Reviewers' comments about this report.
Our central finding is that the present course of higher education--in which costs and demand are rising much faster than funding--is unsustainable. Therefore, we call upon the nation to address the fiscal crisis now, before millions of Americans are denied access to a college education.
We recommend increased public funding of higher education and wide-ranging institutional reforms. These reforms will require strong leadership and new coalitions. A new coalition in itself, the Commission benefitted greatly from the presence of leaders from both higher education and corporate America. The business community has a direct interest in the outcome of educational eform and broad experience in the kind of strategic thinking and internal restructuring that will be required of American colleges and universities.
In a separate volume, we present a series of technical papers prepared by RAND in support of the Commission's work. We wish to thank our colleagues on the Commission for the wisdom and experience they brought to our task. We also want to thank RAND staff for their usual sound and provocative analysis, and Roger Benjamin, President of the Council for Aid to Education, for his leadership in this effort.
| Joseph L. Dionne (Cochair) Chairman and CEO The McGraw-Hill Companies |
Thomas Kean (Cochair) President Drew University |
The monetary difficulties of colleges and universities, thought for a time to be temporary, now appear to be part of long-term trends in the demand for enrollment and the supply of funding. Demand has increased sevenfold since World War II and is expected to continue growing over the next two decades. At the same time, operating costs have escalated and public-sector financial support has flattened. As a result, many colleges and universities have had to sharply increase tuition and fees and look for ways to control costs in order to avoid financial disaster.
To examine the dimensions and implications of these trends, the Council for Aid to Education (CAE) launched the Commission on National Investment in Higher Education in 1994. As members of the Commission, we addressed two major questions:
As service-related jobs have come to dominate the workplace, the college degree--or at least some form of postsecondary education and training--has replaced the high school diploma as the entry card into rewarding employment. Those who only finish high school--or drop out--start on the lowest rung of the wage ladder and will see their real hourly wages actually decline over their working lives. Unless the nation makes a concerted effort to raise the level of education and skill of these Americans, the wage disparity between the rich and the poor will become so large that it will threaten both America's social stability and its core democratic values. Widespread access to higher education is therefore critical to the economic health and social welfare of the nation.
The higher education sector, however, is facing a catastrophic shortfall in funding. Given current trends in both funding and the costs of higher education, the deficit in operating expenses for the nation's colleges and universities will have quadrupled by 2015. Assuming tuition increases no faster than inflation, by that year U.S. colleges and universities will fall $38 billion short (in 1995 dollars) of the annual budget they need to educate the student population expected in 2015. If, however, tuition increases at current rates--basically doubling by 2015--the impact on access will be devastating: effectively half of those who want to pursue higher education will be shut out.
To address a crisis of such proportions, we call for a two- pronged strategy: increased public investment in higher education and comprehensive reform of higher education institutions to lower costs and improve services. The second of these, institutional reform, is in fact a prerequisite for increased public funding. Unless the higher education sector changes the way it operates by undergoing the kind of restructuring and streamlining that successful businesses have implemented, it will be difficult to garner the increases in public funding needed to meet future demands.
More specifically, we make these recommendations:
The Threat from Within
Recent shifts in America's economy have made higher education
more significant than ever. The industrial jobs that once
formed the backbone of the economy are dwindling and will
provide employment for only 10 percent of the workforce by
the year 2000. The service-related jobs that are taking
their place require a level of knowledge and skill that, for
the most part, can be gained only through programs offered at
colleges and universities. If workers in today's economy are
cut off from higher education, they will be unable to attain
the proficiency levels needed to master new technologies and
enter new occupations.
This gradual shift in the educational requirements of today's workforce has put great pressures on the entire educational system. The nation must educate a larger and more diverse population to levels never before required. Those who are content with a high school diploma or with not completing high school are likely to face a bleak economic future. The growing disparity in the incomes of the rich and the poor is testimony to this fact. If current trends in wages and family income persist, the economic disparities that will exist in America by 2015 will pose a grave danger to society:
Figure 1--Long-term trends in hourly wages of male workers
The message here is that the highest paid workers will hold their own to 2015. Those in the 50th percentile--workers right in the middle of the distribution--have lost about 14 percent in real wages over the 20 years; by 2015, they will be earning about 25 percent less than they earned in 1976. But the most striking consequence of current trends shows up in the figures for workers in the bottom 10 percent. If current trends continue, these workers will be earning little more than half of what they earned in 1976.
