S1:E22 Andrew Comrie – University budgets demystified

July 13, 2021 |  Budget, Data
33 min

Andrew Comrie joins to discuss university budgets and what budgetary constraints are along with some of the common misconceptions about the flow of money on campus.

 

Tyler Jacobson  0:01

Welcome to LabChats, a podcast from the team at LabStats. I’m Tyler Jacobson, your host for today’s episode. Each week we’ll sit down with technology leaders in higher education to get the latest buzz and insights while we discuss current events, trends, problems and solutions. Now let’s get into it. Today for LabChats, we are joined by Andrew C. Comrie, who is the author of “Like Nobody’s Business” and “Insider’s Guide to How US University Finances Really Work.” Andrew, you want to give us a little bit more background on your background and area of expertise? And how in the world did you get involved in university finances as an area of expertise?

Andrew Comrie  0:43

Yeah, thanks, Tyler. Glad to be on. Well, let’s see, I was just a regular old faculty member back in the day, and then for a variety of reasons got into central administration. Initially I was a dean, and then I became Provost here at the University of Arizona. And over the course of about a dozen years during those jobs, including some time in the research office, I had to learn kind of how the money worked in the university. And it turns out that we all have pretty simplistic ideas of how that worked. But to, of course, be an administrator and manage units, particularly once I became Provost, I really had to understand the whole kind of financial wiring diagram, in fact, the entire business model of the university, and there is no ‘User’s Manual’. There, you know, there’s a CFO there, people understand all kinds of accounting, and they all are amazing and incredibly useful at their jobs. But when you’re trying to manage both the function and the mission of a giant nonprofit like a university, then you have to kind of understand the financial side and the business side, so to speak, as well as the academic side. So long story short, I ended up doing a lot of talks on campus with alumni and board members and others about how that worked. Because there’s a lot of myths and a lot of misunderstanding about University budgets and how they work and how the business of the university works. And when I stepped down from being Provost, I said, “You know, a great project would be to write this down and explain it in the way I’ve gotten used to as a sort of a giant FAQ,” if you want, which turned into this book about how the money works on campus.

Tyler Jacobson  2:31

And I have started reading the book, but as you said, it’s not a short piece of work. We’re at 489 pages. And you’ve also one of the things that really impressed me is you made this book something that’s a free download. Why did you decide to make it free?

Andrew Comrie  2:49

So one of the things I discovered while doing this job is I…when you’re managing a large organization, one of the fun parts is you get to learn a lot from your colleagues, all of whom at the university are really smart people on the cutting edge of what they’re doing. And I had some overlap with some of the librarians on our campus who are big time into the open access movement. There’s a whole discussion we can have about the cost of journal articles and bundling. And the sort of technological changes involved in the public publishing industry, and that kind of thing. Anyway, there’s a large movement for what’s called “Open Access”, which changes from the classic paywall model to a variety of others basically. And I knew about it there. And then as I was looking to publish the book, I also…there’s over 200 color figures in the book, it’s very figure heavy. I’m a climate scientist in my other life, I plot things in graphs all the time. And that’s what I did with this book. So it’s a picture book, with a few words to explain things. And I needed to have lots of color figures. I was not going to sit there with…unbelievably, I mean, some of the classic university presses and others still use black and white printing technology that was invented by Gutenberg in the 21st century. I do not understand this when we have print on demand, electronic publishing, and everything else. And so it pushes the price up radically. I mean, a book that would sell for 20, 30, 40 bucks, black and white, whatever, you know, they can sell for well over $100, maybe even $200 depending. And that would be cost to them because of the way the industry is structured right now. So I said all right, jumping over that it wasn’t gonna work for me. And I found a really great open access publisher, open book publisher [that’s] actually based out of Cambridge, in the UK. They’re a spinoff from Cambridge University. And I decided to try them and they liked the book and we ran from there. So now I have a book that has plenty of color figures and still retails would have done about the same time if you want to buy a printed copy. And yet you can get a free download because of the open access model that we use. We don’t have to have a pay wall so that means I can get the message out to people who should understand it. That was great. So as of a day or two ago it was coming up on 3000 downloads, which I’m reasonably impressed with for myself, if I might say so.

Tyler Jacobson  5:12

That is impressive, especially for a topic that most people don’t want to spend the time to dig as deeply into as you have gone. So I think that to start off with…the numbers that people are typically familiar with is what they see in the news, which is this university has this many millions of dollars in their budget. And then the next number is “How much was cut last year?” 

