The economics of the public sector


There is no doubt that the price of college, specifically regarding tuition and fees, has risen relative to the prices of other goods and services, and that college tuition takes a bigger bite out of the typical family budget than it did a generation ago (Paulsen & Smart, 2001d, p.39). From an institutional stand point, price determination is a complicated process, yet it has fundamental strategic importance to any institute of higher education (Vasigh & Hamzaee, 2004, p.145). In Question 1 our cohort is asked to discuss and develop the concept of tuition and fees through legal, philosophical, ethical, and moral lenses. In brief, the choices made by both students and institutions are not simple. Price determination is a complicated process. Administrations should seek and establish tuition levels that would facilitate the achievement of institutions long-term strategic objectives, attract new students, and provide adequate revenues to cover a good portion of their present expenditures (Vasigh & Hamzaee, 2004, p.136).

With its inherent complexity, price determination, relative to tuition and fees, is certain to have an impact on students in terms of affordability, and to that end, their access to education itself. From an institutional standpoint, colleges must establish a clear methodology which ties expenditures to faculty, facilities, and other resources which improve student learning (Pedersen, 2003, p.4). This methodology must always consider disadvantaged students whose choice to attend college may suffer if additional monetary resources are required of them. Thus, if additional resources are expended, the attendance of disadvantaged students will suffer (Pedersen, 2003, p.4). For example, Vasigh and Bijan noted that in response to every $100 increase in tuition, a drop of 0.50 to 1.0 percent in enrollments might be seen across all types of institutions including community colleges. In fact, community college students in particular showed more sensitivity to tuition and aid spikes compared to students of four-year public colleges and universities (Vasigh & Hamzaee, 2004, p.136). From a student and family standpoint, it is often a question of affordability. In comparison to middle and high-income families, low-income students are more sensitive to tuition and financial aid decisions (Vasigh & Hamzaee, 2004, p136). As we continue our discussion, we will first evaluate the ideas of affordability, the high tuition / high aid model, and the low tuition / low aid model. We will then conclude with a proposed East of the Mississippi (EOTM) funding model framework that provides access, affordability, and the institutional resources necessary to carry out the community college mission.


Merriam-Webster defines affordability as the "ability to manage or bear without serious detriment and to be able to bear the cost of and to make available, give forth, or provide naturally or inevitably." It is only through a clear understanding of the term "affordability" that tuition and fees can be established. Tuition and fees serve as a source of operating revenue necessary to meet the financial needs of institutions while still providing access to education. So herein lies the question, how can one better understand the meaning of affordability, and how might we define what is affordable for a family regarding college tuition and what is not (Paulsen & Smart, 2001d, p.39).

The concept of affordability to an individual family or student is likely to include several factors in the decision making process. While a child's education (K-12) is legally compulsory, and therefore, the cost burden is shared by federal, state, and local government, higher education is not compulsory, which profoundly affects the decision to continue with one's education. As a result, families and students must make a choice and that, unfortunately, is to bear a greater burden of cost, and families and students must realize that looking for additional financial resources is critical when seeking higher educational opportunities. It is also clear that optimum tuition rates need to be estimated so that new students are attracted, and yet there must be adequate revenues to cover expenses for more long-term objectives (Vasigh & Hamzaee, 2004, p.145). Hence a student's access to financial aid, beyond simply considering family financial resources, is significant.

If we consider only family income in providing the cost of a college education, many families would view college as absolutely unaffordable; way beyond even the sacrifices families may be willing to make (Paulsen & Smart, 2001d, p.40). In fact, because of the uneven growth in incomes among different groups, rising college costs have affected affordability for those in different income brackets (Paulsen & Smart, 2001d, p.42). As a result, virtually all students are subsidized in higher education because the full sticker price is considerably less than the actual cost of a student's college education. Any tuition reduction supported by financial aid may come from a wide variety of sources including grants such as PELL, career specific aid, endowment support, scholarship for service programs, academic scholarships, college 529 plans, student loans, family tax credits, work study programs, tuition deferments, employment or even military service. Some financial aid such as student loans must be repaid and therefore students will often consider their return on investment and ability to repay in post-graduate years. Other financial aid such as PELL is awarded based on financial need determined by the Federal Application for Student Aid (FAFSA). Strach indicates that PELL grants have a quasi-entitlement status in that once funding has been appropriated and future commitments made, students are guaranteed an amount based on their college costs minus their expected family contribution. Although the original Higher Education Act (HEA) of 1965 and in its renewals have established many important campus-based education programs, such as student loans and work-study, it did not guarantee a minimum of funding to financially needy students (STRACH, 2009, p.67). Regrettably, federal support for student aid is motivated by a multiplicity of somewhat unconnected goals (Paulsen & Smart, 2001, p.268). Programmatic clarity and distinctiveness have also been lacking in student aid programs (Paulsen & Smart, 2001, p.270).

