Learning costs and public expenditures for higher education are on a collision course. The decade of the 1980s was a time of inflationary higher education prices, and the 1990s promise a parallel dramatic reduction in the level of public support for the postsecondary educational enterprise. At the same time, many institutions of higher education are pricing themselves out of the market with tuition and fees that exceed student and family ability to pay.
The TYI is at the center of these financial dynamics. It is increasingly the preferred alternative to the four-year experience--in many instances the practical capstone to a baccalaureate. At the same time, the TYI is competing for public support with both K-12 and four-year graduate systems. When these dynamics are coupled with the exploding demand for both technical and general education, the result is a crisis of resource supply that calls for new ways of gathering and managing resources.
This section outlines an approach to financial management that links institutional resources to NDTYI and its work. This approach is based on a view of the TYI as a learning organization--one that can respond to new challenges and opportunities in a timely way.
As should be evident from the above introduction, learning finance is very critical to the implementation of NDTYI recommendations. Although the resources available to TYIs come in many forms, eventually they are converted into a bottom line for the institution--either it is financially healthy and stable, or the institution moves into crisis mode, eventually going out of business if financial matters are not turned around. Each of the previous design elements has implications for finance. And so, like the learning environment, addressing learning finance becomes another opportunity to integrate the design specifications resulting from other elements and to communicate in more concrete terms what is expected by NDTYI.
As with the learning environment, there were no focus group interviews conducted to assist with developing the design specifications for learning finance. The National Design Group had the benefit of staff working on reviewing the research and best practices as it discussed the direction to be taken by NDTYI as regards learning finance at two of its meetings.
The following were the key points made by the National Design Group regarding the learning finance of TYIs:
Financial policies and resource management come together to make all of the previous design decisions in NDTYI a reality. The truth of this statement is easy to see in the implications it holds for steps in the design process:
Surely any new design that has any hope of widespread adoption in the postsecondary community must provide for both adequate funding and warrantible stewardship. These are the two starting points that undergird our understanding of financial policies and resource management for NDTYI.
Before going further, the implications of the previous step in the design process, learning environment, are examined specifically as they relate to learning finance. The implications of each design specification for the learning environment is translated into implications for learning finance:
This section will explore some of the context and emerging strategies for educational finance and operation that are supportive of NDTYI.
The dynamics of public higher education finance are captured in the data displayed in Figure 28. This chart shows that public appropriations for higher education are on an accelerating decline (lower line). Tuition (upper line), on the other hand, has shown a steady increase since 1982.
However, tuition has not increased sufficiently to compensate for the reduction in appropriations so that total funding per full-time-equivalent student (FTE) (center line) is relatively constant. These data are only an indication of future financial policies. Federal funding will continue to decline and will, in the future, provide an ever-smaller share of support for the TYI (Honeyman, Williamson, & Wattenbarger, 1991). As states take on increasing responsibility for programs formerly funded at the federal level, there will be greater competition among the human services at the state level. This is competition that higher education is unlikely to win; health care, corrections, and elementary and secondary education demands are of a magnitude that legislators must address. Finally, the resources that flow to higher education are likely to be directed to the student and not to the institution. To quote from one policy report, "Radically change the way state funds for higher education are appropriated by giving more to students and less to institutions. Beginning with the 1998-99 biennial budget, we propose . . . that the current practice of allocating 90 percent of the state's appropriation to institutions and 10 percent to students be nearly inverted" (Brandl & Weber, 1995, p. 25).
Clearly, higher education is facing a new reality as to resource supply; privately controlled dollars are replacing public support so that colleges are increasingly dependent upon tuition receipts and, to a limited extent, on voluntary contributions (Frances, 1992, p. 19). In the higher education marketplace of the future, colleges will be required to earn the resources needed to support the educational enterprise. Funding formulae will no longer be the sole consideration of institutional leaders; they will be replaced by a new calculus of value where decisions will shift from legislatures to students and employers, and value will be determined by outcomes. In addition, policymakers will be expected to
Shift the protocol from the state meeting the institution's need to the college or university meeting the state's needs, and change the budget language from "numbers" to "learning" and "educational achievement." (Albright & Gilleland, 1994, p. 17)
As these new dynamics come into play, higher education is limited in its capacity to respond by a number of decisions made during the 1980s--a period when institutions experienced seemingly endless growth in enrollment and funding. First, increases in the cost of higher education during the decade of the 1980s greatly exceeded changes in the general level of prices (Getz & Siegfried, 1991). Second, institutions elected to invest in new buildings and faculty in anticipation of continued enrollment growth and regular increases in public support (McPherson & Schapiro, 1991). Finally, higher education has what might be called an "edifice complex," where buildings define both process and product--structures that are expensive to operate and maintain (Clotfelter, Ehrenberg, Getz, & Siegfried, 1991).
