HESA

Higher Education Strategy Associates

Category Archives: Funding and Finances

February 17

Four Mega-trends in International Higher Education – Economics

If there’s one word everyone can agree upon when talking about international education, it’s “expensive”. Moving across borders to go to school isn’t cheap and so it’s no surprise that international education really got big certain after large developing countries (mainly but not exclusively China and India) started getting rich in the early 2000s.

How rich did these countries get? Well, for a while, they got very rich indeed. Figure 1 shows per capita income for twelve significant student exporting countries, in current US dollars, from 1999 to 2011, with the year 1999 as a base. Why current dollars instead of PPP? Normally, PPP is the right measure, but this is different because the goods we’re looking at are themselves priced in foreign currencies. Not necessarily USD, true – but we could run the same experiment with euros and we’d see something largely similar, at least from about 2004 onwards. So as a result figure 1 is capturing both changes in base GDP and change in exchange rates.

Figure 1: Per Capita GDP, Selected Student Exporting Countries, 1999-2011 (1999=100), in current USD

Figure 1: Per Capita GDP, Selected Student Exporting Countries, 1999-2011 (1999=100), in current USD

And what we see in figure 1 is that every country saw per capita GDP rise in USD, at least to some degree. The growth was least in Mexico (70% over 12 years) and Egypt (108%). But in the so-called “BRIC” countries world’s two largest countries, the growth was substantially bigger – 251% in Brazil, 450% in India, 626% in China, and a whopping 1030% in Russia (and yes, that’s from an artificially low-base on Russia in 1999, ravaged by the painful transition to a market economy and the 1998 wave of bank failures, but if you want to know why Putin is popular in Russia, look no further). Without this massive increase in purchasing power, the recent flood of international students would not have been possible.

But….but but but. That graph ends in 2011, which was the last good year as far as most developing countries are concerned. After that, the gradual end to the commodity super-cycle changed the terms of trade substantially against most of these countries, and in some countries local disasters as well (e.g. shake-outs of financial excess after the good years, sanctions, etc) caused GDP growth to stall and exchange rates to fall. The result? Check out figure 2. Of the 10 countries in our sample, only three are unambiguously better off in USD terms now than they were in 2011: Egypt, Vietnam, and (praise Jesus) China. Everybody else is worse off or (in Nigeria’s case) will be once the 2016 data come in.

Figure 2: Per Capita GDP, Selected Student Exporting Countries, 2011-2015 (2011=100), in current USD

Figure 2: Per Capita GDP, Selected Student Exporting Countries, 2011-2015 (2011=100), in current USD

Now, it’s important not to over-interpret this chart. We know that many of these countries have been able to maintain. Yes, reduced affordability makes it harder for student to study abroad – but we also know that global mobility has continued to increase even as many countries have it the rough economically (caveat: a lot of that is because of continued economic resilience in China which has yet to hit the rough). Part of the reason is that if a student wants to study abroad and can’t make it to the US, he or she won’t necessarily give up on the idea of going to a foreign university or college: they might just try to find a cheaper alternative. That benefits places which have been pummelled by the USD in the last few years – places like Canada, Australia and even Russia.

In short: economics matters in international higher education, and economic headwinds in much of the world are making studying abroad a more challenging prospect than they did five years ago. But big swings in exchange rates can open up opportunities for new providers.

February 16

How to Fund (3)

You all may remember that in early 2015, the province of Ontario announced it was going to review its university funding formula.  There was no particular urgency to do so, and many were puzzled as to “why now”?  The answer, we were told, was that the Liberal government thought it could make improvements in the system by changing the funding structure.  Specifically, they said in their consultation document that they thought they could use a new formula to improve i) improve quality/student experience, ii) support differentiation, iii) enhance sustainability, iv) increase transparency and accountability.

Within the group of maybe 100 people who genuinely understand this stuff, I think the scoffing over points iii) and iv) were audible as far as the Maritimes.  Transparency and accountability are nice, but you don’t need a new funding formula to get them.  The Government of Ontario could compel institutions to provide data any time it wants to (and often does).  If institutions are “insufficiently transparent” it means government isn’t asking for the right data.

As for enhancing sustainability?  HA!  At a system-level, sustainability means keeping costs and income in some kind of balance.  Once it became clear that there was no extra government money on the table for this exercise, and that tuition fees were off the table, and they would not use the formula to in any way rein in staff salaries or pensions (as I suggested back here) , everybody said “ok, guess nothing’s happening on that front” (we were wrong, as it turned out, as we’ll see in a second).  But the bit about quality, student experience and differentiation got people’s attention.  That sounded like incentivizing certain things.  Output-like things, which would need to be measured and quantified.  So the government was clearly entertaining the idea of some output-based measures, even as late as December 2015 when the report on the consultation went out (see that report here).  Indeed, the number one recommendation was, essentially, “the ministry should apply an outcomes-based lens to all of its investments).

