Will public universities privatize?

Published 11:08 pm Wednesday, August 26, 2015

Many government services have been privatized over the past forty years, from whole enterprises like British Airways to simply contracting with private businesses for services like trash collection and operating cafeterias. My corner of the world, public universities, has witnessed only service privatization, but this may change. And in contrast with cases where conservative politicians have driven privatization, I suspect that a public university will decide to go private.
Declining state appropriations for higher education represents the driving factor here. Speculation by higher education observers centers on three leading state universities, Michigan, Virginia, and Colorado, which currently receive 10% or less of their operating budgets from state appropriations. (To be clear, none of these universities have privatization plans today.) A university receiving 10% of its budget from the state would only have to cut costs by 5% and increase other revenues by 5% one time to take state funding to zero. I suspect that administrators can imagine how they might make such cuts and revenue increases.
State appropriations to higher education have been falling as a share of government spending and university budgets for 50 years. For instance, the University of Michigan received 80% of its budget from the state in the 1950s. State appropriations fell from 46% to 36% of public university budgets nationally between 1977 and 1996. Appropriations have declined another 16% nationally since 2008 (25% here in Alabama), according to data from Illinois State University. State appropriations now provide less than 20% of the budgets of Troy University and the University of Alabama.
Universities remain under state control despite diminishing financial support. For example, Governor Scott Walker and state legislators cut appropriations to the University of Wisconsin by $250 million this year, but also froze university tuition and revoked state law protection for faculty tenure. Eventually administrators and faculty at some state university will decide that state funding is not worth the control, and elected officials will jump at the chance to cut the remaining spending.
Reduced state support has coincided with a rapid increase in tuition. Net tuition (posted tuition minus university scholarships and financial aid) at public universities has increased 54% faster than inflation over the past twenty years. State appropriations cannot be blamed for all of this, since net tuition has increased 29% faster than inflation at private universities. The relative quality of flagship state universities has also declined. Fifty years ago, Michigan, Virginia and Wisconsin, along with the Universities of California at Berkeley, Minnesota, Illinois, and North Carolina were among the nation’s top twenty universities. Only one public university made the U. S. News and World Report top twenty in 2014.
Federal student aid and Medicaid have dramatically shaped state budgeting since 1965. Medicaid operates under a matching grant formula, under which states receive between $1 and $3 from the Federal government for every $1 they spend on Medicaid. But if states reduce spending on higher education and let tuition rise, many students will receive more Federal aid for students. Lawmakers can bring more federal dollars to their states by shifting appropriations from higher education to Medicaid.
Over the last fifty years, Washington has asserted increasing control over state universities. Eligibility for Federal student aid requires compliance with U.S. Department of Education regulations and maintenance of regional accreditation. Any new tax dollars for higher education seem likely to come from Washington as well. President Obama’s free community college plan would rely on Federal dollars.
Federal control, I think, is bad for higher education. Competition is the greatest force for ensuring performance, and state-run universities will naturally compete. North Dakota has increased higher education appropriations by 26% since 2008, using oil revenues to gain a competitive edge for the state’s universities. State control allows for experimentation and diversity, which is particularly valuable in scholarly fields.
Our state universities have provided millions of people access to a quality education at an affordable price. But state lawmakers providing less funding while insisting on as much control as ever seems unsustainable. Our public universities appear destined to become “state” in name only.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.

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About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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