The numbers for family income over the same period show even wider disparity. As Figure 2 shows, families at the top of the scale will be earning about 50 percent more in 2015 than they did in 1976. This is not because men's wages are going up, but because more women are working and families tend to be smaller than they used to be, creating more workers in the economy per family. Those in the middle of the income distribution scale will be a little better off, though not much. But for those in the bottom 10th percentile--consisting largely of single-parent families headed by women and families of low-educated immigrant populations--we see a 36 percent fall in income compared to what families in that income bracket earned in 1976. In that year, families at the 90th percentile enjoyed income levels nine times greater than those of families at the 10th percentile. By 1993, the disparity was twelvefold. At this rate, the ratio will exceed sixteen to one by 2015.
Figure 2--Long-term trends in family earnings
Figure 3--Changing composition of America's immigrant population
Figure 4--Distribution of real mean hourly wages for male workers by education level
If these lines are drawn out another 20 years using the same rates, the result is devastating. By 2015, male workers with only a high school education will have lost 38 percent of what comparable male workers earned in 1976. And those without a high school diploma will have lost 52 percent in real earnings over the same period. If the U.S. economy continues to place a high value on a college-educated workforce, which we believe it will, then only college graduates will be able to hold their own economically out to 2015. Those who attend some college will not do badly, but those who stop pursuing an education before or after graduating from high school will lose ground over their working lives.
This economic polarization is particularly troublesome in that a growing proportion of the poor will be African American and Hispanic. Like non-Hispanic whites, African Americans and Hispanics suffer lifelong economic consequences if they do not pursue higher education. Because larger proportions of these two groups fail to go beyond high school, larger proportions of these groups are among the poor. Figure 5 shows an index that conveys the ratio of the number of students in higher education for various ethnic/racial groups to the total number of 18- to 29-year-olds in those groups. The figure plots changes in that index over the 20 years and extrapolates the rates out to 2015.
Figure 5--Rate of participation of different ethnic/racial groups in higher education
As of 1995, Asians and Pacific Islanders scored over 40 on this index, and non-Hispanic whites scored just over 30. In contrast, African Americans and Hispanics scored about 20 and 18, respectively. Although participation rates are increasing for all groups, they are currently increasing more rapidly for whites and Asians than for African Americans and Hispanics. As a result, the gap could widen considerably by 2015. Only by increasing the proportion of African Americans and Hispanics going to college can the gap be stabilized or reduced.
It is in the interest of all Americans to promote higher levels of education and training for those who are rapidly losing earning power in American society. Low levels of education are powerful predictors of welfare dependency, unemployment, and incarceration, all of which are very costly. Moreover, by 2015 the number of workers for every retiree on Social Security will be at least one-fifth what it was 50 years ago. This means that a shrinking proportion of American workers will not only have to maintain U.S. economic competitiveness in the global marketplace, but will also have to support the economic base of the rest of the nation at the same time. It is more important than ever that this workforce be adequately educated and trained. It is therefore in the national interest that the widest possible access to higher education be maintained.
Dimensions of the Fiscal Crisis
Will America's higher education sector be equipped to meet
the needs of future students? By the year 2015, the nation
must be prepared to educate over 4 million more students than
it educated in 1995--simply because of population growth. If
the proportion of the population that wants to attend college
also increases, as we think it should, then that number will
be even higher. Will the revenue base of colleges and
universities be sufficient to handle such an increase in the
numbers of students?
Our analysis shows that if current funding trends continue, the higher education sector will face a calamitous shortage of resources. Unless public funding increases significantly and institutions undergo fundamental internal restructuring to improve their productivity, access to higher education will be dramatically reduced in the future.
