For Immediate Release: May 22, 2019

Tony Pals, tpals@aera.net
(202) 238-3235, (202) 288-9333 (cell)

Collin Boylin, cboylin@aera.net
(202) 238-3233, (860) 490-8326 (cell)

Study Snapshot: Cost Efficiency and Privatization at Public Research Universities in the United States

Study: “Cost Efficiency and Privatization at Public Research Universities in the United States”
Authors: Marvin A. Titus (University of Maryland), Kevin R. McClure (University of North Carolina, Wilmington), Adriana C. Vamosiu (University of San Diego), Steffon M. Gray (University of Maryland)

This study was presented at the AERA 2019 Annual Meeting, April 5-9, Toronto, Canada. (Session: Examining the Efficiency of Higher Education Policy.) A copy of the working paper is available on the AERA website. 

Main Findings:

• The privatization of revenue sources at public research universities, as a result of declining state support, has not necessarily increased their cost efficiency. From 2005 to 2015, short-term cost inefficiency has increased by 18.1 percent at these institutions.  
   
• Three of four privatization variables were associated with an increase in cost inefficiency up to a certain percentage of total revenue. As public research universities bring in more (a) money from auxiliary enterprises, (b) money from private gifts and donations, and (c) out-of-state students, cost inefficiency increases until it reaches a tipping point. After surpassing a certain percentage of total revenue, these variables reduce cost inefficiency. Only increases in revenue from tuition were always associated with a reduction in cost inefficiency.

Details:

• The authors note that there has been much discussion about declining state support for higher education and the ways in which public research universities, in particular, are pursuing alternative sources of money, such as recruiting more out-of-state students and cultivating more private donations.
   
• Previous research finds that the average public university has seen its per-student state appropriations decrease by 30 percent over the past 30 years. As a result, public universities began to operate like private institutions by relying more on private funds, such as tuition and fees and philanthropic donations.
   
• Over the 11 years studied, the authors found that the percentage of revenue derived from tuition, auxiliary services, and private grants and contracts together increased from 44.2 percent to 53.9 percent. The average percentage of students enrolled from out-of-state increased from 16.8 percent in 2005 to 22.8 percent in 2015.
   
• A few people have argued that public universities will become more cost efficient as they become less reliant on government money and compete in the marketplace for resources. To study this proposition, the authors examined the relationship between cost efficiency and privatization (as measured by the percentage of revenue from private sources and the percentage of out-of-state students) at 163 public research institutions, from 2005 through 2015, using data from the U.S. Department of Education. 
   
• The authors found that cost inefficiency is actually getting worse at public research universities, and that a number of variables exacerbate inefficiency unless the share of revenues increases high enough.  In short, the findings paint a complex portrait—it cannot simply be said that privatization leads to universities operating more cost efficiently.
   
• The authors found that between 2005 and 2015, total spending at public research universities decreased as revenues from tuition and auxiliary enterprises (e.g., campus dining, bookstores, and student housing) increased. This suggests that bringing in more revenue from these sources may encourage competition and create incentives to lower costs.
   
• However, over the same period, cost inefficiency at public research universities increased.  Short-term inefficiency increased drastically—by 18.1 percent—and showed variation over the 11 fiscal years studied.  From 2005 to 2015, universities experienced 28.5 percent overall cost inefficiency—85.6 percent of which was short-term cost inefficiency.
   
• Results showed that universities with the highest level of research intensity were the most cost inefficient. The authors note as a possible explanation is that these universities must free up more faculty time and use more staff and facilities to support research activities, which may lead to a sub-optimal mix of labor and other resources, compared to other universities.
   
• “Although there are concerns about whether public research universities are effectively stewarding taxpayer money, encouraging institutions to compete for resources in the marketplace doesn’t always result in greater cost efficiency,” said study coauthor Kevin R. McClure, an assistant professor of higher education at the University of North Carolina.
   
• “Institutions have to spend money to make money from these sources, and only some private sources under certain conditions yield greater cost efficiency,” McClure added. “The relationship between privatization and cost efficiency is complex and not a sure bet.”
   
• According to the authors, the fact that most inefficiency is short-term—or time varying—suggests that most of the cost inefficiency is not the result of long-term structural problems or management strategies. Instead, it may be the result of challenges faced by campus leaders adapting to short-term fluctuations in market-oriented sources of revenue.
   
• The authors recommend that campus leaders be aware of the complex short- and long-term costs and benefits of employing certain strategies to increase revenue from private sources.
   
• For instance, at first glance, increasing out-of-state enrollment past the 13.3 percent threshold may appear to be a quick solution to reduce short-term cost inefficiency. However, according to the authors, over the long term, additional non-resident students will require additional staff, residence halls, and overall spending due to the increase in fixed costs. Such expenditures may outweigh the short-term benefits of the overall increase in out-of-state undergraduate enrollment past the 13.3 percent threshold.
   
• “Campus leaders need to take a long-term, strategic approach to diversifying revenue sources,” said McClure. “Some short-term benefits of privatization disappear in the long term, and some benefits only materialize in the long-term. In sum, achieving cost efficiency through privatization is challenging.”

To talk to the study authors, please contact AERA Communications: Tony Pals, Director of Communications, tpals@aera.net, (202) 238-3235, (202) 288-9333 (cell); Collin Boylin, Communications Associate, cboylin@aera.net, (202) 238-3233, (860) 490-8326 (cell).

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The American Educational Research Association (AERA) is the largest national interdisciplinary research association devoted to the scientific study of education and learning. Founded in 1916, AERA advances knowledge about education, encourages scholarly inquiry related to education, and promotes the use of research to improve education and serve the public good. Find AERA on Facebook, Twitter, and Instagram.