Re: 'Til May . . .

On Tue, 18 Apr 2006 01:35:04 +0000 (UTC), Paul J Gans <gans@xxxxxxxxx>
wrote:

James Beck <jbeck4@xxxxxxxxxx> wrote:
On Thu, 13 Apr 2006 17:00:15 +0000 (UTC), Paul J Gans <gans@xxxxxxxxx>
wrote:

James Beck <jbeck4@xxxxxxxxxx> wrote:

As to the other "income statement" items, it's pretty obvious that the
state legislature has been reducing its contribution...a lot. There
are only a few sources to make up the difference: tuition increases,
depletion of the endowment, fundraising, and screwing the faculty/grad
students.

You've got the major problem right there. For historical
reasons schools do annual budgets. However, they do not
run on an annual basis -- nor do they produce a product that
is sold for profit.

Poorly reasoned. Universities are extremely 'profitable' enterprises.
Otherwise there wouldn't be so many of them. The difficulty is that
the profits don't accrue directly. That results in a well-known market
failure. The government compensates by subsidizing education, which
makes sense given that the competitive allocation mechanism is
inefficient in this case, and since the 'profits' accrue collectively
to the population.

This is pure nonsense bred of a "business model" point of view.
One cannot use the word "profit" in connection with a university,
not even in the metaphoric use.

I'm pretty sure I already said this. That's why there's a 'market
failure' in education.

But it is used, and not just
by you. Because of its financial connotation it pushes a
financial point of view onto education -- which is contraproductive
and silly.

Of course it is used. The massive subsidies wouldn't make sense
otherwise.

The government does NOT subsidize education. That is another
"business" viewpoint. Education is outside that realm.

Absurd. In the State, City, and Community College systems, the
Government (i.e. the 'People') own the land and buildings (the
"endowment").

The federal government alone provided about $185 billion in on-budget,
off-budget and non-federal support for education in 2004. As part of
that, the government makes about $13 billion worth of Pell Grants and
$40 billion in subsidized (low-interest loans) available every year.
Education is awash in subsidies.

As you *do* note in a way, education is a benefit to the entire
society. It is good, in many ways, many NOT quantifiable, for
the citizens of a society to be educated.

That's true. While we know roughly what our society is willing to pay
for education, we don't know what it is worth.

Some societies, for whatever reason, limit such education. Others
put a financial value on it which also serves to limit it. This
behavior simply illustrates the fallacy of "profit" in this
case.

No. *Every* society limits education spending, whether it's abyssmal
Haiti at $2 per capita per year, or the US (in 2000, about $8,000 per
elementary/secondary student per year and $20,358 per post-secondary
student per year).

Spending on education is strongly related to GDP per capita. Societies
seem to understand the relationship very well, even if it isn't
entirely quantifiable.

Education is not alone in this. Another example is government.
It does not generate a "profit" either, nor is a "business plan.

In most cases, government isn't permitted to generate a profit in the
US, though there are exceptions.

Many of the costs at a university can be estimated over
a four or five year period. One can estimate the number
of students that will be on hand, the size of the faculty
needed, the amount to be paid in salary, the need for fuel
for heating, etc., and so on.

Most people are dreadful accountants. 'Students on hand' for example,
is not a 'cost'. They are customers, and they represent a major source
of revenue.

Students are NOT customers! If they were, they could purchase
grades.

Doesn't follow unless grades are for sale. Even if grades were for
sale, buying them would be a form of self-deception.

Students are people present to be educated.

They, or their parents in the case of the minors, are consumers of a
service. The providers of that service are remunerated through a
combination of private and public wealth.

In the
end they gain a certificate proclaiming that education.


One of the things currently tending to dumb down education is
exactly this view of students as customers. A fair number of
otherwise respectable schools in effect accept that. And the
customer is always right.

Probably. There is substantial moral hazard inherent in student
evaluations.

These costs are not very elastic at all. One can turn down
the heat in the buildings by 1 degree. And that will save
a fair amount of money. But there is a limit to the amount
of that that can be done.

On the other hand, income is NOT predictable. The amount that
will be provided by the state, as you note above, can fluctuate
greatly. The amount of tuition to be charged is usually under
the control of the State Legislature.

Predictability is a slippery subject and '*not* predictable' is a very
strong statement that I doubt you can defend. For example, at WMU even
the 'no change' forecast appears to be quite accurate with regard to
expenditures. That there have been variances between income and
expenditures tells us that income is not perfectly predictable.
However, these have been rather small, so evidently they haven't found
it anywhere nearly as difficult to predict as you suggest.