While these decisions were being made, there was a largely undetected transformation of the student body underway. Students became older and more ethnically diverse, with often unfamiliar educational needs and expectations (Kempner & Kinnick, 1990). They also began to "shop around" for the institution most likely to give them real value for their educational dollar (Levine & Riedel, 1987). The result is a set of demands for a wide range of training and support services, which colleges have rarely factored into their considerations of costs and revenues.
In order to cope with these fundamental changes, colleges have looked to a combination of revenue enhancement and cost control. On the revenue side, they have created foundations and engaged in development activities patterned on those of private colleges. They have collectively reached out to legislatures and government agencies to influence the pattern of funding reductions. On the cost side, colleges have developed new methods of cost control and, in some instances, new paradigms for financial management (Kapraun & Heard, 1993). From the perspective of NDTYI, it is these new paradigms that hold the greatest promise for effective finance of the educational enterprise of the future.
In taking steps toward a new paradigm, many colleges have chosen to refine their traditional financial accounting and budgeting practices, thereby locking themselves in a management paradigm ill-equipped for the turbulence of the 1990s (Simpson, 1991). More to the point of this chapter, the teaching institution is locked in a paradigm that cuts across all educational organizations. This is a perspective that sees the work of schooling through the lens of resources. Students are counted only as FTE who generate an average level of tuition so that income can be estimated. Insofar as public policy is concerned, the calculus is limited only to enrollment, since there is no income. On the expense side of the ledger, it is the FTE faculty and its average salary that expresses costs. This gives rise to a narrow view of productivity where SCHs are the bearer of the costs of production embodied in faculty (Massy, 1991).
The pervasive truth of this observation is evident in the variables and relationships pictured in Figure 29. This diagram captures the essentials of contemporary higher education management. The revenue budget is distributed across academic units within a standard set of line-item expenditures. Each unit, in turn, is assigned the number of SCHs earned by the courses it offers. This results in a narrow computation of cost per SCH--and to the comparison of widely dissimilar programs of study.
The fundamental dynamic in this paradigm is the generation of cost and revenue by SCHs. On the cost side, courses are offered and student enrollment is translated into SCHs and the consequent unit costs of instruction. SCHs also drive the basic revenue stream through tuition and fees. The cost/revenue balance leads to a number of composite health ratios whereby the institution can compare its condition with others in similar circumstances.
Basic accounting data of this type lead to several key management activities that can be found on every campus. First, the budgeting process is closely tied to the historical activities of collegiate units. Each department can expect to receive a share of the revenue stream of the college according to its most recent experiences. Second, there is an incentive to departments to lower the cost of instruction by increasing class size and "farming out" high cost courses to other departments. Third, revenue and costs are not totally connected in the model, and support services are treated as an afterthought. Finally, there is a tendency to compare departmental costs without regard to differences in programs and subject matters (Meisinger & Dubeck, 1984).
The shortcomings of the traditional spreadsheet approach entered management's consciousness in the late 1980s. Incremental budgeting practices could not be sustained in a resource-short environment. For the first time, managers were required to allocate resources among programs and departments. It also became clear that costs needed to be controlled and brought in line with revenues. Put another way, the dynamic of growth became history and a new economy came into being (Sims & Sims, 1991).
Moreover, changes in the demography and needs of students came into the picture in a subtle--but significant--way. As the variability of the student population increased, colleges experienced greater demand for specialized services. Child care, counseling, chemical dependency treatment, and conflict management all added to the cost of doing the business of higher education (Mangan, 1993).
