Funding and the Future of Ontario Universities

Well, the Council of Ontario Universities or COU is looking for a new President and CEO.  The role of COU is to serve as a voice for the province’s university sector and help improve the public policies that affect the sector.  As the ad for the position states: “As a member-based organization, COU provides the collective voice of Ontario universities to government in an effort to enhance higher education in the province. COU works with its member institutions to convene the dialogue on issues, develop consensus, advocate positions, and advise policy makers. In addition to its important advocacy and policy work, COU co-ordinates a number of shared services for members, including inter-university transit of documents, application processing, and an online portal of research resources for students and faculty.”

Of course, the big challenges for the next president of COU include dealing with the projected slower growth of university enrollment and the development of a new funding formula for Ontario universities in a period of fiscal restraint.  This comes after a period of remarkable expansion in the Ontario university system both in terms of student enrollment as well as funding.  Between 2005/06 and 2012/13 undergraduate FTEs increased by 19 percent and graduate FTEs by 54 percent.  While universities always advance the case for more money, the fact remains that operating grants from the Ontario government to its universities and tuition revenues have increased substantially – faster than the rate of inflation. 

The future however will see a slowdown in enrollment growth given the reduced size of the demographic cohorts available for post-secondary education, increased competition from degree granting community colleges and the leveling off of participation rates in post-secondary education.  Moreover, some awkward realities as noted by George Fallis have emerged with respect to how universities have absorbed all that money.  Class sizes have increased and the reliance on part-time instructors grown while salaries have also grown making Ontario university administrators and faculty amongst the best paid in the country if not most of the world.

Add to all of this the high amount of long-term debt accumulated by universities from their capital expansion to accommodate more students, and one can see why the next ten-years is going to be a real challenge. Ontario allowed its universities to take on rather large amounts of debt over the last decade as a substitute for more government capital funding or additional fees on students.  While debt service costs are currently relatively modest, they still absorb a millions of dollars that might otherwise be available for university operations.

Given slower enrollment growth and a funding system that rewards ‘bums in seats’ universities will find their resource envelope growing less slowly than in the past but they are saddled with an expensive cost structure.   How the province wants to deal with university funding is going to be the big challenge.  On the one hand, the province has liked a ‘bums in seats’ formula because it has helped foster the accessibility agenda the province has and grown university participation and enrollment.  Dangling money for more students has provided the incentive for universities to meet the province’s agenda. 

At the same time, this makes the bulk of university funding dependent on enrollment – grants per student enrolled combined with tuition revenues paid per student means a potential for large revenue fluctuations if enrollment drops.  One need only look at what has is happening to smaller Ontario universities dependent on Education faculties for their enrollment – for example Nipissing - as applications to education dropped recently.  Then there is the recent case of Wilfrid Laurier which apparently has also seen its expenses rise faster than revenue. For these universities, the future has arrived making them the fiscal canaries of the academic mine.

Given the desire to balance budgets in an era of slow economic growth and the resulting fiscal restraint, one might expect the provincial government to be partial to converting its university funding formula to a block grant. Universities might find that attractive given that it would provide them with a stable core of funding to meet their fixed costs or their research mission and use tuition revenues to meet their remaining costs.  As well, their funding would become less sensitive to short-term enrollment fluctuations.    The province might like such an approach because it would actually reduce funding volatility across institutions (and its own university outlays) by pegging the growth rate of the grant to GDP growth or inflation (think of the federal Canada Health Transfer after 2017). However, not tying its grant contribution to enrollment might give it less influence with respect to advancing its accessibility or differentiation agendas.

In the end, expect the focus of the provincial government to remain with funding tied to outcomes.   The outcomes may not emphasize enrollment but some other policy target the provincial government has in mind. The provincial government expects to see a return to its spending on universities and will expect more for less given that some recent research has suggested that universities can increase quality outcomes without increased funding.  The real challenge will be in negotiating what those “quality outcomes” are going to be and who will set that goal – universities, the provincial government or prospective employers.  All the best to COU’s next CEO.

Comments

[Nick Rowe]

The advantage of the "block grant" approach is that the government knows how much money it will spend, and can cap it. The disadvantage is that it gives universities an incentive to reduce enrolment to reduce class size. Universities would compete purely on quality. You might get a "race to the top", where each university admits only A+ students, on full scholarships, taught by a handful of very expensive profs.

