Running head: THE EFFICIENCY OF PRIVATE INSTITUTIONS

The efficiency of private institutions Erin Lewis Seattle University SDAD 585: Higher Education Finance Dr. Kurt Buttleman August 7, 2013

THE EFFICIENCY OF PRIVATE INSTITUTIONS The Efficiency of Private Institutions Introduction Which sector in American higher education is the most efficient? This must be a trick

question because when I consider the current economic climate, the governments lack of interest and investment in higher educationor even education at any leveland the fact that tuition rates have been on the rise for years, my first thought is that there is no sector of American higher education that is efficient. Perhaps that is the point? When initially considering how to approach this paper, I found myself completely floundering. Is this paper about my opinion or is there one right answer? How do I define efficiency? How much does this paper actually have to be about finance? Can the consumer appeal play a large role in efficiency? These were all questions that swam through my head. I bounced many ideas around, and ultimately I settled on the following: If I were to do my college search over again, in the present economic climate, what would I be looking for in a higher education institution? This is how I framed my approach, also taking into consideration several of the financial aspects of the institutional type that I chose. Based on the quality of education, the class sizes, the percentage of courses taught by full-time faculty, the mission-based or liberal arts core curriculum, and the flexibility and timeliness with which the institutions can shift gears in times of challenge, the sector of American higher education that I feel is the most efficient is the private, non-profit sector. And if I can be even more specific, I would say that the sector of American higher education that is the most efficient is the private, selective, mission-based, non-profit sector. Revenue sources for private institutions Although private institutions do not receive state funding to help cover costs, they still have a multitude of revenue sources. These revenues can be allocated, collected or donated for

THE EFFICIENCY OF PRIVATE INSTITUTIONS general use or for a specific purpose (Barr & McClellan, 2011). Because they lack the state funding of their public counter parts, private institutions rely heavily on tuition as one of their main sources of sustainable revenue. Undergraduate tuition at private institutions is one of the main engines that drive the entirety of the institution (Barr & McClellan, 2011). Private institutions, unlike public ones, have a standard tuition rate for all full-time students, with no differentiation between in-state and out-of-state students. Without allocating tax dollars per in-

state student, each student at a private institution costs roughly the same to educate, thus separate tuition prices for state residency need not apply. At private institutions, the tuition is one of the most critical components of the budget and is calculated by the governing board of the institution (Barr & McClellan, 2011). Enrolling and retaining the correct amount of students is key to the financial health of a private higher education institution. Another revenue source for private institutions is the endowment income. The responsibility of managing the endowment lies with the governing board of each private institution, but individual staff members or outsourced investment firms are responsible for the day-to-day endowment issues (Barr & McClellan, 2011). The endowment is a large sum of money that is invested, and the interest is often used as a significant portion of the annual operating budget of the institution. The size of the endowment is different at each private institution, but Barr & McClellan (2011) provide an easy way to calculate whether a particular university has a healthy endowment: One way to measure the strength of the endowment is to examine it in terms of student enrollment. Divide the student enrollment into the endowment and determine what the endowment support is for each student. If the result of that

THE EFFICIENCY OF PRIVATE INSTITUTIONS exercise is a high number, the institution certainly has a strong endowment foundation. (p.35) Gifts are another significant source of revenue for private institutions. These gifts can

come in the form of annual alumni giving, or donations and support from family, businesses and foundations. Private institutions rely heavily on gifts to help off-set the funding that they do not receive from the state that their public counterparts do receive. Lastly, private institutions receive revenue from other operations such as athletics, enterprise, housing, and the increased tuition rate of international students. Private institutions separate themselves from public institutions in large part due to their tendency towards very specific mission statements. These mission statements make it a bit easier to allocate resources in an appropriate and efficient matter. Does this funding request support the mission of the university? This is always a question that private institutions can ask when determining allocations of funds for various departments or programs. The allocation of resources and funding at private institutions is often more flexible and fluid than in public institutions because there are often fewer restrictions on what they money can be spent on. Private institutions are the most efficient sector of higher education Private, non-profit institutions are the most efficient sector of American higher education largely because of their dependency on recruiting, enrolling and retaining their students and their dedication to a 4-year graduation rate. Private institutions also tend to be more openly missionbased than public institutions, creating a sense of shared belonging and community across campus. With small class sizes, low student-to-faculty ratios and an incredibly high percentage of courses taught by full-time faculty members who are dedicated to teaching, private institutions provide students with a quality education that holds both students and faculty members

