Tuesday, August 17, 2004

As Sam Goldwyn Once Said: "Include Me Out."

Performance Review Recommendation ETV #18:

"Repeal the Law of Supply and Demand"

Der Gövernor’s January budget proposed to cut $411 million out of general fund support for California’s public universities by reducing research and academic support, increasing student-faculty ratios, and making other “unallocated reductions” (a polite way of saying: “It’s your problem, buddy, not mine.”) The legislature trimmed back the cuts, but the colleges are still being bled for $244 million in savings, and student fees have been jacked up by 14% to 25%, with more increases slated over the next two years. The only consolation that California’s universities got from Der Gövernor is an unenforceable "compact", with promises to "prevent further erosion of support for higher education in California” for two years, and then, maybe – if the State “returns to a position of fiscal health based on moderate economic growth” – provide “some recovery of vital needs for UC and CSU, such as the ability to provide competitive salaries, and to address several years of underfunding of core programs.” As they say in Hollywood: “An oral contract isn’t worth the paper it’s printed on”.

Yoda (the hench-person who guided the State Performance Review) wants to help. “Help Universities, but cost the State any money not.” And since Schwartzie is politician enough to know that the first folks to squeeze are those who can’t vote against you, the Review gives us recommendation ETV #18, to raise $1 billion for higher education with a 45% increase in tuition charges for students who aren’t California residents. Cut to the chase:

"Increasing the 2005-2006 non-resident surcharge by 45 percent above 2003-2004 rates will raise undergraduate non-resident full-time tuition to approximately $26,000 per academic year at UC, $15,000 per academic year at CSU and $6,480 per year at the Community Colleges. The table reflects the 20 percent non-resident fee increases at UC and CSU proposed in the Governor's Budget. Additionally there is a seven percent annual increase in fees beginning in FY 2006-2007."

Hey, great idea! Maybe they should try it in Hollywood. Just raise the price of movie tickets by 45% -- and watch the audience disappear.

As Sam Goldwyn Once Said:

"If people don't want to go see a movie, there's nothing you can do to stop them."

Won’t students do the same, look for other, cheaper schools, and vote with their feet? "Worry don’t.” says Billy Yoda's ETV #18:

“Increasing non-resident tuition is unlikely to decrease non-resident enrollment. In a 2003 tuition study, Rizzo and Ehrenberg found that,"out-of-state enrollment levels are relatively insensitive to out-of-state tuition levels charged by institutions."[12] Viehland's 1989 study described non-residents as only moderately price sensitive.[13]”

This should be reassuring, but we've already seen that Yoda has trouble with those darn footnotes, and we're starting to recognize the signs that Yoda's little helper elves have been misquoting or tinkering with the evidence. We'd better look at the source.

"[12] National Bureau of Economic Research, "Resident and Nonresident Tuition and Enrollment at Flagship State Universities" Working Paper 9516 by Michael J. Rizzo and Ronald G. Ehrenberg (Cambridge, Massachusetts, February 2003), p. i (abstract).”

Oh, it's an "abstract" = one-paragraph summary. It seems that in Yodaland nobody reads actual documents, only summaries. Like Sam Goldwyn, Yoda "read part of it all the way through." Cut to the NBER website:

"We address the determinants of resident and nonresident tuition and enrollment at public universities. A key explanatory variable is the share of out-of-state students enrolled under reciprocity agreements. We find that public universities use out-of-state enrollments primarily to augment student quality, not to make up for losses in state appropriations. In the main out-of-state enrollment levels are relatively insensitive to out-of-state tuition levels charged by institutions. Finally, we find no evidence that public universities increase their in-state or out-of-state tuition levels in response to increased federal or state financial aid for students.”

Now, does that summary statement: “In the main out-of-state enrollment levels are relatively insensitive to out-of-state tuition levels” mean that price makes no difference? What does the working paper really say? (It costs $5 at NBER, but is available for free elsewhere.) The study focused on 91 “flagship”State universities (8 in the UC system, none in the CSU, no junior colleges), noting that the UC schools get fewer out-of-state students than average -- less than 10%. Had Yoda's little elves read the paper, they might have found that between 1979 and 1998“the University of California schools reduced their nonresident enrollment shares by more than half”, while "public higher education institutions in California and Texas are among those that increased tuition at the fastest rates”, and that “the largest out-of-state tuition levels and tuition increases occurred at Michigan, the Virginia schools, North Carolina schools and the California schools."(pp. 9-11)

One can imagine the farsighted eyes of the diminutive Jedi glazing over at the professors’ careful attempts “to correct for the biases that result from the violation of the orthogonality conditions necessary for OLS to be unbiased”. How his little green forehead would have wrinkled on reading that:

