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Overview of Institutional Higher Education Financing in US. Robert K. Toutkoushian June 5, 2013. Overview of Presentation. First presentation (yesterday): overview of system higher education financing in the United States
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Overview of Institutional Higher Education Financing in US Robert K. Toutkoushian June 5, 2013
Overview of Presentation • First presentation (yesterday): overview of system higher education financing in the United States • Second presentation: overview of institutional higher education funding in the US • Funding from the perspective of individual institutions • Where do institutions get their money? • How do institutions spend their money? • How do institutions manage financial issues?
Depiction of Funding Sources Total Revenues Government Private Donations Other Funding Students Non-Students
Where Do Colleges Get Their Money? • Tuition and fees from students • Tuition varies dramatically for public and private institutions • Tuition at public institutions varies by residency status • State governments (appropriations) • Funding has generally kept pace with inflation, but not costs • Federal governments (research) • Private donations • Revenues from auxiliary enterprises • Endowment
Example: University of Georgia UGA Fact Book revenue by source in 2011-12 (US$) • Revenues from state = $364 million • Tuition and fees = $387 million • Federal appropriations = $ 12 million • Gifts, grants and contracts = $273 million • Special federal funding = $ 14 million • Auxiliary enterprises = $161 million • Endowment = $ 1 million • Sales, Services, Misc. = $140 million Total revenues = $1.33 billion
Changes in UGA Revenue Shares Source: UGA Fact Book 2012 • State funding has declined as a share of total revenues • Tuition and fees have increased as a share of total revenues
Seeking Out Revenues Observations on revenue streams: • State funding is beyond direct control of institution (but can lobby govt, meet performance incentives) • More emphasis on increasing grants and contracts (especially for research-oriented institutions) • More emphasis on raising donations & endowments • Incentives to become more entrepreneurial • Offer special programs to raise revenues • Partner with industry to provide services and generate revenues
The Pricing of Education Services Tuition as a revenue source is a bit more nuanced: • Varied authority to set tuition (state, system, HEI) • Students charged “tuition” and “fees” • Pricing constrained by demand & competitors • Institutions reduce net price paid by some students by offering financial aid (“tuition discounting”) • Need: Aid based on ability to pay • Merit: Aid based on academic performance • Other: Aid based on other attributes (ex., band, athletics)
Institutional Pricing/Aid Goals • Increase enrollments • Entice more students to enroll at the institution • Increase net tuition revenue • Change mix of students • Provide more aid to desired students • Raise prestige • Prestige affected by profile of entering class • Provide more funding to high-ability students
Types of Costs in Higher Education • Instruction – Salaries and benefits for faculty • Research -- Externally-funded research projects • Public Service – Service to community, state, nation • Academic Support – Expenses that support the academic mission (library, information technology) • Student Services – Expenses that contribute to students outside of instruction (student activities) • Institutional Support –Administration • Other Expenses
Example: UGA The UGA Fact Book shows the following expenditure information for UGA in 2011-12: • Instruction = $249 million • Research = $318 million • Public Service = $155 million • Academic Support = $ 94 million • Student Services = $ 45 million • Institutional Support = $ 68 million • Auxiliary Enterprises = $153 million • Scholarships = $130 million • Physical Plant = $113 million Total = $1.33 billion
Expenditures/Student, Public HEIs 2010-11 (US$) Source: NCES, Digest of Education Statistics 2012
Budgeting Approaches in US • How do HEIs in the US allocate revenues and expenses to academic and administrative units? • Two main approaches: • Line Item Budgeting • Responsibility Centered Management
Line Item Budgeting • Administration makes decisions on how much to increase or decrease each line item in the budget • Often based on average pool of additional revenues • If institution has 3% more revenues than last year to distribute, then average line item increase is 3%. • Advantage: Easy to implement and understand • Disadvantage: Does not provide incentive to cut back expenses or bring in more revenues • May continue funding “unprofitable” activities at HEI • Not clear how funding decisions are made (politics, performance?)
Cross Subsidization Considerable cross-subsidization within HEIs: • Undergraduate students subsidize graduate • Low-cost majors subsidize high-cost majors • Academic units subsidize non-academic units that do not generate sufficient revenue to cover costs (e.g., administration) • Teaching subsidizes research and public service
Responsibility Centered Management (RCM) An alternative to line item budgeting is “RCM” • Institution is divided into “responsibility centers” or “RCs” (ex., collegiate units within HEI) • Revenues are distributed to RCs based on formulas: • Revenue per student (credit hours), research • Each RC has to ensure that it has enough revenues to cover their expenditures • May impose a “tax” to pay for HEI administration • Provides incentive to cut expenses, attract funding
Illustration of RCM Model w/Tax • Institution has $40 million in administrative costs, total budget $200 million • In RCM, distribute all revenues, then tax units to pay for administration • Administrative tax = ($2,000) x (Enroll)
Observations on RCM Budgeting • Good aspects: • Makes HEI finances more transparent (can see how funding decisions are made) • Puts decision making power closer to academic departments • Provides an incentive for academic units to cut costs • Provides an incentive to enroll and retain more students • Bad aspects: • Raises concerns about “internal competition” for students • Administrative tax can be unpopular on campus • Limited RC power to raise revenues (e.g., cannot set tuition)
Data on HEI Finances • Important to develop capacity to collect data on HEI revenues and expenditures • HEIs in the US required by national government to submit data annually • Data can be used by policy makers to study higher education industry • Data can also be used by HEIs for comparisons, examine time trends, make projections
Trends in Numbers of SAT Test Scores Sent to USNH Campuses, 1980 to 2007 Notes: Data obtained from College Board, New Hampshire College-Bound Seniors, annual reports 1980-2007. Data show that despite increases in number of SAT submissions to UNH, the share of SAT submissions to UNH was falling
Projected Demand for UNH Data show falling enrollment projections due to fewer high school graduates
Conclusions • HEIs need revenues to enhance reputation and prestige – “arms race” in academia • HEIs focus on specific revenue streams • Less control over funding from state government • Declining state funding has increased pressure to raise funding from other sources (students, grants, donations) • New budgeting model (RCM) has promise for higher education institutions • Data are needed to conduct policy analysis in higher education at both aggregate and institution levels
Suggested Small Group Topics • How do Croatian HEIs get their revenues? Which are growing and declining in importance? • How do the budgeting models in Croatian HEIs compare to those in the US? • How prevalent is tuition discounting in Croatia? How does it compare to the US? • What systems are in place to collect data on revenues, expenditures, and enrollments for HEIs in Croatia and the region?