Ronald EhrenbergCornell University

For at least a century, tuition at selectiveprivate colleges and universities has risenannually by two to three percent morethan the rate of inflation. It wasn’t untilthe 1980s, though, that tuition growthbegan to regularly outstrip growth inmedian family income. During the 1990s,endowments grew enormously as a resultof the booming stock market, leadingmany observers to wonder why tuitionneeded to be raised at all . RonaldEhrenberg, Irving M. Ives Professor atCornell University and director of theCornell Higher Educat ion ResearchInstitute, discusses a number of forcesthat put upward pressure on tuition, andrecommends several steps institutions canconsider to help hold down their costs.

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Cost Pressures on TuitionOver 30 years ago, William Bowen, now president ofthe Andrew W. Mellon Foundation, attributed tuitionrising faster than the rate of inflation primarily to thenature of the educational process, which did not permitacademia to share in the productivity gains that causedearnings growth in the rest of society. Today, severaladditional forces continue to put upward pressure ontuition.

“Winner-Take-All” Society

The objective of selective academic institu-tions is to be the best they can in every aspectof their activities. They aggressively seek outall possible resources and put them to usefunding things they think will make thembetter. To look better than their competitors,the institutions wind up in an arms race ofspending to improve facilities, faculty, stu-dents, research, and instructional technology.Meanwhile, students and their familiesincreasingly want to buy the best: the fractionof our nation’s top students, as measured bytest scores, who choose to enroll in selectiveprivate institutions has increased substantiallyover time. Research suggests they are wise todo so, because the economic return to attending a selec-tive private institution is large, and increasing.

With long lines of high quality applicants flocking totheir doors, top institutions have chosen to maintain andincrease quality largely by spending more, not by increas-ing efficiency, reducing costs, or reallocating funds.

Shared Governance

The shared system of governance between trustees,administrators, and faculty almost guarantees that selec-tive private institutions will be slow to react to cost pres-sures. Trustees are often successful business people whoknow how to cut costs and meet budget constraints. Butif the president tells them that they need to spendmoney to maintain the strength of the university in aparticular field, or that they need funds to enhance the

living and learning environment to attract students,they are likely to agree.

At public institutions, trustees often do not have controlover tuition levels and state appropriations—the politicalprocess often makes such decisions. Administrators at thepublic institutions often can make hard decisions to bal-ance budgets because they can always blame the cuts onstate government. In contrast, administrators at privateinstitutions often find that all blame for cutbacks is

assigned to them. Rather than risk the goodwill of thefaculty, whose support they need to effectively govern,they are more likely to agree to raise tuition than takeother actions to provide budget relief.

Federal Government Policies

The federal government has contributed to the cost pres-sure on selective private institutions in at least three ways.First, the Justice Department’s breakup of the collectiveagreement of several elite institutions to target theirfinancial aid to students with the greatest need has led tothe increased use of merit aid and more expensive finan-cial aid packages. Second, the value of the maximumBasic Educational Opportunity Grant (BEOG) has notkept pace with inflation. Viewed in 1997 constant dol-lars, in 1975, the maximum BEOG grant was $4,000; in

“ t op institutions have

chosen to maintain and increase

quality largely by spending more,

not by increasing efficiency,

reducing costs,

or reallocating funds ”

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1997, it was $2,700. Private institutions have had tomake up the difference in the form of institutional finan-cial aid, putting more pressure on tuition. Finally, thecost of doing research has skyrocketed in recent years asthe government has put pressure on private research uni-versities to reduce their indirect costs rates, and, at thesame time, raised its expectations for matching funds ingrant applications.

External Actors

While valuable to selective institutions in a number ofways, alumni also tend to discourage institutions fromcutting almost anything by threatening to withholdcontributions. Academic institutions also face costpressures from local governments. Obtaining requiredpermits for construction or to develop propertiesoften requires complex negotiations, frequently lead-ing to increased financial payments to local govern-ments to compensate them for the institution’s tax-exempt status. Environmentalists and historicalpreservationists, too, can slow down projects andincrease costs much more so than for a for-profit firm:unlike the university, the business firm has the optionto pack up and move.

