Tuesday, March 6, 2018

A Modest Proposal

On Operating and Financing Higher Education

A Modest Proposal

National student loan debt is at $1.3 trillion and rising. See the February 21, 2017 Forbes magazine report on A $1.3 Trillion Crisis. This debt is incurred after students (and their parents) have already exhausted their savings and student earnings.
More than 60% of the students who received their Bachelors' degrees from the University of Minnesota in 2016 also received a bill for student loans. The median amount of debt was more than $24,000. See p. 20 of the November 2017 Minnesota Office of Higher Education report on Cumulative Student Loan Debt in Minnesota. 
The reliance on student loan debt to finance much of higher education must end. Tuition should be collected from revenues that the students earn after graduation. The amount of tuition should be a percentage of the earnings of each student for a certain time period, such as five years. This would also inject a much needed dose of accountability into the system.

Our current system of financing higher education places all the risk on students, their parents, and the public (by way of state appropriations). It has plenty of financial incentives for advancing into the upper ranks of the administrative bureaucracy at the university and few for providing an education of value to undergraduate students (by either a monetary or non-monetary measure of value).

University administrators have failed to exercise sound financial management in the use of tuition and state appropriations. In a 2012 report the consulting firm Bain & Co. observed that the operating principle for universities has been the Law of More:
Many institutions [of higher education] have operated on the assumption that the more they build, spend, diversify and expand, the more they will persist and prosper. But instead the opposite has happened. Institutions have become over leveraged. Their long term debt is increasing at an average rate of approximately 12% per year, and their average annual interest expense is growing at almost twice the rate of their instruction-related expenses (see Figure 5). In addition to growing debt, administrative and student service costs are growing faster than instructional costs. And fixed costs and overhead consume a growing share of the pie (see Figure 6).
See p. 3 of The Financially Sustainable University (emphasis added).

In fiscal year 2017 the U of M administration spent almost $289 million on "leadership & oversight" and more than $713 million on "mission support" (excluding the costs of facilities and debt service). Those costs of administration exceeded $1 billion and consumed 27% of the $3.7 billion university budget. See The (Over) Billion Dollar Administration.

We can no longer afford to entrust university administrators with hundreds of millions of dollars in unconditional allocations of general appropriations each year. Nor should there be unconditional allocations of additional hundreds of millions of dollars in HEAPR funds to remedy the decades long failure of the administration to allocate sufficient university funds for the maintenance of academic facilities. See Falling (Far) Behind Part II. 
The legislature may impose reasonable and effective conditions on state appropriations to the U of M. As the Minnesota Supreme Court has noted:
Discussing the scope of the legislature's authority in light of the University's constitutional autonomy, we explained in Chase: "At the one extreme the Legislature has no power to make effective, in the form of law, a mere direction of academic policy or administration. At the other extreme it has the undoubted right within reason to condition appropriations as it sees fit." 175 Minn. at 268, 220 N.W. at 955.
Star Tribune Co. v. University of Minnesota Board of Regents, 683 N.W.2d 274, 285 (Minn. 2004) (emphasis added).

The Affordable Care Act requires health insurance companies in large group markets to send rebates to customers if administrative costs and profits consume more than 15% of premiums. See the August 17, 2014 Star Tribune report on Health Insurers Must Pay Up Or Pay Back. In a similar manner, the legislature should impose a condition on general appropriations and on HEAPR appropriations that would require the U of M administration to send rebates to the state treasury if the costs of administration (as defined by the legislature) exceed 15% of total expenses.
In fiscal year 2017 the total expenses of the University were $3.7 billion. Spending 15% of that amount on costs of administration would consume $555 million. More than half a billion dollars is more than reasonable for administrative overhead. 
Acts of reckless endangerment by the leaders of large financial institutions produced the Great Recession. The federal government (finally) cracked down by imposing stress tests on those firms. The state legislature should impose similar tests on institutions of higher education that receive state appropriations. Those institutions should be subject to annual scrutiny by the legislative auditor and the Minnesota Office of Higher Education. The senior administrators of those institutions should also be required to certify annual reports on financial status and the use of state appropriations to the higher education committees of the state legislature.

We need to establish a task force in order to develop a different way to operate and to finance higher education. The work of the task force should include an analysis of the rise in the costs of administration at the U of M over the past 40 years. If there has been an increase in the number of administrators that is disproportionate to any increase in the number of students or the scope of research, we should ask why. If there has been a substantial increase (in constant dollars) in the compensation of any administrator, we should ask why.

We should also compare the compensation paid to university administrators to the compensation of officials in state government who have similar qualifications and duties. For example, the annual salary of the state commissioner of human rights is $145,000. The annual salary of the vice president of the U of M Office for Equity & Diversity is more than 50% greater at $241,000.

Just as the Wall Street bankers created a housing bubble using other people's money, the senior administrators and the Regents at the U of M have created a higher education bubble using both student loan debt and state appropriations. When this budget balloon bursts, they will walk away unscathed, just as the investment bankers did. The students (and their parents) will suffer harm from the student loan debt that inflated the balloon. They will be shackled with that debt for many years (or even decades for many students in the professional schools).

The Regents do not provide effective oversight. They rely on the senior administrators to sift through the volumes of information about the operations of the university. So (with perhaps a couple of exceptions) they see only the information selected by the administrators. They develop a bond with the senior administrators with whom they spend most of their time on campus. So as a group they tend to dismiss the perspectives of other persons (on the rare occasions when they hear other perspectives).

Each biennium the citizens of our state invest more than $1 billion in the U of M in general appropriations. With that much at stake the state legislature should appoint a qualified person to monitor the operations of the university and the use of state appropriations on a continuing basis. This legislative liaison (or watchdog) should have the responsibility to review information produced by senior administrators, to collect additional information through independent research, and to meet with all groups at the university so that the perspectives of other well-informed and thoughtful members of the university community are presented to the legislature.

Michael W. McNabb

University of Minnesota B.A. 1971; J.D. 1974

University of Minnesota Alumni Association life member