One of the elements that has caused skyrocketed of the US college education cost and student loans is the continuation of old paradigm application in managing the organizations such as the tenure system.  About two years ago the Association has mentioned the culprits behind college cost increases and the source of college operational inefficiency.  More tax payers in the US realize that they have supported the unproductive system for many years and finally they listened to what it takes to reduce the burdens of the society.  Recently, it was announced that the Lawmakers in Wisconsin moving closer to cut the education budget and the tenure system.  In addition to Wisconsin, the state of Tennessee has planned to De-Tenure the faculty members at the state university.  Several other states plan to move forward to the same direction.  As the tax payers demand more accountability, there is no question of potential budget cut will occur in the near future.

On May 16, 2015 there were many articles written on the last graduating class at Sweet Briar College. Basically there are two sides, the pros and cons of the closure. Most of those who opposed the closing based their reasoning on emotional factors, while the pros applied past institutional metrics to support such an unpopular decision. What the data show, is that given its present facts about enrollment and the availability of resources then the continuation of the college operation is impossible.

What one can learn from this case is that fundamental changes on the conditions and environments where a college operates need to be taken into account very seriously when managing a higher ed. However, making policy changes to adapt with the new conditions are not always easy, especially when the change will create personal conflicts of those who do not want to go beyond their comfort zone. Had the College made unconventional decision many years ago such as to merge with other peer colleges in the areas, the closure may not need to happen. What does it take to be able to take that route? Set aside the ego, pride, emotion, history and personal interests. Look at what is the best for the students, members of the society, institution and the country. In short, be realistic! Think about the emotional and financial impacts of such a closure to those who are affected. The closure of the College may not be the last that one will hear. Other colleges might be able to learn from such a case and reinvented ways to save their own institution.  The invention cannot be accomplished effectively through a BAU approach.  Rather, by unconventional ways.

On September 18, 2014 the Association has written on its Blog the reasons behind college cost increases.  It applied statistical analyses and econometric on publicly available data in the study.  The results were written in an article and it has been shared to the American public.  The New York Times has published an article today, April 14, 2015 which further confirmed our study.

About two years ago, the Association has shared to the American public the list of trouble colleges in the US. Today, on March 31, 2015, the DOE unveiled partial list of selected colleges (560) of which their federal aid has been restricted due to their financial condition and the institutions’ practices to comply with government aids requirements. The Association compares the government list and AAEA’s list (519 Higher Ed institutions) that has been shared to the public where DER (Debt to Equity Ratio) approach was utilized. While our results are not exactly the same with those institutions listed on the government’s list (different data sets and approaches.  AAEA applied ten-year 2006-2011 average), we are glad to learn that the regulator finally took a step further to integrate financial aspects as the Association has long suggested as one of the elements in its accountability evaluation which has not been done very effectively in the past. The regulator action is surely consistent with the core objectives of the establishment of AAEA. So far, two core objectives of AAEA has been achieved. The announcement confirmed what the Association has hypothesized and its research results.

The Association has achieved one of its core objectives. Since the launch of its website two years ago, the American public is more aware on what has happened with the cost of education, increasing student loans and skyrocketed college tuition. We did not claim all the credits for broader and increasing society awareness on the issues. However, we are unique in our approach. We did our homework and analyzed real data by applying regression, multivariate as well as categorical statistical approaches and econometric analyses before making any inference on a particular issue. We are independent and objective in our studies and we only have one motivation to do what we did, in that to make the US a stronger country by improving its higher education system. We did rigorous analyses based on publicly available data provided by the DOE. Higher education institutions in the US have to be more responsible in managing its organization because its success or failure has huge direct impacts on the welfare of the society as a whole. The era of easy money was the thing of the past. Recently, selected few institutions were forced to make important changes to control its operational cost, but some still do not believe that they have to operate with a new mindset. Others simply do not know what to do which surely a good news for the Big Four.

A couple days ago, the Association has written in its blog on state university budget cuts.  Today we learned another fact of college closures.  If one analyzes the timeline, all that is happening now starts with skyrocketing tuition (due to inefficiency and applying an out-dated mindset) followed by gigantic student loans accumulation.  Now one will see the negative and direct impacts for not controlling the operational inefficiency when these colleges are still have time to do so many years ago.  When the consumers no longer able to pay the price, it will negatively affect student enrollment.  As we have mentioned on our previous blogs, the new dynamics in the industry will first affect the private Liberal Arts Colleges for they are the most vulnerable institutions with limited support from the tax payers’ money.  The longer the marginal institutions wait, the more probable that they can be wiped out from the competition.  This structural changes will not stop until some of the most inefficient organizations close their doors until an equilibrium level is reached and Pareto Improvement is met.  It could take many years, and once it settled, there will only be big and the most efficient players are staying in the industry.

