After years of gyrating state appropriations, it now appears that the University is safely on its way to getting the financial autonomy from the Commonwealth administrators say is necessary to compete among top-10 institutions.
The Board of Visitors approved a proposed six-year financial plan Saturday and delegated final negotiations on a revised Management Agreement that is likely to go into effect by the next academic year. Under the new arrangement, the University will have much greater flexibility in allocating its funds, undertaking new building projects and setting its own fees.
Since the new arrangement was proposed and came to be known as "charter legislation," much of the scrutiny has been on the demand implications.
Less focus, however, has been placed on the supply-side impact of these changes. In the unique world of public higher-education financing where tuition, which is widely perceived to be the cost of education, represents just one of many inputs into the actual cost, it is necessary to examine expenditures separate from program fees.
"People look at tuition, and they see it as a cost, but tuition doesn't cover costs," Education School Dean David Breneman. "The level of tuition charged doesn't necessarily correlate with real economic costs; it correlates with the sources of revenue."
This is true at the University, where tuition and fees account for 26.6 percent of the Academic Division Operating Budget this year, an increase from five years ago when tuition accounted for 21 percent of that budget. Yet the cost of academic instruction is harder to pin down, especially when costs of direct academic instruction are dwarfed by growing demands for increased salaries and costly maintenance on aging buildings.
Where are the rising costs?
While tuition accounted for a 7.8 percent increase in revenues this year, spending on direct instruction rose only 3.2 percent from last year. Library and academic administration costs rose 2.8 percent, while costs for general administration and operation and maintenance of University buildings rose 9.5 percent each.
"Tuition and revenue has to cover the entire operating budget," Vice President for Management and Budget Collette Sheehy said. "It has to pay for new facilities, student services and library services."
These trends towards higher University outlays, which mirror trends nationally, are drawing criticism as the costs are passed on. A controversial Congressional version of the National Higher Education Reauthorization Act included measures that would penalize schools that raised their tuition faster then inflation and called for greater cost controls. Some experts in the field are questioning the necessity and efficacy of University spending.
"The basic fact is that we have no bottom line in higher education," said Richard Vedder, an Ohio University economics professor and scholar at the conservative American Enterprise Institute. "If you ask how Wal-Mart did last year, you can say profits are up or down. We have bottom lines in the private sector. We have no bottom line in higher ed."
Research conducted by Vedder and released in a book published last summer called "Going Broke by Degree," found the percent of funds allocated towards instruction at public universities has fallen 4 percent over the last 25 years, from 39 percent in the 1976-77 academic year to 34 percent by 1999-2000.
"The long-term trend has been for spending on instructional outlays, just the basics -- professors that go into the classroom," Vedder said. "These outlays have gone up less than university outlays in general have gone up."
Two categories account for the vast majority of universities' operating costs: labor and the physical plant.
What Labor Gains?
The principle driver of this spending growth is increased labor and benefits costs, which comprise the single most significant expense of any university because providing a university education is simply so labor intensive, Breneman said. While the rest of the economy gains two to three percent annually from more efficient business operations and improved productivity, the argument is that higher education doesn't produce those types of gains.
"Universities are very labor intensive," American Association of Universities spokesperson Barry Toiv said. "Most of the private-sector labor is not as large a percentage of their costs. You're talking apples and oranges. You can't compare the University of Virginia, California or Michigan to General Motors -- they are different animals."
In higher education, where most employees concentrate in knowledge-based professions, the competition to recruit and retain top employees can be particularly intense.
"The costs of employing a faculty member or other staff person just keeps rising because of health-care costs and other factors," Toiv said.
Yet some do not think rising costs are just a benign excuse but rather a sign of inefficiency. Vedder found that of university expenses nationally, on average, 80 to 90 percent goes to compensation and fringe benefits.
"If you are going to look at cost, or supply side, you've got to look at personnel," Vedder said.
Yet Vedder also found that the number of employees, including non-teaching personnel, has risen dramatically over the last few decades. In the mid-1970s for every 100 students, there were three employees who were non-faculty professionals and another three categorized as non-professional support personnel, such as those working in residence life. Now, Vedder says, we have six of these types of non-teaching employees.
