Some feedback from UC colleagues, following Part II

from Professor X, in business management (12/19/05)

Charlie: In any enterprise with large fixed costs (libraries, computers, administration, landscaping, plumbing maintenance, etc.), (some) users will pay more than marginal cost.  In the case of federal and other research grants  to UC, this is made explicit in charges for "overhead".  When you go to the supermarket to buy a quart of milk, you are charged more than the marginal cost to pay for the store's rent, the light bill, the accountant, etc.  The marginal cost of the milk would essentially be only the wholesale price.

For many university departments, the marginal cost of an additional student is likely to be well *below* tuition at UC.  For example, what does it cost to stick one more student in the lecture hall of the history dept.?  On the other hand, it probably costs a lot more to have one more film student.  It is likely that when UC denied entrance to some undergrads a few years back, ostensibly because of the budget, it actually worsened the budget situation.  If there was a justification, it was to have some bargaining leverage with the state.  I don't think any real leverage was gained but that was what happened.  

Nice to hear from you.  I don't know how much of my analysis you have read, so let me say that I did not calculate  "marginal cost." I looked at the university's total expenditure for the "product line" identifiable as undergraduate education (as separable from other product lines) and divided that by the total number of customers (undergraduate students). This is average cost, not marginal cost. All of those overhead expenses you mention are included in my calculation.

There is certainly room for critiquing how I did that calculation, and I would very much like to hear from economists about whether or not I have properly used the basic principles of ABC, since this is the most contentious point: how to (or can one?) separate faculty research and graduate education from undergraduate education.

What is your view on this?

Charlie: You would need to look very closely at the "product lines" to see how they are separating one line from another if it's average cost.  For example, how much library overhead is being allocating to undergrads, grads, faculty research, public access, etc.?  For that matter, I am not aware of anyone ever finding out how much of my teaching time is allocated between grads and undergrads.  (I teach some courses that have both.)  There is not much incentive for the university to pay a great deal of attention to this.  Overhead charged on grants is essentially a UC negotiation with the feds, not some detailed measurement.  

Let me answer your concerns.

Some years ago the UC administration, with faculty cooperation, hired a social science research firm to conduct a Faculty Time Use Survey of the UC faculty.  This provides an authoritative answer to how one may most logically divide faculty work-time among research and teaching, with further data leading to reliable separation of that teaching work between undergrad and grad courses.  This allows the Activity Based Costing (ABC) approach I used in my calculation. (The longer paper on my website describes all this in some detail. Be sure to see the appendices also.)  The "incentive" for the administration doing that survey was noise from Sacramento about faculty spending too much time at research and not enough time at teaching.  So I expect that the survey results are biased to overemphasize teaching; nevertheless, I have used their results at face value.

As for library cost separation, I used an estimate 50-50 separation based on information from the UC budget that 57% of this budget item goes to acquisitions (mostly research journals) and 38% to reference-circulation (serving users in person).

 I expect I am being overly generous in both of those approaches.  I have asked for detailed discussions with UC officials to sharpen up the analysis. (They don't respond. I wonder why.)

Please put on your professional hat and have a good look at my long paper 
and then tell me how it stands up to economists' scrutiny. Constructive criticism is most valuable.



from Professor Y, in science (1/3/06)

Charlie - you never cease to be stimulating. I think your analogy with luxury cars is probably best to use in this case. If someone wants the best deal as you seem to be defining it (a purely undergraduate education by people purely engaged in providing it), then choosing a major research university is like picking a Lexus instead of a Corolla. The latter provides perfectly comfortable and reliable transportation at a fraction of the cost of the former. My point is that people do have these choices, and I believe they know what they are doing and getting. There are a great many public and private undergraduate institutions, and I suspect the teaching is superior on average at many of them. The fact that students clamor to get into R1 universities suggests that they perceive added value not related to undergraduate education (prestige, name-recognition, eased paths to jobs or graduate school, research experience, strong peer groups, etc.).
Unless you feel that offering the "budget" and "luxury" choices is fundamentally unreasonable, I'd suggest that you move on to a more important topic. The financing of R1s is quite a tangle (the use of overhead from grants is a fascinating and murky topic), but I don't think that implying that the R1s are committing fraud is constructive. It does the already strained research capacity of the nation no particular good to attack one of its main pillars, and as a research scientist yourself I'm a bit surprised you find this the best use of your time. Were you to have your way, R1s would either shrink or become even more expensive. I work on faculty and student diversity; maybe that is an issue your considerable analysis talents could more profitably be turned to. Access to choice is a better goal than reducing choice.