Andrew Comrie  5:38

Yup. 

Tyler Jacobson  5:38

So where do we go from there to get a basic understanding of university budgets?

Andrew Comrie  5:44

That’s a great question. And the first thing is that the university budget completely correlates with size. Not so much the size of the student body, although that’s pretty close. But it really correlates, of course, with a number of employees, like any other service related business, and that’s partly what we are, where our biggest cost is labor. And so the size of the employee pool is the size of the budget. So a large public university, you know, the flagship or the large state university, most states might have a budget on the order of a billion or 2 billion dollars, which sounds huge. But they might have, you know, 6, 7, 8, 10, 12, 15,000 employees, only, you know, a certain percentage of whom are sort of classic teachers. But then there’s support staff and groundskeepers and everybody else in between, as well. So the core budget is really related to the size of the labor force working at the university. And then of course, it’s scaled naturally around the number of students being taught and many of the other activities if it’s a research university, this research component, so forth.

Tyler Jacobson  6:51

Okay, so you have excluded for-profit institutions from the scope of your book. Why did you make that decision? And do the concepts still apply for the for-profits?

Andrew Comrie  7:04

Great question. So I excluded for-profits, A). because they’re actually quite a…in the grand scheme of things are really a much smaller segment. Also, I just physically do not understand them, I have not worked in the for profit world. And by definition, they are… their business model is completely different to the nonprofit model of the bulk of public and private colleges. The book covers almost 1,200 four year schools in the US, which is essentially all the four year schools in the US. And I didn’t do community colleges. And then because they have a somewhat different arrangement. And mostly are two-year institutions, and I didn’t do the for-profits, because they’re just very differently configured and don’t sort of really conform to the same…they’re making decisions based on different principles. Yes, they’re in the education business. But it’s a very different segment, and very limited. And their mission is not the same. So they didn’t fit well. I have in places, including actually in the online section in the book, included for-profits here and there, because they’re really relevant to that discussion. But as a general inclusion, I did not, I did not put them in. Because their model is completely different. And what they do is quite a bit different to what a run of the mill, public or private institution does.

Tyler Jacobson  8:24

So a lot of…like you say, not for-profit, but anybody that either is in school, or has kids in school, it feels very much a for-profit with the tuition prices and things like that. So where did…what are the different revenue streams? Where do they get their money from? How are they going to keep tuition rates down? What are some of the challenges that they have in the solutions they find for it?

Andrew Comrie  8:51

That’s a huge question. In fact, that’s about half the book but I’ll try to give you some bits and some highlights there. So yes, you know, it’s very real. College tuition in a generation is much higher than it used to be and there are several reasons for that. Whether this is public or private. Now the one you normally see in the paper, the one that particularly the East Coast papers will pick up on will be what the sticker price is, as we call it with the analogy to car buying. What the sticker price is, which most people don’t pay by the way just like with cars, but the listed tuition price for the elite privates. You know, if you’re gonna go to Harvard or to Yale, or to one of those, what do they cost? Some of these days that can be 50, 60 even I just saw the news the other day, someone’s tuition actually exceeded 70k at least as a sticker price, which is a crazy number by almost any standard. So that is not the case at your standard state university. In-state tuition is in the region. All 10, 11, 12k plus minus a couple of K per year. Which is not 5060 70k. It’s a small fraction of that now that even that number for a public is still quite a bit bigger than it was 10, 20, 30 years ago. It might have been just a couple of thousand or something like that. So it’s definitely gone up. But that gets in proportion. Okay, why is it going up? Which was the other part of your question. Turns out once you allow for inflation, and once you allow for some of the other costs that have to be covered by that tuition, which is the primary revenue source for the institution, then what we see is an after inflation increase of is that if I recall correctly, I had to check the book for the most recent figures there, but I recall it was in the zone of one one and a half percent over inflation per year is what the increase has been in real costs of running the institution. But the proportion of the institutional costs being covered by tuition has gone up, particularly [at] the public [institutions], where public supportive education, basically what states are using to help subsidize higher education, has dropped a lot in the last two to three decades. The proportion of public university funds being covered by their states is much, much lower than it used to be. That money has to come from somewhere and it comes from tuition.