One year later, the Deputy Minister for Advanced Education sent out a note to all institutions which included the following passage:

 The funding formulas are meant to support stability in funding at a time when the sector is facing demographic challenges while strengthening government’s stewardship role in the sector. The formulas also look to create accountable outcomes, beyond enrollment, that reflect the Strategic Mandate Agreements (SMAs) of each institution.

 As you know, our goal is to will focus our sector on high-quality student outcomes and away from a focus on growth. As such, the funding formula models are corridors which give protection on the downside and do not automatically commit funds for growth on the upside.

Some of that may require translation but the key point does not: all of a sudden, funding formulas were not about applying an outcome based lens on investment, they were about “stability”.  Outcomes, yes, but only as they apply to each institution’s SMA, and no one I know in the sector thinks that the funding envelope that will be devoted to promoting SMAs is going to be over five percent.  Which, given that tuition is over 50% of income, means that maybe, at best, we’re looking to about 2% of total funding might be outcome-based.  As I’ve said before, this is not even vaguely enough to affect institutional behaviour.

What happened?  My guess is it’s a mix of four things.  First, there was a change of both Minister and Deputy Minister and that’s always a crap shoot.  Priorities change, sometimes radically.  Second, the university sector made its displeasure known.  They didn’t do it very publicly, and I have no insider knowledge of what kind of lobbying occurred, but clearly, a number of people argued very strenuously that this was a Bad Idea.  One that gored oxes.  Very Bad.  Third, it finally dawned on some people at the top of the food chain that a funding formula change, in the absence of any new revenue tools, meant some institutions would win, and others would lose.  And as the provincial government’s recent 180 on Toronto toll roads has shown, this low-in-the-polls government is prepared to go a long way to avoid making any new “losers”.

Finally, that “sustainability” thing came back in a new form.  But now it was no longer about making the system sustainable, but about finding ways to make sure that a few specific small institutions with precarious finances (mostly but not exclusively in northern Ontario) didn’t lose out as adverse demographics and falling student numbers began to eat into their incomes.  Hence the language about corridors “giving protection on the downside”.  It’s ridiculous for three reasons.  One, it’s a half-solution because institutions vulnerable to demographic decline lose at least as much from lost tuition revenue as they do in lost government grant.  Two, it’s a departing horse/open barn door issue: the bulk of the demographic shift has already happened and so to some extent previous losses are just going to be locked in.  Three – and this is most important – the vulnerable institutions make up maybe 8% of total enrolments.  Building an entire new funding system just to solve a problem that affects 8% of students is…I don’t know.  I’m kind of lost for words.  But I bet if you looked it up in the dictionary it would be under “ass backwards”.

And that, my friends, is how Ontario blew a perfectly good chance to introduce a sensible, modern performance-based funding system.  A real shame.  Perhaps others can learn from it.

February 15

How to Fund (2)

As I noted yesterday, in Canada we have some kind of phobia about output-based funding.  In the 1990s, Ontario and Alberta introduced, and then later killed, key performance indicators with funding attached.  Quebec used to pay some money out to institutions based on the number of degrees awarded, not just students enrolled, but they killed that a few years ago too (I’m sure the rumour that it did so because McGill did particularly well on that metric is totally unfounded).

Now, there is no doubt that the history of performance indicators in Canada hasn’t been great.  Those Ontario performance indicators from the 1990s?  They were cockamamie and deserved to die (student loan defaults as a performance measure?  Really?  When defaults are more obviously correlated with program of study, geographic location, and the business cycle?).  But even sensible measures like student completion rates get criticized by the usual suspects (hi OCUFA!), and so governments who even think about basing funding on outputs rather than inputs have to steel themselves to being accused of making institutions “compete” for funding, of creating “winner and losers,” of “neoliberalism,” yadda yadda.  You know the story.

Yet output based funding is not some kind of extremist idea.  Leave aside the nasty United States, where two-thirds of states have some kind of performance-based funding, all of which one way or another are based on student progress and completion.  Let’s look to wonderful, humane Europe, home to all ideas that are progressive and inclusive in higher education.  How do they deal with output-based funding formulae?

Let’s start with Denmark and England, both of which essentially offer 100% of their teaching-related funding on an output basis (these are both countries where institutions are funded separately for research and teaching), because although their formulas are essentially enrolment-weighted ones like Ontario’s and Quebec’s, they only fund courses which students successfully finish.  (Denmark also has another slice of teaching funding which is based on “on-time” student completion).  Students don’t finish, the institution doesn’t get paid.  Period.

Roughly two-thirds of higher education funding in Finland – yes, vicious neo-liberal Finland – is output-based.  A little more than half of that comes from the student side, based on credit progression, degree completions and the number of employed graduates.  On the research side, output-based funding is based on number of doctorates awarded, publications, and the outcome of research competitions.  It’s a similar situation in the Netherlands where over half the teaching component of funding comes from the number of undergraduate and master’s degrees awarded, while well over half the research funding comes from doctorates awarded plus various metrics of research performance.