"The out-of-state tuition and the share of nonresident students enrolled at an institution are similarly assumed to result from the interaction of out-of-state students’ demand for seats at the institution and the institution’s willingness to supply such seats, the latter constrained by the political process in the state.”(p. 19)
“The final equation is the nonresident enrollment share equation. The dependent variable is specified as the logarithm of the odds-ratio of the share of first-time freshmen that are nonresidents to allow the error term to be normally distributed. This equation is specified very similarly to the out-of-state tuition equation, with the logarithm of real out of-state tuition (TUITO) included as an explanatory variable.”(p. 23)
“Taken as a whole, the entire vector of variables aside from the sources of student financial aid are strong predictors (across-institutions) of nonresident enrollment share differences. The results seem to indicate that nonresident students are used both for the purposes of generating revenues and to augment institutional quality.”(p . 30)

And how upsetting to find that Rizzo and Ehrenberg conclude, contrary to ETV #18: “The major insight that we draw is that these public institutions do not appear to use nonresident enrollments to supplement or replace revenues (as is the a priori belief of many observers), rather it appears that they enroll nonresidents to improve institutional quality, or to serve other interests.” (p. 39)

Looks like Yoda only read the NBER summary. Looks like Yoda, to a conclusion, unsupported by the evidence, jumped. And since Yoda’s other footnote, [13] Dennis Viehland, "Nonresident Enrollment Demand in Public Higher Education" (Ph.D. diss., University of Arizona, 1989) refers to an unpublished, tho prizewinning Ph.D thesis, we really have no idea what “only moderately price-sensitive” meant back in Arizona in the 1980’s – except it probably doesn’t mean “zero price-sensitivity” for California in 2005 A.D.

Charismatic celebrity leaders don’t like bad news, and they hate it when folks contradict them. To quote Sam Goldwyn: "I don't want yes men around me. I want everyone to tell the truth, even if it costs them their jobs." That’s probably why der Governor’s Performance Review ignored other research showing that hiking non-resident tuition can cause enrollment losses that may negate the gain from the higher fees. Professors Noorbakhsh and Culp studied what happened to the Penn State system, where:

“Nonresident tuition increased an average of 19.6% per year between the 1991–1992 and 1993–1994 academic years. Subsequent to these changes, the State System experienced an approx. 40% decrease in the number of nonresident students attending System universities.” 21 Economics of Education Review 277, 280 (2002)

They calculated: “In Table 1, the estimated elasticity coefficient of nonresident demand with respect to changes in nonresident tuition is equal to -1.15.” (p. 282)

And they concluded that the out-of-state tuition hikes backfired:
“Disparity between resident and nonresident tuition in the Pennsylvania State System of Higher Education was used during the period 1991–1996 in an effort to shield state taxpayers from the burden of subsidizing the cost of nonresident student education and to guarantee access to resident students. Nonresident tuition was raised dramatically by the Board of Governors despite a clear warning about the price sensitivity of nonresident demand. In a report to the Board of Governors, Moyer and Keller (1989) cited Morgan (1983) and cautioned that ‘states can expect significant reductions in nonresident enrollments if they raise nonresident tuition rates relative to competitive tuition rates in surrounding states.’ This is exactly what appears to have happened."

At a net cost to Pennsylvania taxpayers:“the majority of the costs associated with providing educational services are fixed costs. These costs will be born by the institution whether enrollments decline or not.... Declines in nonresident enrollments actually shifted more of the burden of the fixed cost to state taxpayers and resident students.”

Professors Curs and Singall came to a similar conclusion when they analyzed non-resident tuition policy at the University of Oregon. They found:

"The UO price is the only significant price variable in the enrollment model. The marginal effect indicates that a 1% increase in price yields a 0.23% and 0.62% decrease in the respective probability of in-state and out-of-state applicants enrolling at the UO. Thus, consistent with the findings for the application model, out-of-state enrollees appear to be relatively more price sensitive than their in-state counterparts, which likely indicates that they have relatively more alternatives. The own-price elasticity from the combined model is 0.28 for the average enrollee and, unlike the application model, is in between the separate elasticity estimates for in-state and out-of-state enrollees. Although the enrollment results support prior work that enrollees are relatively unresponsive to price changes, the application and enrollment results jointly indicate that the own-price elasticity is greater than one for potential students." 21 Economics of Education Review 111, 117 (2002)

"Our individual elasticity estimates for UO applicants range between -1.0 and -1.5, which are three to five times greater than the price elasticity found for UO enrollees. This finding is important because the vast majority of demand studies focus on enrollment and may find an inelastic price response because the majority of the price effect on college choice occurs early in the process when students have made fewer emotional and financial commitments. Our price elasticity estimates for applicants are also four to six times larger than the few prior application elasticity estimates. However, these studies use the gross price that does not account for financial aid, which prior enrollment demand studies have found tend to yield smaller price elasticities." id. at 122 [references omitted]

So there we have it. Recommendation ETV #18 might raise more money, or it might drive away so many students that it hurts the Universities financially -- and weakens the quality of the students who enroll. Money isn't the only reason to recruit out-of-state. After all, diversity doesn't stop at the State Line. ETV #18 isn't a financing plan, but a fantasy -- an attempt to avoid thinking seriously about the costs and benefits of higher education in California.

"Cut! Where's the script? Who the hell wrote this crap?"

As Sam Goldwyn said: "Our comedies are not to be laughed at."

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