Rethinking resources and return

Competition is a good thing, right?

Our economy is based on the freedom afforded to the business and industry community by allowing the private sector to make the majority of economic decisions in determining the direction and scale of what the U.S. economy produces.

Arguably, this is enhanced by relatively low levels of regulation and government involvement, as well as a court system that generally protects property rights and enforces contracts. Today, the United States is home to 29.6 million small businesses, 30% of the world's millionaires, 40% of the world's billionaires, as well as 139 of the world's 500 largest companies. The long view proves it works.

Our model is based, in large part, on competition, defined as "the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms". In other words, price-point, quality, brand, and value are all concepts that are not only relative, but central.

There are other words that we might think of as well -- resources, for example. Every business is concerned about capital and cash-flow, especially today and especially in Illinois. Today, the lack of resources (to the tune of some $13 billion) is at issue. That picture likely won’t get any prettier over the next few years either. There simply is no money.

If you do business with the state, you have great reason to be alarmed. There are private sector companies in Champaign-Urbana that are owed upwards of $70MM from the State of Illinois. You have to be an awfully well capitalized business to survive that kind of receivable.

        

Return on investment (ROI) is another of those concepts -- the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested. If you are investing in or purchasing a business, ROI is kind of important. ROI is all about demonstrating that a dollar invested yields equal or greater return.

If you are a small business owner, these and other concepts are central to your decision-making processes every day. They are also meaningful concepts for the public sector as well. In particular, our Illinois Board of Higher Education has taken up these reins in light of the fiscal calamity known as Illinois.

Some context relative to higher education:

·         Since 1996, not including pensions, the higher education budget is down $440MM

·         Over the past 5 years, state funding down $250MM (10%)

·         Community colleges and university funding is the same as it was in 1999

·         We are one half of the way through fiscal 2011, yet have not been reimbursed for fiscal 2010

·         Student aid in the form of MAP grants are running out of funds earlier

·         Illinois general revenue is down $2BB since June 2010

·         Contraction of service is already happening

The reality of higher education in our fine state is that things are bad and going to get worse. Even with the very modest signs of recovery, it will take years, possibly even a decade to recover. Parkland College is owed about $1MM from last year and we have seen roughly 1/12th of our fiscal 2011 allocation at the mid-point of the year. Even in this environment, Parkland is fortunate to be in relatively good, if not great financial position in comparison to our sister colleges across the state. At least at the moment…

Given the realities facing our system of colleges and universities, our Board of Higher Education seems drawn to the word "rethinking". Rethinking means performance based funding.

Those of you that were around in the late 1990's may recall Illinois' attempt at performance-based funding that died in 2002. The amount of funding involved was small, beginning at just $1MM during the first year, FY 1998-99. In its last year, the allocation amounted to $2MM or about 0.1 percent of the total community college budget. The performance -based funding system was abandoned primarily as a result of budget cuts due to the fact that state revenues in 2001 dropped sharply (13% in one year). In light of the situation, the Illinois Community College Board instituted reductions in restricted funding, including the performance funds in order to protect the primary method of funding community colleges, which is based on enrollment.

Today, just eight years later, we are faced with the resurrection of a failed system.

In 1997, the model was based on six goals:

1.     Student satisfaction

2.     Student advancement (number who earned a degree or certificate, transferred to a four-year institution, or were still enrolled at the end of a five-year period)

3.     Student success in terms of the number of graduates employed or pursuing the next degree

4.     Student transfer rates

5.     Proportion of population served

6.     Academically disadvantaged student success (hours attempted versus earned)

In 2010, we are in the formative stages of developing a new model where we will be asked to consider:

1.     What do degrees mean?

2.     What are the "momentum points" along the way?

3.     How can we make community colleges more affordable?

4.     How will we address "training the workforce"?

5.     How will we offer "tangible contributions to the health of the state"?

All of these are good questions. Actually, they are excellent questions. However, it does seem somewhat ironic that the very same reason that caused the demise of performance-based funding in 2002 is the very same cause for reconsideration in 2010. Since there is no money, we are advised to rethink.

I shall.

During the process of writing my dissertation (related to cost-efficiency and ROI), I learned that when considering costs of a particular educational delivery system there are three general measures: cost-benefit, cost-efficiency and cost effectiveness. 

Cost-benefit is intended to measure, in economic terms, the benefits of education to the individual and society in terms of the rate of return to the individual and to society as a whole.

A system is cost-efficient if, relative to another system, its outputs cost less per unit of input. A system increases its cost-efficiency when it maintains output with a less than proportional increase in inputs.

