HESA

Higher Education Strategy Associates

Category Archives: funding

March 21

Capital!

If you’re ever bored and playing around with CAUBO data (what do you mean, “no else does that”?) you may have noticed that in 2011 there was a significant (roughly 3%) decrease in university expenditures – which is weird, because no province significantly reduced funding to universities that year, and universities never voluntarily reduce their spending.  So what the heck is going on?

The quick answer is: the Knowledge Infrastructure Program (KIP) ended, and so institutions lost a nice little source of income that they could devote to making newer, nicer, and more energy-efficient buildings.  But a deeper look at some of the numbers on capital spending makes for interesting reading.

Here’s the overall story on capital expenditure at Canadian universities:

Figure 1: Capital Expenditures at Canadian Universities, 1992-2011, in $2011

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Obviously, this graph shows the enormous effect of KIP – an enormous two-year spike in spending in 2009 and 2010.  But to me, the more interesting thing is the long-term increase in capital spending.  Back in the 1990s, we basically kept capital spending at around a billion dollars/year.  Come the millennium, we changed tack.  Over the next three years, capital spending jumped by 150%, nation-wide, and stayed there.  Part of that was of course the result of Ontario going on a double-cohort-related construction spree.  But it wasn’t just Ontario – remember that enrolments went up by about half between 1997 and 2009.  And of course, from 1999 onwards, Canada Foundation for Innovation money started flowing into institutions across the country to upgrade institutions’ research infrastructure.

Here’s what happened to spending in the four big provinces which make up 90% of the country’s post-secondary expenditures:

Figure 2: Capital Expenditures at Universities in Ontario, Quebec, British Columbia and Alberta, 1992-2011, in $2011

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Figure 2 shows that although the big increases were in Ontario and Alberta; Quebec stands out for having a policy of very steady investment in capital.  It had a one-off increase in 2000 (one assumes this is mostly due to CFI), but other than that the expenditures were quite stable.  That means Quebec wasn’t a stand-out performer in 2010, but it also means that for most of the 90s, Quebec was outspending Ontario 2:1 (and thus it probably didn’t have the same kind of infrastructure deficit going into the 2000s).

But maybe the mind-blowing thing here is what happened in Alberta post-2000, which is best seen by isolating the later years in the previous graph and indexing provincial spending:

Figure 3: Capital Expenditures at Universities in Ontario, Quebec, British Columbia and Alberta, 1999-2011, indexed to 1999

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Figure 3 illustrates two extraordinary spikes in spending: BC, where capital spending quintupled between 1999 and 2005, and Alberta, where capital spending triples in just three years after 2006.

The long and the short of it is that in the 2000s, for a variety of short-term reasons (double-cohort in Ontario, having more money than God in Alberta), capital expenditures settled at a level about 2.5 times where it was in the 90s.  Can we stay at this level, or are we doomed to give in to short-termism and start diverting this money to shorter-term priorities?  Certainly, a number of faculty unions (particularly in the Atlantic) have been making the case that capital expenditures should be re-directed to higher faculty salaries.

One can’t predict the future, of course.  But these figures really do remind you that the mid/late 00s were the Golden Years for Canadian higher education financing.  Makes you wonder how many people now feel silly for not having seen it at the time.

February 25

The War on Small, Niche Public Universities

Governments love universities that make a niche for themselves.  ”How delightful“, governments say.  ”Oh, we’re so proud of you for not following the herd and trying to be just another big multi-versity.  You go, girl”.

They say all of this, of course, until it comes time to actually fund them, at which point governments effectively flip small, niche universities the bird.  In practice, governments behave as though they hate small universities with a passion.

There are two separate problems here.  The first has to do with the difficulties governments have with “small”.  Funding formulas tend to push institutions towards “average” costs.  But since most universities in Canada are big, “average” costs usually means the costs that large institutions with major economies of scale can achieve.  Small universities have to survive on the same amount, but without the economies of scale.

At one level, maybe that’s OK.  Smaller institutions probably do less research, and because of that they can pay their staff somewhat less.  And maybe there’s an argument to be made that it’s more important to run higher education systems efficiently than to have well-funded small institutions available to those students who would thrive in them.  But then why not let them charge more for their services?  But of course, no government will go that extra simple step.

