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This is a historical/archived web page. For current budget information go to: 2011sitearchive.lanecc.edu/budget
*At the request of Cam Preus-Braly, Commissioner, Oregon Department of Community Colleges and Workforce Development
The Oregon State Board of Education faces two exceptionally difficult challenges in funding Oregon’s community colleges at this time.
First, Oregon faces what Jane Wellman in a recent paper calls “the double whammy”-- the collision between increasing demand for higher education and stagnant or even declining resources from state and local government for these services. You will not find an easy solution to this dilemma because there is none. When resources decline in real terms over time, quality, access, or both are sacrificed. Yet, this happens in an environment where no one can readily admit that it is occurring. Neither college presidents nor board members are inclined to proudly claim that either quality or access is being jeopardized under their leadership. Yet, it is happening. The quality of the Oregon’s community colleges is eroding because of growth in student enrollment for which adequate additional resources are not being provided. If you cap enrollments to sustain quality, however, access will erode. You are in a no win situation. This challenge is exacerbated in Oregon by the large differences in size of your various community colleges, which make it difficult to fashion any single formula that accommodates these disparities.
Your second major challenge is that, although you have a state responsibility for distributing funding to the community colleges, you do not have a state governed community college system that would allow you to manage within limited means. It is not within the State Board’s purview to manage system level decisions that focus on state needs, because those decisions remain under the control of your local district community college boards. As a result, individual institutions within the group of seventeen colleges can either complement your intentions or defeat them. And, indeed, you are experiencing both. State planning is simply not possible within this governance structure.
To address perceived past inequities in funding, you adopted just a few years ago a new funding formula intended to address two principles -- adequacy and equity. Through this policy, which remains in effect today, you address adequacy through a modest base funding component to the formula, while equity is addressed by providing the lion’s share of funding on the basis of full-time equivalent (FTE) enrollments. Through these two principles -- adequacy and equity – you intend to ensure access and sustain quality and innovation, yet it is also clear are that access, reflected in funded growth, clearly carries more weight in the formula than does quality or focused program development.
This formula has served you well for a number of reasons.
There are four ways in which you could address these issues.
Keep on keeping on.
Why change? Your current policy has served you well. And, just as it comes into full compliance with its original purposes, it is being suggested that you abandon what was clearly a good plan. Why would that make sense? Well, it would make sense only if there were a compelling case for change and if other strategies would better address your principles in the current environment. So, is there a compelling case for change and are there logically better funding strategies to address current circumstances?
With respect to the case for change, there are at least three compelling problems with your sustaining the keep on keeping on approach.
First, though the current policy served you reasonably well on the adequacy principle, it isn’t as effective as you envision it is on the equity principle. Equity, as you present it is intended to assure a fair distribution of state resources to the seventeen colleges. Yet, in calculating the perceived equitable distribution of resources your policy excludes from consideration two important revenue sources – fifty percent of local property taxes and all tuition revenue. The property tax exclusion is admittedly a “compromise” to balance state and local interests, but its exclusion clearly creates inequity, benefiting those communities with more robust property tax bases. Similarly, the exclusion of tuition revenue fails to take into account the differential capacity of some institutions to generate more income through higher tuition levels. Furthermore, the assumption that all FTE should be weighed equally, even though there are substantial economies of scale for institutions serving large numbers of students exacerbates the funding inequities between large and small institutions. Furthermore this assumption that all FTE cost the same fails to distinguish between the actual costs of education students in different fields. For example, it would be in Oregon’s best interest to provide more funding in certain areas, such as preparation for high technology occupations, yet your funding policy provides no direction or incentives for institutions to do so. As a result, the equity built into the current formula is not as equitable as you have perceived. It has satisfied all parties in the recent past because it provided more resources for all, but it has not achieved funding equity.
Second, your current funding scheme, which has provided both stability and predictability and the recent past, can now be predicted to provide declining resources for your most financially vulnerable campuses. Too much is often made of the importance of funding stability. Nobody complains about instability when that means more funding. Frankly, predictability is much more important than stability, and your current funding policies do provide predictability, as unfortunate as that predictability might be. More important than either stability or predictability, however, is basic sufficiency; and one compelling reason for changing your funding policies is that within the context of Oregon’s current financial circumstances, your current policies will not keep some of your institutions afloat. Imagine a scenario where one college has growth of ten percent and another has growth of five percent, yet total resources do not increase at all. In these circumstances the first institution would receive an increase in funding, albeit not what it “deserved” but at least some increase. Combined with the increased tuition revenue from these new students, this college should receive enough marginal increase in funds to hold its own. The second college, however, would actually receive less state funding, even though it is serving more students. New tuition revenue from the increased enrollment would unlikely cover real costs, so quality would be at risk. So, this institution faces a real catch-22: it loses resources if it grows but it loses even more resources if it chooses not to do so.
