Fixing Public Education: One, Two, Three

BY JARED TURKUS

The University of California system has been the gold standard in American public higher education for years. According to the U.S. News & World Report, eight of its undergraduate institutions are ranked in the top 100, six in the top fifty and two in the top twenty-five U.S. universities. It is known for its distinguished faculty across disciplines and its ability to draw students from across the country and around the world. Its tuition is affordable to California residents and remains competitively low for out of state students. No other public university system in the world comes close in comparison.

Tragically, these institutions nearly went bankrupt last year. The University of California was living far beyond its means, despite receiving record-high private contributions. Three factors are primarily responsible for these swelling deficits.

First, the State of California reduced the University’s $22.5 billion annual subsidy by $900 million over the past five years. This left the UC system with less money to accommodate more students on expanding campuses like UC Davis, Merced and Riverside.

Collective bargaining allows professors to negotiate their salaries together, instead of an individual basis. Good professors are rightly rewarded with higher salaries and pensions but bad professors get those extra benefits as well, and the university’s budget suffers as a result.

Third, there is a massive disparity between the university’s in-state and out-of-state tuition rates. The average in-state tuition for students living off campus is $13,200 annually. Students from out-of-state, on the other hand, pay an average of $36,078 per year. As recently as 2007, nearly 90% of the system’s student body was in-state and eligible for the lower rate. Most of these students paid even less because two out of three University of California students receive financial aid. These financial burdens left the University of California’s future at the mercy of its state’s voters with what became known as Proposition 30.

Proposition 30: A Band-Aid For A Gaping Wound

In November 2012, California voters approved Proposition 30, an emergency tax hike supported by Governor Jerry Brown that will raise revenue to fund the UC system for the next seven years. In addition to preventing $375 million in new cuts to the UC system, it restores $256.5 million of the $900 million cut previously. Expansion would have been halted, most academic departments would have been reduced across the board and in-state enrollment would have fallen further.

Jerry Brown’s tax hike is only a temporary fix that gives the UC system time to restructure itself. Fortunately, this process has already begun. The University of California is now beginning to accept more out-of-state students. As of last year, out-of-state students averaged 18% of the university’s population. Strong fundraising has brought donations to pre-recession levels. The tax hike, large donations and increased revenues from out of state students have helped the University of California get back on its feet. This solution is nonetheless fragile. Proposition 30 raised the sales tax to 7.5% and all state income tax brackets over $250,000 were increased. Now that the state income tax rate is over 10% for all incomes above $250,000, California has the highest effective tax rates in the country. It is irresponsible to assume voters will renew these tax increases every seven years. It is also irresponsible to assume that private donations will remain at record-high levels.  The electorate could force the UC system to return to a 90% in-state population. Further, Proposition 30 does not provide a long-term solution to pay for rising costs and future liabilities such as the insolvent state pension fund. Two reforms are absolutely necessary.

What Public Education Can Learn From California’s Mistakes

The biggest lesson from the University of California is that public institutions cannot operate like private ones. Most private universities receive most of their revenue through tuition and donations. Most public universities cut their tuition requirements and make up the difference through state subsidies. Subsidy receipts cannot be spent as liberally as tuition receipts. A private university has direct control over how much it can immediately take in through tuition (minus financial aid, grants and loans). Subsidies are more directly tied to a government’s health, which is in turn connected to a country’s fiscal stability. A public, bust-vulnerable school cannot expand like a private institution. The University of California ignored this rule by expanding its budget too quickly. This approach fails to account for recessions or the sudden decreases in government revenue that stem from economic busts. To prevent future budget shortfalls, the University of California should create a reserve to use as a buffer to accommodate rising costs or decreased government subsidies to the state university.

The second solution is to reduce the gap in tuition charged to in-state and out-of-state students. Part of the problem was that the average cost of educating a student was higher than what the average student (a California resident on financial aid) was paying. Free markets do not deceive students into thinking that they can pay less for more. Granted, because the University of California is a public good partially subsidized by taxpayer dollars, some price discrimination is acceptable. Nonetheless, the rates should still be structured to be less unfavorable to out of state students and paint a realistic picture of what education actually costs. For example, tuition could be raised to $15,000 for in-state students and cut to $30,000 for out-of-state students. Over time, this could raise enough revenue to fund the UC system without running deficits. While this does shift costs to consumers, the difference buys one priceless commodity: security. Private universities never worry about bankruptcy because of their large receipts and endowments. Market prices reflect the financial security of a college. The government’s failure to apply the same principle to its own system ultimately harms the people who it is supposed to help. It is wrong to trick students into enrolling in a department that will face cuts at a school destined to face even larger cuts. Nonetheless, to prevent too many out of state students, the UC system can establish a quota based on its financial needs. For example, a rigid 80-20 rule could work, where 80% of students are California residents and the other 20% are out of state. The lower prices and higher acceptance rates incentives out of state students encourages students to invest in the Californian economy and possibly settle in California post-graduation.

If we want to prepare teenagers for the modern economy, then we must urge states to reform their public education institutions to avoid making California’s mistakes. Spending within means, demanding stellar faculty and reducing price discrimination are necessary to give young people an opportunity to define and pursue their own happiness. Tuition hikes, right to work legislation and responsible spending will be deeply unpopular among all relying on the UC system for employment or education. While these choices may be unpleasant, their consequences are trivial compared to the pain that would be caused by the system’s collapse.