HESA

Higher Education Strategy Associates

Category Archives: Funding and Finances

June 19

Europe’s Latent Strengths

I spent part of last week at the European University Association’s Funding Forum in Salzburg. Though it’s getting harder to see how you keep a European-wide conversation going when different countries are heading off in such different directions (small increases in funding in Germany and some Nordic countries, versus cuts of 35-45% in Ukraine and Greece), it was nevertheless a pleasant and productive event.

My job there was to give delegates a bit of a pep talk about European higher education, and why it may see better days soon. Sure, they have very big demographic and fiscal challenges, but these days, who doesn’t?

European universities have two big latent advantages over North American ones. The first is their cost structure. As we’ve seen before, European universities have done well to keep their labour costs relatively low. They also have room to squeeze a bit more productivity out of the teaching function by reducing the number of contact hours per degree. Though the numbers differ a bit from country to country, it seems that German and Austrian students, at least, have about 15% more contact hours on the way to a degree than do North American students. Close that gap, and that’s a lot of labour costs potentially saved.

Can this be done without reducing standards? Well, unlike universities here, European universities actually have some objective standards to uphold, thanks the widespread adoption of learning outcomes statements. As a result, I’d back their universities over ours every day of the week to engineer those kinds of efficiencies in a sensible way.

Public and Private Expenditures on Tertiary Education as a % of GDP, 2009

Then there’s the issue of income. European universities have an enormous untapped asset; namely, students. Even if EU members could close half the tuition revenue gap with non-EU OECD members, they would suddenly have enormous new pots of income which they can use to revitalize themselves. Almost instantly, they could go from having systems that are poor (if efficient), to having systems that are genuinely well-funded. The back half of this decade could be an exciting time in Europe, if governments and institutions have the will to grasp this nettle.

Of course, introducing tuition fees is a delicate thing, especially in countries where high unemployment is reducing the obvious payoff to higher education. Not surprisingly, I spent a lot of time there explaining what was going on in Quebec (most were shocked to find out how generous the Quebec government’s package really was). The lesson seems to be that introducing big changes in fee policy requires careful timing and – more importantly – governments with a lot of popular credibility. We might be waiting a while for that in Europe – and in Quebec, too, for that matter.

June 05

Support Arts Faculties: Embrace Academic Profit Centres

Whenever someone at a university argues for the need to concentrate on boosting net revenues, you can pretty much count on large numbers of academic staff getting together to decry the move. They’ll brandish various Newman-esque (the Cardinal, not the Seinfeld character) arguments about how money corrupts the academy, how it betrays scholarship, etc., etc. And more often than not, the people brandishing these arguments will be from the Arts faculties.

Outside observers usually assume that the Arts professors are hiding behind philosophical arguments in order to protect themselves. This is because many assume that in a shift to a more revenue-boosting system, Arts will be left behind and others will profit. Who knows, Arts professors themselves may believe this. But it’s 100% wrong: in pretty much every university in the world, Arts disciplines are money-spinners.

The reason for this is simple: compared to other courses, they are cheap and efficient. Ever wonder why the world over (apart from a few exceptions in the U.S.) private universities shy away from Sciences and Engineering? Because they’re brutally expensive and don’t cover their costs. Conversely, it’s easier to increase the size of Arts classes and hence the “profit” of a given course. There are also a lot more underemployed Arts PhDs than there are underemployed Engineering PhDs, meaning there’s a nice reserve army of cheap sessional labour available for use (though the presence of strong staff unions can make this more difficult).

The problem here is a confusion between sources of prestige and sources of revenue. Universities crave prestige, and so pursue it the way private-sector companies pursue profit. But that doesn’t mean the two are equivalent. Prestige, in fact, is in some ways a form of conspicuous consumption; the prestigious institutions are the ones rich enough to support research and staff that can lose money at a spectacular rate. Less prestigious institutions worry more just about keeping the lights on and the staff paid – hence, they tend to have lots of Arts, Social Science and Business programs which can cross-subsidize the rest of the university.

The confusion arises because universities conduct their cross-subsidies in the dark. A more open budgeting process, which shows costs and revenues across university units would make the crucial funding role of Arts programs more obvious. Maybe embarrassingly so.

Far from rejecting dollars and cents arguments, Arts professors would do well to embrace them. If they’re the ones whose labours allow the university to function, they should get at least get the credit – if not a little bit of extra money, too.