U.S. population growth is expected to continue into the next century, as is the rate at which Americans go to college. As Figure 6 shows,[1] if these trends continue, the total number of students in colleges and universities will increase from the 1995 level of 10.3 million to about 13.2 million full-time equivalent (FTE) students by 2015.[2]
Figure 6--Past enrollment and projected demand
Figure 7--Growth of costs to higher education institutions
Figure 8--Government appropriations to higher education over 20 years
In effect, the United States has been underfunding higher education since the mid-1970s. Figure 9 shows the share of personal income allocated through government appropriations to higher education from 1960 to 1994. In the 1960s and early 1970s, Americans doubled the share of their income that went to higher education--from $7 to about $14 per $1,000 earned. Since 1976, however, that share has been steadily decreasing.
Figure 9--Share of personal income allocated to higher education since 1960
Tax revenues as a share of personal income actually increased slightly over the period shown in Figure 9. In fact, they have been increasing since 1976. What has changed is government spending priorities. At the federal level, the growth of entitlements--most notably, Social Security, Medicare, and Medicaid--has dominated federal spending, as Figure 10 illustrates. Mandatory spending on entitlement programs and interest on the national debt consumed about 38 percent of the federal budget in 1965. In 1995, they accounted for about 67 percent. The entitlement programs focus largely on older Americans, which means that as the baby boomers age, the population drawing on these programs will increase. The Congressional Budget Office estimates that in 2005--less than a decade from now--these programs will consume almost 75 percent of federal revenues. This vast intergenerational transfer of wealth is squeezing higher education out of the federal budget.
Figure 10--Erosion of federal budgetary discretion by entitlements
The situation at the state and local levels is very similar. Like the federal government, state and local governments are increasingly allotting greater shares of their budgets to health and welfare programs. And the plight of higher education in state and local budget battles is exacerbated by rapid increases in spending on corrections, mainly prisons. Figure 11 shows the distribution of state government spending on higher education, health and welfare, and corrections from 1976 to 1995 and extrapolates the trends through 2015 to indicate their consequences.
Figure 11--Distribution of state expenditures
Clearly, government support for higher education has declined both economically and politically over a long period, and it will be difficult to bring it back to previous levels. Now that there are stringent fiscal limits on public resources, the government is beginning to ask the same kinds of questions of colleges and universities that it has asked of the health care industry--questions about cost, productivity, efficiency, and effectiveness. Until institutions of higher education can provide good answers to such questions, it will be difficult to increase public support and to regain the priority formerly given to higher education in federal, state, and local budgets.
Figure 12--Growth of tuition
If appropriate steps are not taken, higher education could become so expensive that millions of students will be denied access. Average real tuition per student, adjusted for inflation, approximately doubled in the 20 years from 1976 to 1995. Figure 13 shows that if it doubles again in the next 20-year period (1996 to 2015), about 6.7 million students will be priced out of the system. In other words, about one out of every two people we would expect to seek a college education will not be able to pay for it. Even if tuition increases by only 25 percent over the 20 years, one out of five students will be excluded.
Figure 13--Effect of increasing tuition on enrollment
The consequences of such exclusion will not be confined to the affected student population. Those who are denied access to college might not be able to afford to send their children to college 20 years later. The social and economic ills generated by inadequate levels of education will reverberate through successive generations.
Increased private sector support of higher education by alumni, other individuals, corporations, and foundations can help and has done so already: private grants, gifts, and endowment income have roughly doubled over the past two decades.
However, in 1995, they provided only 8 percent of higher education's revenues--almost the same percentage as they provided in 1975. This private sector and endowment income represents a relatively small proportion of the total higher education budget and is more concentrated in the private, relatively elite, and wealthy institutions that serve a smaller share of the total student population.[6]
Figure 14--Funding shortfall facing higher education in the next 20 years
In 1995 dollars, higher education will have to spend about $151 billion in 2015 to serve future students if costs continue to grow at current rates. Assuming that public appropriations to higher education continue to follow current trends, government funding will be about $47 billion in that year. Tuition, grants, and endowment income will account for another $66 billion. In other words, the higher education sector will face a funding shortfall of about $38 billion--almost a quarter of what it will need.