In the growth years, colleges had funded special services from the pool of general revenues. In effect, state aids and tuition dollars from students needing little or no services were transferred to support programs for the needy. This form of redistribution of resources had little impact, so long as the level of need in the student population remained low. As the costs of these programs grew--many in an exponential manner--colleges were forced to take into account the real costs of the educational enterprise.
For many colleges, unfamiliar services and their associated costs were signals to raise admission standards. These institutions are able to "skim" the market for students with few or no needs for support services, encouraging a lack of institutional responsiveness to a wide range and diversity of students. However, the TYI's mission requires that they pay close attention to the composition of the student body and the associated costs of servicing individual needs. This results in a transitional financial management paradigm; one where the "case mix" of the student body is taken into account (see Figure 30).
This paradigm is drawn from the financial practices of medicine and hospital management. These organizations found--not surprisingly--that clients were different and that their demands for services were highly variable. By grouping clients according to service needs, health care was able to link income and cost to create a mix of clients best suited to the organization's capacity to deliver services (Jencks, Dobson, Willis, & Feinstein, 1984).
Case mix adds an important perspective to the traditional paradigm of Figure 29. First, there is an assessment of student condition and needs, which determines the range of instructional and support services students are likely to demand. This makes it possible to estimate the "load" to be placed on instruction and student support services and to make realistic projections of the true cost of all college activities. To the extent that students are charged for both instruction and support services, the flow of revenue follows the student. And the costs of various "case mixes" of students can be analyzed.
However, the focus of management attention remains fixed on financial health. Nowhere in this paradigm is any attention paid to learning. Not even in the limited sense of costs per unit gain. Learning is assumed to take place whenever SCHs are delivered. And the magnitude of learning is reflected in the amount of "seat time" spent by students to accumulate "credits" toward some license or degree. There can be no argument with the proposition that education is instruction, and that, for the most part, it takes place in the institutional frame defined in the above paragraphs.
The institutional focus is also evident in the way government revenues are treated in Figure 30. They are still received and accounted for at the institutional level and apportioned on a per capita basis to the operating units of the college. In effect, management does not recognize the financial implications of case mix variability. It assumes that all students are equally costly, and, in most instances, that there is little or no need for non-instructional services. Here is the starting point for NDTYI. To be seen as credible, however, any new design for finance must be translatable into the concepts and language of Figure 29 and, to some degree, Figure 30.
There are at least three reasons why these paradigms must be taken into account. First, the institutional system of higher education speaks this peculiar dialect. Students attempting to move from one organization to another must measure the value of their learning in terms of credits. Second, those who staff and manage schools and colleges see their world in terms of this ruling paradigm. They see students as seekers after credits; they allocate resources according to the variables of FTE and tuition; and they organize themselves in divisions and departments that house credit-based subject matters. Finally, the buyers themselves--the students--expect organizational forms and practices consistent with the paradigm. They know that "credits are coin of the realm," and they are unconvinced that alternative products such as learning outcomes have value in the marketplace.
This paradigm stands in the way of innovation in several ways. Consider the following issues as seen at the University of Michigan (Whitaker, 1994):
The traditional financial management paradigm is one of the most significant roadblocks to NDTYI. It is not only firmly embedded in management thinking, it is also woven into the fabric of daily management by accounting practices and conventional communications. And the management information systems now in place are not readily altered to include new data elements. Even with the inclusion of student case mix-analysis, there is an over-riding emphasis on accounting, budgeting, and management practices, which reinforce a collegiate model of higher education. There is little support for the kinds of analysis and decisionmaking called for by learning organizations. Something must give in order that a new paradigm can come into being.
A transitional financial paradigm which builds on familiar practices while supporting the fundamental changes required by NDTYI is exemplary of the direction that the financial element in NDTYI should move. One illustration of this intermediate schema is the set of assumptions and conventions making up Responsibility Centered Management (RCM) (Robbins & Rooney, 1995; Whalen, 1992).