"We've doubled the number of personnel," Vedder says. "The hallmark of America's prosperity has come from reducing labor for every amount of output we have," and colleges have not done that.
The proliferation of non-teaching deans, such as the chief officer for diversity and equity the University just hired, is particularly troubling, Vedder said.
"The 'in-thing' is bringing in diversity people," Vedder said. "It's adding to the cost, and I question that it's justifiable to that extent. There are diminishing returns to that kind of spending, just as with other kinds of spending."
Some University faculty members have noted similar trends here.
"An awful lot of money is going to administrative stuff," Classics Prof. Jenny Clay said. "Every time you turn around, there is a new vice president for something."
Moreover, Vedder suggests that universities offer some of the most lavish benefits packages in the United States.
"We at universities have the best benefits in the world, benefits that people would die for," Vedder said. "That's driving things up a lot of things up."
Across the country, colleges have adapted to the higher labor costs by reducing the number of tenured faculty and making other substitutions in the faculty mix, Breneman says. Changes include the substitution of adjunct, visiting and lecturing professors and graduate student teaching assistants for full-time professors.
"TAs for lower division language classes really interfere with pedagogical effectiveness," Clay said, though she added they still play a necessary role in the undergraduate education process. She said classes staffed by TAs are preferable to larger classes and noted that these hard-working graduate students only recently received a small pay increase.
Buildings and Grounds
At the University, spending on the aging physical plant has been increasing particularly rapidly. Of the $155 million in annual spending growth projected over the next six years, $29 million will go to deferred maintenance, according to the Board approved six-year plan.
Renovating existing buildings, however, is not enough to stay competitive. The construction of additional new facilities are necessary to recruit and retain top faculty and students. These new buildings, Sheehy said, are constructed with private funds.
Yet some think the new construction has gotten out of hand, drawing away large amounts of resources from other expenditures at a time when universities do not make adequate use of existing facilities.
"A private company would go broke if they operated the way U.Va does," Vedder said. "Most of the buildings are partially empty a third of the year."
He added that when schools are closed on Fridays, as is the case with the University's Commerce School, this adds to the waste.
The University also has recently completed several relatively expensive non-academic buildings in response to student demand and the availability of funds to complete the projects. The new Observatory Hill Dining Hall opened this year at a cost of $23.5 million. Over $130 million of funds raised by the athletics department currently is being spent to construct the new John Paul Jones Arena.
"If kids want to have all the fancy facilities in the world, that's fine, let them pay for them," Vedder said. "Just don't ask the public sector to pay for it and give rich alumni and people who donate golf facilities and athletics facilities, fat tax deductions."
For the University, not completing such projects leaves it vulnerable to competition from schools that do offer lavish facilities.
"You often hear about how everyone has to have the best recreation facilities, and clearly students have to pay a large proportion of those facilities -- but this is clearly what students are demanding," Sheehy said. "You have to keep up with student expectations. Particularly, recreation facilities are such a good example for us because we have such a high participation rate even compared to our peer institutions."
An Arms Race
Many in the higher-education community disagree with the way Vedder has characterized the debate about University spending.
"I think that a lot of folks in the higher-education community would disagree with his conclusions," Toiv said. "Basically, I think that clearly there are costs in addition to instruction that are rising, including the cost of financial aid."
As the University gears up for a new $3 billion Capital Campaign slated to begin next fall, the question might be raised: Where can this enormous amount of money possibly be invested?
In the higher-education field, there has increasingly been talk of a positional "arms race" among schools to attract the best students and grow the biggest endowments. Clearly, that competition includes fields tangential to the education.
"We are, rightly or wrongly, feeling forced to invest in a lot of expensive activities that don't have directly to do with instruction," Breneman said. "You can say it's foolish, but it is enormously difficult for one university not to participate. You lose students."
The University's struggle to identify where it wants to invest is in some ways highlighted by the branding debate. A Board meeting last spring revealed that the administration, donors, faculty, alumni and students all have distinct priorities and visions for the University's future. Even though the University has drafted six and 10-year financial plans that account for precisely where revenue is expected to and could come from, it is clear that where at least some of that money goes is still up for debate.
Will this money go into instruction?
"You've got to do some hard thinking about the core mission," Clay said, "and I don't really see that happening."
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