Understanding the effects of Governor Walker’s UW System budget cut on the cost of instruction and tuition

March 10, 2015

Reactions to Gov. Scott Walker’s proposed budget cut of $300 million for the UW System in the next biennium, while strong in their opposition, have not been clearly focused. To better understand the effects of these cuts, it is helpful to have an understanding of instructional costs and their relation to tuition. Instructional costs are the costs of educating undergraduate students, including, for example: faculty/staff compensation, student services (such as advising), and the operation of campus libraries.

The relationship between instructional costs and tuition
Views on how to finance instructional costs have shifted over the years. A formal relationship between tuition and instructional costs was established in the mid-1950s. Beginning in 1955-57, academic year tuition for resident, undergraduate students was pegged at 20 percent of instructional costs, or $90; in about 1970 it rose to 25 percent of instructional costs. Tuition increased slowly after that but began rising more rapidly in the 1990s, and even more rapidly over the past decade. In 2004-05, student tuition accounted for more than 50 percent of instructional costs, and in 2013-14 it accounted for 71 percent. This shift explains the 64 percent increase over the past decade in resident undergraduate tuition, which rose from $4,415 in 2004-05 to $7,232 in 2013-14. (See the See the top panel of Table 2.)

The past 10 years has seen an accelerated shift away from taxpayer funding of the UW System to much greater reliance on students and their parents to finance the costs of undergraduate education. (See Table 1.)

An interesting question to ask is this: What would the 2013-14 tuition charge have been if the 2004-05 split in the cost of instruction had been maintained? Tuition would have risen to $5,297, a 20 percent increase instead of 64 percent. The GPR share would also have risen by 20 percent to $4,889, instead of decreasing by 28 percent to $2,954. (See the bottom panel of Table 2.) What a striking difference!

What readers may not fully appreciate is the slow increase in the undergraduate cost of instruction in the UW System. The cost of instruction rose by 20 percent over the decade. When adjusted for price-level increases over this same period, using the GDP implicit price deflator, we find that the real or constant-dollar increase in the cost of instruction remained constant. That the real costs of instruction did not rise over the decade is a tribute to UW-Madison faculty, staff, and administrators for holding down instructional costs. Expressed in another way, for being highly efficient in their provision of top-quality undergraduate instruction.

The effect of adjusting for the price level change from 2004-05 to 2013-14 is shown in Table 3. With a price level change of 20 percent, the 2004-05 cost of instruction must be expressed in 2013-14 dollars. Doing so pushes the cost of instruction figure to $10,188, which is virtually identical to the 2013-14 figure of $10,186. The 2004-05 figures for the GPR share and the tuition share must also be adjusted. This pushes the GPR share to to $4,890 and the tuition share to $5,208. This last figure should be $5,298!

The differences between the price-adjusted 2004-05 GPR share and the 2013-14 share comes to $1,934. This figure is identical to the difference of $1,934 for the tuition share. What distinguishes the two figures is that the GPR share is negative and the tuition share is positive. In other words, the dollar decline in the GPR share is offset by the dollar increase in the tuition share. The percentages changes are roughly comparable. The larger percentage change for the GPR share is due to its slightly small share of the cost of instruction.

Likely effects of Gov. Walker’s proposed budget cuts on instructional costs and students
With this background, what will be the likely effects of the proposed $150 million annual reduction in the UW System budget? For illustrative purposes, I am assuming that the full effects of the budget reduction will fall on undergraduate instruction; this means that the effects of the budget cut estimated here will be a bit on the high side, because these calculations ignore the costs of graduate student instruction.

The size of Gov. Walker’s proposed budget reduction on the dollar amount of the GPR share is approximately $1,000. This $1,000 figure is derived by dividing the $150 million budget reduction by the approximately 150,000 students enrolled in the UW System. As a consequence, GPR support is further reduced from 29 to 21 percent, that is, from $2,954 to $1,954.

This reduction of $1,000 in the GPR share means that without an opportunity to offset that amount by raising tuition, the cost of instruction must also decline by $1,000 — from $10,186 to $9,186. (See Table 4.) With this reduction in the cost of instruction, the tuition share rises from 71 to 79 percent even though the dollar amount of the tuition charge remains the same.

How any institution could accommodate what amounts to a more than 10 percent reduction in its expenditures during the course of a single year is difficult to fathom. In fact, decisions on actual spending reductions could not be made until late this spring after the state legislature approves the budget and it is signed by the governor. By then, UW System campuses will have formalized their instructional plans for the 2015-16 academic year, meaning that the schedules showing what courses will be taught and who will teach them are in place, and students will already have signed up for fall semester courses.

If the $150 million budget cut for 2015-16 is enacted, instructional programs will have to be scaled back. This will endanger the plans of juniors and seniors to graduate in four years and join the Wisconsin labor force. Newly admitted students may have to be turned away because of course cancellations. Thousands of students and parents will experience the disruptive effects of such a precipitous budget cut.

Even if the first-year reduction is cut in half, by 50 percent, to $75 million, there would be major problems in adapting quickly to what is still a substantial cut.

What if political pressures cause the governor and legislature to relent on their freezing of student tuition for the 2015-16 academic year? What if they AGREE that tuition could be raised for the next academic year to replace the governor’s reduced GPR support? For the UW System to maintain funding for costs of instruction at the current level, average tuition would need to increase from $7,232 to $8,232 — a 12 percent increase. (See Table 5.)

Though this might solve the UW System’s budget problem, it would negatively affect students. Without any increases in need-based student financial aid, some unknown but sizeable number of students, because of their limited personal and family resources, would be unable to enroll at UW System institutions next fall. Most likely, the composition of the student body would change, with a larger proportion of students coming from more affluent families who could afford the new, higher tuition charge.

Closing off opportunities for bright young people from lower-income families to participate in higher education would not support the state’s economic growth agenda.

The governor’s budget proposal means that the entire UW System is operating under a cloud of uncertainty. While giving the UW System public authority status is likely to have some favorable effects, the short-run costs in the form of $150 million annual budget cuts seem too high a price to pay. Beyond that are many unanticipated consequences, both short-run and long-run, that need careful examination. Let us hope that legislators realize this and take the time to consult with UW System faculty and administration about the bill’s effects. Let us hope they give Walker’s budget bill the careful scrutiny it deserves.

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