FINANCING  the  UNIVERSITY -- PART 11

by Charles Schwartz, Professor Emeritus, University of California, Berkeley
schwartz@physics.berkeley.edu                                     April 25, 2007

>>This series is available on the internet at   http://socrates.berkeley.edu/~schwrtz


WHERE THE MONEY GOES – Lesson #1

Some numbers, a picture and detailed explanations are provided to illuminate the most misleading habit of research universities in answering the simple question: What is the cost of Education?


The University’s Accounting System

     This University has a well-established accounting system that reports how our money is spent.  The annual report on Expenditures of Current Funds, for the fiscal year 2005-06, gives a total of over $14 Billion (not counting the DOE Laboratories) and this is detailed in Table 1 below in terms of ten standard categories.

Table 1: UC Operating Expenses by Function (2005-06)
Uniform Classification Category
 Expenditure ($ Millions)
Instruction
  3,212
Research
  3,036
Public Service
     401
Academic Support
  1,139
Medical Centers
  3,675
Student Services
     470
Institutional Support
     764
Operation & Maintenance of Plant
     452
Student Financial Aid
     364
Auxiliary Enterprises
     720
     Source: Annual Financial Report, inside front cover

     It is most important to understand what these accounting categories mean.  The University has a three-fold mission: Teaching, Research, and Public Service.  However, it would be a serious mistake to believe that the three top accounting categories, listed above, accurately reflect spending for each of those three missions.  To understand the basic funding arrangements of UC (or any research university), refer to the picture on the following page.  This illustrates the basic fact that the accounting category called “Instruction” covers the full expenditure for salaries and benefits of the faculty throughout the academic year; thus it supports their work in Research (and Public Service) as well as their work in Teaching.

picture

     To formalize this picture, let me quote from the official Accounting Manual, which gives the definitions of these categories.

INSTRUCTION:  This category includes expenditures for …  
• academic instruction…
• departmental research and public service that are not separately budgeted; …

     What is Departmental Research?  

     A typical professor (like me) at a research university (like UC Berkeley) is hired as a member of the faculty of a specific academic department (like Physics). I am paid an annual salary for all my University work during the academic year (9 months): this work includes teaching, research, public service - and also university service (e.g., campus committees) and professional service (e.g., peer review of papers for journals in my field of expertise). This total salary payment (plus benefits) is recorded by the university as an expenditure of Current Funds for Instruction.  Also included in this cost category are expenditures in my department for support staff, supplies and equipment that are provided in assisting me effectively to perform those duties. (In budget language, this whole package is called “the I&R budget.”)

     What happens during the summer months? Nothing, as far as the accounting of Instructional Expenditures is concerned. If I happen to have an external research grant (“Sponsored Research”), then I can draw extra salary from that source for my research activity during 2 or 3 months of the summer, when I am free of any teaching duties; that expenditure will be recorded under the accounting category “Research.”

     Is there any difference between the research work I do during the academic year (Departmental Research, paid for under the accounting rubric of “Instruction”) and the research work I do during the summer (paid for under the accounting rubric of “Research”)?  No. I just have more time to devote to my research during the summer, without the distraction of teaching classes.

     The external research grant which I have (as a Principal Investigator) does pay out significant money for my research program during the academic year.  That money may go to paying post-doctoral researchers, graduate students, research technicians, and secretarial staff that I hire to assist me in my research program. It may also go for the purchase of research equipment, pay for ancillary research costs, travel to conferences, etc. It does not pay for any part of my salary during the academic year. (I am designated as “100% I&R faculty.”)

     With this understanding now in hand, please go back and look at the picture presented earlier and see how things fit together.

(I have left out the whole subject of the “overhead” money, which the University collects on any externally sponsored research.  This is an interesting subject to discuss, but it is not relevant to our present focus.)

     The picture and explanations I have presented above are not unique to UC. This accounting scheme is pervasive, being promulgated by the long established organization NACUBO – National Association of College and University Business Officers. The good thing that such industry associations do is to establish a uniform system of accounting and reporting.


What Is the Cost of Education?

     If you look in the annual Budget for Current Operations produced by the University of California Office of the President (UCOP) you can find the statement that the Average Cost of Education at UC amounts to $17,030 per student for the year 2006-07. [See page 71 or page 99 or page 236 of the Budget issued November 2006.]  It also says there that UC students “currently pay 30% of the cost of their education” referring to the fees we now charge them.

     What does this mean?  I expect that most people reading this will believe that this cost figure refers to the cost of undergraduate education; but that is not correct.  Based upon my earlier correspondence with UC officials, it is established that this figure ($17,030 per student) covers that whole bundle of expenditures described earlier as counted under the accounting category “Instruction.” In other words, this is the university’s total expenditure for undergraduate education plus graduate education plus departmental research (along with their supporting and overhead expenses), divided by the total number of students. Yet they call it the Cost of Education.