The second problem has to do with niches.  These sound great, until you realize that niches, by definition, are unstable.  Change just one or two external parameters and suddenly a species can no longer exist .  So, all those institutions that bet heavily on education over the last decade, with the encouragement of lots of government funding?  Now they’re getting hammered by governments that no longer think their niche is worth funding (Law is in a similar situation, different only in that it was privately, rather than publicly, funded).

Now, imagine you’ve been trying to be both a small university and a niche university over the last few years.  The government won’t pay properly for your non-niche programs, and suddenly decides it dislikes the niche you’ve chosen (or, alternatively, the market for that niche suddenly disappears).  You’re screwed, basically.

This is why most small universities become medium or even large universities: in our system, size = more secure income streams.  Utilitarians might say “so what – what’s wrong with scale?”  But the problem for most of these institutions is that their Unique Value Proposition is being small.  Small doesn’t scale.  When you force these institutions to grow, there’s a real danger that you force them to be something they were never intended to be.  And that’s a loss of diversity to the whole system.

What’s really weird is that after all this, governments still wonder why there’s such skepticism about differentiation.  But on that, more tomorrow.

January 09

The Salaries Problem

I’ve made a few key points over the last couple of days:

1)      Canadian Universities will be lucky if they keep being able to increase their incomes by 3% per year, holding enrolments constant.

2)      The kinds of salary settlements we have seen recently at Canadian universities, if allowed to continue, will eat up easily 70-80% of that income, maybe more, leaving precious little left over for IT, infrastructure, etc.

3)      It’s not a problem of administrative bloat.  The ratio of academic salaries to non-academic ones hasn’t changed in over a decade.

To put it bluntly, this isn’t sustainable.  Things have to change.

Could the solution be on the revenue side?  Certainly, that’s part of the current problem.  Over the past two years, things have been pretty dire for higher education, with institutions only receiving about 0.45% per year in government funding increases.  That might improve a bit in some provinces over the next year or two, but my guess would be that both Ontario and Quebec will see significant cuts in the 2015 budget cycle, once they’ve both had elections.  So that’s not in the cards.

Ask students to pay more?  That would make oodles of sense in many places (especially Alberta, BC, and Quebec), but it’s a tough sell in a recession.  To the extent this is possible, it will be for professional Master’s programs, which are going to spread like mushrooms.

Admit more students?  Well, that would work in some places, but not east of the Ottawa River, where things are drying up.  International students are always a very viable alternative, though it’s not clear that every institution is equally suited to acting (as Brad DeLong recently wrote in a delightfully bitchy post about the University of California) as finishing schools for the superrich of Asia.

That leaves expenditure – the largest and fastest-rising bit of which is salaries.  And here there are only three options: cut jobs, cut salaries, or some combination of the two.  Tenure limits institutions’ ability to do the former (to academics, at least), so that suggests that restraint on the salary side is where the action is going to have to be.

It’s not even a matter of cutting salaries.  It’s about getting the rate of salary increase back down to where it historically was for most of the 70s, 80s and 90s.  The 2000s saw an historically unprecedented rise in professorial salaries, as shown by Figure 1:

Figure 1: Median Academic Salaries, Canada Real $2012

 

 

 

 

 

 

 

 

 

 

 

 

More relevant for university finances was the fact that average salaries were increasing even faster than the median during the 2000s – 18% in real dollars vs. 11% for the median.

Figure 2: Average Academic Salaries, 2001-2 and 2009-10, in Real $2012

 

 

 

 

 

 

 

 

 

 

 

 

You know the good old days everyone talks about?  Maybe they were good precisely because salaries weren’t cannibalizing the rest of the budget.  Something to think about, anyway.

January 07

How Universities Are Becoming More Labour-Intensive

Yesterday, I showed how universities in New Brunswick were – despite welcome new promises of stable funding from the provincial government – facing problems because salary increases were going to eat all the available new money.  Some of you possibly thought I was being alarmist.  But it’s easy enough to show how this can happen.  In Ontario, it already has.

