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Are State Universities Being Privatized?

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By: Richard Vedder

One can build a good case that the private sector is under attack in America—in the past five years, iconic American corporations like General Motors and AIG were essentially nationalized.  Financial institutions have been strangled by burdensome new regulations. Businesses feel that the Obama Administration’s “soak the rich” and anti-Wall Street populist rhetoric mean that the environment for competitive capitalism is both scary and worrisome. The huge increase in government spending in the past few years has crowded out private sector activity and contributed to the sluggishness of the recovery. Many think we are moving to a continental European concept of social democracy, more socialist than capitalist.

Yet, in the midst of all of this, there is a stealth privatization of one important American public sector institution underway—the state university. Data recently released by Illinois State University’s Center for the Study of Educational Policy and the State Higher Educative Executive Officers (SHEEO) show that the absolute amount of state appropriations (including stimulus monies) for higher education declined by 7.6 percent over the past five years, or about 17.4 percent after adjusting for inflation—but before adjusting for enrollment growth. Adjusting for enrollment growth as well, the decline probably approaches 25 percent.

But that is not all. A half dozen states had inflation-adjusted increases in appropriations, but some very important states had cuts of well over 20 percent (inflation but not enrollment adjusted), including California, Florida, Michigan, Washington, Arizona and Pennsylvania (these states alone contain over one-third the American population). More and more so-called state universities receive 15 percent or less of their basic operating funds from the state. Thus tuition increases have soared at these schools, even more so than at private universities.

For years, I have identified several schools that I have thought prime cases for privatization. The top three flagship university examples: the University of Michigan, the University of Virginia, and the University of Colorado. Michigan and Virginia are prestigious schools with pretty impressive private endowments, large out of state enrollments, and state appropriations now dipping into the single digits as a percent of state funding. They probably would like to be free of state government strictures relating to admissions, governance issues, and the like.  The University of Colorado is hugely popular to out of state students who pay very high tuition fees. At all three schools, privatization has been discussed and, to a limited degree, even achieved at the University of Virginia.

But the continued appropriations decline opens the door up to privatizing whole state systems. The prime candidate is New Hampshire. The new survey data suggests that New Hampshire schools in this academic year are receiving barely $63 per capita in state aid (over 30 percent less than five years ago), dramatically below the national average of over $232. At the flagship University of New Hampshire, in-state tuition and fees exceed $15,000 a year—many times the amount received in state appropriations (which averages well under $3,000 a student for the system as a whole).

One might say, “low state appropriations certainly means the state has a lower proportion of college graduates.” Not necessarily so: states like New Hampshire and Colorado that have very low state appropriations by national norms also are in the top 10 states in the nation in the proportion of adults with bachelor’s degrees or more.

Over the next few years, the pool of 18 to 22 year old students will stagnate. State appropriations are not likely to grow robustly, given the medical care costs facing states, a problem aggravated by looming ObamaCare expenses. More and more persons are looking for alternatives to high priced four year education.  Amidst all of this, can public universities become private without the endowments that private schools have? My guess is that the University of Michigan and University of Virginia can—they have endowments per pupil equal already to some moderately well endowed private schools. But for lesser endowed state universities with modest reputations, the prospects are bleaker, as they are for similarly situated private schools.

Protected in the past from market forces by generous government subsidies, schools will find that the decline in those subsidies will mean markets—and consumers—will play a greater role in determining their destiny. And like the market-driven private sector, higher education will face something rarely seen in the past: the creation of obvious winners and losers, with the latter group of schools facing, in many cases, extinction.

Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.