It isn't slippery at all. I was there talking about State
schools. One cannot predict, from year to year, what a given
state legislature will do vis-a-vis the meagre budget provided.

You continue to employ useless language. Based on the WMU numbers, it
appears that, including variance from all sources, they are able to
predict to within about +/- 0.5%. Rail against it as you like, that is
an extremely predictable social process.

The situation is better today, but not for the reasons you
give. The fact is that states are providing such a small
percentage of the budget of many state schools that cutting
that budget 20% amounts to a 20% cut of 15% of the budget.

You haven't provided any evidence that they *are* significantly
cutting the budget. On the evidence we have so far (from WMU), they
are smoothing the budget as they manage the replacement of direct
funding via tax dollars in favor of indirect funding via loan
guarantees and low interest loans. [The Marshall Plan isn't nearly so
appealing when it happens in your own backyard.]

Yet financial control of the schools still rests with the
state. The state, either directly or through appointed
officials, must approve the school's budget.

Why wouldn't it? The state owns the endowment of a public school.

Nationally, university enrollment is highly predictable. Its
predictability decreases as you drill down. However, to the extent
that the university maintains enrollment caps, at the university
level, total enrollment will still be highly predictable (almost
perfectly predictable at top-tier schools).

Likewise, grant funding is sticky over the life of the grant, which
tends to smooth flows from that source.

On the other hand, both fundraising and the legislature are wild
cards. Of the two, fundraising is the more difficult to predict
because it depends heavily on the state of the current economy. While
the state of the economy is only weakly predictable, even it is not
unpredictable.

Although legislative behavior is somewhat dependent on the current
state of the economy, past economic performance is much more
important. With regard to legislative funding, to the extent that by
'fluctuate' you mean 'varies irregularly', it is a poor word choice.
Legislatures attempt to 'smooth' university income over time, so it's
not irregular, per se. However, because it occurs with a lag, this
behavior can have very negative consequences.

Here you are agreeing with me. But I assure you that states
are far more variable than you think.

Don't patronize me. I've seen this process from both sides.

You might look at the City University of New York as an example.
Another is the State University of New York, but because its
campuses are scattered over a wide area, it has far more support
in the legislature. CUNY has essentially no support outside
of New York City -- yet it is effectively controlled by Albany.

SUNY has twice the enrollment of CUNY. Assuming democratic
representation, why would anyone expect CUNY to have equal support in
the legislature?

Among them, legislatures prefer to fund universities from sources
other than tax revenues. If say, fundraising or grant production is
particularly good in a given year, the legislature is apt to cut its
contribution to university funding. By contrast, when fundraising goes
down, the legislature is more apt to try to get the university's
president fired than it is to boost the budget. Penalizing success
creates a lot of perverse incentives.

You are being strange. This is all very true, and it adds
up to large unpredictability of state funding.

Again, what exactly do you mean by 'large unpredictability?'

The university's biggest prediction challenge is at the course level.
Enrollment in a particular course, at a particular time, is only
moderately predictable. This creates serious internal management
problems for universities because they have to forecast enrollment,
then hire and/or train staff. The more contingencies the university
attempts to cover, the higher its costs will be.


Efficiency gains that are produced by squeezing more out of the
existing faculty create long term retention problems. Unfortunately,
the first to go are often the ones generating grants. Whether
efficiency gains come from making the faculty work harder or not, it
is likely that the faculty will be punished by budget cuts.

There goes the business talk again. There is absolutely
NO WAY to measure faculty efficiency. NONE.

You seem unusually eager to make absolute declarations on this
subject. If the faculty can't figure out how to improve efficiency,
you might follow Harvard's example and give your undergrads a crack at
the problem.

It is a term often kicked around. In the end it usually
means one of two things (or both): larger classes (i.e. the
person teaches more students so he or she is more efficient)
or more classes taught.

In fact both these measures are faulty. Neither, by themselves,
changes either income or expenditure. At most schools full-time
tuition is flat-fee. Thus the income from students is that
tuition times the number of full-time equivalent number of
students. The size of the class or number of them does not
enter into this equation at all. And the cost of faculty is
set by their number and salaries. Again, the size of their
classes or number of them does not enter into this at all.

And yet university officials talk of making the faculty "more
efficient" all the time.

Endowment is usually small unless the state university is very
well-known. And fund-raising is among the more predictable
income items.

So schools face serious problems. Especially difficult are
building costs and renovation costs. These are almost always
underestimated (for reasons I have never been able to understand.
We often do far better than our masters at estimating the real
costs -- but they will not listen to us.)

It's a mixture of moral hazards.