All throughout Europe we see similar stories, though few have quite as much funding at risk on performance measures as the four above.  Norway and Italy both have performance-based components (mostly based on degree completions) of their systems which involve 15-25% of total funding.  France provides five percent of its institutional funding based on the number of master’s and bachelor’s degree completions (the latter adjusted in a very sensible way for the quality of the institutions’ students’ baccalaureat results).  Think about that for a moment.  This is France, for God’s sake, a country whose public service laughs at the concept of value for money and in which a major-party Presidential candidate can advocate for 32-hour week and not be treated as an absolute loon.  Yet they think some output-oriented funding is just fine.

I could go on: all German Länder have at least some performance-based funding both for student completions and research output, though the structure of these incentives varies significantly.  The Czech Republic, Slovenia, and Flemish Belgium also all have performance-based systems (mainly for student completions).  New Zealand provides 5% of total institutional funding based on a variety of success/completion measures (the exact measures vary a bit, properly, depending on the type of institution).  Finally, Austria and Estonia have mission-based funding systems, but in both cases measures looking at research performance and student completions indicators which form part of their reporting systems.

You get the picture.  Output-based funding is common.  It’s not revolutionary.  It’s been used in many countries without much fuss.  Have there been transition teething troubles?  Yes there have (particularly in Estonia); but with a little foresight and planning those can be mitigated.

And why have they all adopted this kind of funding?  Because funding is an essential tool in steering the system.    Governments can use output based funding to purchase institution’ attention and get them to focus on key outcomes.  If, on the other hand, they simply hand over money based on the number of students institutions enroll, then what gets incentivized are larger institutions, not better institutions.

Ontario, with its recent formula review, had a golden opportunity to introduce some of these principles to Canada.  It failed to so.  I’ll explain why tomorrow.

February 14

How to Fund (1)

Over the next three days, I want to talk about funding formulas.  I know I did this a couple of years ago, at the start of the Ontario funding formula review exercise (see here, here, and here, but it’s worth revisiting  partly because I’m cheesed off at how Ontario managed to botch the review, but also, it’s because I’ve been looking at funding formulas in Europe and the US for article I’ve been writing, and it’s absolutely stunning to me how pretty much everyone except Canada has some kind of performance measurement in their formula, but we can’t because everyone is afraid of creating “winners” and “losers”.  So today I’d like to give you a kind of grand overview of how funding formulas actually work, tomorrow I’ll have an overview of how formulas work in various parts of the world and then on Thursday I’ll come back to blow off steam about Ontario.

Are you sitting comfortably?  Then I’ll begin.

There are basically seven ways governments can hand money over to institutions.  They are, in more or less ascending order of policy sophistication:

Negotiated BudgetsMost of the developing world works on this system.  An institution tots up its wish list for the year, shows up at the Minister’s office, which says yea or nay to a variety of requests, and that’s that.  The government is under no obligation to treat institutions in the same manner and so “favoured” institutions often make out pretty well under this system.  This system tends to exist in countries where trust in institutions is low: effectively this system gives government a line-by-line veto over institutions budgets.

Historically-based lump sums.  This is more or less how it’s done in most Canadian provinces.  Government looks at what they gave each institution last year (which probably has at least some relationship to costs and outputs) takes a gander at provincial finances this year, and decides what everyone’s going to get in consequence this year.  It’s a step up on negotiated budgets in the sense that everyone gets treated more equally.  In provinces like Newfoundland and PEI, where there’s only one institution, this systems makes sense (because really, why make a formula when there’s only one institution?).  It probably makes less sense in Alberta, which also uses it.

Enrolment-based fundingIn most of North America, including Canada’s two biggest provinces, the majority of cash transferred by governments to institutions is simply based on the numbers of students enrolled, with more expensive programs given an extra “weight”, allegedly based on real costs (so, a medicine student is worth 5x an arts student, etc.).  These weights vary quite a bit from jurisdiction to jurisdiction so it’s a bit dubious that they are really based on “actual costs”.  It’s better to think of them as consensual fictions which are mutually convenient for both institutions’ and government’s planning purposes.  (Intriguingly, during the Ontario funding formula discussions, one of the most urgent pleas from institutions was “don’t mess with the subject weightings”.  Make of that what you will.)

Output-based FundingFitfully, the world is moving to various types of output-based funding.  In the US that means small amounts of funding based on various measure of progress/completion; in Europe, it’s quite large amounts of funding, usually some combination of student output and research outcomes.   Where it is based on student funding, the money is often weighted by the discipline from which the student graduate, just the way enrolment funding is. Note that output-based funding is not the same thing as outcome based funding.  There are a very few places which get funded based on student employment rates or student loan default rates (though the Harris government in Ontario did give that a try for awhile and countries like Finland do incorporate employment outcomes in funding decisions at the margins).