Published Rankings of Institutions

It has been shown that when an institution’s ranking in U.S.News & World Report improves, the number of applicantsincreases and the percentage of applicants accepted decreas-es, while yield and freshmen test scores increase, and theamount of financial aid that must be offered to enroll theclass decreases. As a result, institutions have every incentiveto improve their ranking. To the extent that the rankings arepartially based on how much an institution spends educat-ing each student, pressure to increase such spending

mounts, and unilateral reduction of costs in a number ofareas is untenable.

Appointment and Evaluation of Deans

While the president or provost typically makes appoint-ments, searches for deans are often conducted by com-mittees comprised primarily of faculty from the relevantcollege. Once in office, if a dean is successful at fund rais-ing and external relations, and maintains faculty support,it is difficult for a provost or president to penalize orremove the dean for failing to cooperate in university-wide initiatives. Thus, central administrators have limit-ed power to influence the actions of deans, whose inter-ests most often lie with their own colleges rather than thebroader institution.

How Universities Organize Themselves

How institutions are organized for budgetary purposescan have a significant impact on their ability to controlcosts. Universities use four broad types of resource alloca-tion methodologies, as follows:

• Central Control. Nearly all revenue flows directly tothe central administration, which covers costs and thenallocates some portion of the remaining revenues backto the individual colleges.

• Tubs. Each college keeps the revenue it generates,including tuition, and is responsible for all costs thatit incurs. Funds are remitted to central administra-tion only to cover allocated shares of central costs.

• Tubs with a Franchise Fee. Each college is a tub, butremits more than its share of central costs; this “fran-chise fee” is allocated back to the colleges at the discre-tion of the central administration.

• Activity Driven. Each college remits to the centera share of its total expenditures; the share differs

“ how institutions are organized for budgetary

purposes can have a significant impact on

their ability to control costs ”

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across activities (e.g., teaching, research, etc.). Thecenter covers central costs and allocates excessfunds back to the colleges without explicitly hav-ing calculated central costs for each unit.

The results of a survey of research and doctorate institu-tions that I conducted in 1999 indicate that central con-trol is by far the most prevalent form of organization,with 63 percent of the privates and 92 percent of thepublics arranged as such. Less than 10 percent of the pri-vates were organized as tubs, and this form was mostprevalent in private research I institutions. In practice,however, at nearly half of the institutions under centralcontrol, year-to-year percentage changes in the allocationof revenues to colleges did not vary much across colleges.De facto, it appears that the colleges are being treated astubs at these institutions.

The tub model reduces central administration’s controlover resources and the actions of deans. It is not thebest form to use to improve efficiency and controlcosts, as what is in the best interests of the individualunit is not necessarily in the best interests of the uni-versity. To provide incentives for colleges to raise rev-enues and hold down costs, as well as contribute to theoverall efficiency of the university, variants of the tubswith a franchise fee model or the activity driven mod-els are the preferred alternatives.

ConclusionSelective private colleges and universities can take severalactions to moderate their tuition increases. The resourceallocation method an institution uses can have consider-able effect on its ability to control costs. In the same vein,deans should be held responsible for the well being of theinstitution as a whole, not just for their individual col-lege. Trustees and alumni, too, need to be educated tolook beyond their special interests. In private institutions,trustees can play a crucial role in backing efforts on thepart of presidents and provosts to control costs.

Further, colleges and universities must assume the mind-set of growing by substitution, not by expansion. Andfinally, institutions must increase cooperation with theircompetitors. Consortia to share academic and adminis-trative resources both within campus and across institu-tions promise significant savings in a number of areas.Clearly, tuition increases need not—and, indeed, giventhe changes sweeping throughout higher education, can-not—march on inexorably for another century.

Ronald Ehrenberg is the Irving M. Ives Professor of Industrialand Labor Relations and Economics at Cornell University, direc-tor of the Cornell Higher Education Research Institute, and co-director of Cornell's Institute for Labor Market Policies. He alsoserved for three years as Cornell's vice president for academicprograms, planning, and budgeting. Ehrenberg has authored orco-authored over 100 papers and books.

“ the shared system of

governance between

trustees, administrators,

and faculty almost

guarantees that selective

private institutions will

be slow to react to cost

pressures ”