 

Cost-effectiveness is a measurement or determination of the extent to which a system produces outputs that are relevant to the needs and demands of its clients.

Efficiency and effectiveness are not mutually exclusive. Organizations can be efficient while lacking effectiveness and vice-versa. 

There is a difference between cost-benefit and cost-effectiveness. A cost-benefit analysis is used when both cost and effects can be measured in monetary terms and cost-effectiveness is applied when costs are expressed in monetary terms and effects are measured in non-monetary terms. So, in order to accurately compare two systems, either the cost or the effects have to be fixed. When the costs are the same, the system with the largest effect is the most efficient. When the effects are the same, the system with the smallest cost is the most efficient.

Simple, right?

I will assume that you believe our situation in Illinois dictates that there will be less money available to higher education. By default, if there is less money, our colleges and universities will be required to become more cost-efficient.

Therefore, it would be reasonable to assume that any performance funding model will require that colleges maintain increase output (graduates) with a less than proportional increase in inputs (tuition and fees, property taxes, and state support).

If our community colleges are to face the reality of resource scarcity and demonstrable return on investment, we should discuss some potential results. If colleges are to pursue cost-efficiency without regard to benefit and/or effectiveness to logical ends:

1.     Our technical and professional programs (automotive, diesel power, everything related to health care, graphic design, anything computer or network related, welding, industrial technology, et cetera) won’t make the cut. Each of these programs cost more than the combined revenue sources support. In some cases, the cost is significantly more.

On the other hand, there appears to be a shortage of registered nurses. We enroll 53 students into our nursing program every semester from a pool of interested students that approaches 1000. It is no secret that these programs are expensive. Accrediting agencies require a very small student to faculty ratio as well as Masters-prepared nurses as instructors. Our outputs are excellent with nearly 100% pass rates on national exams. The program costs multiple hundreds of thousands of dollars more than revenue sources yield. The other programs mentioned are similar.

2.     Our developmental/remedial mission and open-door admissions policies are hallmarks of the community college system. We accept many high school graduates that are often woefully unprepared for the rigors of college-level work and devote significant resources toward this very important mission. It is time-consuming and challenging work that we have embraced with better-than-average success rates, yet the reimbursement rate for each credit hour completed is roughly ¼ the rate ($9 per credit hour) of a general education course ($37 per credit hour). More than 10% of our enrollment is in developmental courses.

3.     Adult education and GED preparation, community education, athletics, student activities, study abroad, staff development, and sabbaticals – those don’t have an easily understood cost-efficiency ratio either.

4.    We have institutional goals of having 60% of our courses taught by full-time faculty and average class sizes in the mid-twenties. There are far more efficient ways to operate, as you might imagine, all to the detriment of our students.

5.     Our Center for Academic Success that logs 40,000 student visits per year, we have a career center, a disability services office, and other student support functions that help ensure good outcomes. All have associated costs and benefits.

The list goes on. Today, our institutional Research office produces over 80 required reports for federal and state government with an implicit goal of demonstrating cost-efficiency in one form or another. This is the result of ignoring cost-benefit and effectiveness in favor of efficiency.

If we were to spend some time on cost-benefit and effectiveness, we would learn that Illinois’ 48 community colleges contribute to their regions and the state in many ways:  educationally, culturally, recreationally, civically, and economically.  Perhaps the least measured and understood of these are the economic contributions. I’ll list a few that you can find in this report:

·         Illinois community colleges add skills to our workforce and boost the competitiveness of our businesses.

·         Illinois community college graduates generate billions of dollars in local, state, and federal tax revenues.

·         An Illinois community college education increases earnings for workers.  By completing courses, students gain skills that contribute to higher earnings and graduates enjoy even higher returns.

·         As major employers and business entities, Illinois community colleges generate billions of dollars in local sales and wages and more than 55,000 jobs

This economic impact analysis (cost-benefit) of the Illinois Community College System considers changes in student characteristics over a 10-year period, student outcomes, tax revenues generated, market penetration, and economic impacts. Following are a number of significant findings from the analysis.

·         Eight out of 10 Illinois employers (81.2%) hired a community college student at some point over the past 10 years.

·         Three out of 10 Illinois workers (29.5%) participated in credit courses at an Illinois community college during the past 10 years.

·         Statewide, there was a 62.9% increase in students who completed an Illinois community college program from 1996 to 2006.  The four occupational program areas with the largest completer earnings gains per credit hour were Protective Services, Construction Trades, Health Professions and Related Sciences, and Precision Production Trades.

