Can Arizona universities reconcile 'nearly free' mandate with improvement mission?

The Arizona Constitution mandates that "the instruction furnished shall be as nearly free as possible" at the state's universities, and that the state appropriate money for the "development and improvement" of its universities. In 1998, the Arizona Board of Regents adopted an operational interpretation of "as nearly free as possible" that maintains resident undergraduate tuition at Arizona universities in the bottom one-third among the 50 states' senior public institutions. A recent report published by the W. P. Carey School of Business reviews the constitutional requirements and examines how the operational interpretation has influenced financial resource levels at Arizona universities. "First, the operational one-third rule is essentially arbitrary," says report co-author Dennis Hoffman. "Second, the list of 50 senior public institutions is not a list of peer or aspirant peer schools. Third, the 'development and improvement' mandate takes on more significance under the current operational interpretation of the 'as nearly free' clause."

The Arizona Constitution establishes a dual mandate for public higher education in the state. The first stipulates that instruction be "as nearly free as possible." The second states that "the legislature shall make such appropriations, to be met by taxation, as shall insure the proper maintenance of all state educational institutions, and shall make such special appropriations as shall provide for their development and improvement."

A recent report published by the W. P. Carey School of Business, "Tuition, Appropriations, and Constitutional Mandates in Arizona," examines two questions: What is the overall benchmark for "nearly free" tuition, and has the state met its constitutional obligation to provide for the "development and improvement" of the university system?

The report, written by Dennis Hoffman, associate dean for research, and Tom Rex, associate director of the school's Center for Business Research, is part of a broad Arizona State University and W. P. Carey School initiative — the Productivity and Prosperity Project (P3). Other recent P3 papers include an investigation of the value of a college degree, a review of educational attainment in Arizona, and an assessment of job quality in the state.

Defining tuition that is 'as nearly free as possible'

Over the lifetime of a college graduate, the individual's investment in higher education (in the form of tuition payments and foregone earnings while attending school) is more than offset by higher earnings realized after graduation. According to the P3 report, "The Value of Higher Education: Individual and Societal Benefits," the return averages nearly 12 percent per year. Society also benefits from a more educated work force and general populace.

However, according to Hoffman and Rex, "the 'as nearly free as possible' clause of the Arizona Constitution implicitly assumes, by shifting the financial obligation away from students, that most of the benefits of higher education accrue to society, with little discernible private return."

Since 1998, the Arizona Board of Regents (ABOR) has interpreted "as nearly free as possible" to mean that resident undergraduate tuition at Arizona universities should rank in the bottom one-third among the 50 states' senior public institutions. However, the Arizona Supreme Court's interpretation of "as nearly free as possible" is that resident tuition shall be neither "excessive nor unreasonable."

Hoffman suggests that the operational "bottom one-third rule" is essentially arbitrary. "For example, setting tuition at the average of the 50 states' resident tuition (a bottom one-half rule) would be neither excessive nor unreasonable. Moreover, the ABOR list of 50 senior public institutions is designed so that the sample spans the nation and is not a carefully crafted list of peer or aspirant peer schools, using any measure of university quality. The list includes some highly regarded institutions, but the majority are average at best."

Instead, Hoffman suggests a policy that targets aspirant peer schools — institutions with the high levels of instructional and research quality that Arizona schools would like to achieve. "Some have said that Arizona universities need to aspire to be more like the University of Michigan. To reach the quality standards that the UM maintains, tuition, state appropriations, sponsored research, and private fund-raising at Arizona universities must be similar to those in Michigan. We need to recognize that higher-quality schools are more expensive."

Addressing the affordability concern

Despite restricting tuition increases so that tuition remains in the bottom one-third of the ABOR list, some continue to worry that higher tuition will price lower-income students out of the market. But this concern may be misdirected. "Affordability may not be the most significant barrier to obtaining a university degree," says Hoffman.

"The literature suggests that affordability is less of a barrier to higher education than are other factors, including student ability and a full understanding of the value the degree will bring. And it clearly helps if a student's parents are college graduates." Affordability is not an overriding barrier to higher educational attainment since numerous financial aid programs are available from both the government and the private sector. Resident undergraduate students at ASU have access to nearly $80 million a year in low-income assistance.

Further, the financial returns that a university graduate receives over his or her lifetime far exceed the expense of getting that degree. Even if the cost of attending college were increased substantially, the private return would remain significant. "People see the costs in thousands of dollars expended today and forget that the value of the degree is worth hundreds of thousands over a lifetime," Hoffman notes.