Competitive Funding. In Canada, we traditionally think of competitive funding as occurring at the level of the individual researcher.  But increasingly, we’re seeing funding being competitive at the institutional level (think CFI, think CFREF).  In other countries – particularly those which provide money for teaching and research in two separate envelopes – this has been the norm for a long time.

Mission-based funding.  There are a few places – Austria in particular – where funding is at least partially conditional on fulfilling a particular mandate or reaching a set of goals.  (Arguably, British Columbia uses this method, but the conditions are softer than in Austria).  In some ways this is a throwback to a negotiated budget system, but with an actual check for  “return on investment”.

Other Stuff.  Governments hand out money for all kinds of reasons.  Some are recurrent, such as being a Northern university (in Ontario, anyway) or a university serving the French community. In some countries you will see special envelopes for institutions to maintain art galleries and museums.  Then there’s the stuff which is basically play-money for ministers wanting to make a few headlines: throw-away money for a new building here, a new building there, money for mental health initiatives, or entrepreneurship centres, or what have you.  Most often seen in election years.

(If you want to split hairs, there’s an eighth way: subsidizing student tuition dollars through loan and grants.  But we’ll stick to the direct methods of subsidy for now).

Most jurisdictions of course use multiple means of dispersing funds.  For instance, though a majority of the world’s jurisdictions provide funds primarily as “negotiated”, “lump-sum” or “enrolment-based formula” systems, they still often have pockets of money given out competitively, or as “other” funding.

Internationally, what is striking about Canada (and to some extent the US) is how reliant they are on methods 2 and 3 compared to Europe which on the whole uses method 4 (output-based funding) a lot more.  I’ll show those differences in more detail tomorrow.

February 08

New York, New York

With the Republicans in control of both Congress and the White house for at least the next two years, the fight for “free tuition” is moving to the state level.  And so to New York, where Governor Cuomo has proposed a form of “free tuition” for anyone attending the City University of New York (CUNY) or the State University of New York (SUNY) and whose family earns less than $125,000.  So what does this mean exactly?

Well, to be clear, it’s not the same kind of free tuition Hillary Clinton was offering back in the election campaign.  (There are many kinds of free tuition, as I noted back here; refresh your memory, if you like).  Clinton was offering – with scant details – a vision where with enough federal funds, states and their public university systems would agree to stop charging tuition fees to students from families below $125,000 in income (or, roughly, 80% of the student population.  That idea was always a little bit pie-in-the-sky: the impracticalities of it were well covered by Kevin Carey at the time.  What Cuomo is offering instead is a top-up plan to make tuition “net free”.  Basically, he’s going to offer students below the cut-off line whatever amount of grants it takes to equal the amount they pay in tuition.  This payment, to be known as an ‘Excelsior Scholarship” (really), is thus equivalent to tuition minus any grants the student is already receiving from the federal or state governments via the Pell grant system.

Now, you might be saying to yourself: hey, that kind of sounds like the Ontario model.  That’s good, isn’t it?  To which the answer is: yes, it is a lot like the Ontario model.  It’s income-targeted net free tuition.  Except a) in some respects it’s going to be more like New Brunswick, with a big step-function (link to: ) at $125,001 instead of a nice smooth slope of benefits like Ontario and b) the threshold for getting full benefits is ludicrously high and has perverse consequences.

What do I mean by perverse consequences?  Well, the thing is that for students at the low-income level of the spectrum, federal and state grants already equal tuition.  So literally none of the money involved here is going to help them.  The biggest winners in the Cuomo proposal are precisely those people who get no grants right now – basically from families with about $80K and up in family income.  And yet these are the people who have the least trouble going to college right now.

The question here is: if you have a couple of hundred million dollars to spend, why would you give it to a group of people who have no issue attending in the first place?  Why not put money where it will be most effective? Columbia University’s Judith Scott-Clayton suggests there’s good evidence that money going to institutions creates better access outcomes than simply limiting the price.

Even Chile, once very keen on full “gratuidad”, has belatedly come around to this realization.  For budgetary reasons, the government was forced to limit its recent introduction of “free” tuition to students from families in the bottom six deciles of income.  This summer, the Chilean Treasury Department published cost estimates for the program.  In its present state the fully-phased in cost of the program will be 607 billion pesos (about $1.25 billion Canadian, or about $950M American).  Adding each of the next four deciles raises the price by about 350 billion, or 58%.  That is to say, free tuition for everyone would cost over 2 trillion pesos, or over three times as much as it costs for the bottom six deciles.  That difference is equal to 1.5% of GDP.  And what would be the purpose of spending all that money?  The very fact that it costs so much is a reflection of the fact that participation from these groups is already so high they don’t really need government help.  What kind of socialist government prioritizes handing over 1.5% of GDP to families in the top four income deciles?

