COLLEGES AND UNIVERSITIES MUST BE COST-CONSCIOUS

A college or university faces powerful incentives to hold down its costs whether it is engaged in a mission-good or revenue-good activity and whether it is public, private nonprofit, or for-profit. As our two-good framework makes clear, though, the differing missions mean that the reasons for concern about costs differ. A traditional not-for-profit school has the incentive to hold down costs because the more successful it is at that, the more money it can transfer to its unprofitable mission. And when the school is providing its mission-good services it also has the incentive to hold down the production cost so as to be able to maximize the amount of the services it can provide. Thus, whichever activity the school engages in, revenue goods or mission goods, it faces the incentive to be efficient, choosing how to spend its resources – acting “businesslike.” It is clear that for-profit firms also have an incentive to hold down costs, as an element of their pursuit of profit.

Businesslike behavior extends in a number of directions in addition to cost-cutting. It includes the search for profitable markets, such as distance education or the leasing of the university's stadium or golf course for commercial use (which may be subject to “unrelated business” taxation if done “regularly” by a private nonprofit school).

To a college or university, tuition is a major, if not the principal, source of revenue for financing its mission. It is also the principal instrument used by a school to influence which students attend that school and, thus, the peers that a school can offer as an attraction to prospective students. Put another way, tuition plays the dual role of helping to raise funds while simultaneously serving as a mechanism for attracting the particular mix of students the school wants in advancing its mission.

The key to this dual role, as we shall see below, is that the notion of a school's “tuition” is less clear-cut than it may first appear. Although one typically associates a single number with a school's undergraduate tuition (the listed tuition), the actual prices that students pay to take classes (the net tuition) vary from student to student. Indeed, it is quite common for two students in the same major and taking identical classes to pay different net tuitions in the same way that two people sitting next to one another on a plane flight likely paid different prices for their tickets. The reasons for the differential pricing may differ, however. For the airline the price “discrimination” is simply geared to a profit-maximizing strategy, whereas for a public or private nonprofit school it is aimed at both revenue and student mix.

Intercollegiate athletics are no different from any other activity colleges and universities engage in, but are they a revenue activity, a mission activity, or a hybrid of the two?

There is no doubt that they are big business. Attendance for college football and men's basketball exceeds that for the combined National Football League (NFL) and National Basketball Association (NBA) professional teams, and ticket revenue is comparable to that of the NFL (Sandy and Sloane 2004). Athletics can be vital to promoting the goals of many colleges and universities, giving them a particular identity and creating loyalty in students, alumni, area residents, businesses, and donors – loyalty that translates into advertising, student recruitment, and donations. There is also no doubt that intercollegiate athletics – especially football and men's basketball – are expensive and can be distractions from the educational and research missions of the school. In fact, for nearly as long as intercollegiate athletics have been in existence, critics have questioned their role in higher education.

When Harvard College's long-serving president Charles William Eliot criticized commercialism in college sports in 1893, he might have been speaking today, except that the colleges he singled out were those in the Ivy League. He railed against colleges engaging in what we would today call big-time, money-making sports and losing their focus on academic pursuits.

INTRODUCTION

The contrast between democracy and dictatorship — in structures, policies, and performance — has been the object of intense scrutiny. Yet little consensus exists over the definition of regime type. What cases qualify as “democracies”? Which cases constitute the universe of “dictatorships”? The latter question is easy to answer when we encounter the ferocity of a Joseph Stalin or a Pol Pot. No one would quarrel with labeling their regimes as dictatorships. But other regimes are more controversial. For almost seven decades, a new president in Mexico was elected every six years. Nevertheless, the same party's candidate always won. Or consider Singapore, where Lee Kuan Yew crushed political competition for over thirty years. Yet continuous measures of regime type rate him somewhere in between “most autocratic” and “most democratic.”

Part of the problem is that dictatorial rulers are quite inventive in how they organize their rule. Decision-making power is concentrated in everything from juntas to politburos to family councils, for example. Yet the institutional inventiveness of dictators is most apparent when they govern with nominally democratic institutions, such as legislatures and political parties. Dictators frequently govern with legislatures, some of which have formal law-making powers, whereas others serve only to “advise and counsel.” Membership to assemblies may be by appointment or by election. In elections, candidates may use party labels or may be forced to run as independents.