Comparing universities

According to Hoffman and Rex, in 2005-06, resident undergraduate tuition at Arizona's universities ranks 40th highest among the 50 state institutions of higher education on the ABOR list — well within the bottom one-third required by the ABOR. Resident undergraduate tuition at ASU, the University of Arizona and Northern Arizona University in 2005-06 was about 30 percent less than the national average of the 50 universities and 62 percent less than the most expensive university.

Similarly, Arizona ranks low compared to other states in terms of state appropriations. The authors take their data from the Grapevine Report, which tracks state funding for traditional four-year public universities by state. In 2005-06, Arizona ranks 39th on funding per dollar of personal income and 45th on funding per capita.

In the paper, Hoffman and Rex describe a simple simulation used to compare total revenue — tuition (combined resident and non-resident) plus state appropriations — with instructional-related expenditures. The simulation compares this financial picture at ASU's Tempe campus with the senior public institutions in the ABOR-designated list.

The simulation revealed that to match the average (combined resident and non-resident) tuition level at the universities on the ABOR list, ASU's average annual tuition would need to rise by $772 per full-time student. To match the average government appropriation level for the ABOR list of schools, annual appropriations to ASU would need to rise by $1,945 per average full-time student.

Cutting costs by improving efficiency

Hoffman and Rex make a case for the constitutionality and economic importance of increasing tuition as well as state appropriations for Arizona's universities. Yet critics wonder whether more money is the answer, suggesting that universities should improve their bottom lines by becoming more efficient.

Hoffman responds that "improving efficiency is a positive step that must be pursued where possible, but certain factors prevent universities from reaping the high productivity gains observed in industry. These limiting factors apply to both public and private universities."

One limiting factor is that a university is a highly labor-intensive enterprise that relies much more on human capital than physical capital. For that reason, even as labor-saving technological advancements (like robots replacing factory workers) make many businesses more efficient, the university is hard pressed to attain "labor saving" efficiency gains.

Another reason that universities inherently cannot match corporations' efficiency improvements is the conservatory nature of the university enterprise. Technologically advancing corporations like GM can use the innovation-as-substitution model, where new innovations replace old technologies and old techniques are discarded. But universities are in the knowledge creation business, so archiving and continually revisiting information about the past is important, especially since few other organizations will do so.

For example, Professor Paul Courant of the University of Michigan told the participants of a recent Chicago Federal Reserve Bank conference that "the University of Michigan needs to maintain and analyze far more information about [the year] 1957 than GM needs to retain about 1957 Chevys." Evidence of productivity enhancement at universities includes larger class size, higher average teaching loads, and online or other remote instruction delivery. But, Hoffman states that "productivity gains are limited by the fundamental structure of our business. High-quality research and teaching often requires more, and higher-paid, employees, not fewer or cheaper workers.

"It will be a continual challenge to squeeze out sizeable productivity gains in an enterprise that is inherently so highly labor-intensive. Yet universities compete with the private sector for highly skilled workers and thus face the pressure of rising wage rates."

Getting what you pay for

"Evidence exists that the benefit of a university education is higher for those attending higher-quality institutions," the authors write. "In addition, there is increasing evidence of significant economy-wide social benefits to increasing the share of college graduates in the work force. Thus, an increase in quality would enhance the prosperity of all Arizona residents and businesses. Such enhanced quality may well be necessary in the 21st-century economy of international competition and rapidly evolving technologies."

The bottom line, say Hoffman and Rex, is that both tuition and state appropriations at Arizona universities are at levels below the average of other states' senior public universities. The authors suggest that the operational benchmark for "nearly free" tuition could be raised — at least to match the average of the ABOR list or perhaps the average of a list of aspirant peers. Increasing that benchmark would fit within the Arizona Constitution's mandate while increasing state appropriations would align with the mandate to provide for the "improvement and development" of the university system, say Hoffman and Rex.

"Tuition and appropriations are important pieces of the funding puzzle," says Hoffman. "But universities need to attract funds from other sources [such as sponsored research and private donors] as well. The data suggest that financial capital is an essential ingredient to success. But it needs to flow from a variety of sources and should be aligned with accountability metrics that insure dollars are used most efficiently."

Bottom line:

• Tuition and government appropriations for higher education in Arizona are significantly lower than in many other states.
• Arizona universities could increase tuition without tuition becoming "excessive or unreasonable."
• Tuition increases will not price lower-income students out of the higher education market if adequate access to low-income tuition assistance programs is maintained. In addition, the substantially higher income realized by college graduates should be considered.
• The legislature has a constitutional mandate to provide appropriations for the "improvement and development" of the university system.
• Structural impediments keep both public and private universities from achieving efficiency-induced cost reductions at the scale observed in an average corporation.
• Education quality is strongly correlated to price. High-quality schools are more expensive and have the resources to maintain high-quality programs.