[rsj]

I think Universities are like health care. If you leave it up to the free market, then only the wealthy get care. Neither is there any market discipline on the cost side. While technically, people are free to not get a university education, in reality they will pay whatever it costs; and will beg, borrow, and steal in order to pay it. Neither is there free entry and exit for competitors (nor can there be).

IMO Public Universities need to be micro-managed by the government in terms of their cost structure. The incentives are all wrong for each individual department to pay star professors who attract grants way too much and to spend way too much on admin staff overseeing the grants, while at the same time underpaying the teaching staff that do the bulk of the work that justifies the university's primary revenue: In the current system, the universities pay, say, $300K for a hot researcher to get $400K of grants, of which they steal 1/2 as "overhead", while the actual teaching is done by those earning 50K. Then they complain about being in the red by $150K, while parents are only getting 50K of teaching value. It's insane.

Research should be subsidized by the government but not by students and parents, and it should not come out of the education budget. It should come out of an R&D budget. There should be an iron wall, both financially and institutionally between research institutions and institutions of higher education. Professional researchers can visit and give lectures at public universities, but should not be paid by them. Educators can apply for a grant and then take a leave from their teaching duties to work at a research institute for the duration of the grant, but the home university/department of the educator/researcher should not get one dime from the research grant and the researcher, while on leave from the university, should be paid only by the research institution and not the universities. The institutes could be on the same grounds as the universities to promote cultural dissemination, but students should never be forced to subsidize research, nor should education money be hijacked for grant-chasing activities.

I don't think this is the only problem facing universities, but it is a stark one.

[Avon Barksdale]

"I think Universities are like health care. If you leave it up to the free market, then only the wealthy get care."

This is patently false. There is no reason for post secondary education to be publicly funded. Post secondary education is NOT a public good. It is both excludable and rivalrous. One may argue that people with higher education create a spill over effect, generating a small positive externality, but that has to be balanced against the negative externality of credentialism. Nevertheless, the vast, vast majority of the gains of a post secondary education are enjoyed privately which, as economics teaches, should therefore be paid for privately. Pure research is a different matter.

Private universities would use their endowments to attract talented students from less financially fortunate families while competition on price would reduce the costs. Subsidized post secondary education is just a free ride give away to the upper middle class, who cyclically propel their children into society's elite.

[rsj]

I never said education was a public good. Who cares if it isn't? The public good test just checks whether the market is able to provide something at all. Not whether it is able to provide it efficiently.

It's not like health care, mass transportation, sewage systems, R&D, financial payment systems, elementary and middle level education, and the many other areas where the free market is a colossal failure at effective and efficient provisioning are public goods. They aren't.

You only know that the government *must* fund *all things* that are public goods (if those things are too be funded at all). That doesn't mean that the government shouldn't fund other things as well. I.e. just because it's possible, in theory, for some amount of provision to occur via the free market doesn't mean that it is in fact a good idea for the market to provide said thing.

A much better rule of thumb is to ask whether, in a highly unequal society, something be rationed to the public on the basis of wealth? If this is about, say, watches, or laptops or hotel stays then sure these should be provided based on wealth. If this is about education, or health care, or transportation, then of course the answer is "no, this should not be provided to members of society based on their wealth". Which is why these things are funded publicly.

[rsj]

The interesting thing about higher education is that historically it was never provided by the market but the earliest universities relied on gifts/bequests/or transfers from the Church/government to fund their operations. Prior to government provision of education all universities were charities (as were hospitals). This is not something that the free market has ever succeeded at providing, even though it is not a public good.

At some point, you decide that something as important as higher education should not be dependent on individual charitable donations and you fund it with taxes.

[Bob Smith]

A much better rule of thumb is to ask whether, in a highly unequal society, something be rationed to the public on the basis of wealth?

But the market doesn't ration based on wealth, it rations based on price. Now, there's a linkage between the two to the extent that capital markets are unwilling to finance otherwise good investments in human capital. But that's why we have government intervention in the financing of post-secondary education (through government backed student loan schemes).