CHAPTER 5 APPENDIX MATERIAL

Table A5.1 breaks down university and liberal arts college tuition and grants by ranking. For universities, listed tuitions are indeed highest for top-ranked schools and lowest for those ranked outside the top 100. Average institutional aid grants per undergraduate are also highest at the top-ranked schools and decline as rankings decline. Interestingly, the top 50 schools' average listed tuitions differ little – the average for schools ranked 26–50 is only 5 percent less than for schools ranked in the top 10 – but average institutional grants per undergraduate are 33 percent lower for schools ranked between 26 and 50. At liberal arts colleges, the top 25 are comparable in terms of listed tuition and grants per student (schools ranked 11–25 actually report slightly higher grants per student), whereas lower ranked colleges set both lower list prices and provide lower grants.

Table A5.2 shows the full results for the analysis of the impact of ability and income on the degree of discounting for undergraduate students.

Why do nondemocratic rulers govern with democratic institutions, such as legislatures and political parties? One view is that these institutions under dictatorship are mere shams. Scholars and policy-makers alike have pronounced the irrelevance of formal institutions under dictatorship. In discussing the role of political institutions on regime change, Gasiorowski (1995: 883) writes: “Huntington's (1968) argument about the importance of institutionalization also applies under authoritarian regimes, but consociationalism, party system structure, electoral rules, and the type of executive system are largely irrelevant and therefore presumably have little effect.…” A USAID report (n.d.:1), in describing communist regimes in Eastern Europe and Central Asia, states more bluntly: “Elections were a sham. Parliaments had no real power. Basic democratic freedoms — free speech, the freedom to assembly and organize, the right to form independent parties did not exist.” The conclusion is clear: nominally democratic institutions constitute mere window dressing that dictators can point to as evidence of their democratic credentials.

Yet those who encourage the formation of these institutions in the interests of promoting democracy imply another view. As Jeane Kirkpatrick (1979: 37) observed: “democratic governments have come into being slowly, after extended prior experience with more limited forms of participation during which leaders have reluctantly grown accustomed to tolerating dissent and opposition.…”

INTRODUCTION

Some countries experience phenomenal rates of economic growth while governed under dictatorship. By the end of General Franco's reign in 1975, Spain's per capita income was eight times as large as it had been since the end of World War II. China's average income nearly tripled under Deng Xiaoping. The East Asian “tigers,” such as Malaysia, Singapore, Taiwan, and South Korea, all achieved growth rates of over 10 percent under the thumb of dictators. Yet some of the worst economic disasters also occur under dictatorial regimes. Zambia under Kenneth Kaunda witnessed its average income fall: from 996 dollars in 1964 when he took power, to 817 dollars shortly before he left in 1991. The revolution led by Ayatollah Khomeini was costly for average Iranians: their per capita income when he died was almost 1,600 dollars less than when he seized power. It is only now that average income in Iran is returning to its pre-revolution levels.

South Korea and Zaire constitute the paradigmatic comparison. In 1960, per capita incomes in South Korea and Zaire were similar. In fact, as the second largest state in Africa and endowed with copper, cobalt, and diamonds, Zaire faced considerably brighter prospects than small, resource-poor Korea still dealing with postwar devastation. Yet the reversal of fortune could not have been more complete.

Higher education is a large, complex, and changing industry. There is no single measure of the industry's size, but it enrolls some 19 million students and employs 3.4 million people, 3 percent of the entire U.S. service-sector labor force. A small number of schools are very well known, but the industry includes 4,314 degree-granting institutions (U.S. Department of Education, National Center for Education Statistics 2007b).

The higher education industry consists of public colleges and universities, private nonprofit schools, and a small but very rapidly growing number of private for-profit educational firms. About 39 percent of all U.S. degree-granting colleges and universities are public – four-year state universities and two-year community colleges – but as of fall 2006 they enrolled the large majority, 74 percent of all (undergraduate and graduate) students. There are as many nonprofit colleges and universities, about 38 percent of all schools, but their enrollments tend to be smaller than the public ones, accounting for 20 percent of all enrolled students. For-profit degree-granting schools are only 23 percent of the mix, enrolling over 6 percent of all students (see Tables A2.1 and A2.2 in the Appendix). The for-profit sector is vastly larger, though, when postsecondary schools that do not grant degrees are included. Nearly three-fourths of the 2,200 non-degree-granting schools in 2006 were for-profit, and this segment of postsecondary education is growing rapidly; its 330,000 students – an average of only some 160 students per school – is up from 189,000 as recently as 1997 (U.S. Department of Education, National Center for Education Statistics 2001, 2007b).