The College Board's report "Trends in College Pricing 2009" shows that sticker prices are rising across the board, and even these look larger because the consumer price index declined 2 percent between July 2008 and July 2009 (de Vise & Anderson, 2009, pA24). Unfortunately, despite these sizable subsidies received by college students, they and their families pay a significantly higher percentage of the cost of their education now than did college students thirty years ago (Paulsen & Smart, 2001d, p.43). With the current economic downturn, education experts from both public and private colleges may soon be in serious financial straits, forcing increases in tuition (Lewin, 2008, p.18). ''Given the economic strain on state budgets, the pressure on state governments to shift the cost of education to students and families may prove irresistible,'' said Molly Corbett Broad, President of the American Council on Education. ''Private institutions, too, given the loss of endowment income and the expected cutbacks in private giving, will likely be forced to increase tuition at the same time they struggle to increase institutional financial aid.''(Lewin, 2008, p.18). With both sides trying to struggle with the challenge of affordability, it is certain that tuition and fees for students or institutions must still be understood as a continued investment in human capital.

High-Tuition / High-Aid

Supporters of a high-tuition approach believe that students recap a large share of the benefits of investment in higher education, and therefore, they should be asked to pay a substantial share of educational costs in the form of tuition (Paulsen & Smart, 2001b, p.116). Paulsen also noted that by raising tuition, students would then need to rely on greater aid for access, and even the higher income students would find their college costs increasing (Paulsen & Smart, 2001f, p.327).

Presently in Nevada, the state's higher education system is preparing to abandon its long-established low-tuition model and support one that increases tuition and also offers greater financial aid for lower-income students (Lake, 2010). Nevada's governing Board of Regents has recently asked the chancellor to develop a new tuition and fee policy. What the chancellor outlined follows what would be referred to as a "high-tuition, high-aid" model. In fact, Lake and Richard noted that this model has gained in popularity, and California has recently set tuition and fees to rise more than 30 percent next year (Lake, 2010). Lake and Richard also noted that the Nevada Regent, Jason Geddes, realized some students would have difficulty continuing their education, but as state support dwindles, this new model is the only way to preserve the state college system. The new policy for Nevada is a commitment of at least 10 percent to the tuition and fees at community colleges and 15 percent at the state college and the universities in their financial aid programs, at least 90 percent of it need-based (Lake, 2010). The current policy ties about 5 percent to the community colleges and 10 percent to the universities in aid. The old policy also utilized a complex regional funding formula which was considered too complicated. The proposed plan connects annual increases to the national Higher Education Price Index, which has averaged an increase of close to 4 percent annually over the last several years (Lake, 2010).

Proponents of higher tuition also argue that a low-tuition/low-aid model is economically inefficient because many of the students subsidized do not need the subsidy to attend. To some these tuition increases may seem unethical. When searching for justification through our moral compass it could be argued that if colleges are charging higher prices with no noticeable change in services provided, the American public is likely to become skeptical of higher education's objectives and the efficiency (Honeyman, Wattenbarger & Westbrook, 1996, p.8). The resources used to subsidize the higher-income families and students actually could have been used to support alternative activities that would yield a higher benefit to society (Paulsen & Smart, 2001b, p.118). As in the Nevada and California examples, states have begun to abandon their traditional commitment to low-tuition/low-aid and have moved to high-tuition/high-aid models. By following these models, states are able to shift their funding of higher education away from state appropriations and more towards needs based student aid (Paulsen & Smart, 2001f, p.337). At EOTM 's recent visit to Valencia Community College, President Sanford Shugart noted in the cohort interview that state revenue is unpredictable and, therefore, cuts could be expected. Moving towards a higher-tuition/higher-aid model would provide greater financial resources to the college and less dependence on state revenue, which at the present time is not increasing. He also explained that if properly supported and managed, increases in financial aid could lesson any impact on student's affordability and access, a key concern.

Low-Tuition / Low-Aid

Supporters of the low-tuition approach believe that there are substantial external benefits to society when individual students' decide to invest in higher education (Paulsen & Smart, 2001b, p.117). Supporters also believe that society should be asked to pay a substantial share of educational costs in the form of taxes. These taxes would then be used to provide subsidies that permit public institutions to set tuition low, yet still cover required operating costs as well as future costs (Paulsen & Smart, 2001b, p.117).

In defense of low-tuition/low-aid models, a Seattle-based research institute commented on Washington's Gov. Chris Gregoire's planned tuition increase. They suggested that a move towards high-tuition/high-aid will cause low-income and minority students to think twice before heading off to college. This research group also says high tuition tends to drive high-achieving students into the arms of private schools (Amaro, 2009). The institute reviewed what has happened at other universities in the country that have implemented such a model. In their findings, it was indicated that the enrollment of low-income and under-represented minority students tends to decline when shifting from low-tuition/low-aid to a high-tuition/high-aid model (Amaro, 2009). Enrollment of higher performing students also decreases due to competition with private schools (Amaro, 2009). With today's economy, these trends will only increase!