For data here, I pulled the financial statements for the last five years at the “Big 8” (Toronto, Waterloo, Western, Queens, Guelph, York, Ottawa, and McMaster), which comprise about 75% of all university spending, and hence are a pretty good proxy for the university system as a whole.  It’s not as good as Stastcan data; but, on the other hand, it gives me something past 2011, which is the most recently-available Statistics Canada/CAUBO report.  And here is what it shows:

Figure 1: Total and Salaries/Benefits Expenditures, 8 Largest Ontario Universities, 2009-2013

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures at these institutions rose from $7.4 billion in 2009 to $8.6 billion in 2012, before falling back to $8.45 billion in 2013.  That’s a 14% nominal increase, which is about 6% after inflation – not bad.  Meanwhile, salaries and benefits rose from being 59% of overall budgets to being 63% of overall budgets.

Now that doesn’t sound so bad, either.  But let’s look at the same data another way:

Figure 2: Increases in Total and Salaries/Benefits Expenditures, 8 Largest Ontario Universities, 2009-2013

 

 

 

 

 

 

 

 

 

 

 

 

This looks considerably less good, doesn’t it?  As new money has come in and permitted higher spending, salaries and benefits have eaten fully 92% of the increase.  This, friends, is the consequence of increasing salary mass by 5% per year, when income is only growing at 3%.

And the consequences for the rest of the budget?  After salary increases, the Ontario 8 only had $83 million to put into non-salary areas.  On a base of about $3 billion, that’s an increase of about 3%, but after inflation, that’s actually a 4% reduction, i.e., a fall of about 1% per year.  And of course much of that money is earmarked for things like research, so in terms of disposable income, it’s likely that the figure is actually much higher.

Outside Ontario, we don’t see quite the same pattern.  I pulled 7 other comparable institutions (UBC, Alberta, Calgary, Saskatchewan, Manitoba, McGill, and Dalhousie) and found that on the whole they spent a greater proportion of their money on salaries (66% in 2013, compared to 63% in Ontario), but that there was no sudden change in the way money was spent (only 67% of new expenditure went to salaries, meaning the average went unchanged).  That said, there were differences inside this group.  Most actually managed to decrease their salary-to-total expenditure ratios; the two exceptions were Alberta (where salaries took 86% of all new expenditure) and McGill (where they took an astounding 179% of new expenditures).

For a set of institutions that endlessly bang-on about how hi-tech they are, Ontario universities are apparently one of the very few industries in the provinces that are becoming more labour intensive over time.  And that won’t change until compensation increases start coming into line with increases in income.

January 06

The New Normal

Happy New Year!  Did everyone have a great vacation?

The highlight of my vacation was going to Argentina and stumbling upon the world’s most unfortunately-named university in a suburb of Buenos Aires, named “Morón”.  It’s called – wait for it – Unversidad de Morón.  Seriously, their international marketing people must have the most difficult jobs in higher ed.

Anyhow, I wanted to start the year by talking about what was a hopeful development from last fall – the Government of New Brunswick’s decision to pre-announce university funding increases for the next two years.  Instead of waiting for provincial budget-time to make an announcement (which, quite honestly, is far too late for institutions needing to do serious planning), the government pre-announced not one but two(!) years’ worth of future increases: 2% for 2014-15, and another 2% for 2015-16.  And they also told institutions they could raise domestic undergraduate tuition by 3% for each of the next two years.  Assuming no big increase in domestic or international student numbers, that means the university can count on overall budget increases of around 2.33%.

Great news, right?  Guaranteed new money!

Put the champagne down, guys.  2.33% still isn’t enough to keep pace.  Cutbacks will inevitably follow.  To understand why, let’s look at professorial pay.

UNB profs are currently without a contract – and indeed are very close to a strike on the issue.  But their previous four-year contract was a fairly generous one.  It moved the salary grid upwards by (on average) 2.4% per year, plus everyone not at the top of their pay grade got annual bumps of (on average) about $1300/year.  What percentage that works out to in total depends on where your place is in the pay grid, but for new associate professors, on average, it was about 4% per year on the nose.

So, 4% in total on academics pay.  Benefits tend to scale at the same rate, as does non-academic pay, so 4% on those, too.  At most Canadian universities, salaries and benefits are about 60% of all expenditures.  Multiply that out – 60% times 4% = 2.4%, and right there we’ve already used up slightly more than the entire announced increase in funding.