The basic idea of RCM is a simple one that can be summarized in the notion of "every tub on its own bottom." What this means is that each of the TYI's enterprises is responsible for both costs and revenue associated with it. Costs and revenues are shifted from central administration to each individual enterprise. On the one side, instructional costs are traced to their ultimate use and their contribution to academic productivity assessed (Massy & Zemky, 1995). On the other side of the equation, institutional income is apportioned to the enterprise responsible for generating the revenue. By adding income to the management schema of Figure 30, RCM gives a more complete picture of the financial dynamics of a particular enterprise (see Figure 31). In its purest form, RCM gives all the income to a given enterprise and requires that all costs be met from revenue. Further, RCM allows each enterprise to purchase whatever services it requires from the college. If the enterprise can make a "better deal" with other suppliers, it is free to buy from the lowest cost source.
Figure 31 shows that RCM can be imposed on the more traditional models of financial management. RCM cuts across existing practices to show how enterprise performance follows from the student case-mix typologies it serves. Each center--or enterprise--is responsible for all aspects of student experience and for arranging for services within and outside the TYI. It is the instrument whereby the TYI engages in community and economic development (Hernández-Gantes, Sorensen, & Nieri, 1995). The enterprise is also accountable for revenue generation even though it may receive a share of government revenue on a per capita basis.
This concept is far more revolutionary than it seems; it essentially puts the operations of the TYI on a market footing and clarifies the competitive nature of many TYI enterprises. Thus, RCM can be the mechanism needed to foster innovation; if an enterprise can generate an income stream that can cover costs, it has the potential to develop a market presence over time. Note what is being said here: RCM helps enterprise managers focus on cash flow--rather than the end-of-year audit data. In the words of Omar Khyyam (1923), "Ah, take the Cash and let the Credit go" (p. XIII). RCM is the instrument that makes it possible for the traditional TYI to recognize the dynamics of contemporary higher education and to respond appropriately.
The RCM paradigm is quite familiar to those involved in custom training in the community and technical college. These enterprises possess the structures and practices needed to implement RCM and are, as such, excellent examples to the larger institution hoping to move toward RCM. Concerns for assessment and accountability, as well as profitability, are all present in custom training, and there is a continued emphasis on the contributions of each venture to the goals of the TYI (Bragg & Jacobs, 1994).
But education is about more than cash, income, and expense. It is about value--in many forms. Students and employers of graduates look to higher education for knowledge and skills of value in the marketplace. In this sense, value implies return on the investment of student time, tuition, and public support. Value has another important connotation; it speaks of values held by institutions and individuals and their expression in the activities of the college and its constituents. This is Value Centered Management (VCM)--another new paradigm of finance and financial management for higher education (Whitaker, 1994).
In its simplest form, VCM looks to the business value of educational programs and services; and education attempts to follow the business practices of the 1980s. For-profit organizations have begun to shift their management focus from the bottom line to an assessment of the value of the organization (Reimann, 1987). Within VCM, a set of guiding principles/values are agreed to by all enterprises within an institution. These guiding principles/values govern the actions of the enterprises. The enterprises within the institution agree to take care of certain things together, community outreach for instance. Based on the value these actions/relationships provide to the institution as a whole and to the other enterprises within the institution, some revenue is shared among the enterprises in order to accomplish goals based on the guiding principles. From the perspective of managers, value maximization becomes a primary objective and cash flow an operational measure of the value-generating capacity of various activities. As Copeland (1990) suggests,
The challenge for business unit managers can be summed up in two words: managing value. To meet that challenge, every business unit manager should know the answers to such questions as: What is the cash flow based value of our business? How does this compare with its potential market value? How much value will our current plans and strategies create vs. business as usual? . . . The trick is to focus not on traditional accounting measures but on cash flows. (p. 23)
It is easy to see how RCM models can conform to the practices of value management--at least insofar as financial measures of value are concerned. If, however, institutions are to take the final step toward VCM as defined by Whitaker (1994), provisions must be made to articulate the values of the TYI with the overall performance of its constituent enterprises. The collective "TYI" must make decisions as to which of its enterprises are to be taxed in order to achieve institutional goals. And it must select those enterprises to be nurtured. What this implies is that successful enterprises are, in some measure, to be used to support other enterprises whose work is central to the purposes of the TYI.