May 08

The Shape of Things to Come

Sit down before you look at this graph, which shows new investment in higher education in 2011. The data comes from our annual survey of 40 countries around the world which make up over 90% of all enrolments and scientific production.

Change in Public Expenditures on Higher Education, 2011

The basic story here is this: in the OECD, we’ve finally hit what I call “Peak Higher Education”; the point beyond which we can no longer expect any increase in public investment in higher education. Between shrinking youth populations and catastrophic fiscal pressures across most of these countries, there simply isn’t room for expenditures to grow the way they have over most of the past forty years. At the moment, the downward pressure is mostly coming from the United States, and there are some countervailing pressures from newer OECD members (Turkey, Israel and Chile all saw double-digit increases) – but even in the medium term this trend looks unstoppable.

But outside the OECD it’s a whole different story, where the country average increase was 8.4%. Now, some of that was due to inflation, which tends to be much higher in these fast-developing countries than it is here. And the average hides the fact that there is movement in both directions: funding drops in places like Ukraine and Pakistan topped 20%. But the big hitters are furiously increasing spending; in India, a 21% real increase (albeit from a pretty tiny base) and in China it’s 10%. Small players aren’t being left behind, either; Singapore’s increase was close to 30% last year.

Now, we don’t need to get all Lou Dobbs about this. It’s not as though the rise of universities in other parts of the world poses some sort of existential threat to our own schools – the spread of education and knowledge like this is a great thing. But let’s not ignore some of the obvious ramifications. It means increased competition for top faculty, which will drive up prices at the top end of the scale. It means both increased sources of and competition for prestige, which will lead many universities to expand their activities into some very distant parts of the world.

It’s not going to all happen overnight. Many of these countries are starting from a very long way behind our universities in terms of resources, so even with very large annual increases, it could be a couple of decades before they reach western levels of expenditure (and because prestige is a stock rather than a flow, it will take another couple of decades again before institutions in these countries will be seen as broadly comparable to ours).

It will happen; it’s just a question of time. Many more years like 2011, and it could happen a lot sooner than you think.

May 03

Chasing a Buck

There are a lot of institutions facing a demographic challenge over the next few years. Outside the GTA and the B.C. lower mainland, the youth population is in decline, and that means institutions in these regions are either going to have to start increasing their yields or find some new markets to exploit.

(Or, I suppose, cut their budgets a bit, but that seems to be a last resort.)

Though I can’t claim to have a lot of granular detail on the issue, I’m getting the sense a) that most institutions have decided to go for new markets, and b) that the ratio of frantic, flailing activity to serious strategy and planning in this area is alarmingly high.

The two obvious candidates for attracting new money are “older students” and “foreign students.” Going after “older students,” interestingly enough, now seems to be entirely a digital affair; it is assumed that this demographic has little interest in hauling itself to campus and should be addressed primarily via online programs. But – and this is the crucial bit – what is it exactly you should put online? The same courses you were offering before? Or totally new courses? It’s a critical question, but it doesn’t seem to be one a lot of people are asking – the automatic assumption seems to be that offering the same courses with a new delivery mechanism will do the trick. I’m not convinced this will end well, especially given the costs of translating old content into a new format.

Another option, of course, is to aggressively court foreign students. You can charge them more, of course, which is a bonus. But they also cost more to educate and they cost a lot more to find and recruit. That sounds simple, but a lot of schools haven’t figured out that second part; I know of at least two in Western Canada that are losing money hand over fist on international students because they don’t systematically stack up costs against revenues.

In both cases, the issue is marginal net revenue: there is no reason to do something for the sake of chasing revenue if the costs are too high. More to the point, it’s comparative marginal net revenue that matters. Why spend any time or energy recruiting foreign students if you can make more per student via the digital option (or vice-versa)?

Ultimately, institutions need to be more strategic about deciding which avenues to exploit in order to chase a buck. The temptation to just “do something” is very real, but needs to be resisted. Deciding on the right balance between different types of revenue-generating activity needs to be done with a lot more deliberation than is often given at present.