That people will "beg, borrow or steal" (though, in practice, borrowing is the usuual mechanism) to fund their post-secondary education is a sign that they think (rightly or wrongly) that it's worth what they're paying for it. The fact that I borrow to buy a new car or a house, doesn't mean that the market for cars or housing doesn't work.

Also, be careful about making the distinction between "provisioning" public foods amd "paying for them". Many of the markets you mention are, in fact, satisfied by private providers (doctors, drug companies, medical supplies, etc., charter schools, even water suppliers), but financed or regulated by public authorities. Even in markets where compelling cases can be made for state intervention, it doesnt' follow that public provision is the only or best means of intervening.

[Avon Barksdale]

OK, you RSJ you really don't know what public good is. Pure research is a public good. There are huge externalities with elementary school education that does turn it into a public good. The case for government intervention in those cases is easy to make. It is not easy to make the case for government subsidized post secondary education. Gains are private, there is no free rider problem. You say that the market does not provide post secondary education efficiently. That statement has a very technical meaning in economics. What is the source of market failure? Your other complaint, that the market can't provide it "effectively" has no meaning at all. Your other statement about a highly unequal society, that's a big so what. If inequality comes from rent seeking and political privilege, then yes that's a problem (and more government just makes that worse), but if inequality comes from a meritocracy, that is not a problem. Yes Roger Federer makes far more money than I do, but he hurt no one doing that - in fact he made everyone who paid him BETTER OFF by playing tennis for them at a price they found acceptable. And even if we accept that we want to "solve inequality", subsidizing post secondary education is the worst thing we could do - it's a huge give away to the upper middle class, who should be paying their own way for the benefits that they will enjoy from it.

[rsj]

Avon,

"OK, you RSJ you really don't know what public good is."

Patents can protect research, tolls can protect roads, etc. Access to water systems and airports can be excluded. The presence of externalities does not mean that something is non-rival. Get a grip and stop with the name calling.

"What is the source of market failure?"

In real life, markets are pretty lousy ways of producing and funding goods and services. In many cases they are more efficient than other mechanisms, but the burden is on *you* to prove why markets, in this particular case, would start to succeed when they have always failed in the past. What is new here? Why have universities always lost money and been run as charities since the middle ages? That's not a puzzle for me, but it is for you. If you want me to explain this to you, then you need to open your mind and stop assuming that "public good" is the be-all and end-all litmus test.

[rsj]

Bob,

I agree that a good solution here is, like in health care, public financing and regulated private providers. Competition among providers to provide quantity is healthy, whereas price competition in university education is dysfunctional. A big problem here is that the government provides both research funding and per pupil access-based funding to the same institutions, which should be banned. A second problem is that we expect universities to break even, when they have never broken even. A third problem is that the market can't really create universities ex-nihilo, whereas the government can. The government can also destroy universities, and should in cases of declining enrollment.

[Avon Barksdale]

RSJ,

"In real life, markets are pretty lousy ways of producing and funding goods and services."

Sad. Just sad, and utterly ignorant.

"The presence of externalities does not mean that something is non-rival."

I didn't say that. Externalities create free ridership and thus a suboptimal amount of output. Excludability and rivalry limit the opportunities to free ride.

"Patents can protect research, tolls can protect roads, etc. Access to water systems and airports can be excluded."

Patent protect against free ridership - positive externalities - in commercial developments. Pure research - finding out the mass of the Higgs boson - creates a positive externality that patents can't solve. It is a pure public good. Airports can be private, so can freeways - no problem there. Water systems quickly become technical monopolies - that's a different problem.

There is no reason at ALL to think that universities need public funding for education. You can say that you normatively want other people to pay for your benefits, but that's not economics. Remember, economics teaches that when thinking about a benevolent social planner (government) the goal is for the planner to achieve what a competitive market would have done if not for obstructions. Re-read the Welfare Theorems. But when you say that markets are lousy at producing goods and services, there is not much about economics that matters to you - ignorance springs eternal. Sorry, but governments are made of the same people as the rest of us, with all their self interest and foibles intact - except governments have all the guns, and the capacity to use as much force as deemed necessary to accomplish a goal.

[Erik Lund]

It's sad to see everyone dancing around the real crisis of post-secondary education.