That is to say: if labour contracts continue to play out the way they have over the past four years, there is exactly no money left over for anything else.  But since inflation erodes buying power, that actually implies ongoing cutbacks of all non-salary items of about 2% per year.  And that’s the best case scenario for a university, since I think few provinces will be as generous as New Brunswick this year.

The reality, then, is this: either staff pay settlements have to start coming into line with increases in institutional income, or the new normal is going to be continuing pay hikes, combined with annual cutbacks in all non-salary items.

That’s the math, and there’s no escaping it.

November 05

Owning the Podium

I’m sure many of you saw Western President, Amit Chakma’s, op-ed in the National Post last week, suggesting that Canadian universities need more government assistance to reach new heights of excellence, and “own the podium” in global academia.  I’ve been told that Chakma’s op-ed presages a new push by the U-15 for a dedicated set of “excellence funds” which, presumably, would end up mostly in the U-15′s own hands (for what is excellence if not research done by the U-15?).  All I can say is that the argument needs some work.

The piece starts out with scare metrics to show that Canada is “falling behind”.  Australia has just two-thirds our population, yet has seven institutions in the QS top 100, compared to Canada’s five!  Why anyone should care about this specific cut-off (use the top-200 in the QS rankings and Canada beats Australia 9 to 8), or this specific ranking (in the THE rankings, Canada and Australia each have 4 spots), Chakma never makes clear.

The piece then moves on to make the case that, “other countries such as Germany, Israel, China and India are upping their game” in public funding of research (no mention of the fact that Canada spends more public dollars on higher education and research than any of these countries), which leads us to the astonishing non-sequitur that, “if universities in other jurisdictions are beating us on key academic and research measures, it’s not surprising that Canada is also being out-performed on key economic measures”.

This proposition – that public funding of education is a leading indicator of economic performance – is demonstrably false.  Germany has just about the weakest higher education spending in the OECD, and it’s doing just fine, economically.  The US has about the highest, and it’s still in its worst economic slowdown in over seventy-five years.  Claiming that there is some kind of demonstrable short-term link is the kind of thing that will get universities into trouble.  I mean, someone might just say, “well, Canada has the 4th-highest level of public funding of higher education as a percentage of GDP in the OECD – doesn’t that mean we should be doing better?  And if that’s indeed true, and our economy is so mediocre, doesn’t that give us reason to suspect that maybe our universities aren’t delivering the goods?”

According to Chakma, Canada has arrived at its allegedly-wretched state by virtue of having a funding formula which prioritizes bums-in-seats instead of excellence.  But that’s a tough sell.  Most countries (including oh-so-great Australia) have funding formulae at least as demand-oriented as our own – and most are working with considerably fewer dollars per student as well.  If Australia is in fact “beating” us (a debatable proposition), one might reasonably suspect that it has at least as much to do with management as it does money.

Presumably, though, that’s not a hypothesis the U-15 wants to test.

October 25

Daycare Subsidies, Tuition Subsidies

I see the Globe is currently doing a series on affordable child care.  It’s a good series, but it’s striking how different the tone is from public discussions on higher education, despite the evident similarities between the two policy fields.

This occurred to me a few months ago while reading a Globe op-ed from a new-ish parent, wondering why daycare was so unaffordable.  It was framed in the Globe’s very weird, class-politics manner, as: “My wife and I make $100,000 and we can’t afford daycare”.

(Sidebar for non-Torontonians: the tribes of downtown “Tronna” have literally no idea that a $100K family income puts them around the 80th income percentile, and that such whining makes the rest of Canada want to smack them upside the head.  Nice people, but clueless in this respect.)

One meme which keeps popping up here is that daycare users should receive greater subsidies, as day care is an expense that people incur at a time in their lives when they’re just starting out, have less capital, etc.  In higher ed, our answer to this problem is loans, which provide precisely this kind of income-smoothing.  So why not provide loans to help people afford daycare?