Tyler Jacobson  11:31

Okay, so the other thing is: a lot of times anytime you’re talking finances, the budget office, the administration is often considered the “Department of No”. And so what flexibility do schools have with beg, borrowing, stealing resources from one budget category to another? Are they really as restricted as it feels like when departments come after additional funding for resources that they deem critical?

Andrew Comrie  12:03

Yeah, another really insightful question. So at some level, as an old CFO colleague of mine used to say “All money is green.” But it turns out, it’s not that simple. And there are different colors of green. As another colleague caught me, I had no idea that money came in different colors. But it’s accounting jargon, to say that, at least, especially in the nonprofit world, money does come in different colors. It comes in with different rules about how you can spend it. Now at the university level, yeah, there’s a lot of fungible money involved, a lot of money that can be used for different purposes. But you do want to roughly keep track of where the sources of money and the uses of money are. Because you don’t want your business to get out of alignment with where the money generation is versus where you have to spend it just like in any other business. But there have to be big cross subsidies internally, because a lot of what we do is our bottom line in higher education is: we are here to provide or….produce, if you’d like in a very simple industrial sense. And please, you know, don’t don’t overthink my answer here. But just a very simplistic way, we’re supposed to produce qualified students who graduate and produce knowledge. Those are the bottom lines and to some extent, connect those to society and add value, right? This is a two to three part mission of the university. That’s our bottom line. And we do that as a nonprofit. But first, we need money to do that. And primarily that comes from multiple sources, but first and foremost tuition. And then there’s research funds, there’s donations, there’s state support, there’s investment funds, if it’s a private university, and the list goes on. Auxiliaries, things like the dorms, and athletics and things like that. Many of those are self-funding, but others are not. So a complex set of inputs, a complex set of outputs, you can somewhat cross-subsidize internally, but the one thing you cannot do is take money, that is what’s called restricted. The typical example would be gifts, and spend it on something that it was not intended to be spent on. If you are a wealthy person, even if you’re not a wealthy person, and you give a university some money, let’s say for a scholarship. The university can’t spend that on anything else other than the scholarship in the way that was intended. So even if they’re running out of money to pay salaries, or to teach the various students, the scholarship was intended to support something that can only be used for that thing. And that’s, of course, the intent of the donor. And so when you see these news articles about, particularly the big, famous private institutions with massive endowments, people think, “Oh, they got this big bank account, they can just spend the money.” In fact, it’s thousands and thousands of these donations, all of which have rules applied to them, and they really can’t be moved around as much as people think. And so it’s a PR challenge for them. But it’s a real business challenge nonetheless. So there is that. But you know, getting back to your department of no question. All nonprofits have this problem every year, and this is a part of the book. Actually, it’s a really interesting economic theory that applies. In this case, all nonprofits have this problem, where your mission is to do as much of your mission as you can to add as much quality to it as you can every year. What that means is you spend every last dime every year. All right, and then if next year, you have a little bit less money for some reason, oh my gosh, you’ve got to cut something and you’re cutting quality. Because all you’re building is quality. You want quality education, and you want quality research and everything else. So you’re always spending the max and, and investing to produce the best social bottom line. And then if you don’t have quite as much money, the next year, you’ve got to cut something that is a good, a social good. So there’s this constant tension in all nonprofits, universities is just one good example, where it’s always hard to find an extra buck, because every buck is not just money sitting around waiting to do nothing. You’ve got to actively allocate it over some other purpose. So that’s known as the Baumol effect. B-A-U-M-O-L after the person who invented it. And it’s characteristic of many nonprofits, you’ll see it in the performing arts and other areas as well. Yeah, it’s a really interesting challenge.

Tyler Jacobson  16:32

So if money was raining from the sky, and there were no budgetary restrictions, how would education change? 