THE EFFICIENCY OF PRIVATE INSTITUTIONS accountable for the learning that occurs in the classroom. Students at private institutions

experience a well-rounded education, often grounded in the liberal arts or other core curriculum that supports their holistic education and provides a foundation for students before they pursue a particular major. The holistic education that students receive at private institution provides student with life skills and the tools they need to think critically and navigate the real world in a way that extends beyond simply mastering a specific academic or technical skill set required to get a job. In these trying economic times, the idea of a public education is a scary one. Both the state and federal government are cutting funding to education across the board, forcing public institutions to raise tuition and enroll more out-of-state and international students than ever before. According to a College Navigator search within the Integrated Postsecondary Education Data System (IPEDS), data shows that in the state of Washington, tuition for some public institutions has increased between 8% and 11% over the past year for both in-state and out-ofstate students, while many private Washington institutions have only raised tuition by about 4% (2013). Considering that these same public institutions have a much higher percentage of faculty whose responsibilities are geared towards research rather than teaching, and the fact that these public institutions also utilize teaching assistants to teach their courses, it is safe to say that their focus is less on teaching and student learning than their private counterparts (Appendix A). Additionally, public universities have been forced to enroll increasing number of out-of-state and international students in an attempt to make up some of the funding that the state has cut from their budgets. If the point of public, state subsidized education is to serve residents of that state, increasing out-of-state and international students is actually doing a disservice to the taxpayers who pay good money for affordable, quality public education.

THE EFFICIENCY OF PRIVATE INSTITUTIONS According to Facione (2009), during a budget crisis, private institutions are less at risk because they have the ability to be more agile in terms of policies and making the necessary changes to adjust to the market. Public institutions, on the other hand, are unable to adapt as quickly due to strict regulations and procedures that they are required to follow. Institutional change happens slowly at public institutions, and that hinders them. Financial aid at private institutions is both a blessing and a curse. No one can argue

against the fact that private institutions come with a hefty price tag. Because private institutions do not have the added per-student subsidy that public institutions do, they must carefully calculate their tuition prices. This means that even if they under-enroll by a few students, that can make a significant difference in their operational budget. The per year sticker price of a Gonzaga education may be $46, 615, however, 98% of Gonzaga students receive some sort of grant or scholarship aid that they do not have to pay back (Appendix A). An average grant/scholarship package at Gonzaga is $22,905 (IPEDS, 2013). An average grant/scholarship package at Washington State is $9,127 and only 56% of their students receive grant or scholarship aid. This is fine if you are an in-state student, but if you are one of the increasing number of out-of-state students that are enrolled at Washington State it means that you are now paying more than you would if you attended Gonzaga (IPEDS, 2013). While, yes, private institutions do generally come with a larger sticker price, they also provide significantly more grant and scholarship aid for students that they do not have to pay back. Another reason that I find private institutions to be effective is that they value teaching above all else. Although funds are running dry, private institutionsfor the most partare spending their money in a way that directly supports the mission of their university: on teaching. Of the Washington private institutions that I researched, none of them utilize graduate teaching

THE EFFICIENCY OF PRIVATE INSTITUTIONS assistants to teach their classes (Appendix A). In fact, at Gonzaga not only do they not have

teaching assistants, but 95.6% of their faculty are full-time instructional, meaning that they have almost entirely eliminated adjunct faculty (IPEDS, 2013). Professors teach full-time and are oncampus to help students. This, in my opinion, is a worthwhile investment. Because of their investment in teaching and their large price tag, private institutions are much more likely to graduate students on-time than public institutions. According to Sullivan (2011), the average four-year graduation rate for private institutions is 49% as compared to 27% at public institutions. Highly selective private institutions average a 79% four-year graduation rate (Sullivan, 2011). Based on all of that evidence, I claim that private, non-profit, four-year institutions that are highly selective and mission-focused are the most efficient. They are dedicated to students, holistic education, and quality teaching. They do the best they can with the limited funding sources that they have, and they often provide a better alternative for students searching in a different state than out-of-state public institutions. Raising prices are a reality that all institutions face, but private institutions continue to admit students selectively and based on their institutional focus. Unlike at public institutions, who have somewhat turned their back on their constituents in order to make more money of out-of-state students. If I were to do the college search all over again, I would choose a values-based, selective private institution that will offer me scholarships and grants based on academic merit and can offer me small class sizes with fulltime professors that care more about my learning than about their own research. Recommendations for efficiency The fact that it was so difficult to select a sector of American higher education means that no one sector really is more or less efficient, but rather it is entirely up to ones personal

