to what they were in 1983. Rather, tuition, federal grants, and private gifts have increased disproportionately.

One of the most dramatic changes in the relationship between universities and the state occurred in Virginia. After a protracted legislative debate that ended in 2005, all of Virginia’s public colleges achieved more managerial autonomy. They gained freedom in purchasing and disposing of property, issuing bonds without state approval, and setting information technology and human relations policies.

But the biggest prize in this tumultuous legislative battle was freedom for the state’s leading schools to set their own tuition, within limits. Tuition is important because, unlike a lot of state appropriations, it is cash that comes without strings attached. A mere $200 increase in tuition at a campus with 25,000 students brings in $5 million that can be used for nearly any purpose.

Colette Sheehy, vice president for management and budget for the University of Virginia, described the results of the Virginia legislative process: “We are clearly a public institution, and we know we are,” she explained to a higher education think tank. “We do not want to be private. But we do have a desire to be the best public university we can be, and that takes resources.” Although all of Virginia’s public colleges and universities became eligible for greater autonomy, the University of Virginia, Virginia Tech, William and Mary, and Virginia Commonwealth have the greatest level of freedom.

In addition to freedom to set tuition (which, some observers argue, the schools may, ironically, have had already), Virginia’s flagships have another valuable freedom. They can bring in many out-of-state students, who pay higher tuition. Nonresident tuition at U. Va. is $31,870, compared with $9,870 for in-staters.

The value of these students is not just the money that they pay. Because the university can draw students from the entire country, it can select the cream (especially by using merit scholarships as bargaining tools), and a select student body raises a university’s standing in critical rankings such as those of U.S. News and World Report. About 38 percent of the students at the University of Virginia are from out-of-state, with figures for other leading Virginia schools ranging from 29 to 37 percent. (In contrast, the North Carolina legislature limits out-of-state students at the University of North Carolina at Chapel Hill to 18 percent of the student body.)

Another university affected by the 2001-02 recession was the University of Michigan at Ann Arbor. It has been effectively privatized, though not by design. Over the past fifty years, state support dropped from 78 percent of the university’s total revenue to 23 percent. Recent economic woes in the state led to significant declines in state appropriations. Today, the university receives $327 million from the state—about $100 million less than it received in 2002, in inflation-adjusted terms.

Despite “fighting the appropriations cuts kicking and screaming,” as James Hohman of the Mackinac Center for Public Policy in Michigan said in an interview, the university has prospered. Michigan’s overall standing in the U. S. News and World Report’s rankings has remained high, as have its revenues. It is considered one of the top public universities in the nation.

Michigan has no pre-set limits on the number of out-of-state students it accepts, who pay $34,937 in tuition and fees per year, compared with $11,689 for in-state students.  Approximately 34 percent of its students come from outside the state. In addition, as state support has declined, the university has taken greater advantage of private revenue sources, especially for its hospital and science centers.

Other schools, too, pushed for more control over their affairs after the 2001-02 recession. The University of Florida and Florida State University—Florida’s flagship schools—negotiated freedom from line-item budgeting by the state legislature. But that was just the beginning of political turmoil that pitted the state legislature against the leading universities. Today, several of the state’s public universities have some freedom to set their tuition differentially.

Universities in Texas and North Dakota, too, gained independence to set their own tuition rates, as long as they met accountability mandates from their states. In South Carolina, Governor Mark Sanford offered public universities in South Carolina complete freedom in return for dropping direct state appropriations, but they didn’t act on it.

Not all schools have had a good experience with tuition flexibility. In 2004, administrators at Miami University of Ohio instituted a novel plan that charged both resident and non-resident students the same tuition. Roger Howe, chair of the board of trustees at the time, called it “ground-breaking.” The goal seems to have been to allow the school to grant more merit and need-based scholarships to in-state students—rewarding some but not others. Thus, the school would receive more tuition than previously from in-state students who were able to pay but not sufficiently qualified to warrant large scholarships.

As described in a 2003 university news release, it worked this way: Miami would grant a $5,000 scholarship to all in-state students, holding out the possibility of additional scholarships for some. “Larger scholarships will go to students who come from moderate-income families, show high ability or plan to major in areas of high state need,” the release said. But the number of in-state applicants dropped, and the school discarded the plan four years later. Miami currently charges in-state students $11,442 for tuition and fees and $26,202 for out-of-state students, according to the school’s website.

On a small scale, but perhaps in the long run more permanently, some colleges in Maryland and Massachusetts have received sweeping freedoms to improve quality and lower costs. Maryland’s St. Mary’s College obtained that freedom in 1992, setting an example for the Massachusetts College of Art and Design, which won the ability to set tuition, enrollment goals, and admissions standards in 2004. In 2009, Katherine Sloan, president of the school, wrote a glowing description of the first five-year results. Her article in the New England Board of Higher Education magazine reported higher enrollment, increases in faculty, new programs, and more private support. This “new partnership” she said, “ reveals a record of success.” (The Massachusetts Maritime Academy has a similar relationship with the state of Massachusetts.)

The move toward greater autonomy is often called privatization—but that term arouses suspicion among some higher education experts, especially because it implies higher tuition rates. In an interview with the Pope Center, Patrick M. Callan, president of the National Center for Public Policy and Higher Education in California, expressed concern that without appropriate measures, greater autonomy could result in universities’ shirking their commitments to providing access. Others argue that such a trend violates the original mission of public land-grant universities, which were authorized by the Morrill Land-Grant Act of 1862—a law designed to offer higher education to many Americans at relatively low cost.

 But just as there is a diverse array of colleges and universities—even public ones—across the country, there are likely to be different financing models to support them. While privatization is not a model for every school, it can lead universities to shed heavy government restraints, reduce costs, and perhaps win more revenues. Although the 2001-2002 recession was a painful experience, in some cases it brought clouds with a silver lining.