 

April 12

How to Fix the Canada Learning Bond

Chances are you’re familiar with Registered Education Savings Plans. Though they’ve been around for 40 years now, it was only with the 1998 budget’s introduction of the Canada Education Savings Grants and their 20% top-ups of RESP contributions that they got big. Nowadays, parents contribute $3.39 billion per year to RESPs, and the CESG program hands out $667.1 million per year.

Of course, people pointed out at the time that the CESGs offered much more to families that could afford to set aside savings for PSE than for those who didn’t. So, in 2004, the feds created the Canada Leaning Bond, a one-time $500 RESP payment at birth to children from low-income families, followed by annual deposits of $100 over the course of the next fifteen years.

Yet the Learning Bond remains dwarfed by the CESG program, meaning the “free money” component of the RESP program still skews towards those who have complex investment portfolios and are good at efficiently managing them – and hardly need the most financial assistance for post-secondary education. On the flipside, families that could really use support lack awareness of these programs, and have few resources to set aside for future educational pursuits.

According to the formative evaluation of the CLB, “although more than half of Canadian parents are aware of some type of government financial assistance program, few are familiar with the… CLB.” The feds rely on banks to do a lot of the RESP legwork, since they offer savings vehicles, and banks aren’t super keen on chasing the business of low-income families. Meanwhile, the evaluation notes that “many of those who indicated that they were moderately aware or unaware of the CESG and CLB mentioned that they would have opened an RESP had they been aware.”

So why not make the CLB automatic? Instead of waiting for low- and moderate-income families to get the paperwork rolling, the Government of Canada would be wise to take the lead. Send each eligible family a voucher for $500 and a list of local banks that can set up an RESP. Include CLB and RESP information in every piece of communication to eligible families – their tax forms, their Universal Childcare Benefit cheques, their National Child Benefit forms, etc.

Don’t underestimate the nudge.

March 14

Improving the Post-Secondary Student Support Program (PSSSP)

While out in Saskatchewan recently, I heard an interesting rumour to the effect that INAC was investigating the possibility that substantial sums of PSSSP money – that is, money paid to individual First Nations for use by their members for post-secondary education – was either going unused or being used for purposes other than post-secondary education.

Assuming this is true, one shouldn’t jump to the conclusion that fraud is at work (though obviously that’s possible). It’s not unheard of for bands to temporarily plug holes in their finances by moving money from one account to another if funds from Ottawa arrive late or if there are temporary cost overruns elsewhere in their budget. Viewed from one perspective, this is “misuse,” but from another (arguably more reasonable) point of view, it is a pragmatic approach to dealing with the byzantine colonialist financing system with which Ottawa has saddled First Nations bands.

It’s also quite possible for bands to innocently fall afoul of Ottawa’s rules, especially at smaller bands where administrative capacity isn’t very strong. Remember, some First Nations only have a couple of hundred members, and yet they are expected to “control” funding for education, health, housing, social services, etc.

Imagine what would happen in mainstream society if we handed student loans over to municipalities. How many errors or cases of “fraud” would we have, especially in small rural municipalities? I’m certain there’d be more than a few. And I’m also certain the policy response would be to re-centralize delivery at a level more likely to have acceptable administrative capacity rather than to bring in rafts of new “accountability measures.”

There’s also the possibility that there is simply a mismatch between where Ottawa sends PSSSP and where it’s needed. Remember, PSSSP isn’t a national program to which students can apply centrally; it’s a transfer program, with money being doled out via individual bands. Hence, it’s quite possible to have insufficient funds in one First Nation while money goes unused in another.

The answer to problems of distribution and administrative capacity are the same: PSSSP simply shouldn’t be delivered by individual First Nations. That’s not to say it should be administered by INAC or the Canada Student Loans Program or anything like that. Rather, what’s needed is a new type of Aboriginal organization, working at the level of a province or treaty area, providing professional services to many different First Nations (for those of you who’ve been paying attention to the National Panel on First Nations Education, what I’m talking about is a student-aid equivalent to the First Nations Education Organizations that it recommends).

Retain First Nations’ control. Improve First Nations’ capacity. A recipe for a better PSSSP.

March 02

Shifting Away from Need-Based Aid in Alberta

Last month, the Government of Alberta announced some fairly radical changes to its student financial aid program, to wit:

– The province will no longer count student income, RRSPs and, crucially, parental income in the calculation of revenue. Instead, all students will be expected to make a $1,500 contribution to their education, except for single parents, who will be exempt.