Think about it: both Early Childhood Education (ECE) and higher education are non-compulsory forms of education, which is why we ask people to pay for them (compulsory education should always be free).  In universities and colleges, we generously underwrite the education providers, and provide need-based aid – part loan, part grant – to help people who can’t afford to cover the remaining costs.  In most of the country, daycares are funded similarly, if less generously.  The outliers are Quebec, where funding comes almost entirely through core grants (with a little extra assistance available to low-income parents), and Ontario, where it comes mostly through individual fees (though significant subsidies for lower-income families exist).  Thus, outside Quebec, net price for daycare is on a sliding scale based on income, just as it is for university and college (though subsidies for daycare are MUCH simpler, and more transparent, than those for student aid – PSE could learn a lot from ECE in this respect).

So why not daycare loans (or “extended payment plans”, if the word “loans” is too icky)?  Why not give people like the author of this Globe op-ed piece – that is, people just outside the subsidy range (at $1500/month in fees, the subsidy in Toronto disappears at around $92,000), and who find it too burdensome to pay 25% of their after-tax income on daycare – a break by letting them pay fees over 6-8 years, rather than 3-4?  Unlike students, these are people with steady incomes – costs to the public should be minimal.

September 30

The View from Vilnius

I spent an enjoyable couple of days in Lithuania last week, at a meeting of the EU’s Directors General of Higher Education.  I was there to talk about some research we at HESA (along with some colleagues from DZHW in Germany) are doing for the European Commission, assessing the impact of cost-sharing on institutions and students.  Unsurprisingly, at the margins of the conference (and occasionally within its proceedings), what really drove conversation were tales of austerity, and their effects on higher education.

One thing I hadn’t previously understood was just how different the dynamics of cutbacks are in continental Europe.  In many countries, professors are civil servants; that is, they are employed by the government rather than their institution.  This means that governments can impose salary adjustments directly, rather than faffing about giving a cut to institutions, and then letting universities hash it out with academic unions. And hand out salary cuts they have: in Portugal, the cut was around 15%; in Greece, 25%.  I wonder how that would play out in Canada?

(This, by the way, is why one should take care in interpreting news of “cuts” to European universities.  University budgets in some countries exclude professors’ salaries, because those are paid directly to the professors.  In such places, a 10% cut to university budgets actually just means a reduction in non-salary items, or about 5% in our terms.)

Even among the minority of countries which have managed to keep their budgets stable, or increased them a bit, there is a new mood of ruthless efficiency.  Finland, for instance, while still being flush in relative terms, hacked 20% from the Polytechnics’ budget because they were thought to not be delivering the goods on employability.  Waste not, want not.

The problems mostly came at dinner, when I was asked about conditions at Canadian universities.

“Not bad,” I said.  “Weathered the storm so far.  Just starting to head into the difficult bits now.”

“How difficult?” I was asked.

“Oh, well, um… we have some freezes in government funding now.  But institutions can still get to 2.5% growth through tuition increases.”

Frowns aplenty.  A 2.5% increase in revenue is not “difficult” in Europe.

“But wait”, I said.  “In some provinces, we have actual cuts.  Alberta, for instance, had a 7% cut.”

At this point, everyone around the table chimed in with the cuts they’ve had: “Ten!”  “Fifteen!” “Eighteen”.  Alberta wasn’t impressing anyone.

“But isn’t Alberta quite rich?” someone asked.

“Well, yes,” I said.  “And they do spend a lot on higher education.  Over $19,000 per student.  But that was before the cut”.

At this point, frowns were replaced by jaws hitting the floor.  The European average is about half that.

Nothing like going abroad to get some perspective.

September 24

Education is a Right… So?

I dig those little buttons you see sometimes.  The ones CFS hands out saying, “Education is a Right!”  What I don’t get, though, is why anyone thinks that kind of a slogan actually means anything with respect to education funding.

You’ve probably been in this discussion once or twice in your life.  Chatting about tuition, or funding, or whatever, and someone takes the position that there should be no fees/greater funding/etc.  You debate the merits of the point for a while and then that person – often with a tone of smug moral superiority – lays down the trump card: Education is a RIGHT!  And then dares you contradict him/her.  After all, you’d have to be some sort of monster to constrain a right, wouldn’t you?

Of course, this is horsepucky.  Education is not the only economic and social right which has been enumerated by international convention; how would those other “rights” look if we presumed that: if “X is a right” then “X must be provided free of charge”?