President Clinton proposed significant increases in federal student aid programs in his State of the Union message in January 1997. Figure 15 offers an initial estimate of how far his proposal would go toward filling the shortfall. While it is clearly a step in the right direction, the added funding falls far short of what will be needed if institutions do not find a way to control costs. Moreover, most of the increases in Clinton's proposal are in the form of tax credits, which will benefit middle-income groups rather than the lower-income groups we have singled out for attention.
Figure 15--Effect of President Clinton's proposal
Institutional Roadblocks
Given the magnitude of the deficit facing American colleges
and universities, it is surprising that these institutions
have not taken more serious steps to increase productivity
without sacrificing quality.[7] Many have adopted cost-saving measures,
such as forced retirements and hiring freezes, but most of
these actions have been partial and ad hoc.
The main reason why institutions have not taken more effective action is their outmoded governance structure--i.e., the decision-making units, policies, and practices that control resource allocation have remained largely unchanged since the structure's establishment in the 19th century. Designed for an era of growth, the current structure is cumbersome and even dysfunctional in an environment of scarce resources. In fact, impediments to change are built into the management assumptions and practices of colleges and universities. In that sense, higher education is a prime example of a public-sector institution struggling to deal with a changed environment.
The academic department, for example, which is the heart of the current governance structure, is based on the assumption that faculty members should govern themselves, making all decisions about what should be taught, who should be hired, and so forth. The continued sway of the department might be justified if departments were truly auto-nomous. In reality, however, they function as parts of a greater whole--one on which they are financially dependent.
Besides being decentralized and departmentalized, institutions are a maze of hierarchical structures operating independently of one another. The dean of a college of arts and sciences allocates resources among several dozen social science, humanities, life science, and physical science departments. The dean of engineering does the same for a variety of engineering programs. And the vice president for operations manages facilities, maintenance, parking, and campus security. Administrators report up or down their narrow chains of command, largely ignorant of what those in other parts of the institution are doing.
What is needed now is a systemwide process for reallocating resources among departments and other parts of the institution. Just as successful companies have learned to focus on their core competencies--the products and services they supply at a better quality and lower price than their competitors--higher education institutions and systems need to reexamine their missions and streamline their services to serve those missions. This task requires that operations be seen from a broad perspective, one that will lead to such questions as: Which of our centers, departments, colleges, or services enjoy comparative advantage over those of other education or training institutions? Would another classics professor contribute to the educational mission more than another mathematics professor? More than acquiring additional equipment for the geophysics laboratory? More than expanding the student counseling program? More than repairing classroom and dormitory roofs?[8]
The current governance structure actually prevents institutions and institutional systems from asking such questions. Moreover, finding answers for these types of questions will require not only a new decision-making process, but a concerted effort to generate data on the costs and benefits of providing different services. With the structure as it is now, decision makers have not had to choose among competing functions, so comprehensive information systems have not evolved to support such decisions. Higher education officials simply do not have the information they need to compare missions and functions and understand the trade-offs among the potential allocations being considered.
Clearly, these roadblocks need to be taken into account and surmounted before colleges and universities can streamline. One of our strongest recommendations is that institutional restructuring, including mission differentiation, be made a national priority.[9] Like the health care industry, the higher education sector must systematically address issues of cost, productivity, efficiency, and effectiveness as a prerequisite for increases in public sector investments. Indeed, if the higher education sector is to get a sympathetic ear from legislators, it needs strong advocacy from the business community, an ally it is unlikely to win unless it has put itself through the same sort of streamlining and reengineering that the business community has implemented to reduce costs and improve service.
We believe that colleges and universities must make major organizational changes. To do so, their governance systems must be changed so that they can reallocate scarce resources and permit fundamental reform in the way they do business. Moreover, we urge academic leaders to actively involve the business community in their restructuring. Business leaders have extensive experience in such matters, as well as a direct interest in the outcome of education reform.
