Vedder: Will state colleges become federal universities?

Get public-university presidents together, and they start complaining about the diminishing amount of subsidy support from their state governments.

A review of historical data shows that from the early 1980s until the year before the recent financial crisis, inflation- adjusted state funding per student was essentially unchanged. Over the last generation, an academic arms race has considerably increased total spending per student, so as a percentage of university budgets, state appropriations have sharply fallen.

At some flagship state universities, the cuts in appropriations have been real in absolute dollar terms. The state share of academically related university spending (excluding revenue items such as food, lodging, hospitals and intercollegiate athletics) is now less than 10 percent. This, however, varies among the states: Per-capita university appropriations in fiscal year 2012 ranged from $63 in New Hampshire to $592 in Wyoming; California ($256) spent 80 percent more per capita than Pennsylvania ($143), although the Golden State continues to face a very challenging fiscal outlook.

Even at the midquality state university where I teach, Ohio University, tuition fees provide $2.47 in revenue for every $1 in state subsidies, which cover only 23 percent of the budget. When I first began teaching at the school in the 1960s, that figure was 50 percent.

Because state funding is becoming such a small portion of the budget, why don't these universities privatize, sacrificing a modest amount of money for the freedom to operate without government-imposed constraints? Board Control These constraints are considerable. Most state universities face severe limitations on the size and selection process for their governing board. For example, Virginia state universities have boards of visitors appointed by the governor for short terms (four years); and since the governor in Virginia is limited to one term, board reappointment isn't assured.

Therefore, few board members have much experience or institutional memory, perhaps contributing to the uproar last summer at the University of Virginia when the president was forced to resign, then quickly reinstated after protests.

In some states, trustee appointments go to big political contributors whose qualifications for the position are questionable. Some universities face formal or implicit restrictions on the number of out-of-state students who can be admitted, sometimes depriving the school of a geographically more diverse, and academically more able, student body.

In a number of states, prevailing-wage rules and other laws governing public construction increase the costs of new buildings. Many university presidents bristle at limits on tuition increases imposed by the state, and have been trying to increase the number of out-of-state and foreign students (who pay out-of-state fees) to offset these limits.

With the assistance of Christopher Denhart and Joseph Hartge, I looked at five flagship state universities where the de facto privatization process is well under way: California (Berkeley), Colorado, Michigan, New Hampshire and Virginia. At Michigan, New Hampshire and Virginia, state subsidies finance 14 percent or less of core spending (excluding university commercial activities such as housing and hospitals), according to our survey. In all of these states, the subsidy share of the budget was much higher a generation or two ago.

The University of California was always the ideal for a state university -- with generous public support, modest tuition levels and high academic distinction. This model is breaking down rapidly because of the state's fiscal challenges.

Tuition Increases A tax increase approved by California voters will restore some drastic cuts in university funding, but students are increasingly covering a larger share of the bills. The tuition at the Berkeley campus for in-state students, for example, soared 68 percent from the 2007-08 to the 2011-12 academic years. Counting mandatory fees, it is now about $15,000 annually.

Some state universities have impressive private endowments, sometimes exceeding the per-student funds at good private schools. The National Association of College and University Business Officers tells us that both the University of Virginia ($4.8 billion) and the University of Michigan ($7.8 billion), for example, are (as of 2011) in the top 20 endowed schools, and endowment income rivals state subsidies in budgetary importance. The University of Texas, with an endowment of more than $17 billion, is No. 3 on the list, behind only Harvard and Yale.

The tradition of state support of higher education is well established, however, and there is strong resistance to breaking the formal tie between flagship universities and state governments. Even some fiscally conservative governors see universities as economic-development engines worthy of public support.

But being a "state" university isn't necessarily like being pregnant, where you are or you aren't. Pennsylvania State University is a hybrid institution, as is the University of Delaware, where support is provided, but the institution is not viewed as being controlled by the state government. (For years, Penn State wouldn't reveal Joe Paterno's salary as football coach, arguing it was not a public institution governed by open- records laws.) A new category of "state-assisted" (as opposed to "state-owned" or "state-governed") universities might emerge. Governments could move away from funding institutions toward financing students at these schools directly through vouchers or scholarships. The schools would have the freedom to raise tuition, but the state would still indirectly provide financial support, similar to what Pell Grants do at the federal level.

Blurred Distinction Any direct retreat by states from higher education will concern those educators who think that the U.S.'s global stature in higher education depends on having 50 jewels in its crown, not just a handful of brand-name private schools. A reduced state role won't mean that dependence on government simply melts away. Private gifts might increase with favorable tax laws, but it also means reliance is shifting from the states to Washington. Relatively speaking, federal assistance rises, most directly to students, which, in turn, allows for tuition increases.

The distinction between "state" and "private" universities was already blurred. Many so-called private universities, including prestigious ones such as Harvard or Stanford, receive more federal-government money per capita than nearby public schools such as the University of Massachusetts or San Jose State University.

If distinctive state systems of public higher education fade away, that might lead to a more centrally directed federal system. As Supreme Court Justice Louis Brandeis pointed out 80 years ago, America's states provide "laboratories of democracy" allowing 50 different approaches to providing public services. That useful diversity declines with increased federal financing of higher education. Although I see many advantages to privatizing state universities, if the result is complete federal control, we will have taken a step backward.

Richard Vedder directs the Center for College Affordability and Productivity and teaches economics at Ohio University.