What VCM does is to add another "decision loop" to the financial management practices of the college (see Figure 32). VCM enables managers to look to the collaborator level of the institution and to address the dynamics that define the vitality and purpose of the TYI.
VCM--if it is based on a functioning RCM model--addresses the signature component of the learning organization. As the organization seeks to live up to its signature and to adapt the signature to new realities, it must consider the match between its values and those of the surrounding culture. VCM keeps a focus on both value and values so that the TYI can position itself as a major contributor to the community and those things it values most.
As VCM enters into the conversations of financial managers, it extends the discussion from the narrow perspective of conventional financial indicators (Opatz, 1994). Managers are enabled to interact with faculty and other stakeholders in meaningful ways and to share concerns and insights about the ways resources are used to further the educational enterprise. VCM becomes, in effect, a dialect that draws the TYI community into a common debate about the performance of the institution (Morgan, 1992).
Financing new learning designs requires major changes in the ways resources are acquired and applied to the learning process. The changes discussed above can be summarized as design specifications for learning finance (see Exhibit 12).
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The NDTYI approach to finance and financial management is a significant break with the common practices of TYIs. In the "spreadsheet approach" of the past, managers were centered on the cost side of the ledger. They were interested primarily in the variable costs of instruction in programs and departments. There was little recognition of the larger dynamics that drove student flow and the attendant implications for both cost and revenue.
As organizations shift to VCM, there is a concomitant transformation of administrative perspective--from "spreadsheet" to "cash flow." The TYI also becomes an active participant in community development and fosters entrepreneurial activities among its various enterprises. Enterprise leaders understand their student case mix and match all aspects of educational experience to the conditions and needs of students. Enterprises also engage in joint ventures with agencies and organizations in the community, to increase revenue in the short run. As the work of enterprises is shaped by the collaborative, these ventures begin to define the values of the college and to share them with the community.
VCM is one approach for new designs for the finance of TYIs. It is an approach that is in line with emerging higher education finance policy, where value takes the place of institutional support. VCM also plays into the strength of the TYI as it focuses management attention on the outcomes of education--the ways the institution adds value to the individual and the community. Finally, VCM makes it possible for faculty to see, for the first time, how their work is valued, how it contributes directly to student development and institutional vitality.
The National Design Group suggested several examples of exemplary practice with regard to learning finance. Three were selected for brief description here.
Kirkwood Community College in Cedar Rapids, Iowa, has several years of experience with a Workforce Development Service that provides a wide variety of services to businesses in their geographic area. These services expand the revenue sources beyond the campus-based "teaching" typically provided by a TYI. The Fall 1996 Kirkwood brochure describes a "comprehensive line-up of business courses, seminars, and training services available in the areas of employee growth, business management, computer training, health and safety, technical training, and continuous process improvement."
Fox Valley Technical College in Appleton, Wisconsin, has 15 years of experience with allocating revenues resulting from training and technical assistance service to business and industry back to program areas for their use and further investment. The college now has nearly three-fourths of all faculty involved in some way in customized corporate training. Fox Valley has found a powerful way to communicate to staff the advantages of innovation and responsiveness.
The technical colleges and universities in various regions of Wisconsin have formed alliances called the Wisconsin Manufacturing Extension Partnership to receive and respond to requests from business for customized training and other services. With the alliance in place in each region, businesses are not plagued by frequent visits from colleges seeking opportunities for training, and colleges and universities are not wasting energy by writing proposals for the same training opportunity. Rather, a board made up of representatives of all the institutions, businesses, and industries meets as a clearinghouse for training needs and allocates the training opportunities to the educational institutions that are most appropriate under prevailing circumstances.
This section has undertaken the consequential challenge of developing a set of design specifications for learning finance in NDTYI. The National Design Group considered the task formidable, given the traditions of higher education, the funding picture ahead, and the likelihood of escalating costs. The tact taken in the design specifications was to decentralize decisionmaking, increase entrepreneurship, become more flexible and responsive to learners, and pay attention to values.
[*] A first version of this paper was prepared by Neil Christenson. Using his work as a base, the section introduction and sections on "Key Concepts Regarding Learning Finance" and "Design Specifications for Learning Finance" were written by William Ammentorp. The remaining sections and overall editing was done by George Copa.