·         The percentage of Illinois community college enrollees intending to prepare for college transfer increased from 25.8% to 32.9% between 1996 and 2006.  

·         Illinois community college graduates generate billions of dollars in local, state, and federal tax revenues.

·         Illinois community college students who attended school in 1995 paid an estimated $3.3 billion in state taxes and $12.8 billion in federal taxes between 1996 and 2005.  

·         Illinois community college students who graduated in 1995 paid an estimated $168 million in state taxes and $650 million in federal taxes over the next 10 years.

·         More than 9 out of 10 Illinois community college graduates remain in Illinois after completing college and contribute to the state’s economy.

·         On average, all students who completed their Illinois community college education in FY05 and worked year-round saw a 31% increase in earnings over their pre-enrollment wages. This figure measures the change in earnings between pre-enrollment and post-completion and represents graduates and individuals who did not re-enroll in FY06.

·         Students who complete their program of study realize even greater benefits.  A 25-year-old Illinois community college program graduate can expect a total lifetime earnings gain of $541,115.  This is 55% more than the projected total lifetime earnings of $1.2 million if they had not completed an Illinois community college program.

·         Illinois community college graduates employed full-time averaged $32,369 in annual earnings after completing their programs of study. This represents about 250% of the state’s minimum wage.

·         As major employers and business entities, Illinois community colleges generate billions of dollars in local sales and wages and more than 55,000 jobs.    

·         In FY05, Illinois community colleges directly employed 13,840 full-time and 19,397 part-time staff with a total payroll of $1.1 billion.

·         In addition to wages and salaries, Illinois community colleges reported $464 million in operating and capital expenditures.  These monies produced an estimated $332 million in output for a total economic impact of $796 million and an estimated additional 8,683 jobs.

·          The total economic output of the community colleges on the Illinois economy in FY05 was estimated at $2.55 billion and 55,407 jobs.

·         A majority of Illinois community college have increased enrollments by almost one-third over the past 10 years and completion rates by 70 percent.  

·         Between 1996 and 2006, two out of every three Illinois community colleges increased enrollments at a rate averaging 32.0%.  

·         Illinois community college students completing their course of study during this period increased at 85% of the colleges by an average of 70.3%.  

It is apparent to me that the trend going forward may very well result in fewer colleges and universities in Illinois. In addition, mission-shrink may be unavoidable as well. We simply won’t be able to afford to do the things we have in the past. If there is no money AND we are to be funded on how well we meet objectives (momentum points), some colleges and universities wither and die. If we wish to maintain the same or increased level of degree production without sacrificing quality, all with the same or less money, it is inevitable. Something will have to give.

As for the way our performance is measured, you may recall the issues I raised with the way that occurs.

It is my opinion that Illinois community colleges are already funded on performance. We are reimbursed, two years after the fact, at the midterm of a course, for every student that is still enrolled in the course, by credit hour taught. The categories and respective reimbursement rates are already controlled by the state and paid after the fact, based on the dollars that are available (or not). Our tuition rates are very reasonable, the lowest cost of entry into higher education, period.

The areas by which our college would be measured in virtually any performance funding model are already present in our institutional performance indicators and woven into our strategic plan. As President, I am evaluated annually on our performance and progress toward our goals. Our data and measurements are publically available on our website. To be sure, outcomes and performance indicators are very important and we ought to be held accountable. We are. My point is that there is more to the equation than cost-efficiency and to base funding solely on six or seven measures discounts huge sections of the community college mission.

Before I sound too curmudgeonly or angry, I will be the first to say that we have work to do. We must, over time and with appropriate care for balance, be accountable for outcomes, especially course completions and, to the extent reasonable and practicable, graduation. What appears to be a newly created focus on outcomes as a major structural improvement in higher education that will bring great benefits to students and the public is simply not the case. Parkland College has always concerned itself with persistence, retention and graduation of our students. Always.

If our funding formulas are carefully constructed to reflect the populations we serve (no small task) in terms of student preparation and background in education culture, we’ll find that with few exceptions, differences between institutions will be very small and have far more to do with the differences in the community being served versus something nefarious.

To quote Garrison Walters, “…those using crude data to support winner-loser formulas point out that right now some universities are doing better than others in, for example, graduation rates. In part that’s a function of different inputs. If we have just a few simple measures to compare disparate entities, we’re going to get simpleminded results that won’t convince anyone — garbage in, garbage out.”

A focus on cost-efficiency without regard for cost-benefit or cost-effectiveness is not only short-sighted, it’s harmful. And now you know the rest of the story.

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