Universities like the University of Dayton are non-profits. Unlike for-profit businesses, they are allegedly pursuing a mission–research, scholarship, and the education of young people–and not merely seeking to “make money.” As a result, non-profits are tax exempt, and indeed, the tax exemption is the most important privilege enjoyed by non-profits. But when we consider how non-profits actually behave, do they pursue their mission with a single purpose, or do they instead try to “make money,” that is, increase their income?
Well, let’s take universities. An insightful student recently posed the following question. When demand for higher education increases, do universities take advantage of the opportunity to charge higher tuition? Or do they keep tuition down in response to increases in demand, and increase price only when they need to do so in order to cover higher costs? The latter is what we’d expect to see if universities cared only about their mission and not about income. We should see only cost-push inflation and not demand-pull inflation in tuition rates.
Unfortunately, cost-push cannot explain tuition increases, since the increases far exceed the growth in costs. The bulk of the costs are salaries and benefits for faculty. These costs, however, have risen much more slowly than has tuition. In fact, the American Association of University Professors recently released a study showing that, adjusted for inflation, salaries in the past decade rose 7.7% at doctoral-granting private schools, and only 0.7% at doctoral-granting public schools. Meanwhile, full-price and inflation-adjusted tuition at these schools over the same decade rose 28.9% and 72% respectively. Now, those figures are for the full “sticker” price, and overstate the tuition rise a bit because they don’t account for price-discriminating discounts, euphemistically termed “scholarships.” Still, it seems clear that universities are raising tuition far beyond what is needed in order to merely keep up with costs. And tuition has also increased more rapidly than wages and salaries paid outside the university.
In 1975, a University of Minnesota undergraduate could cover tuition by working six hours a week year-round at a minimum-wage job, the Journal calculated. Today, a student would have to work 32 hours at minimum wage to cover the cost.
In case any more evidence were needed, now comes news that the University of Wisconsin has amassed a slush fund of at least $450 million. At the same time, the university, while awash in cash, was complaining about budget cuts and begging for more money! The folks at rightwisconsin.com assembled some damning quotes, such as the following.
Regent Regina Millner urged Board members to remember that belt-tightening cannot proceed indefinitely without compromising the quality of the product. “There is some point when you’re eliminating fat, you’re also eliminating muscle,” she said.
“I’m already worried about degrading the quality of the educational experience for students,” [UW-Milwaukee Chancellor Mike] Lovell said. He pointed to already high ratios of students to providers of student services such as mental health counselors and academic advisers. He also noted that the availability of fewer class sections would lengthen students’ time to degree, thereby increasing their costs.
Upon discovery of the slush fund, GOP pols in the state Assembly were livid, and issued a statement that reads in part as follows.
We are outraged with the mishandling of taxpayer dollars and the pattern of incompetence shown by university system administrators. We want the citizens of this state to know that we will examine the gross mismanagement of the system’s finances. We will demand accountability and transparency.
At a time when the UW System is asking for more flexibility and funding from the state, this situation clearly illustrates the need for strong legislative oversight. Our state deserves better from the institutions that are educating our students and future leaders. It is not only unfair to the students and their parents who keep getting hit with tuition hikes; it’s unfair to the taxpayers of Wisconsin.
We beg to differ, however. Rather than “gross mismanagement,” the existence of the slush fund represents much better management than we have come to expect from universities. At least in this case, the funds are still available. They were not wasted internally by financing administrative bloat, which is how universities typically dispose of surplus funds; they hire more and more useless administrators–people who never teach a class, never publish research. For instance, the Wall Street Journal reports that at the University of Minnesota, administrative staff increased by 37% from 2001 to 2012, more than twice as much as the growth in faculty, and nearly twice as much as the growth of the student body.
This wasteful spending highlights an important distinction between non-profit and for-profit institutions. The profit motive is constantly under attack from people who don’t know better; for instance, insurance company profits are blamed for higher health insurance premiums, and oil company profits blamed for higher gasoline prices. None of that is true, of course, but it’s also important to note that when Exxon makes a surplus it pays out the money in dividends on stocks, often held in 401(K)’s by people trying to save for retirement. Exxon doesn’t primarily waste resources and destroy wealth by dissipating the surplus on internal bloat, which is what often happens at non-profits. The problem is that non-profits don’t have shareholders who can claim those funds before the institution can waste them.
So now the news of the slush fund has put UW’s leadership on the hot seat. The irony is that if the leadership had instead blown the money on worthless campus bureaucracy, there would be no slush fund and no controversy. Rather than punish these managers, we need to encourage similar behavior by rewarding them. Some money should be taken from the slush fund and used to give UW leaders a huge cash bonus and a plastic trophy, spray-painted gold. Then, UW’s budget and tuition should be slashed.