Thanks for your response; I appreciate feedback from colleagues.

You talk about motives for my recent research (on costs at research universities) and I'll be glad to answer. In my longer paper ( I talk a bit (in Sections VI and VII) about the larger political/moral issues.  I am not out to make life harder for the research enterprise; I am out to try to preserve the principle of public access to quality higher education, independent of students' financial status.  I think that is something you also care about.

 I believe that the trend of increasing fees at UC (and other public universities of quality) will have (is already having) an effect of skewing student populations toward those from more affluent families.  At one point I ask the question: Is there any ethical or political line that might be drawn to limit that socially regressive trend?  And my proposed answer is: that undergraduate students should not be charged more than the actual cost of the education that is provided to them. Maybe others will disagree with this concept; I only ask for an honest open debate based upon honest accounting of where the money now goes.

You say, "My point is that people do have these choices, and I believe they know what they are doing and getting."  I agree that people who spend enormous tuitions to send their kids to exclusive private schools do know what they are doing (buying a seat on the super elite train.)  But people who have to scrimp and sweat to send their kids to UC (or have to cancel this option because of the cost) are not being told the truth about what those fees are being used for.

Please send me you reaction to this.

 [Here is Y’s next email, with my responses interspersed in italics.]

Charlie - I don't think you are giving the people enough credit for knowing what they are doing. This state has excellent options in the State University and Community College systems for those who wish to choose purely undergraduate options. Indeed, there is a disturbing trend at the State Universities to encourage more research, and think about opening more PhD programs. That I do think is a mistake, because then they will end up being too much like UC and narrow the choice. People clamor to get into UC BECAUSE it is UC: a highly-regarded research and graduate institution (mostly for the reasons I gave last time: they think they will accrue advantages beyond classroom learning).

Do you suggest that students/parents would choose to select CSU over UC because they didn't want to bother with what UC has to offer (the research mystique)?  I disagree.  Students are selected for UC on the basis of their high school records (there is some elitism in this whole structure, but I can accept that.)  I agree that students who get into UC do get something better than those who go to CSU: primarily a more strict course curriculum and a more stimulating set of student peers (and, yes, also the presumed benefits of a more pedigreed certificate).  Does our research activity really provide some tangible added benefit to our undergraduate educational program?  I think very little indeed. (Graduate programs are an entirely different matter.)

I share your concern about rising fees, but think that the solution is that the State should provide more support to UC to keep fees low, not that we should attempt to separate costs for UG and Grad education (which I agree with many others would be a somewhat misleading procedure). Now I agree with you that the fees do not go to pay us purely for what we are hired for, which really, as far as the State pretends, is just for teaching. On the other hand, most of the UC budget doesn't even come from State funds, and a good bit of research overhead ends up in the State and UC general funds. If the people want (as they seem to) a first-class University as part of their higher ed system, they should be more willing to pay for it, and they should not do so by "user fees" but rather by general state taxes.

I also would like to see the public treasury provide more money for education - at all levels.  That approach is what all the establishment folks in higher ed seek: more money.  Good luck to them.  My contribution is to say that a bit more honesty on our part - about how we spend the money we now get - is not just a good thing abstractly (honesty is good), but may also help in bringing about a better relation between taxpayers and our institutions. Those scandals about UC exec pay should not be regarded as mere "UC bashing", but a real failing that we ought to get fixed.  Public confidence in what we do is absolutely essential; and it needs to be real, not just PR.

I think we do agree on goals here, but I just think your efforts on this particular aspect are not to the crucial point, and will have a negative effect on the overall education of Californians. It is too easy to get distracted with the arcana of University funding, and ignore the larger issue of public funding of public higher education.

I think it is a two-way street.  If we (at UC) can learn to be more honest and more decent in how we spend public money, then the public is more likely to support us. (I am sure there are plenty of sophisticated people around the university who would consider this statement of mine naive. How do you react?)

There's been enough nonsense (along with some sense) about the "bonuses" paid to faculty and administrators. Too much UC bashing at once will not be in the interests of the public (and certainly not in UC's interest) in the long run.