– The province is introducing completion grants, as the Herald explains: “$1,000 for a technical certificate, $1,500 for a diploma and $2,000 for an undergraduate or graduate degree.”

– It’s introducing a $1,000 retention grant for students who graduate and work in high-demand occupations, including nurses, doctors and social workers.

– To pay for all this, the province is ditching its loan remission program, an annual savings of $69 million.

Some of these ideas may seem familiar to student aid nerds. A few years ago, New Brunswick introduced a completion grant and also ditched parental contributions from the student aid calculation, only to reintroduce them this year. Hardcore nerds may also remember a Nova Scotia deputy minister arguing for the elimination of student income clawbacks at a CASFAA conference in 2008. Alberta’s Education Minister Greg Weadick argues – correctly – that these changes will help simplify the complex student aid process. And while that’s a good thing, the trade-off presents significant challenges for accessibility.

The bottom line is straightforward – it’s a shift away from need-based aid, much like the one HESA’s Alex Usher and Sean Junor anticipated five years ago. The province will issue more loans to students whose need was hitherto low or nonexistent, and a lot of small grants that are essentially need-blind.  And as a result it will also provide many fewer large grants to students with high need.

What explains this trade-off, beyond the desire for a simpler student aid system? Perhaps the fact that demand for student aid in Alberta is way up in the last few years. According to the Canada Student Loans Program, the number of borrowers in Alberta increased by 19% between 2008-09 and 2009-10 (data for 2010-11 are not yet available, but it is reasonable to assume demand for loans continued to increase).  More loans means more remission, and that means that the government may have felt that under the status quo, costs were about to rise  very quickly.

Student loans may be cheaper than grants or remission, especially with interest rates as low as they are. But a significant increase in borrowers can really stretch a budget, especially when remission programs kick in automatically. “Simplification” may be the selling point on these changes, but the true motivating force is even simpler: dollars and cents.

March 01

The Economics of Non-Traditional Degree Programs

There was an interesting report out of the U.K.’s University and College Union (roughly the equivalent of our CAUT) last week, describing how the number of English degree programs (which, confusingly for us, are called “courses” over there) has fallen by a quarter in the last six years. The back-and-forth in the media between talking heads on this story was quite amusing, with a leftish union rallying around the banner of “choice” and a right-wing government claiming that the raw number of students and graduates matters more. Any old rhetorical port in a storm, I guess.

But it’s interesting to take a quick look at the stats behind this story:

2006 2012
Total Degree Courses 70,052 51,116
Total “Primary” Degree Courses 7,002 6,024

 

Now “primary” degrees are what we might call “traditional,” single-subject degrees – history, physics, etc. Those are down by about 14%, and – despite what you may believe if you’ve been reading Stefan Collini in the Times Literary Supplement over the last couple of years – it’s down slightly more in the STEM fields than in humanities or social sciences.

But let’s focus on that massive gap between total courses and primary courses. In 2006, primary programs only made up one-tenth of all programs – the other nine-tenths were joint programs between disciplines, interdisciplinary programs and specialized programs nestled within a single discipline (e.g., urban history, development economics, etc). And these were cut at twice the rate of primary programs, meaning that 95% of all courses axed were non-primary.

There are two reasons for this, I think. The first is obviously political – precisely because these programs are by nature small and have few staff associated with them, they are easy pickings come budget time. But the second is more straightforwardly economic. The cost/benefit of these programs is much worse than commonly realized.

This is one of the better points made by Clayton Christensen in his book The Innovative University. On paper, the costs of these programs look trivial: you borrow staff from “real” departments, maybe hire an administrator part-time – what could be cheaper? But the real costs lie in the graduation requirements: students must take particular courses, some of which may have very low enrolments. And, of course, when you’re paying professors $150,000 per year and your income depends on enrolments, low-enrolment courses really hurt the bottom line.

So this U.K. data doesn’t necessarily suggest wild cutting (the number of academic staff actually increased by about 5% over this period). Rather, it suggests an attempt at pruning marginal programs. No doubt the results are not always pretty; but it’s an example Canadian institutions need to start considering for themselves.