I don't think so. Chemistry departments are usually the
most expensive departments in the arts and sciences. We
are always renovating laboratories -- and the university
*always* gets the cost wrong, with too little money appropriated.
Our estimates for the project, produced as a request to the
university for money, are much closer to the truth.

And no, we don't run the cost up. The actual renovation is
totally under the control of the university. We can only
watch in horror as badly designed space is put into service
only to be re-renovated within a decade.

Maybe you didn't understand what 'a mixture of moral hazards' meant.
Feel free to look it up.

As a result "compactification" often takes place. This includes
deferred maintanance (which in the end is almost always more
costly than *not* deferring it)

The Taoist master fixes problems when they're small & cheap, whereas
most people wait until problems are big and expensive. It's human
nature.

NO. It is NOT human nature when such problems are reported
and similar examples of time-escalated costs given. It is
simply the desire of administrators to cover their asses and
keep their (inadequate) budgets down. Routine maintainance
comes out of the annual budget, capital projects such as
renovations, do not.

More moral hazard.

Because of these accounting rules (which reflect no actual
reality in the world) things happen as you say. These rules
are forced on state universities by legislatures that *insist*
on "accountability", another one of those words.

Yes, and I'm sure that if you look, you will find dozens of additional
examples of perverse incentives and moral hazard.

, increased class size, reduced
number of sections, fewer adjunct and contract hires, fewer
courses, tougher tenure standards (i.e. we've got to get rid
of 70% of that group for budgetary reasons), and so on.

So on the ground the perception of steep cuts is there. While
the cumulative budget sheets look much better.

It's not just that they look much better, in this instance, they are
much better. Someone is lying. An 'across the board cut of 5% per year
for five years' and a net increase in expenditures are mutually
exclusive ideas.

This is wrong. I know of a school where there were no faculty
raises at all for a year followed by meagre raises for a few
years after that. That is what was seen on the ground. In
fact the money saved was hoarded for a few pet administrative
projects. Over a five year period there were no budget cuts at
all! It was only a silly perception on the part of the faculty.

Which is also what appears to have happened at WMU. A claim that there
was an across-the-board 5% budget cut every year for the trailing 5
years there is simply false. Someone is being lied to. What we don't
know from the aggregated numbers is who is soaking up the resources.
However, we *do* know from its publicly available supplemental
requests that Admin has been about 40% of any extra funding it asks
for. It wouldn't be a surpise if approval of those supplemental
requests accounts for most of the inflation-adjusted erosion in the
departments. Further, I never disputed that stakeholders have observed
cuts in the micro-environment.

Despite the cuts that you have observed, the University has been
running deficits, so we know both that the screwing has been less hard
than it might have been, and that the students' tuition increases have
been less than what would otherwise be implied by the cost of
providing their education. [Fundraising wouldn't be my first guess in
a state with a weak economy.]

Fundraising is never good except in a few universities with
either wealthy alumni or excellent football teams... ;-)

Not really. Fundraising is a talent. On average, it is good at schools
with talented fundraisers and bad at schools with untalented
fundraisers.

Jim, you said the exact opposite above.

No. I said that fundraising depends on the current state of the
economy, which is only weakly predictable. Most real estate salesmen
crumble in bad economies, too. That doesn't mean that the talented
ones go under. They are very different ideas.

Most universities either underpay the fundraiser, or
impose this function on the president of the university. They should
not be surprised when their fundraising performance is poor.

Fundraising is the PRIMARY job of the president of a university
these days. The actual day-to-day running of the place is usually
vested in a chancellor or provost.

Non-responsive. Top fundraisers make a lot more than university
presidents. They work fewer hours, and endure far fewer academic
requirements. If schools hire mediocre fundraisers to serve as their
presidents, they should expect to get what they pay for.

Consequently, checking the balance *** for depletion of WMUs assets
is a no-brainer. Long term, it is hard to see how deferred
maintenance, underinvestment in technology, and depletion of assets
can enhance WMUs competitive position. [It shouldn't take you too long
to find the announcement that indicates how much of that Admin has
been doing.]

Almost. Since most other universities are in the same vote,
the wave is dropping all ships.

New York's birth-dearth passed a few years ago. The next big up-wave
for universities should start shortly, and that will be recognized
within the next year, or so. This will be a big wave. There are 3
million more in the cohort than there were in the baby boom
generation.

For example, the (back a few years ago) unforseen surge in
oil and gas prices has had a horrible effect on *all* universities.
Mine is lucky, having building envolopes that are high volume
and low surface area. Most schools are the opposite and are
suffering. There are no slush funds in state schools that can
be tapped to make up for this.