THE EFFICIENCY OF PRIVATE INSTITUTIONS

preferences and what they find to be important at a university. That being said, there are several recommendations that I would make for developing a system of American higher education that is more efficient. First, I would recommend all institutions revisit their mission statements and really narrow in on what they want their institution to stand for. It is much easier to recruit students when there is a clear mission and institutional values. Students want to feel important and at home at their university, so being transparent about exactly what the institution stands for and supporting the mission with the way resources are allocated is important. Another recommendation I have would be to outsource non-essential services that require a very specific skill set from staff. Examples of this would be the bookstore, technology departments, and grounds staff. Take offers from multiple companies. A little healthy competition never hurt anyone. According to Jeffries (1996), private sector or free market will, by its nature, provide a service more efficiently and at a lower cost (p.26). Next, I would recommend specializing in something. Not every institution has to be phenomenal at football, but they can be phenomenal at something else. Find your institutional niche and run with it. In hard economic times and budget crises, institutions must decide which programs, services, and departments are essential to the survival of the institution (Facione, 2009). For private institutions, the essentials are keeping enrollment and retention up and producing quality teaching and learning. Private institutions must protect and preserve their students and the people who educate them (Facione, 2009). Because there is a lot of discussion surrounding the increasing cost of administrators and student services in higher education, a creativealbeit riskyrecommendation comes from Frione (2009). He recommends requiring all administrators with a Masters degree to teach a course. In a way, I like this recommendation, although it does take away from the percentage of

THE EFFICIENCY OF PRIVATE INSTITUTIONS full-time instructional faculty. I like this recommendation because these administrators are

already familiar with the student population, they understand the institution and the mission, and they are dedicated to the student experience. This also provides students with an additional level of faculty accessibility. Yes, they are adjunct instructors, but they work on campus and are therefore more accessible than adjuncts who work off campus. These recommendations will not, by any means, fix the current educational crisis that we are experiencing in the United States. The only way to truly overcome this crisis is to convince the government and the public that higher educationand all educationis critical to the continued economic success of our country. Until education becomes a national priority, we will continue to have budget crises and continue to be forced to cut valuable programs from our colleges and universities. We have already reached the point where it is more affordable for students to attend private institutions than to attend out-of-state public institutions. And in-state public tuition is rising quickly as well. Our country is in some serious trouble.

THE EFFICIENCY OF PRIVATE INSTITUTIONS References Barr, M.J. & McClellan, G.S. (2011). Budgets and financial management in higher education. San Francisco, CA: Jossey-Bass. Facione, P.A. (2009). A straight-talk survival guide for colleges. The Chronicle retrieved from http://chronicle.com/article/A-Straight-Talk-Survival-Guide/3268. Integrated Postsecondary Education Data System (2013). IPEDS College Navigator. Retrieved from http://nces.ed.gov/collegenavigator/. Jeffries, C.L. (1996). The privatization debate: Examining the decision to outsource a service. Portfolio, January 1996. Sullivan, D.F. (2011). Private colleges a better deal. Times Union. Retrieved from

http://www.timesunion.com/opinion/article/Private-colleges-a-better-deal-1019271.php.

THE EFFICIENCY OF PRIVATE INSTITUTIONS Appendix A

Gonzaga Undergraduate Enrollment Faculty Student-Faculty Ratio Full-time Faculty (Instructional) Part-time Faculty (Instructional) Full-time Faculty (Research) Part-time Faculty (Research) Teaching Assistants Annual Cost (In-State) Annual Cost (Out-of-State) Change in Tuition from Previous Year (In-State) Change in Tuition from Previous Year (Out-ofState) Percent Students Receiving Financial Aid Percent of Student Receiving Grant or Scholarship Aid Average Amount of Grant/Scholarship Aid Received Percent Receiving Student Loan Aid Average Amount of Student Loan Aid Average Net Price W/O Loans (In-State) Average Net Price W/O Loans (In-State) First-to-Second Year Retention Overall Graduation Rate 4-Year Graduation Rates 6-Year Graduation Rates 4,865 417 11-to-1 95.60% 4.40% 0.00% 0.00% 0 Whitworth General Information 2,248 276 11-to-1 56.90% 43.10% 0% 0% Washington 29,022 4,792 13-to-1 70.00% 24.20% 4.20% 1.70% 3,342 $26,066 $43,621 5.00% 8.30% 56% 44%

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Washington State 22,763 2,055 16-to-1 56.80% 11.20% 28.50% 3.50% 1,598 $27,302 $40,384 9.50% 11.50% 79% 56%

0 Cost of Attendance & Financial Aid $46,615 $46,066 $46,615 $46,066 4.40% 4.40% 99% 98% 5.40% 5.40% 98% 95%

$22,905 53% $9,870 $23,710 $23,710

$17,476 64% $6,698 $28,590 $28,590 Retention & Graduation

$11,747 34% $6,304 $14,319 $31,874

$9,127 51% $7,201 $18,175 $31,257

91% 83% 69% 83%

83% 80% 67% 80%

84% 80% 59% 80%

71% 67% 38% 67%

This table was developed by Erin Lewis with data gathered from Integrated Postsecondary Education Data System (2013). IPEDS college navigator. Retrieved from http://nces.ed.gov/collegenavigator/.