They're running out of land! UBC has 1000 acres, and it's all built out. They've been reduced to tearing down stupid, impractical buildings from the 1960s. That can't go on. It is getting very hard to remember my carefree undergraduate days in the 1980s, when it seemed as though there was a limitless supply of impractical 1920s buildings and open areas (I think they were called "campusses?" And "fields?").

In the future, this trend will impact not only education, but society as a whole. Without building projects, how will universities justify ever-increasing tuition fees? Without ever-increasing fees, how will student loan burdens continue to increase? Without gigantic student loan payments, what will motivate multiple-degreed twentysomethings to get out of bed and head down to their minimum wage service sector jobs?

Apocalypse is nigh, ladies and gentlemen. Nigh, I say.

[JAMRC]

Ontario probably really has economic need for only 2, 3 universities. U of T, Queens, and maybe Western could be maintained but I don't really see why more graduates than what these schools produce are actually needed beyond bloated credentialism caused by a glut of university graduates in the first place.

[Erik Lund]

That's crazy talk, JAMRC. If we were allowed to hire our high school kids straight into full time work when they turn 18 and graduate, instead of waiting until they were 22 and had college degrees, they wouldn't have gigantic student loans. Then what kind of leverage would we have to make them accept back-to-back shifts and alternating 0 and 40 hour weeks? In a dark, post-apocalyptic future, I can even (dimly) see the prospect of an entire work force with stable schedules and full time employment. Is that really the kind of world you want to live in?

[rsj]

Credentialism is the head of the Beast, but if you cut it off, it grows another. There really should be a system of trade schools so that we don't fill universities with people who are there simply to not be a failure in life but display no love of learning. That's something that might come to them later in life, but shouldn't be a requirement for employment.

[Patrick]

I agree that an aging populations will become increasingly unwilling to pay for education. Especially if it means taxing their retirement savings or reducing heath care services. I can easily foresee the day when institutions that can pull it off throw-in the towel and become private institutions.

I think the unwillingness of the public to pay for education has been increasing for a long time. Maybe it's a good example of revealed preferences. Just compare schools built 100 years ago to the modular classrooms that are all the rage here in AB. The old schools are magnificent brick buildings that signal that the activities taking place in them are really important. Trailers signal "we sorta feel like we have to stick you somewhere and this is the least we could get away with". Not exactly signalling the importance of education. If you want to see the difference, google "McKay Ave School Edmonton" and then "Modular classroom". Compare the hockey arena being built in Edmonton at enormous expense to taxpayers. Not shortage of funds for that!

I think what we are seeing is this trend creeping into Universities. Especially as Universities are increasingly perceived as machines for the mass production of workers. First will come minimizing costs of the physical capital (do Uni's have modular classrooms yet?), next will come strong downward pressure on wages - the question that will be asked is: "why pay upwards of $200K a year for someone who is essentially a teacher, who can't be fired, has a gold plated pension, and who's additional contribution beyond teaching is writing some stuff published in journals nobody reads? If they're so smart, let them go work in the private sector!"

[Oliver]

@ rsj

There really should be a system of trade schools

http://www.sbfi.admin.ch/berufsbildung/01606/index.html?lang=en

Not that credentialism hasn't taken hold here, but probably on a different level overall and helped along by the recent Bologna reforms.

[rsj]

Here, it seems my friend Paul agrees with me:

"So, how big should the government be? The answer, broadly speaking, is surely that government should do those things it does better than the private sector. But what are these things?
The standard, textbook answer is that we should look at public goods — goods that are non rival and non excludable, so that the private sector won’t provide them.
[…]Nowadays, however, governments are involved in a lot more — education, retirement, health care.
[..] experience shows that these are all areas where the government does a (much) better job than the private sector.
[..] the common thread among these activities that makes the government a better provider than the market; namely, they all involve individuals making very-long-term decisions.
[..]Now, the fact is that people make decisions like these badly. Bad choices in education are the norm where choice is free; voluntary, self-invested retirement savings are a disaster.
[..]When you say things like this, libertarians tend to retort that if people mess up on such decisions, it’s their own fault. But the usual argument for free markets is that they lead to good results — not that they would lead to good results if people were more virtuous than they are, so we should rely on them despite the bad results they yield in practice. And the truth is that paternalism in these areas has led to pretty good results
[..]To think about the growth of government, we need to look at the range of things government does well, a range that goes well beyond the narrow concept of public goods."