The Association celebrated its second year in March with more than 125k viewers. This shows what we have discussed in the blog is the interest of many people and the American public. Recently we read, the State of Tennessee Board of Region has discussed the possibility to “De-tenure” the faculty members within its system. Simply put, due to budget constraint, the tenure system may no longer relevant. On March 18, 2013—exactly about two years ago, the Association has written an article on the topic to remind the players in the industry what are coming their ways. Nothing wrong with the tenure policy, so long the money is available to support it. Budget limitation does not just happen in TN, but in all other places as we have mentioned on February 11, 2015.  Those who are negatively impacted by the policy changes could be very well disappointed, but the new reality has come and the policy makers are under pressure to deal with it.

About three years ago AAEA has predicted that US colleges are going to have difficult time financially if they keep applying their “old” wisdom. Again and again we saw what we have predicted about two years ago became a reality. What surprise us was that none of these colleges have taken enough steps to cope with the potential problems until they got hit on the face. Even though we have presented clear evidences to support our finding, the Association saw little efforts to curb the spending spree and college mismanagement. Instead of proactive, they are reactive as shown recently in this article. If an institution keeps increasing the price of its product, sooner or later the consumers just do not have the ability to pay the price that they are charging (though they assume students will keep taking loans). What happening in the industry is nothing but the adverse reactions of the reckless pricing policy that these colleges have done in the past. We have argued rigorously and consistently that passing all the operational inefficiency to the consumers, to the tax payers or private contributors are things of the past. If these colleges are smart, perhaps they need to start thinking which peer institution (or competitor) that they can merge to (though this will not happen easily). By doing so, they can reduce all redundancies which will make the institution leaner. For example, when two colleges, A and B merged into one new institution, say C; then the new institution will only need one college president and one of each cabinet member, instead of two.  That way the legacy of both institutions will be preserved and written on the history book of College C.  It is pretty interesting to see how the restructuring process will bring the US Higher Ed to. Surely, there will be many small, private non-profit or Liberal Arts Colleges need to close their operation. There are too many of the same services offered in the same market. Things will get even gloomier if edX, Udacity and Coursera are able to streamline their programs and become the power house to deliver free online classes and that their issued certificates or diplomas are proved to be worthy and, therefore widely received by the employers. Welcome a new reality!

It is very interesting to note that recently one state after another is facing budget problem which negatively affect the US colleges’ operational budget. It started with UC System followed by others such as Washington, Wisconsin, Louisiana, Illinois and the last we heard was from the state of South Carolina where the state House Budget Committee has voted to temporarily close South Carolina State University. Poor management and applying the out-of-date approaches are the common cause of such troubles. The Association has informed the players that competitive environments where they are operating have experienced massive phenomenal changes. Therefore, there are no questions that past approaches or strategies may not work to deal with the new reality. In addition to declined enrollment trends and lower graduation rate, college decision makers are also facing budget shortages which may cause potential course reductions and faculty lay-off or any combination of these unfortunate options. Postponing taking the new approaches in managing the organization will only make things go from bad to worse.
The Association has anticipated such a situation to occur, so it has conducted intensive study based on real data and the results have been shared to the American public at least two years ago. It is up to the school administrators to make strategic changes or just go BAU.

The good news finally came that the two administrators will sit side by side to find out the way to manage higher education in CA more efficiently. That what we call it civilized way of managing public education institutions instead of using threats or holding the students as the hostages. As part of the Association’s contribution to the American public, we have published many research results on the issues and will continue to do so. The driving factor of our analyses is nothing, but motivated by and for the good of the American public. We do not have the interest on the political side of the issue, but to the public policy which will maximize the social benefit above the cost i.e., to max out the return of public investment by an optimal allocation of resources such that at least Pareto Improvement (PI) can be achieved.

Right now, the public sees that PI is attainable and it is not something that is true in theory. Based on ten-year data submitted by each institution to the regulator agency we look pretty closely on the spending structure at each UC campus under the System. While the spending behavior is different by institution, one can see pretty clear pictures from the figure below that, in general, the largest spending of the budget is on instruction. The regulator has defined:
1. Instruction_share: Instruction share of education and related expenses.
2. Admin_share: Academic and institutional support and operations and maintenance share of education and related expenses.
3. Studserv_Share: Student services share of education and related expenses.
While this graph only shows the big picture, one needs to analyze deeper to understand the real problem behind each spending category.  The University of California at Merced stands out on its administrative expenses way above those of other institutions and it did not have the graduation rate information.  UCLA’s instruction expenditures are above those of others’, but it has the highest graduation rate (6-year) as well.  This simple information can be used to (1). apply performance based funding; (2). be used to make  strategic decisions; (3). to initiate the application of LEAN across campuses and  departments.  For example, how can UCLA justifies its 71.8% spending for its budget on instruction.  Which of the spending items on the instruction expenses make up most of the expenditures?  Is it faculty members’ salary?  Which faculty members i.e., Assistant, Associate or Full Professor?