Why high fees are not necessarily the answer
14 August 2014, by Prof. Leo Goedegebuure
Professor Leo Goedegebuure, Director, LH Martin Institute & Lea Patterson, President and CEO, Pilbara Group
In Flanders the recently formed coalition government has decided to cut the higher education budget by 5% and has given the universities two options to absorb this cut: reduce your operating budget by a same percentage or increase student fees to recoup the cut. The latter would effectively mean more than doubling fees from €600 to €1500. The Rectors of the two leading research universities, Leuven and Ghent, have forcefully spoken out against what they consider a poison chalice. And the Flemish University Council has equally condemned the government arguing that what should be avoided at all cost is a price war over fees.
On our side of the world realities are quite different. With the exception of a few vice-chancellors, Stephen Parker being the most outspoken and vocal, there has been general support for fee-deregulation, with Universities Australia actively lobbying the Senate to pass at least this part of the government’s reform package. Some concerns have been raised over steep hikes in tuition fees, but the common opinion appears to be that it is ok for students to bear the cost, given the availability of income contingent loans. And there appears to be general agreement that compound interest at the bond rate will be the first thing to go in the Senate bartering, making the reform package somewhat more palatable to students and their parents.
What perhaps is not surprising but nevertheless needs to be pointed out – hard truths never are easy to face – is that attention hardly has been focused on increasing productivity, at least as a contribution to offset the level of fee increases to deal with the proposed 20% cut in Commonwealth funding provided for education. The collective university position on this is that a decade of cuts, non-indexation and underfunding in general has taken ‘the fat’ out of the system. Further efficiencies simply won’t work to deal with yet another significant cut.
There is an obvious appeal to this argument as Australia is one of the OECD countries that stands out negatively when it comes to comparative investment in higher education and research. But this does not mean we should close our eyes to the well-documented phenomena of the ‘academic ratchet’ and the ‘administrative lattice’. The academic ratchet refers to the ever increasing cost on the academic side of the university equation through adding on more and more specialisations, combined with the creation of increasing discretionary faculty time to pursue professional and individual goals. The administrative lattice refers to the ballooning costs on the professional side of the university through the unanticipated consequences of increased marketization. This ranges from expanded student services centres to professionalized marketing departments to finance and legal departments to deal with increased reporting, compliance and risk-aversion. Together, the ratchet and the lattice feed the classic law that universities will raise every dollar they can and then spend it all.
Many in Australian higher education will argue that these American concepts do not apply to our specific context and that we have worked hard and diligently to contain our costs and become very efficient indeed. We would be the last to argue that no attempts have been made as we are well aware of the continuous state of restructure that Australian universities find themselves in. But trying to deal with symptoms is not the same as tackling the root causes. And this is where the Australian problem begins.
First, we need to understand where our costs are coming from. This seems akin to kicking in a well-opened door but unfortunately it is not. The main costing undertaken at a lot of universities is either based on direct costs or worse the budget. Direct costs are fine for some purposes if properly calculated, but they can be misleading if used uncritically. The budget simply states how much is planned to be spent, not how much things cost. Most analysis of potential student fees only considers the revenue side of the equation. But obviously it is very important to consider the fully burdened expense side of the equation as well, so that the university properly understands which courses are making money and which are losing money.
As an example a benchmarking exercise was conducted comparing the detailed expenses per EFTSL for each funding cluster across a number of Australian universities. This analysis highlighted the fact that the actual margin per EFTSL ranges widely. When we look at averages – i.e. excluding serious outliers – what we see are margins ranging from -$3,000 to +$4,000. Taking reasonable enrolment figures of around 1500, this results in swings ranging from –$M4.5 to $M6. Not understanding these basics and not being clear about levels of cross-subsidization can lead to a potentially disastrous financial position. It should be noted that this benchmarking was done on existing CGS and HECS rates, but the proposed Commonwealth changes would do little to alter these relativities.
Second, our national and local policy settings are very conducive to the further expansion of the ratchet and the lattice. Collectively we have institutionalized research performance targets across the board to not only demonstrate that we are ‘real’ universities but to also play the ranking games focussed on the international student market that is so crucial to our financial sustainability. The increase of faculty discretionary time fits so well with these settings it is almost frightening. Combine this with the outcomes of enterprise bargaining based on the classic conception of the academic job, and the nightmare scenario of increasingly rising academic costs comes uncomfortably close.
Third, partly due to culture partly due to real pressure we have become compliance-focused and risk-averse. Australian universities are seriously bureaucratic places where the lattice is getting bigger and bigger. Not all of this is due to externally originated red tape. A good deal of it is self-inflicted administrative pain. This will only become more exacerbated in a further marketized environment as has been and still is demonstrated in the US.
We recently embarked on a series of financial simulations to see where the current government proposals might take us and gave participants in our symposium the opportunity to explore alternatives. The results were to an extent unexpected and gave rise to quite some debate. Some examples may suffice to ask some serious questions about the fee hikes that are at the base of so much speculation.
The proposed government reduction in base funding could be compensated by setting tuition fees to around $10,000 a year on average. This would seem a modest price adjustment, and in some cases, such as Accounting, Dentistry and Medicine, even a reduction in tuition fees, compared to the rather absurd figures that have been flying around. This scenario assumes a status quo in all other aspects.
However, a rise in tuition fees appears not necessary at all if we start playing around with the current business model. Were one to concentrate research activity, i.e. provide research time to those academics that actually produce something in that time – ‘research active’ in current parlance and if one was able to redirect the additional academic time/effort to education, the results to the bottom line are quite spectacular. The modelling shows changes to the order of tens of millions.
Admittedly, this is theory as realities are far more complex and cumbersome in terms of redeployment of academic staff, skill sets and capabilities. And this situation could not be reached overnight as the design and implementation of such a redesign of our workforce and structure requires careful planning and negotiation. But it very clearly points to the fact that fee-hikes are not the only answer and that haste is a bad advisor.
What the modelling also showed was that if we start working with more significant fee increases these could be used to significantly improve the quality of the education experience through reduced class sizes, more intensified teaching modes and more time for course development and renewal. This would be the value-for-money proposition that perhaps might persuade students and parents that indeed we do have a world-class system. However, if all of the financial ‘gains’ are redirected to research to further lift the scores in ERA and to marginally improve institutional positions in the international rankings, we are short-changing our students.
Moreover, we will have created a world-first in the sense of having a research system funded through increased student contributions. Politically we must address the innovation conundrum that we are currently facing: how can we truly become an innovative society that prepares itself for what is to be post-mining? Given the realities of the Australian economy this is going to require significant public investment focussed on strategic basic research and significantly increased university-industry interaction. In the longer term this may well have positive spin-offs on the education side of our enterprise. But it is taking the concept of cross-subsidization to a different plane to have our students pay significantly higher fees to fund something they will not consume during their time of study.
Universities need to consider the relative importance of research, teaching quality and student fees. This does not mean picking one over all the others. It is a careful balancing act that requires vision, time and a serious understanding of our costs, to ensure the university has a disciplined research focus and improves teaching quality without the need to greatly increase student fees.
Robert Zemsky, Gregory Wegener & William Massy (2005), Remaking the American University: Market-smart and Mission-centered, Rutgers University Press.