1)   Housing.  Shelter is of course a right under the Universal Declaration of Human Rights (article 27, for you treaty nerds). Now maybe I’m not paying close enough attention, but I don’t see anyone arguing that housing should be provided free of charge by the state just because it’s in the UDHR.  It’s been done of course – many communist countries went down this route – but one of the results is that housing providers tend to want to make provision more uniform.  And of low quality.

2)   Food. Even North Korea doesn’t make food free.  Subsidized, yes; free, no.  That’s because even the most hardline communists recognize that different people have different tastes, and have the right to use the fruits of their labours to construct their own consumption baskets.

3)   Health.  Most countries buy some of their health-care collectively though some sort of insurance function, which makes it free in the sense that the zero-tuition crowd would like education to be.  But not even Canada pays for all its health care this way – between eyes, teeth, drugs, elder care, and sports medicine, private expenditures still make up 30% of all health care dollars in Canada.   The difference of course is that this is insurance – protection against random catastrophic loss.  Education doesn’t work in quite the same way.  One rarely hears of young people being randomly and catastrophically educated.

In short, the “rights” argument is the start of a conversation, rather than the end of it.  In no other social and economic fields does the fact that something is a “right” make it automatically free to all.  Rather, it means that it needs to be available to all, and selectively subsidized where necessary.  In other words, the status quo.

September 11

Financing Canadian Universities: A Curious Story (Part 3)

Yesterday, we saw that Canadian student-faculty ratios rose by 24% between 1992 and 2010, even though operating grants per student went up by 20%.  The cause, it turned out, was a combination of individual academic salaries rising, while aggregate academic wages fell, as a proportion of operating grants.  What we didn’t do yesterday was ponder why academic salary mass didn’t keep up with operating grants, and where the money went as a result.

Figure 1 – Operating Expenditures by Category, 1992-2010, in Real 2011 Dollars

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1 shows that the two biggest categories under operating expenditures are “academic salaries”, and “other salaries and wages”.  Throw in benefits – compensation under another name – and these three categories make up about two-thirds of total operating expenditures.

With so many categories, it’s a little difficult to see exactly how much each category increased over time in Figure 1, so in Figure 2 we simply show growth indexed to 1992 levels.

Figure 2 – Growth in Expenditure Categories, 1992=100

 

 

 

 

 

 

 

 

 

 

 

 

Of the six major expenditure categories, academic salaries increased the least, by some margin – just 37% in real dollars, not quite enough to keep up with growth in student numbers.  Non-academic salaries – the next largest category – increased by 70%.  But growth for benefits, “other instruction & research”, and “other” (a catch-all category including travel, utilities, and externally contracted services) was all over 100%.

For reasons of legibility, Figure 2 excludes two line items that were in Figure 1.  The first is library expenditures, which are actually pretty trivial in the big picture (1.7% of operating expenditures).  The other is scholarships, which are excluded because they would have broken the scale.  Here’s what happened to scholarships between 1992 and 2010:

Figure 3 – Total Scholarships Expenditures, 1992-2010, in 2011 Dollars

 

 

 

 

 

 

 

 

 

 

 

 

This is one of those things universities just don’t get credit for.  Scholarships (a term which here includes both need and merit-based aid) increased by more than seven-fold, after inflation.  Based on previous research HESA has conducted, I estimate that between 55 and 60% of this money went to graduate students, which is consistent with large institutions’ increasing emphasis on research and graduate studies.

Another way to look at this question is to look simply at changing shares of total operating income, which we do below in Figure 4.

Figure 4 – Change in Shares of Operating Budgets by Category, 1992-2010

 

 

 

 

 

 

 

 

 

 

 

 

Although spending in all categories rose between 1990-2012, some spending categories “gained share”, while others lost it.  The biggest losers were faculty, as academic salary mass fell by 9 percentage points as a share of the operating budget.  Had they kept their share constant, there would have been another $1.6 billion in money for academic salaries.

But the “culprits” were not the oft-scapegoated bogeymen of “administration”.   Rather, the line items that significantly gained share were actually scholarships, non-wage benefits, and “other” (mainly utilities and externally contracted services).  This is not a story often heard on campus.  But it’s the truth.

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