In short, while targeted free tuition makes a great deal of sense, it really does need to be targeted.  If targeting weakens, the program becomes more expensive and less effective.  New York’s plan, clearly, suffers from insufficient targeting.  Ontario’s plan has it about right.  But beware: the Premier occasionally muses about extending the plan to higher income groups and there’s certainly a chance such an idea will make it into the policy conversation as the provincial election approaches.  That way madness and much wasted public funding lies.

January 31

Hiring Decisions

One of the more thoughtful replies I received to my piece on CAUT’s politicization of university accounting pointed out that one of the reasons people didn’t trust university accounting was because they made seemingly incomprehensible decisions with respect to hiring.  How was it, my reader asked, that there was plenty of money to hire sessionals but never money to hire full-time, permanent faculty?  Isn’t that money fungible?  Why spend on one and not the other?

I can see why this might be puzzling if you’re used to seeing budget decisions in annual terms, but it’s actually fairly simple.  Yes, on an annual basis, one new assistant professor might cost the same as eight sessionals (or whatever – pick a number), but on a longer-term accounting, it’s a completely different story.

At this point I should point you to a recent piece by Carleton University’s Nick Rowe, entitled “University Budget Surpluses: Irreversible Investment and Uncertain Demand” which lays out the basic challenge in accounting for academic staff on the university’s books.  (This, by the way, is not the only Nick Rowe piece on universities you should read – everybody should read, and I mean now, his “Confessions of a Central Planner” which is the best thing ever written on university finance ever, by anyone.  Seriously, it’s genius).    I am doing a bit of violence to Rowe’s argument (which is somewhat broader than the case I am making here), but the simple version is this:

University income are uncertain – and in fact getting more uncertain all the time as universities increasingly become more dependent on market operations (i.e. money from students, both domestic and international).  That’s not the fault of anyone in the institution: that’s simply the way public policy has been moving for the past few years.  Now, if you’re a provost or a VP Finance trying to plan for a future, what’s the absolute last thing you want to do?  Add permanent costs.

Well, as Rowe points out, hiring a full-time prof is about as permanent a cost as it gets.  In fact, given the way tenure works and how collective bargaining agreements are written and the fact that retirement is increasingly a thing of the past, a new hire is pretty much the same category of investment as a new building: it’s going to be there for 40 years, minimum.  A new assistant professor should not be viewed as an $85,000 annual cost ($100K with benefits); he or she should rather be viewed as something like an extremely illiquid $6 million asset.

The analogy here is one with personal finances: say you were being paid $100,000 per year and you’re debating whether to buy a house or keep renting.  Then someone came along and said: listen, we’re going to pay you $80,000 and pay you a bonus of between $10,000 and $25,000 per year.  In all likelihood, this means you’ll end up right about at $100,000, but there’s a non-trivial chance that your pay may fall below that level.  Quick: are you now more likely to take on the responsibility of a mortgage?  Or do you stick with renting?  Not everyone will have the same answer here, but certainly most would consider the latter to be the “safer” option.

In any case: institutional policy on temporary vs. permanent hires is probably not a gauge of miserliness or what have you.  A more accurate analysis would suggest that such policies are actually a function of institutional confidence in future revenues.  Where institutions feel good about the future, they will make full-time hires; where they are less confident temps will be hired more often.  That’s not something anyone ever says out loud, for obvious reasons, but it is nevertheless a perfectly sensible long-term planning perspective.  No conspiracy theories about university budgeting practices required.

January 27

A Slice of Canadian Higher Education History

There are a few gems scattered through Statistics Canada’s archives. Digging around their site the other day, I came across a fantastic trove of documents published by the Dominion Bureau of Statistics (as StatsCan used to be called) called Higher Education in Canada. The earliest number in this series dates from 1938, and is available here. I urge you to read the whole thing, because it’s a hoot. But let me just focus in on a couple of points in this document worth pondering.

The first point of interest is the enrolment statistics (see page 65 of the PDF, 63 of the document). It won’t of course surprise anyone to know that enrolment at universities was a lot smaller in 1937-38 than it is today (33,600 undergraduates then, 970,000 or so now), or that colleges were non-existent back then. What is a bit striking is the large number of students being taught in universities who were “pre-matriculation” (i.e. high school students). Nearly one-third of all students in universities in 1937-38 had this “pre-matric” status. Now, two-thirds of these were in Quebec, where the “colleges classiques” tended to blur the line between secondary and post-secondary (and, in their new guise as CEGEPs, still kind of do). But outside of British Columbia, all universities had at least some pre-matric, which would have made these institutions quite different from modern ones.

The second point of interest is the section on entrance requirements at various universities (page 12-13 of the PDF, p. 10-11 of the document). With the exception of UNB, every Canadian university east of the Ottawa River required Latin or Greek in order to enter university, as did Queens, Western and McMaster. Elsewhere, Latin was an alternative to Mathematics (U of T), or an alternative to a modern language (usually French or German). What’s interesting here is not so much the decline in salience of classical languages, but the decline in salience of any foreign language. In 1938, it was impossible to gain admission to a Canadian university without first matriculating in a second language, and at a majority of them a third language was required as well. I hear a lot of blah blah about internationalization on Canadian campuses, but 80 years on there are no Canadian universities which require graduates to learn a second language, let alone set this as a condition of entry. An area, clearly, where we have gone backwards.

