One of the most important but least-acknowledged subjects in higher education management and finance is internal cross-subsidies.  So today, I‘m going to demystify it, and then consider how higher education institutions can be more transparent about them.

Let’s start with costs per student because that is a bit easier to understand.  Not every student in every class costs the same to educate.  Broadly speaking, for each course or course section, there is a labour cost and a materials cost.  Labour is easier: it’s the cost of the instructor’s and assistants’ (if any) time.  The cost largely depends on the instructor’s rank.  Materials are more costly for clinical courses than lab or studio courses, and very low in a lecture format.   Divide all these costs per course/section by the number of students in that class and you get the cost per student per course.

Among folks who do this kind of thing for a living, there is some debate concerning how zealous to be in terms of assigning overhead costs like infrastructure library, admin and student services, and recruitment, etc., to the level of class or program.  It’s possible to make rules of thumb for doing so and doing so makes all the numbers line up neatly so that all the pluses and minuses balance.  On the other hand, rules of thumb can be a source of picayune squabbling, so it’s equally possible to leave out a whole bunch of costs so that most, if not all courses, look as if they are “making” money and simply conduct the analysis in terms of which courses/programs/units possess higher and lower surpluses, knowing that in practice the former are cross-subsiding the latter.

Then there is revenue per student per class, which comes in two forms: tuition and government grants.  The former is easy to calculate when student fees are calculated on a per-credit basis and only a bit more difficult to calculate if it’s a flat-fee per semester.  Note that where you have differential tuition – say, with international students – this must be calculated as well.  If you want to get fancy, you can also subtract various forms of student aid and just do net tuition. 

In places where governments use some kind of weighted student enrolment formula for grants (where an arts student = X, an engineering student = 2x, a medical student = 5X, and so on), it is possible to assign a value to a single student in a single class.  It is trickier in provinces where the value of the provincial grant is effectively unrelated to enrolments (e.g. Manitoba, Alberta).  If you treat all government income equally, lecture-based courses and programs will look very profitable compared to similar ones in provinces with weighted grant systems, while lab/clinical ones will look like dogs.  On the other hand, it’s possible to assign income based on some other measure, such as funding costs that are used when developing a new program—though these also often draw on “rules of thumb.”

So that’s the mechanics of how to assign income/costs for courses and departments.   But what do these exercises show?  While it varies, there are a few basics that are pretty constant because, holding tuition constant, big classes are typically going to earn more money than small classes. 

The first mechanic is that teaching subsidizes research in the North American system, where all government grants are theoretically tied to teaching. Europe is different because governments tend to fund research and teaching activity through different streams of income.  This is true, even if some universities actually behave as if the reverse is true.

Second is that course-level net earnings have an inverse relationship with the course number assigned to it.  100- and 200-levels classes tend to be big (and often are taught by sessionals).  These make huge net surpluses.  Just to give you an example, in Ontario, your average domestic arts student is bringing in about $1100 in tuition and grants per class.  A 200-student class would therefore be “worth” about $220,000.  The direct labour costs will depend a bit on how you allocate instructional salaries to a single course but using the most conservative method possible (that is, assuming you ignore all research/service time) it’s unlikely to more than about $60,000 and more likely less.  And where that money gets spent, essentially, is on graduate- and upper-level undergraduate level courses, which overall are much smaller.  So: lower-division courses subsidize graduate/upper-division courses.

The third is that typically, lecture-based courses/programs subsidize clinical courses/programs and at most institutions most subjects are subsidizing laboratory or studio courses/programs as well.  At a departmental level, it is rare that English or economics are not piling up substantial surpluses while physics is losing money and over fist.  Now, this can vary quite a bit based on time and place.   Engineering programs on the whole look a lot better now than they did a decade ago because high numbers of international students have raised income substantially (even holding class size constant); Fine Arts programs are usually net contributors in Quebec, where the funding formula pays out generously, and usually net drains in Ontario, where the opposite is true (IIRC, a Fine Arts student is worth about 5x as much in government grants in Quebec as they are in Ontario – and as you can imagine that has an effect on how institutions view Fine Arts).

Now, I raise this issue not because I think institutions should make every class a net contributor.  Far from it!   Institutions derive meaning in large part because of cross-subsidies, with certain departments supporting others financially as well as intellectually.  But what’s remarkable about the current system of cross-subsidies is how unconscious it all is: that is, that no one really acknowledges that it is happening and very few have any real sense of the sums involved.  And that’s unfortunate, because a wider and clearer understanding of the ways institutions cross-subsidize could generate higher-quality thinking about how institutions should be investing their surpluses.

So, here’s a slightly belated New Year’s resolution suggestion for every President, Provost and VP Finance: try working out what every class or program or department (pick your own unit of analysis) contributes to the bottom line.  Not as a punitive exercise or anything like that: just calculate it and publish it.  Show everybody who is being subsidized and who is subsidizing.  I guarantee you there will be a few surprises that make you think more deeply about the way your institution implicitly works.