INTRODUCTION

Jordan, a dynastic monarchy since independent statehood in 1946, was dominated by King Hussein. During his 47 years in power, he made a number of institutional changes. After a failed coup attempt and wrangling with a socialist-led parliament, Hussein dissolved the assembly and banned political parties in 1957. Elections to a new legislature were held in 1962 and again in 1967, but candidates had to run as independents. By 1978, Hussein had marginalized the parliament in favor of a National Consultative Council, a sixty-person council charged with giving advice to the king. Hussein reconstituted the legislature, however, in 1984 with the first competitive general elections held five years later. The elections were a huge success for Islamist groups, who were expected to win seven to fifteen seats, but instead garnered thirty-four. A further ten deputies were elected from opposition parties (six nationalists and four leftists).

In the face of opposition victory, the king made a conciliatory choice of prime minister in Mudar Badran, who had already served in the post in the early 1980s. Nevertheless, assembly members were in no mood to compromise. In Badran's initial appearance before the parliament, he was “subject to a bruising three-day debate” in which parliamentarians criticized the government's past record in managing the economy.

In the competitive struggle for revenue to advance its mission, a college or university – as a firm in any other industry – has the incentive to not simply “go it alone” but also to reach out for alliances. Even the strongest and wealthiest schools are continually searching for ways to strengthen their competitive position. In the competition for students, even for traditional students, it is clear that no college or university can provide everything it needs to achieve its educational mission – at least not efficiently. Engineering students, for example, may benefit substantially from internship experience with a private construction firm, and faculty researchers in biochemistry may benefit from collaboration with researchers at pharmaceutical laboratories. A school could not efficiently provide those opportunities by operating its own construction and pharmaceutical research firms, and so they engage in “outsourcing,” turning to other schools, private businesses, and governmental agencies.

Collaborations of colleges and universities with other schools, private firms, and governments are both mission driven and revenue driven. A school can be expected to take advantage of all sorts of opportunities, including collaborating with other organizations, collegiate or otherwise, when that will generate revenue or otherwise advance the mission. They collaborate with each other when that will help them compete more effectively against other schools. They collaborate with private firms outside education, with nonprofit organizations, and with governments at various levels and with any other organizations if that will provide revenue or opportunity.

INTRODUCTION

Some dictators rule so long that they are feared even after their deaths, whereas others fall almost immediately. Sobhuza II reigned over Swaziland sixty-two years; Haile Selassie of Ethiopia ruled for forty-seven years. Even those without royal blood can hold onto power for ages: Kim Il Sung died in 1994 after forty-seven years in power. Even in death he remains the Eternal Leader. Yet for every Kim Il Sung, there is a Léon Cantave, the first of many who tried to take power in 1957 in Haiti: he lasted five days. Why do some dictators survive for decades, whereas others fall soon after taking power?

The force of tradition or legitimacy from religious or other sources may play a role in the survival of some rulers, particularly monarchs. But, then again, it was not enough to save Libya's King Idriss, Egypt's King Fuad II, or Iraq's King Faisal II from being deposed in military coups. Similarly, charismatic or personalistic leadership is frequently evoked to explain the maintenance of power in sub-Saharan Africa (Bratton and Van de Walle 1997; Jackson and Rosberg 1982, 1984). Yet, along with Southeast Asia and the Middle East and North Africa, this region has one of the highest turnover rates of dictatorial rulers.

Alternatively, the long tenure of some dictators is attributed to their overwhelming monopoly of force.

Although tuition, donations, and research all bring in revenue, many colleges and universities generate additional, and in some cases substantial, funds from managing their endowment funds. Although endowments are typically restricted – the university cannot simply decide to spend all of the endowment in a single year – prudent management would preserve funds for the future even if there were no restrictions whatsoever, and so the management of endowment wealth remains a material piece of the mosaic of university finance: the pursuit of revenue and mission.