Recommendations
The problems delineated in this report must be addressed. We
challenge America to adopt--and make into goals--our
recommendations for putting U.S. colleges and universities on
a path to financial health and keeping the door open to all
Americans willing and able to reap the benefits of higher
education. Meeting this challenge will require a combination
of increased government investment and far-reaching
institutional reforms that will provide high-quality
education at lower cost. Increased public funding could be
tied to institutional reform to create incentives to
innovate.
If the American people had known how the educational requirements of the workforce were going to grow in the 20 years from 1976 to 1995, it is doubtful that they would have allowed public funding to stagnate as it has. We believe Americans should no longer tolerate inaction: The nation should not be allowed to continue to drift toward educational mediocrity and the ominous levels of economic inequality that are arising. We are confident that once the American public and their leaders are aware of the dangers of the current course, they will act to increase public support for higher education--even if that means reducing the level of support for other public sectors.
For example, we believe it is a reasonable goal for the nation's government--the federal, state, and local levels--to attempt to reduce the deficit facing the higher education sector by half. At present, the federal government provides slightly less than a third of government appropriations to higher education; state and local governments provide the rest. The federal government might commit to providing one-third of the public sector share of the needed increase, with state and local governments providing the remaining two-thirds. We realize that this is an audacious goal given the current stresses on federal, state, and local budgets, but to do less is to put the nation at grave risk.
Meeting this goal would provide 50 percent of the future deficit. The rest of the shortfall would be made up by productivity gains achieved through the structural reforms described in the following three recommendations, and by modest increases in tuition and fees.
In our view, the most pressing reform needed today in the higher education sector is the redesign of the governance structure of institutions so that decision makers can think and act strategically. In particular, colleges and universities must
Greater mission differentiation among postsecondary education institutions and systems is the only way to ensure effective and efficient provision of all teaching and research functions over the next several decades. The current mission "creep"--e.g., community colleges attempting to become four-year degree-granting institutions, state universities becoming research centers, and research universities offering remedial instruction--violates the mission differentiation principle.
If higher education institutions and systems focus on their points of comparative advantage within the overall ecology of higher education, both productivity and improved quality will result. Specifically, the community colleges, undergraduate universities, and research universities should embrace different missions, give priority to activities central to those missions, and reduce or eliminate more-marginal activities.[10] We recommend the following specifics:
As part of this initiative, colleges need to identify, strengthen, and give visibility to programs already focused on this outcome. These should be continued, improved, and built upon. To encourage commitment to such socially responsive initiatives, colleges should evaluate and reward faculty work in ways that provide the right incentives.
As increased mission differentiation is achieved, a greater sharing of resources will lead to improved productivity of the entire higher education system:
Almost a century ago, Americans established a high school education as the basic educational requirement for all citizens. At that time, the telegraph was the height of communications technology and the telephone was on the horizon but far from an everyday instrument. Engineers and scientists looked to their slide rule as the best instrument for advanced calculations. Today, computers, the Internet, and a host of advanced technologies are everyday work tools. Clearly, it is time to recognize that the required educational level of a century ago is no longer adequate for preparing the modern workforce.
Instead of retaining the traditional sharp distinction between the bachelor's degree and all other nondegree categories, we find it preferable to think in terms of a continuum of learning activities appropriate for attaining specific goals. In the future, the focus should be on the attainment of more specific, measurable knowledge sets, rather than on simple attainment of a bachelor's degree. It is time to encourage the rich range of subbaccalaureate opportunities that can provide millions of citizens with the tools needed to survive in the emerging high-skill economy.
Benjamin, Roger, and Stephen J. Carroll, "Impediments and Imperatives in Restructuring Higher Education," Education Administration Quarterly, Vol. XXXII, Supplemental, December 1996, pp. 705-719.
Carroll, Stephen, and Eugene Bryton, Higher Education's Fiscal Future, DRU-1601-IET, Santa Monica, Calif.: RAND, February 1997.
Elms, Debbie, Preliminary List: Higher Education Indicators--Resources Available, DRU-1597-IET, Santa Monica, Calif.: RAND, February 1997.