Though I understand your desire to create common ground, your
statement is misleading. NYU is one of the fortunate top-tier schools
that hits its enrollment caps, has decent fundraising, a big
endowment, and collects a lot of grants, so the impact of every
adverse trend is felt less acutely there than in most schools.

You are so wrong that it hurts. You have no idea how badly
a school run on "business principles" can be actually run.
I'll be happy to discuss details with you via e-mail. But
suffice it to say that NYU's endowment is microscopic and
efforts to increase it have never really succeeded.

Wa-a-h. NYU has one of New York's big five endowments. The other four
with over a billion in endowments are Columbia University, Cornell
University, The Rockefeller University, and the University of
Rochester. NYUs endowment performance stems from dreadful asset
management (your clueless, timid endowment team invests like a
Depression baby), not from lack of fundraising.

For that matter, NYU has pulled off two successful billion-dollar
capital drives since 1985. The first was completed in 1995, 5 years
ahead of schedule. The second was completed in 2000. As of a few years
ago, NYU had spent about 85% of that on capital improvements.

As for running a university on business principles, I've never seen a
university give it more than a superficial try. It would take a very
special business-type to put up with academe even if you could find
one that the faculty wouldn't undercut at every turn.

Besides, Mr. Hines assures me that NYU is only a third-rate
institution.

Well...realistically, 30 years ago, it was a commuter school, and it
*was* pretty mediocre. It nearly went under in 1973 and again in 1977
as CUNY became more attractive to commuters. NYU survived, and
prospered, by repositioning itself as an elite school.

Rather farsighted planning, all in all, but I don't doubt that there
were many potholes along the way.

As to energy costs, if you ask around, I think you'll find that both
NYUs cost per kilowatt hour of electricity and its cost per BTU of
heating is obscenely high compared to the rest of the country.

Sure, but that's because of the cost of those items in New York.
It is still cheaper to heat (or air condition) a building with
a high volume to surface ratio than one with a ratio the other
way around, given the same fuel costs.

In other words, the economics of a university are rather different
than the economics of a "rational" enterprise. State schools today
in aggregate get only about 20% of their funding from the state.
Yet in almost all states the legislature retains control over
most of the operations of the university -- while failing to pay
for those operations.

This is a natural consequence of having a growing population and
enrollment caps at the top 100 schools. It's not even remotely
surprising.

Control extends to tuition, the mandating that certain subjects
be taught, class size, faculty size, renovations and renovation
schedules (indeed almost everything concerned with the capital
budget), and so on.

For example, medieval studies is being deprecated at many state
schools as being "irrelevent" to today's education. In many
cases it is due to the detailed line-item budgeting by state
legislatures.

That's nothing. Fisher Black (econ 'Nobelist') argued for the
elimination of all in-the-red programs (virtually all Arts & Sciences)
from the university curriculum.

Sure. Another business-oriented point of view. And one that
can easily be seen to be a bit silly. Not totally silly, but
a bit silly...

A lot closer to 'totally silly' than to a 'bit silly', and certainly
silly enough for me to walk out on him mid-sentence.

As for departments being in the black, if the costs were figured
rationally, liberal arts departments would be seen to bring
in the most money.

To see this, credit each course with the tuition money paid
by the students in it and subtract off the faculty salary and
a reasonable overhead.

Liberal arts courses are large and their faculty cheap. And
at several thousand dollars per student per course, having
150 in a class pays for a lot more than five students in an
advanced science class with a top-dollar faculty member.

Typical pro-liberal arts spin. On the whole, liberal arts has survived
as a parasitic lump on the backs of vocational and professional
schools departments/schools. If you subtract the liberal arts
enrollment of students from the professional schools like business and
engineering, and that of student with vocational objectives like
pre-med, the rest of liberal arts doesn't pay its way on its own. It
scratches along because the various accreditation bodies continue to
mandate liberal arts content.

This way of doing things is certainly irrational, but that's
the way it is.

On the contrary. Crafting political solutions to handle market failure
is often the most efficient alternative. Even so, as touched on above,
the solution has some problems. I'm pretty certain that the crew here
can think of dozens.

Please do not think of universities as "marketing" a product.
They are not.

Dreary nonsense. Of course they are, and they always have.

On the other hand, if you don't like this one, you might seriously
reconsider solutions to other market failures (like socialized
medicine).

Certainly socialized medicine has not been a failure. In the
US everybody gets basic medical care if there is an emergency.
And it is all paid for, one way or another. Is that socialized
medicine?

No. It's an extremely expensive, hybridridized patchwork held together
by band-aids.

Of course our way of providing that care is so inefficient that
the costs are enormous, but you knew that.

Yes.

.