The third and final bit to enjoy is the section on tuition fees (page 13), which I reproduce here:

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*$1 in 1937-38 = $13.95 in 2016
**$1 in 1928-29 = $16.26 in 2016

Be a bit careful in comparing across years here: because of deflation, $100 in 1928 was worth $85 in 1937 and so institutions which kept prices stable in fact saw a rise in income in real terms. There are a bunch of interesting stories here, including the fact that institutions had very different pricing strategies in the depression. Some (e.g. McGill, Saskatchewan, Acadia) increased tuition while others (mostly Catholic institutions like the Quebec seminaries and St. Dunstan’s) either held the line or reduced costs. Also mildly amusing is the fact that McGill’s tuition for in-province students is almost unchanged since 1937-38 (one can imagine the slogan: “McGill – we’ve been this cheap since the Rape of Nanking!”).

The more interesting point here is that if you go back to the 1920s, not all Canadian universities were receiving stable and recurrent operating grants from provincial governments (of note: nowhere in this digest of university statistics is government funding even mentioned). Nationally, in 1935, all universities combined received $5.4 million from provincial governments – and U of T accounted for about a quarter of that. For every dollar in fees universities received from students, they received $1.22 from government. So when you see that universities were for the most part charging around $125 per students in 1937-38, what that means is that total operating funding per student was maybe $275, or a shade under $4500 per student in today’s dollars. That’s about one-fifth of today’s operating income per student.

While most of that extra per-student income has gone towards making institutions more capital-intensive (scientific facilities in general were pretty scarce in the 1930s), there’s no question that the financial position of academics had improved. If you take a quick gander at page 15, which shows the distribution of professorial salaries, you’ll see that average annual salaries for associate profs was just below $3500, while those for full professors was probably in the $4200 range. Even after for inflation, that means academic salaries were less than half what they are today. Indeed, one of the reasons tenure was so valued back then was that job security made up for the not-stellar pay. Times change.

In any case, explore this document on your own: many hours (well, minutes anyway) of fun to be had here.

January 10

The Politicization of University Accounting

Back in the fall, the Canadian Alliance of University Teachers (CAUT) published an interesting little guidebook called CAUT’s Guide to Analyzing University & College Financial Statements, written by Cameron and Janet Morrill, two profs at the University of Manitoba’s Asper School of Business.  Stripped to its essentials, it purports to be a DIY guide for faculty to help hold their institutions to account over finances.

Nothing wrong with that.  Learning how to read financial statements is a good thing.  The issue is the subtext (“THEY’RE LYING TO YOU!”) and the curious way in which they treat the matter of internally restricted funds.

In practice, universities have three types of funds.  There are unrestricted funds: money which they can do whatever heck they like with.  For the most part this is equivalent to the annual operating budget.  There are externally restricted funds – money which can only be used in manners specified by outsiders who have provided them money.  These include most research budgets and infrastructure money (you can’t take CFI money and blow it on beer and popcorn) as well as – of course – money destined for the school’s endowment.

But then there’s a third and slightly more curious type of money called “internally restricted funds”.  These are funds which institutions have set aside themselves for various purposes, usually related to the long-term health of the institution.  They don’t show up as a separate category on balance sheets, though a quick read of notes accompanying the financial statements is usually sufficient to work out their size (admittedly not the most exciting pastime).

The CAUT document is implicitly a guide for how to hunt for evidence that administrators are lying about the institution’s health.  The document starts off in fact by the authors telling the tale of how gradually they came to understand that their own university’s financial position was not fragile but loaded, thanks to their sophisticated understanding of “interfund transfers” (i.e. the process of putting money into internally restricted funds).  Left unsaid: hey, these internally restricted funds could be going to increase professor’s salaries!

Occasionally the document seems to accept the existence of and rationale for internally restricted funds, but the kicker is in the appendices, where they produce a step-by-step guide to working out how much unrestricted cash an institution really has on hand, and use the financial statements of the University of New Brunswick and the University of Ottawa as their case studies.  The formula they use is a little complex but basically it comes down to 1) find out how much money they have in “investments” 2) subtract the endowment and externally restricted funds 3) the residual is “unrestricted cash and investments”.  Which of course can only be true if you completely ignored internally restricted funds.

According to the Morrills, UNB has about $130 million in “unrestricted cash and investments” – you know, just loose money hanging around – while Ottawa has $331 million.  This is preposterous, as even a cursory look at each institution’s financial statements.  At Ottawa, for instance, note 19 of the financial statements clearly notes that the university has $297 million in internally restricted funds (ie., almost exactly what the Morrills claim to be “unrestricted cash and investments”) and note 12 of the financial statements lists a number of the uses of these funds, including: a $57 million for capital expenditures (e.g to match an external grant), $30 million to support faculty research activities, $31 million in a sinking fund to retire long-term debt, etc.