Endowment size varies tremendously in higher education. The wealthiest schools are large even by the standards of the business world: Harvard's $34.6 billion endowment in 2007 is comparable to the market value of Burlington Northern (ranked 110 in the S&P 500), Aetna (ranked 119), or Colgate-Palmolive (ranked 72). Even the eighteenth largest endowment in 2007, Cornell University, exceeded $5 billion, a requirement for listing in the S&P 500 and on par with the market value of Aramark (Forbes.com 2006). The schools with the largest endowments are the ones that everyone recognizes – and not coincidentally. Large endowments are both a driver and a reflection of university growth and prestige.

These wealthy schools are rare, however. The vast majority of schools have endowments that are measured in tens of millions or less, not in billions. And schools with large endowments invest them very differently than do schools with small endowments, generating systematically different rates of return.

When colleges and universities hire football and basketball coaches, their choices reflect their priorities and goals. As we have seen, Division I and Division III schools have very different views of the role of athletics, and their choices in coaches confirm those differing athletic purposes. Similarly, the types of presidents colleges and universities hire reveal aspects of their mission that are otherwise difficult to observe. We can discern some patterns of choice, and thus goals, that the nonprofit, public, and for-profit schools and that the research universities, four-year colleges, and two-year schools make via the presidents they choose.

The contracts with athletic coaches and presidents provide an especially rich and revealing contrast. These contracts, and what they reward, tell a great deal more than do broad public statements about what the school really sees as important, though in sometimes complex ways, as we will show. In addition, when we examine the backgrounds of experience and training that presidents have, and how they differ among types of schools and over time, we see more evidence of what various kinds of schools judge to be important leadership qualities. Both backgrounds and contracts, in short, tell a story of what schools truly value in their presidents and coaches.

We begin by contrasting the contracts and rewards offered to coaches at Division I schools and at Division III schools to infer what the two types of schools are looking to their coaches to accomplish.

The private enterprise segment of the economy in any industry is almost entirely dependent on revenue from sale of goods and services. Donations are of no consequence. Not only is there no tax incentive for people to give to Macy's or General Motors – or, for that matter, to a for-profit school such as the University of Phoenix – but it is most difficult for a prospective donor to have reasonable assurance that a donation would be used in any way other than to advance the interests of shareholders or managers.

The higher education industry is not really different. The 2,680 for-profit schools – most of which are “career academies” that do not offer a four-year baccalaureate degree or even a two-year associate degree (see Table A2.2 in the Appendix) – are like their for-profit counterparts throughout the economy. They receive virtually no donations; less than one-third of 1 percent of their total revenues is from contributions (see Table 2.1). And like other for-profit firms they are overwhelmingly dependent on revenue from sales to their “customers” – that is, from tuition.

But the traditional, public and private nonprofit colleges and universities are another matter. They depend heavily on donations – what the IRS calls “contributions, gifts, and grants” – especially from state and local governments in the case of public universities and community colleges and on individual and corporate contributions in the case of nonprofit higher education, as a look at Tables 2.1 and Appendix Tables A2.4 and A2.5 shows.

Here we examine the changes in the industry that have spurred competition and the directions competition is taking. We take the broadest view of the whole industry, not simply the elite schools whose names are familiar to all but that educate only a few percent of all undergraduates. The goal of this chapter is to show that the higher education industry has a great deal in common with most other industries – having, for example, successful and unsuccessful organizations, with new entrants to the industry as well as exits from it, with schools borrowing money and developing credit ratings, with mergers occurring, and schools advertising and competing vigorously while collaborating when useful. The mixed ownership gives higher education a somewhat different character, but even that is by no means unique, with the hospital and nursing home industries, for example, having all three ownership forms, and other industries, such as the arts, museums, and antipoverty organizations, having at least two ownership forms in competition.

ENTRY AND EXIT OF PROVIDERS

The competitive process produces winners and losers. Some schools thrive and others falter – as in every other industry. Little recognized is that the higher education industry is very much in flux, with new schools emerging and existing schools closing, merging, and even switching ownership forms, as when a nonprofit college converts to a for-profit.

In recent decades there has been an influx of schools of all three ownership forms.