Proponents of low-tuition/low-aid have also addressed issues of equity with respect to higher education. Paulsen notes that these proponents believe equity is enhanced for several reasons (1) low tuition promotes equal access and enrollment across all income groups (2) equity is enhanced through a progressive tax system and (3) low tuition can be subsidized through needs based aid. Proponents also argue that if increases in tuition are accompanied by increases in aid, lower income students may respond more negatively to a change in tuition than a change in aid (Paulsen & Smart, 2001b, p.117). Paulsen also notes that there are more low and middle income students in public colleges, and therefore, raising tuition for the upper income students will not generate sufficient revenues to cover the financial aid for the lower income students (Paulsen & Smart, 2001f, p.338).

EOTM Funding Model

If one is interested in understanding how community college administrators manage their revenues, one needs to understand the history, cultures, and norms of the individual states in which they are located (Piper Kenton, Schuh, Huba, & Shelley II, 2004 , p.1-17). Thus, a primary driver for funding must be the mission of the community college. This mission, established by the local board of education, must support the connection of operating expenditures to staff and faculty, facilities, and other resources to improve student learning while at the same time providing affordable and open access to the community. If administrators can utilize a planning process that ties the mission of the institution to its financial resources, they may be able to meet the goal of keeping college affordable and accessible while at the same time achieving financial accountability (Piper Kenton et al., 2004, p.1-17). This is the goal of EOTM.

Three primary sources of revenue are essential to the community college's operating budget (1) tuition and fees (2) local appropriations and (3) state appropriations. Although these are considered primary, there are generally several other revenue opportunities including federal appropriation, federal grants, state grants, local grants, private gifts, endowment income, sales and services of education activities, asset leases, and auxiliary enterprises (Paulsen & Smart, 2001e, p.35). These additional sources are not considered a dependable source of funding, and therefore, represent a small portion of the overall operating expenses.

Tuition and Fees

Our philosophy when taking into account tuition and fees will be considered synonymous as a funding source and will make up a considerable portion or 35% of the operating revenue. It was discussed by EOTM that although community colleges are choosing a "higher-tuition/higher-aid" model, fiscal conservatism must prevail to maintain tuition increases at a pace no greater than inflation tied to the Consumer Price Index (CPI) or national Higher Education Price Index (HEPI), whichever less is. In order to ensure open access and affordability, .5% - 1% of the operating budget would be allocated to aggressively seek out and support all and any forms of financial aid for students. This is a significant investment which is felt will ensure proper allocation and maximization of aid for lower-income and disadvantaged students. As previously stated, a "lower-tuition/lower-aid" model was considered less economical as often students do not require aid to attend.

It is well understood that the sticker price may dissuade those lower to middle income students from engaging the institution; therefore, as part of the "access for everyone" mission, all students will be required to participate in an individual financial aid advising session, in coordination with the placement and application processes. To determine the amount of financial aid that is appropriate for each student, the FAFSA (Free Application for Federal Student Aid) process will be utilized, and the amount of aid each student is eligible to receive will be determined. Additional attention will be given to federal student and parent loan applications, and counseling will be offered to discuss the pros and cons of such loans.

Local Appropriations (Levy)

Local appropriations will act as a funding source and will make up another considerable portion, 25% of the operating revenue. From a philosophical standpoint, this allocation will allow our institution to continue to maintain downward pressure on tuition and fees and provide revenue sources through reasonable property tax levies. By using a progressive tax system of equalized assessed valuation, local municipalities will be able to work in cooperation with the locally elected school board members to ensure finances are well managed. Local property tax contributions are also viewed as a mechanism to limit any state appropriation dependencies and build equity with the local community. Tax caps must be implemented to ensure community confidence and any increases will be tied to the Consumer Price Index (CPI) or national Higher Education Price Index, whichever is less.

State Appropriations

State appropriations will act as a funding source and will expectantly make up 30% of the operating revenue. In the current economic climate, a high dependence on the state for funding could bring, for the most part, uncertainty to the budgeting process. If state appropriations grow greater than the dependent amount, the board may determine if those resources will be directed towards additional financial aid or property tax relief. If state appropriations are not met added pressure to increase tuition beyond the standard increase based indexes must be addressed. A continued and ongoing process of engaging with other institutions and legislative processes will be of primary focus to ensure continued state support.

Auxiliary Enterprises

Auxiliary enterprises including food services, bookstore, and workforce development (not for credit business and industry training) will be positioned to generate revenue and also subsidize other cost center auxiliaries such as child care. While these revenues will make up only less than 5% of the overall operating expenses, they will continue to provide a revenue source for cost center auxiliaries in the wake of unforeseen state cutbacks. Child care for example is a critical function and to ensure access for all these support services must be provided for.

Other funding sources

Other funding sources will make up only less than 5% of the overall operating revenue. These include sources such as federal and state grants. An office for institutional effectiveness will be established to ensure professional grant writers are equipped to engage faculty and staff to optimize appropriate responses to federal and state funding solicitations.


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New References

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