At both UNB and Ottawa – and I think it’s safe to assume it’s true at other institutions as well – internally restricted funds also cover money set aside to cover the unfunded costs of benefits programs, and funds for strategic priorities.  They also cover (and this is one of Canadian higher education’s dirty little secrets) many millions of dollars which are under the control of individual faculties and departments with respect to which the central administration has barely any understanding let alone control.  How did they get these?  Simple: many universities allow faculties/departments to roll over any unspent non-salary-related money in their budgets from year-to-year.  Over time, these can become formidable war chests.  I know of one medium-sized university in western Canada where such funds add up to around $60 million.  But is this really “unrestricted cash/investments”?   I can’t imagine any university administrator trying to take such funds away from lower units.  The words “from my cold dead hands” leap to mind.

So what we have here is a document from CAUT which is encouraging its member locals to label “internally restricted funds” as “unrestricted cash and investments” and hence, presumably, available for distribution to faculty members during collective bargaining talks.  And there is a sense in which this is correct: the designation of certain funds and certain priorities are political designations within the university itself.  It was a decision by the Board of Governors which restricted these funds and the Board could just as easily have not restricted these funds, or restricted them to some other purpose.

It might be a good idea to have an honest discussion about the size and use of these funds, and the trade-offs they entail.  Should professors get more pay at the expense of paying off the institutional debt or covering the unfunded costs of future benefits?  Should the institution have a lower tuition increase this year paid for by raiding faculty funds built up over the years for internal priorities?  I think those kinds of discussions would be helpful and clarifying.

But that’s not what the Morrills and CAUT are trying to do here.  Quite clearly, by claiming that internally restricted funds are in fact “unrestricted cash & investments” what they are trying to do is get more of their members to believe that universities have plenty of money lying around to spend and hence that any holding out at the bargaining table is chicanery rather than prudence.

Let’s not beat around the bush.  This is a lie, one designed specifically to increase labour strife by increasing distrust in university financial statements.  I wonder what CAUT has to gain by publishing it?

December 14

More on International Fees in Canadian Universities

Due to a few unexpected issues yesterday, we had to postpone the One Thought. With no further ado, here it is:

The day before yesterday we looked at what universities in different parts of the country are charging in terms of international tuition fees.  Here’s a quick graph to refresh your memory:

Figure 1: International Undergraduate Tuition Fees, by Province, Canada, 2016-17

ottsyd-20161213-1

Figure 2 shows the same data but with a different Y axis.  Instead of showing the figure in dollars, let’s show the figure as a percentage of national average total institutional expenditures per FTE students (minus sponsored research), which in 2014-15 was $24,732.

Figure 2: Provincial Average Tuition as a percentage of National Average Institutional Expenditures per FTE student

ottsyd-20161213-2

What figure 2 shows is that on average international students are covering more or less (95%) covering the cost of their education through tuition, but that is mostly because of policies in Ontario, where the figure is 120% of cost.  In the other three “big provinces” the fees are about 85% of cost, whereas elsewhere the figure is lower; as low as 38% in Newfoundland’s case.

Now, let’s think about these figures in terms of how Canada positions itself as an education market.  Are we a bargain player, or a luxury player?  This isn’t quite a straightforward question to answer because not everyone reports data in the same way.  But, basically, here’s the basic story: in the US according to the College Board’s Trends in College Prices 2016, 4-year private non-profits charge US$33,480 (for both national and international students); out-of-state charges at public 4-year universities are US$24,930.  In the UK, international fees vary substantially based on whether the course is a lecture course, a laboratory course or a clinical course; the Times Higher 2016 survey of fees, the average for these three types of courses are, respectively, £13,442, £15,638 and £20,956.  In New Zealand, the most recent data available comes from the Education Counts website; according to this, in 2015, the average tuition at universities was NZ$24,150.  So far as I can tell there is no “official” average for fees in Australia (not even for domestic students), but this 2014 survey shows that the average in “indicative fee” for international students is A$23,521.  Given that a couple of years have passed and fees certainly aren’t going down, we can probably round that up to an even $25,000.

Now, let’s translate all those figures into a common currency.  And let’s do it the way an international student likely would; namely, in $USD, using current exchange rates.  Normally, I do these kinds of comparisons in $PPP but since international students have to convert money to buy in each currency, exchange rates make more sense.  So, at current rates of exchange, here is what the competitive picture in each jurisdiction looks like:

Figure 3: Average International Student Tuition Fees, Selected Jurisdictions, in $USD

ottsyd-20161213-3

In brief, prices for international students in the US are substantially higher than they are elsewhere in the Anglophone world: US privates are charging 85% more than Canadian universities, and the publics are charging about 35% more.   National averages for Canada, Australia, New Zealand and UK (lecture courses) are all very tightly bunched together at between $17-18,000 US.  Only Ontario seems to be trying to play around the same price point as US publics.

