Cost Analysis and Public Policy: Problems, metrics, and emerging directions from the Untied States

1. Cost Analysis and Public Policy:Problems, metrics, and emerging directions from the Untied States Jane Wellman Executive Director of the Delta Cost Project Submitted to the Forum de Financiamento Bogota, Colombia March 2010

2. About the Delta Cost Project • Non-profit, policy and research organization established in the District of Columbia in 2007 • Mission to develop data and metrics to address costs in postsecondary education, with the goal to improve the management of costs, reduce growth in tuitions, and provide tools to help institutional and policy makers focus resources on areas that will help to improve access, degree completion and quality • Data base and publications available from the website http://www.deltacostproject.org

3. The problem we hope to address • Tuitions are rising, and public subsidies are declining, despite a national priority to increase access and degree attainment • Public resources will not grow for some time, and tuition increases alone cannot be expected to pay for increased access • Need to address cost management, cost containment, and productivity: keep costs from rising, use the resources that are available more efficiently, and invest resources in areas that pay off in academic performance • The allocation of resources is the most powerful policy tool available at the state or institutional level – need to use data on costs and performance to guide fiscal decision making

4. The institutional and finance context for US higher education • Institutional diversity: public and private, majority of institutions are private, majority of students go to public institutions • Different finance models for different types of institutions • Historic state role is to pay for operating expenses for public institutions; federal role is student aid • See Charts 1 – 4 for snapshots of finance by sector

5. 1: Revenues by major source and sector, 2000-2008

6. 2. Costs/Subsidy structures: public institutions, 2002 - 2008 Source: Delta Cost Project IPEDS Database, 1987-2008; 10-year matched set.

7. 3: Cost/Subsidy structures, private nonprofit institutions, 2000 – 2008 Source: Delta Cost Project IPEDS Database, 1987-2008; 10-year matched set.

8. 4: where the money goes

9. 5. NATIONAL: WHERE THE MONEY GOES, WHERE THE STUDENTS ARE ENROLLED: E&R SPENDING PER FTE STUDENT/ENROLLMENTS Source: Delta Cost Project IPEDS Database, 1987-2008; 10-year matched set.

10. The experience of the United States • Data rich and information poor • Cost metrics focus on revenues or institutional position, and not on use of resources within the institution • State policy makers and institutional governing boards historically have not looked at costs • Cost analysis has been made difficult because of poor data, and a general belief that costs are too technical to be analyzed or compared

11. Improving costs management: the importance of language • Tradition in US has been to look for revenue solutions to cost problems – by increasing tuition or private fund-raising • Recession is forcing new attention to cost management • Language and concepts are needed to frame this discussion, beginning with distinctions between one-time budget cuts, permanent reductions in costs, and increases in productivity • Common metrics are also desirable, to allow measurement of cost reductions over time

12. Budget cuts, cost shifts, cost reductions, productivity improvements • Cost cutting: one-time budget cuts: not designed to be permanent, when revenues return costs go back up • Across the board cuts; hiring freezes; work furloughs; travel freezes • Cost shifting: substituting new revenue sources for functions previously funded from another source • Increasing student tuitions to make up for reductions in state subsidies: costs have not increased, but prices have – cost shifting has occurred • Cost reductions: permanent reductions in the cost structure • Academic program redesign to increase distance-based learning; academic program consolidation and elimination of high cost programs; reductions in administrative costs; reductions in benefit structures; shift to lower cost personnel • Productivity increases: increase in degree production without increasing costs • reducing enrolled time to the degree (savings to the student) credit accumulated prior to obtaining the degree (savings to the student and to the institution) and reducing student attrition

13. The importance of metrics: common measures over time • Six measures, can be aggregated at the national level, at the state or system level, or applied to individual institutions • Revenue by source over time • Spending by function over time, including the proportion of spending going to instruction v. other areas • Cost/subsidy: the proportion of educational costs covered by subsidies v. tuition • Costs and prices: the proportion of tuition increases caused by subsidy shifts v. increases in spending • Costs per degree or credential • Costs against enrollments: across postsecondary education, where is the spending, and where are the students

14. Principles to guide development of cost measures • Distinguish between what the state needs to know to play its role and what the institutions need to know to manage resources • Don’t over-design: detail ≠ transparency ≠accountability • Look for measures that are relevant to decision-making, not just those that are interesting to analysts • Develop measures that can use existing information • Ensure that fiscal measures tell something about performance – need to be put into context, by measuring spending against enrollments or degrees, over time, or in relation to other institutions

15. State priorities for monitoring costs • Focus on goals first: resources have to be evaluated with reference to priorities for future performance. • Look at the use of state subsidies: primary focus on state subsidy as a share of costs, and whether these are consistent with priorities. • Student share of costs: are these equitable across types of institutions and student populations? Are they consistent with goals of economic access? • Institutional use of data to manage costs: is there evidence that the institutions are managing costs? Look for transparent metrics showing evidence of attention to cost management and productivity. • State responsibility for costs: how are state regulations, including budget allocation and accountability procedures, contributing to the goal of effective cost management? How are they getting in the way? (example: allocation formulae; benefits requirements)

16. A final comment: balancing market and regulation • State should aim to balance healthy market forces with appropriate use of regulation • Competition in higher education can improve quality, provide students with diverse institutional options, and balance public solutions with private alternatives. Private institutions have greater flexibility in general, are more adaptive to changes in circumstances, and can be a model for public solutions. • BUT: the experience in the US is that competition increases costs; that increased costs mean higher prices, with no evidence of an increase in value, and at the expense of student access. • The state needs to be prepared to regulate in these matters, by attending to institutional mission, and maintaining regulatory control over tuitions.