February 16

The Drummond Report

If you’re from Ontario, you’ll have had yesterday penciled into your calendars, like a trip to the dentist, for weeks. If you’re from outside Ontario, you’re likely at least dimly aware that Premier McGuinty punted the matter of long-term fiscal stabilization to Don Drummond, an ex-Ottawa mandarin, so that his ministers could take to the hustings last fall saying everything was under control when in fact this place is broke, broke, broke.

Anyway, Drummond released his report yesterday and it’s a doozy. Figure 1 provides a succinct overview of Drummond’s view on Ontario’s prospects.

Figure 1 – Don Drummond with a word on Ontario’s Fiscal Future

RUN!

The big highlight is that sticking to the status quo will mean a $30 billion annual provincial deficit by 2017. As a result, Drummond recommends significant reductions in government spending growth rates. Specifically, he recommends keeping health expenditure growth over the next seven years to 2.5% per year (good luck with that!), education to 1%, PSE to 1.5% and everywhere else to -2.4%.

(How did PSE get that lucky? I’m guessing that having two serving senior university officials – Dominic Giroux and Carol Stephenson – among that four task members didn’t hurt.)

Not content to lay out general targets, the report offers a raft of specific measures designed to improve the efficiency of public services. The PSE chapter has no less than 30 recommendations, which vary significantly in quality. Some, like ditching tax credits and investing in upfront grants, are eminently sensible; others, like “rewarding teaching the way we reward research,” are things people have been saying for 20 years without much progress having been achieved. Some are weirdly trivial (extending the review period for OSAP default rates? Who cares?), and some are just flat out terrible. Specifically, the one about placing a moratorium on new Bachelor’s programs in community colleges. There’s zero justification for it, it will do nothing other than entrench a program-delivery monopoly by universities and it is completely at odds with the rest of the report’s emphasis on opening up public services.

It’s hard to tell how many of these 30 recommendations will actually become policy. Some are difficult to implement and TCU is – how to put this? – out of practice when it comes to tackling multiple tricky projects simultaneously. Others, like re-evaluating student assistance, will probably be seen as too likely to cause excess whingeing from certain (ahem) student groups to be worth the irritation.

If I had to guess, I’d say very few will be implemented any time soon. Universities and colleges will be grabbing that 1.5%, praying the health care leviathan doesn’t eat it into it, and letting bureaucratic inertia take care of the rest.

January 26

Consensual Hallucinations

Imagine you’re running a Canadian university or college in 2008 or 2009. All signs point to a nasty recession, but your provincial government is still in spending mode and keeps giving you more money. It can’t last; the provincial deficit is completely unsustainable and cuts are inevitable within a couple of years. How should you use that extra money the finance minister just slipped you?

Anyone with a modicum of financial sense would tell you to save it. Put it in a rainy-day fund. Use it to offset the cuts that are so clearly just around the corner.

So why did almost nobody do this? Why did institutions collectively continue to spend in such a way that was so forseeably unsustainable? And why are so many institutions now in desperate straits when it’s been so obvious for so long that restraint was coming?

There are a number of plausible short-term excuses, I suppose. The crisis in many schools’ pension funds took up a lot of budget-cutting energy. Generous multi-year salary agreements take a while to work their way through the system.

(Though there’s some question-begging here: what exactly were institutions thinking when they signed deals tying them to effective salary increases of 4-5%/year in 2009 and 2010, after the crisis was perfectly apparent? Can’t blame a union for asking, of course, but what’s management for if not to say “no” occasionally?)

The real answer, though, boils down to two things. First is force of habit: the good times have been rolling for so long that most institutions have forgotten how to “do” austerity. But second – and more importantly – is that politics forms a serious barrier to sensible behaviour. Say you made a rainy-day fund: how would you explain it to politicians? They’d want to know why you weren’t spending all that money the legislature had voted for the purpose of educating the province’s young people. The perfectly sensible answer: – because we’re making preparations for when the legislature returns from outer space and admits spending trends are totally unsustainable – probably wouldn’t go over too well.

Governments, at the end of the day, account for 90% of institutional revenues through control of both grants and tuition policy. So even though Canadian institutions have very high levels of financial autonomy, penalties for acting rationally still remain. In order to keep their benefactor happy, institutions are required to enter into a consensual hallucination in which they must treat as permanent funds that are clearly going to disappear in a couple of years. They must use these funds to hire new staff, set up new centres and programs… and then act shocked and disappointed when they disappear.

Quite a way to run a railroad.

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