A Case for Multifaceted Reforms in Public Higher Education Using Performance Based Incentives

During the 2001 legislative session most southern states faced significant reductions in projected revenues due to an economic slowdown.  Because higher education expenditures are a significant portion of state budgets, there has been a wide spread call to reduce state funding and cutback higher education expenditures. Unfortunately, people living in the south are not in a competitive position to make cuts in higher education.  In order to generate higher incomes and world-class economies, southern states need more baccalaureate-educated people.    Quotes from administrators typically express frustration, concern over lack of support for university agendas, and threats of program cutbacks. Quotes from students typically express concern over the increases in their direct costs and possible debt. Yet average student debt remains well below the cost of a new car and earnings paybacks are typically well within five years for most public tuition. However, on average only about 40% of students graduate in a timely manner and tuition at public southern universities has accounted for much less than 40% of the costs spent at these institutions. On average private institutions are much more successful at graduating students.  Perhaps private institutions are more focused on the education mission because students realize more of the full costs; but students also may be more focused because more of their own resources are at risk.  While any institution can become more productive by reassessing priorities and eliminating programs and types of activities, the production process of higher education is complicated. To date most of the discussions of higher education reforms have focused on program delivery, more intensive workloads on the part of faculty and administrators, or ways to increase the number of students by focusing on students as customers demanding anytime, anywhere service. The later is not a hallmark characteristic of a public good. Less attention is paid to the fact that students play a role in determining successful outcomes in the human capital formation process of higher education. Because of this precarious customer/input role of the student in higher education, increasing tuition can be a positive incentive. Policy makers, particularly those in the south, need to rethink reform strategies for higher education.   This paper contends that reforms in higher education need to recognize four critical factors: 1) higher education has become the financial responsibility of the people living in a particular state; 2) completion rates at some institutions are appalling low from a taxpayer/donor perspective; 3) multiple student populations have been created because of past performance and labor market conditions, and 4) higher education is a private good, albeit, with significant externalities.&nbsp