Andrew Comrie  16:42

That’s a really interesting question. Um, in the short run, I think people would, people on campuses would want to make the programs and services they deliver as good as they possibly could, especially if money was no object. In other words, maximize delivery of the mission, whichever segment of the university you’re in, but it’s all in the end towards, you know, obviously improved education and knowledge discovery. So it would be in that direction. There’s an example from history that’s a bit like this, because we actually have had, maybe not money raining from the sky, but certainly more flush periods in higher education history. Two examples. One would be post-World War Two in the 50s and 60s, massive expansion of the US higher education system. At one point in the 60s, there was one new community college opening a week in the country. That’s how fast higher ed was growing, because states and the federal government were plowing all kinds of money into educational programs. The population was growing, the country was very wealthy and doing very well in the post war years. Once we got into the 50s, it was the Sputnik era and very competitive. And there was massive diversification going on. So we’ve got post-World War Two, we’ve got the GI Bill funding, primarily male students to go back to college, many of whom would not ordinarily have gone to college pre war, because it was a changing social situation. So you’ve got a massive increase in supply funded by the federal government, then you’ve got the wealthier country overall, you’ve got women going to college, who generally were not going to college pre war. So in the 50s, and 60s, the gender balance started its shift. And so a huge demand side growth, and actually demand and supply side growth in higher ed, then, at the same time, you’ve got huge growth in research expenditures. The US started investing massively in research and all the universities we think of today as the big research universities, the University of Chicago and Columbia and Princeton and some of those, [Johns] Hopkins, were already active in this area. The privates, the huge push as the National Science Foundation was formed. And then the National Institutes of Health, and a number of other big federal agencies started spending money on research. And instead of spending the money on government labs, like other countries did, a huge policy, called “Science, the Endless Frontier”, that came out in the late 40s into the 50s. said, “Let’s not spend this money all on government knowledge discovery. Let’s invest in universities, where a lot of the good scientists and social scientists are, and have a government-higher ed collaboration to produce research. And it turns out that somewhat consciously and somewhat unconsciously produced this huge ecosystem of really research-active universities that are now among the very best in the world and in the US and produced, arguably the best, graduate education system the world has seen. So all those things were effectively money raining from the sky to use the quote, how you started the question, because we have a huge influx of tuition dollars funded by the federal government and from private means and others. And then you’ve got this big federal research investment plus whatever the states were investing to grow their universities and community colleges. And what we saw was that higher ed just ballooned in those periods. They had year over year over year of budgetary growth for about 20, 30, 40 years, actually. Until the late 70s, into the 80s. And that things flattened down and have been much more cyclical since then. So I have senior colleagues who were around in those days who remember that you know, you wanted a new department, you made a good proposal, and you said, “We need any fancy new computer, or we need this building or any of these hires.” And if they were well argued they would probably get those funds back then. That sort of thing is much, much more rare now than it used to be then. So it was about building bigger and better then and I imagined a long answer to your question, but good one, it would be about building bigger and better again, now. 

Tyler Jacobson  21:09

Okay. So in the real world, where money isn’t raining from the sky, we are looking…all the conversations that I’ve been having, as we’re looking at potentially some cuts that are coming in the coming years for especially the public institutions. So what data are the decision makers using in order to determine where to cut? Because as you had said, everything’s a service, everything is essential. How do you decide when you have to make an across the board 4% cut…How do you decide what goes? And, you know, from a medical standpoint, do no harm? Where do you make the cut so that it’s not as damaging to the overall school experience for the students?

Andrew Comrie  21:58

Really interesting. So first of all, I think there’s a…let me say there are two parts to my answer. Part one is: the reason you mentioned cuts, and what the future looks like is that the demographics of school leavers and college goers, for the next 10 to 15, 20 years, is on a slight downward slope, maybe not 4%, but certainly a percent or to the the number of viable college goers just from the census and from how many people they are coming to the K-12 system are likely to go to college, that number is a little soft, the next 10 years, as the population is not growing as fast. And so universities are well aware of this, we get 18 years warning. And what happens is it becomes very competitive. So universities start, increasingly in recent years, and it’s going on right now. There is a brutal competition to recruit those students, and there are winners and losers in that competition. And I think what you’ve been seeing is a restructuring in higher ed as some of the smaller, non-elite privates, what used to be the small little regional, private, you know, you have a small liberal arts college in a small town in your state, and local folks who go to college, and now they’re attracted by going to the big State University, or even going out of state or to other better known and better marketed institutions. And so there’s a sort of a consolidation that I think is happening there. So plenty of competition. And so what that’s really doing is, you don’t as an institution, you don’t have to accept that it will necessarily be a shrinking budget, you try to outcompete the competition, so that you are ahead [and] have better offerings, and that you’re going to have students preferentially come to you. So you try to diversify and grow your budget so that in fact, you don’t have to shrink. So that’s answer one. All right. But if you do, and inevitably, they’re always the budget ups and downs, and someone’s always gonna kin