The Daily Sound: The University of California, Inc.

By Randy Alcorn
November 24, 2009

As expected, the University of California’s Board of Regents has raised tuition fees by 32%. Such a steep increase in the price of anything usually triggers a certain incredulity as to its justification. Oil companies were widely suspected of price gouging when fuel prices quickly spiked by 50% last year. How can anything suddenly cost so much more?

From the perspective of business, the more appropriate question might be; what price yields the greatest profit without damaging the franchise? Charge too much and you lose so many customers that profits suffer. But, the right balance of price and volume can actually increase profits.

By ratcheting up its fees 181% since 2004, the UC is recognizing the fundamental mechanism of free-market capitalism, supply-and-demand. Like big oil and big oil’s fellow species, the health insurance industry, the UC is maximizing “shareholder value” by raising prices on a high-demand commodity. If that means some folks can no longer afford to drive cars, buy health insurance, or attend college those are simply market adjustments.

Who are the UC shareholders for whom value is being added? Apparently, they are not California students aspiring to attend the world’s premier public university system. The “public” aspect of the UC is becoming less important to the UC’s Board of Regents and executive administrators.

There are subtleties in the current UC situation that are moving it away from being California’s great engine of public education and leaning it toward privatization. The UC regents, president, and chancellors are responsible for maintaining the financial health of the system, but relying on State funding has become increasingly problematic.

The corruptive special interest greed, fiscal mismanagement, and partisan stupidity in Sacramento are perpetuating and worsening the State’s failing financial condition. The UC is prudently seeking to uncouple itself from the slow train wreck that is California state government, and has turned to the private sector for financing.

Private sector financing requires collateral. For the UC that collateral is the stream of income from tuitions—now totally pledged to secure private bond financing. The less money the UC gets from the State, the more it borrows in the bond market and, therefore, the more collateral it needs. So, tuition goes up and will continue to do so, if for no other reason than to cover the $300 million in debt service on those bonds.

To the extent that it relies on taxpayer funds, the UC is a public institution. But, the less it relies on public funding, the less it must adhere to certain state mandates tied to that funding. The UC can spend private funds as it likes, and it can decide which and how many students it admits.

Back to supply and demand. Foreign and out-of-state students pay higher tuitions than do in-state students. That is why the ratio of admissions between state residents and non-residents increasingly favors the latter. Seeing that private universities on average command two and a half times the $10,320 tuition the UC now charges, UC management knows it has vast opportunity on the price side—especially for a university system with the stature UC has.

But, as it edges towards privatization, the UC is becoming more subject to the unregulated egos of its management. Most of the money the UC has borrowed is being spent for construction, not instruction. Ultimately, a university’s stature and success is measured by the proven quality of its instruction, not by its monuments. However, the UC has furloughed faculty and reduced library and class availability—ostensibly because of State funding reductions. Meanwhile, it continues to pay lavish executive salaries and spend over a billion dollars on extensive construction projects.

The UC’s edifice complex is not shared by all great universities. In fact, Harvard, rather than adversely affect its core mission, education, has suspended construction projects until finances improve. The folks who run Harvard understand what keeps it the world’s preeminent university.

The on site university experience is compelling. Walk the campus of a Harvard or UC Berkeley. The elegant buildings, the manicured gardens, meandering pathways, and sprawling plazas, exude an intellectual gravity that impresses visitors and elicits pride from students, faculty, and management. But, let’s not lose sight of the main purpose of higher education—it is education, discovery, and increasing human knowledge.

Ultimately, the direction the University of California takes depends on the priority state residents place on maintaining it as a public institution dedicated to serve California first and foremost. The UC is demonstrating that it will survive and even thrive with or without California’s tax money. It can join Harvard, Stanford, USC, and other great private universities. And, given its size, it might surpass all of them as a private institution—providing its management focuses on instruction rather than construction.

If the UC goes private, that will be just another consequence of California’s chronically dysfunctional government.

[ Source: The Daily Sound ]