     Stanford University is even more blatant in providing this sort of misleading information.  Their recent press release announced that undergraduate tuition will be going up to  $34,800 next year but, they claim, “tuition covers only about 60 percent of the costs of educating an undergraduate.”  I have had an interesting correspondence about this with officials at Stanford and they have explained that they do their calculation following a methodology established by NACUBO.

     Let’s look into this.

The NACUBO Study

     The study, issued in 2002, is titled, “Explaining College Costs – NACUBO’s Methodology for Identifying the Costs of Delivering Undergraduate Education”  and it may be found at http://www.nacubo.org/x376.xml      The Preface of that 52-page document explains its origins as follows.

In 1998, the National Commission on the Cost of Higher Education issued a report calling on the nation’s colleges and universities to increase their public accountability and to develop better consumer information about costs and prices. In response, the staff of the National Association of College and University Business Officers began to consider how the association might help its member institutions meet the commission’s charge. The result is NACUBO’s Cost of College Project, which is the subject of this report.
The goal of the project was to create a uniform methodology that any college or university in the nation could use to explain and present how much it costs to provide one year of undergraduate education and related services. Most observers might think this would be a relatively simple task. However, the fact that it had never before been done was one indicator of its difficulty. The complexity and diversity of American higher education had thwarted previous efforts to devise a cost reporting system that could be acceptable to professional economists, never mind a methodology that was amenable to public use by every institution.

     In summary, the prescription they came up with for calculating the Cost of Undergraduate Education is as follows. Take the full expenditure for Instruction and for Student Services; add an allocation of overhead for general administration, facilities management and depreciation of plant and equipment; divide this total cost by the number of students enrolled, perhaps with some extra weighting given to graduate students.

     I think that is a reasonable methodology for colleges and universities whose only mission is undergraduate education, plus, perhaps, a modest program for graduate students. However, when one considers the realities of a research university, then we must consider the question of how to account for Departmental Research.  Here is what NACUBO concluded about this (page 27).

Departmental Research. Several alternative proposals were considered, but NACUBO concluded that all departmental research costs should remain within instruction and student services. Departmental research is vital and has a direct impact on the value and quality of instruction provided to students. ….

     This is strange logic.  In its introductory sections, their report says (page 9), “NACUBO never intended its Cost of College Project to address issues of value or quality…” yet here we see they depend on a claim of the “value and quality” this research activity gives to instruction.  Even if one were to admit that faculty research does contribute some significant value to undergraduate instruction (and this is a contentious claim), NACUBO goes way overboard in saying that the entire expenditure for Departmental Research should be charged to the cost of education.  I consider this distortion of reality to deserve the name of fraud.

How to Do it Honestly

     What then would be an honest way to calculate the Cost of Education? Look again at the financial picture given earlier and note that box, in the upper left corner, that shows the components of “Work of Regular Faculty,” which is counted  as Instructional expenditure.  All one needs to do is to disaggregate this bundle of work and their associated portions of that cost component.  Is there an objective way to make such a quantitative separation between faculty’s teaching work and their research work?

     This is a type of problem that occurs frequently in economics and business management.  Cost Accounting is a well-developed subject; and the particular method of Activity Based Costing (ABC) is the standard answer to our question. You don’t need an advanced degree in Business Economics to see that if you know how much of their work time is spent, on average, at these different functions, then you can assign appropriate portions of the total cost.  And, indeed, there exists data on this very question for the UC faculty.

     From 1978 through 1984 the University of California conducted a series of Faculty Time-Use Studies and this data provides the most authoritative answer to the question of how faculty at a leading research university spend their time.  Roughly summarized: about half of the professors’ work time, on average during the academic year, is devoted to teaching and half devoted to research and professional service.  The teaching activity is again divided, about equally, between undergraduate and graduate instruction.

     With this key data in hand, I have calculated that the actual expenditure for undergraduate education at UC averages about $7,000 per student per year.  That is quite a lot different from the $17,030 figure published by UCOP.  It means that undergraduate students (and their parents) are now required to pay fees that amount to a full 100% of the actual cost of the education we provide for them.  This conclusion has all sorts of implications for public policy – at the University, at the State level, and at the Federal level.

     For Stanford University, I estimate that what they actually spend on undergraduate education is about half of what they charge in tuition.

     For the details of this calculation see “The Cost of Undergraduate Education at a Research University,” which is posted on my web site; and for extension of this result to other research universities, both public and private, see Part II of that same paper.

     If officials of this and other research universities disagree with my results, then they must provide their own calculations – but let them be honest and not distorted by the fiction about departmental research that NACUBO has promulgated.