Gates, Susan, and Ann Stone, Understanding Productivity in Higher Education, DRU-1596-IET, Santa Monica, Calif.: RAND, February 1997.
Guess, Gretchen, and Stephen Carroll, Patterns in Federal Support for R&D: 1973-1994, DRU-1598-IET, Santa Monica, Calif.: RAND, February 1997.
McArthur, David, and Matthew Lewis, Untangling the Web: Applications of the Internet and Other Information Technologies to Higher Education, DRU-1401-IET, Santa Monica, Calif.: RAND, January 1997.
Way-Smith, Susan, Information and Resource Systems for Higher Education: A Briefing, DRU-1599-IET, Santa Monica, Calif.: RAND, February 1997.
[2] Since many students attend college on a part-time basis, placing smaller burdens on institutions, they are traditionally counted as full-time equivalent students. For example, a part-time student whose course load is 70 percent of a full-time course load is counted as 0.7 FTE. By this method, higher education will have to educate approximately 3 million more FTE students.
[3] The HEPI measures the average change in prices over time for a fixed basket of goods and services that higher education institutions buy to support current operations. These goods and services include salaries of faculty, administration, and other professional and nonprofessional personnel; contracted services such as communications and transportation; supplies and materials; equipment; library acquisitions; and utilities. See Inflation Measures for Schools, Colleges, and Libraries, Research Associates of Washington, Washington, D.C., 1995.
[4] National Center for Education Statistics, Digest of Educational Statistics, U.S. Department of Education, Office of Educational Research and Improvement, Washington, D.C., various years.
[5] Figure 12 shows gross tuition revenue per student and thus does not speak, for example, to the increasing efforts of private institutions to lower net tuition price to many students. Few students actually pay the full price of tuition. Indeed, one reason for tuition increases is that universities and colleges are attempting to maintain access for low-income students by substituting aid packages for lost state support.
[6] For trends in private giving, see Voluntary Support of Education, Council for Aid to Education, New York, annual. (See also www.cae.org.)
[7] By increases in productivity we mean a measurable reduction in costs achieved while maintaining or improving effectiveness without sacrificing quality.
[8] Unlike large research universities, small liberal arts colleges do not have multiple layers of management. While this means that their administrative costs are lower, it also means that there is less room to maneuver internally when restructuring. As a result, other measures--such as sharing among institutions and creative use of educational technology--become even more important.
[9] It is important to note that some colleges and universities have taken important steps down the restructuring path, beginning with reforms of administrative functions. The Pew Higher Education Roundtable, for example, has performed a useful role in bringing together leaders of private universities and colleges to discuss restructuring ideas. (See Policy Perspectives, a continuing series edited by Robert Zemsky and William Massy, Pew Higher Education Research Program.) Important experiments are being conducted by higher education leaders in California and Florida, to name just two states; and the Foundation for Independent Higher Education has launched a pilot project to assist independent colleges that want to undertake cost containment efforts. These are isolated efforts, however--not the restructuring of the entire higher education sector that we believe is an urgent necessity.
[10] A Framework for Linking Resources to Mission in Higher Education, provided in this report's volume of supporting analysis, presents a set of analytic tools useful for any institution or system of higher education contemplating changes in its mission.
[11] This is especially pertinent in fast-growing states having large urban populations and economically depressed areas.
[12] The top 30 science and engineering departments garner 70 percent of federal research support while the other 30 percent is shared among several hundred other such departments.
[13] We leave open to public debate the most appropriate mechanism for implementing this reform. One option would be for the National Science Foundation to request universities to provide their qualifications in each research area. The Foundation could then identify the most qualified in each area and guarantee them a minimum level of support. Another option would be for the federal government to provide funding to graduate students for vouchers that could be used at the institution of their choice. The resulting competition would effectively decrease the fragmentation of funding to research universities. Whatever the mechanism, we believe there is great value in concentrating scarce dollars in the most worthy institutions. This does not mean, however, that elite research universities need not improve their efforts to diversify the ethnic makeup of their faculties. The failure to tap potential top-level scientific talent from all segments of society remains a significant barrier to full realization of America's human capital.