One question that arises from this chart is: why exactly aren’t universities in the rest of Canada charging more?  What do Manitoba and Nova Scotia, let alone Newfoundland, gain by having such low fees?  Well, part of the story has to do with the way provincial subsidies work in these provinces.  In both Manitoba and Newfoundland, institutions get block grants and so all money from international students is “additional” to institutional budgets (I have a feeling this is true in Nova Scotia as well but wasn’t able to confirm before publication).  They can set them low because they simply do not need to get income equivalent to cost of education, the way Ontario universities do.  But while that might make sense from an institutional point of view, it’s not as clear why that makes sense from a provincial one: what’s in it for provincial governments to provide this level of subsidy for international students?

One possible argument is that these provinces need to price low in order to attract students (Winnipeg winters are perhaps a tough sell in South East Asia); and since education is a funnel for immigration, maybe the way to think about this money is as a “loss leader” for future population growth.  But then again, we already know that Atlantic Canada has a harder time hanging on to students after graduation than the rest of the country , so maybe this isn’t such a winning idea after all.n

I’d argue in fact that low-pricing is self-defeating in international higher education.  A degree from a (reasonably) prestigious institution is in fact a Veblen good: higher prices drive greater demand because they give an aura of exclusivity.  It’s the one type of good where demand curves don’t slope downwards and institutions would be kind of crazy not to take advantage of that.  There’s a good case to be made that institutions in the Atlantic and prairie provinces could increase international student tuition.

 

December 09

Does Student Debt Matter If You’re Not Going to Pay It Back?

You can accumulate one hell of a lot of debt these days in the UK.  Just in an undergraduate degree, fees are ‎£9,000 per year plus you can get another ‎£10,702 in maintenance loans per year of you’re studying in London.  Over a three-year degree that’s ‎£59,106 or a tad over $100,000 (yes, really). So, at face value one can understand the spate of stories coming out of the UK these days talking about how their massive debt loads are going to paralyze them for life, stop them being able to buy housing etc.

Except, wait – these are income contingent loans, not mortgage-style loans.  The maximum payment you have to make in any given year is 9% of marginal income over 21,000.  And the debt incurred doesn’t necessarily need to be paid back.  Loans are forgiven after 25 years, regardless of how much you have repaid.  Estimates vary, in part because it depends on what discount rates one chooses and in part because the government criminally keeps messing with the terms of the loans, but at the moment it is expected that between 25 and 40% of student loan balances will never be repaid and a higher proportion of students (perhaps 50%) will receive at least some forgiveness on their loans.  For those who do not repay their loans, the UK loan system is more like a tax than a loan – a 9% surtax on income over 21,000 which lasts for 25 years after graduation (more on that here).

Despite massive nominal debts, students simply aren’t facing massive repayment burden.   A graduate making 30,000 is only repaying 810 per year, or about 3.1% of after tax income, which is a heck of a lot less than the amount that the average Canadian graduate with student loan debt is paying (our grads pay close to 8% of after-tax income on average).  And they’re paying that regardless of how big their debt is, which is not true in Canada either: at any given level of income over $25,000 per year, Canadian student loans borrowers’ rise along with the amount of debt they have up to a maximum of 20% of family income.

(If you’re wondering how that works – how UK loans can be so big and yet borrowers repay so little – it’s precisely because the government expects quite large losses on the program.  Student loan burdens are easy to reduce if you’re prepared to go to extreme lengths to subsidize them).

The point of income-contingent loan systems like those in the UK, with their guarantees, their maximum payments and their generous forgiveness systems is precisely  to do everything possible to make life easier for borrowers, to ensure that their student loan debts are not going to affect their ability to borrow for other things later on.

But perception is everything.  If graduates feel that their large debts constrain their ability to do make certain life choices like buying a house even though (technically) they don’t, then can we say the policy is actually working? There’s an interesting side point here. When deciding on applications for mortgages or other types of consumer debt, it’s unclear whether banks in places like Australia and UK actually treat income-contingent student loan debt differently than Canadian and US banks treat mortgage-style debt.  They should, but apparently nobody knows for sure because no one’s ever checked – not that banks would necessarily fess up if they didn’t.

Now, I’m not saying that these stories coming out of the UK are in fact true; people in opposition to government policies will tend to come up with whatever argument sounds good at a particular moment. But even if such views aren’t widespread, the point raised is a good one.  Student loan policy wonks have always assumed that if you provide guarantees and limit liability/risk on student loans, then students will be ok with debt.  But if the facts of the policy don’t change people’s attitudes about risk, then the policies will fail, no matter how well they deal with the actual problems at hand.

But what’s the alternative?  It’s a bit of a scary thought.

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