Some would say such is life; all is not fair. And, that would probably be a defensible triage position in difficult times if all institutions were equal from the get go. Your institutions, however, despite your efforts to treat them equitably in recent years face substantially different capabilities to face revenue losses. Imagine for a moment that the second college described above, the one with just five percent growth, is one of your smallest campuses. A reduction in funding for campus absolutely would erode the ability of that college to provide an adequate academic program. This may not occur in the first year of cuts, but certainly would over time. As a result, one of two things would occur; either the college would be forced to close, thus eroding geographic access to the district it serves, or the college would remain open and offer a lousy education. Neither is an acceptable option to the State.
Freeze the distribution, and regroup.
The majority of your Presidents have suggested that the consequences of keep on keeping on would be so deleterious that you should simply provide funding over the next two years on exactly the same percentage basis that funding is being provided this year, as a holding pattern, until you can devise a new funding strategy that better fits the frugal financial environment you are likely to face in the near future.
It is hard to ignore this advice. These are the folks who must make the funding serve your purposes. Some of them would benefit by imposing a freeze, others would not, but the majority believes it is the best system-wide approach, given the frugality of the times. Your Commissioner has indicated that a modification of this concept should be adopted. The value of constructing policy that has the support of your professional staff cannot be underestimated.
But, why would this make sense? You would lose the long sought discipline of the current policy. But, what would you gain; what evidence suggests that this interim step or any future policies resulting from “regrouping” would better address Oregon’s dire circumstances? These are reasonable questions to ask and answer before jumping ship on a policy with which you have been quite pleased.
One of the principle arguments for maintaining the current distribution percentages is that it will provide stability. In truth, what it provides is predictability, not stability, because there is no assurance that overall funding from the State of Oregon will be stable over time. Predictability has great value in a fiscally constrained environment, however, because it allows institutions to gauge better the implications of enrollment growth. In practical terms, stable funding allows modest growth for a short period of time because the marginal new tuition revenue allows additional students to be “accommodated” within existing facilities, classes, and service levels. If such growth continues, however, either new resources are required or quality begins to erode. Two dangers can result from this approach, though. First, if your colleges decide to accommodate modest growth, the constituencies that you serve – the people of Oregon and their elected representatives – will believe that you can do more. Rather than appreciating your exceptional efforts, they will come to expect them; they have no reason to do otherwise because few will understand the full picture. So, there is the danger that you may be justifying a lower base level of funding per student in the future. Second, this strategy has the potential of dividing your colleges and their Presidents into good guys and bad guys. If some colleges choose to accommodate growth and other do not, the growing colleges will be perceived as more responsive to the general needs of Oregonians and as more efficient, and the others will be considered the goats.
Another benefit of freezing the formula and regrouping is that the formula under which you are currently operating, though ostensibly developed to work well in both good times and bad, isn’t well crafted to work effectively in as dire financial straights as you currently face. If sustained, your current policies will jeopardize the viability of your smallest institutions. Oregon and its local taxing districts may need to address the issue of whether you can sustain the number of institutions you have established, but such a serious question should be addressed directly, not unintentionally or covertly through the funding formula.
Despite the benefits discussed above, though, even freezing the formula at today’s values may not solve the problem of fiscal viability for your small institution. Small institutions need an absolute amount of funding, not an absolute share of funding to sustain a minimal level of services, and distributing funds on the basis of today’s state share could fall short on two accounts. First, if the resources captured in the state share (state appropriations and a portion of local property taxes) actually decline, the actual resources for your colleges will decline. Second, your policy, which recognizes the need for base funding, considers only a portion of the total resources available to your institutions because it does not take into consideration tuition revenue or 50 percent of property tax revenue. As a result, you can’t truly assure adequate funding for all colleges because you don’t factor in all revenues sources and even those you do control are subject to potential declines.
Despite these limitations, however, the risks to both access and quality, particularly for your low enrollment colleges, of the freezing the distribution and regrouping strategy appear less than the risks of the keep on keeping on strategy.
