By Richard Vedder
Like the Gaul of Julius Caesar, the modern research university is divided into three parts, often of roughly equal size. Universities are in the business of disseminating knowledge (teaching), creating knowledge (research), and public service and a variety of business activities ("auxiliary enterprises"). The proportions vary somewhat --at M.I.T., for example, the research component is, no doubt the largest, whereas as many medium quality state institutions (my own Ohio University is a good example), the instructional or auxiliary enterprise components are the largest. Auxiliary enterprises include feeding and housing people, caring for the sick (at university hospitals and clinics), entertaining (games where balls are thrown around, theatrical productions),etc.
The financing of these myriad activities is complex, and usually the public has no idea about the relative importance of the components of this trinity of functions or the amount of cross-subsidization that goes on between them. When university presidents tell parents "your tuition payments cover only 30 percent of the cost of running this institution," they neglect to tell them that the school may be only using 30 percent of the budget directly or indirectly on the dissemination of knowledge and that, in fact, they are paying 100 percent of the cost of educating their kids (in some cases, even more than 100 percent). At my university, the athletic department routinely overruns its budget and runs, in effect, a $12 million plus annual loss which is subsidized elsewhere --about 3 percent of the total university budget. While this is higher than average, it is not extraordinary. Rather than lower tuition by 6 percent and eliminating the subsidy, it continues to keep it to make alumni (who give trivial amounts to the institution) and a few noisy wannabe jocks happy. The students would vote resoundingly, I think, to lower the tuition and give up Division I football if given the opportunity.
I think we should have greater transparency about financing (I have a piece coming out shortly in the Chronicle of Higher Education on this point). The ratio of tuition payments to instructional costs, academic support, and a pro rata proportion of general administrative expenses is needed for every school --and it should be posted on a national web site. The issue arises: where do third party payments REALLY go --for the purpose for which they are intended, or elsewhere? I suspect most third party payments go for instructional or research purposes. But some money intended for "instruction" goes for "research." Does research pay for itself or is it heavily cross subsidized? Do state appropriations, probably designed mainly to improve student access, in reality promote very expensive graduate programs and esoteric research? Does 10 percent or so of my university's state appropriation in reality go to finance intercollegiate athletics instead of, say, creating lower tuition for students that would improve access to college?
CCAP is working on two ways to control costs. First, we are trying to offer alternatives to the cost-enhancing US News & World Report rankings, evaluating schools more on outcomes than inputs (resources used). We are also continuously promoting competition and transparency --both things that can only lead to some moderation in the excessive rise in college costs.