Establish an absolute core to protect all seventeen colleges, and distribute the remainder “equitably”.
A third generic strategy would be to factor an absolute core funding level for your colleges, and then provide the remainder to the colleges on an “equitable” basis. This may have been the intent of your current policy, but it fails to assure core funding for the reasons identified above. Your current funding formula does have some important building blocks for establishing a true core funding component. Presumably the 1,100 FTE level was established through a logical process. It certainly seems reasonable. An FTE enrollment of 1,100 should be sufficient to generate adequate tuition and FTE formula funding for basic sustenance, yet it would be difficult to sustain an institution below that enrollment number. But, in fact, that may not generate sufficient funds for financial viability in the fiscal environment you now face, so you may need to set an absolute funding level to sustain an institution, and that number must include all sources of revenue – state appropriations, tuition revenue, and all five mills of local district property taxes. If the combination of these revenues do not provide enough funds to sustain a viable college you have only three choices:
Provide base + marginal funding.
The fourth generic funding model you could adopt would be a base + marginal funding approach. Base + marginal funding assumes that the greater the number of students being served, the lower the average cost will be to serve those students effectively. This suggests that, because of economies of scale, large institutions don’t need as much funding per FTE nor do new students at virtually any college require as much funding to serve well. In a modest way, your current policy recognizes these economies of scale through the base funding adjustment and FTE weightings. Ostensibly large institutions can spread fixed costs in a way in which small institutions can’t, and new students fit into facilities, classes, registration lines, e-services that already exist, and thus can be served well for less – not for nothing, but for less. Many funding policies, thus, either explicitly or implicitly provide less funding for larger campuses and for new enrollments than they do for core students. In essence, this is what guides many non-resident tuition policies that don’t fully fund non-resident students at the average cost of instruction. Your colleges that accept out-of-district students at in-district tuition rates have implicitly accepted this concept. Each of your colleges that accept more students than the state is funding is educating these students with marginal funding; that is, they are not being provided full average funding for these new students.
One clear advantage of base + marginal funding is that it reconciles what is in fact going on, and thus makes funding policy more transparent and manageable. Under your current policy, you seek average funding per FTE from the state, but invariably receive less and still provide a quality education. From the state’s perspective, you are delivering more for less, which is both laudable and comfortable. Within certain bounds, you can do this because the additional students do provide economies of scale that allow some maintenance of effort with just marginal funding. The dilemma you face is that you can’t deal openly with the possibilities and limitations of marginal funding, because it isn’t an integral part of your policy.
Though marginal funding can be a powerful funding strategy, it also has potential drawbacks. One limitation of base + marginal funding is that marginal funding works well until existing facilities, services, etc. are maximally utilized, at which point the marginal costs of new students actually come to equal or exceed the average costs because of the need to increase institutional capacity, and it is difficult to incorporate realization of this into a marginal funding formula. A second limitation is that, just as there are economies of scale, there is an increasing literature in economics and organizational management of potential diseconomies of large scale. A very large college may have to spend exceptional resources, for example, to provide the type of supportive student learning environment that evolves almost naturally in a small institution. A third limitation of the base + marginal funding approach is that it can foster unintended consequences. Because funding is sufficient, but not much more, there is generally virtually no funding available for innovative ventures, unless the promise substantial “economies”. Part-time faculty becomes more attractive to the organization because of their low costs, compared to full-time faculty. In sum, productivity that focuses on economies rather than on quality enhancement drives a larger share of the institution’s activities.
In truth, however, you live today with a marginal funding model, and are experiencing virtually all of the limitations described above. Perhaps it would be better to do so explicitly rather than implicitly so the consequences could be more broadly understood which would also make them easier to manage.
Summary
This paper addresses four ways in which the Oregon State Board of Education can approach state funding for the Oregon community colleges. Changing from where you have been is always difficult, particularly when you are convinced that what you have done has served Oregon well. And it has. But it may not in the future, depending on your objectives. The greatest risk in maintaining your current policy is that growth its focus on growth will almost certainly jeopardize the long-term viability of your smallest institutions and may well jeopardize the quality of your larger institutions. Despite these limitations, however, your institutions would be forced to grow just to sustain funding. All else being equal, growth is good; you want to reinforce it because Oregon needs greater access. But, all else isn’t equal today in Oregon. If you grow without adequate state support, you will certainly see both quality and access erode. Access to inadequate education will be a hollow victory.
So, you need a new way. The Presidents have proposed a temporary fix – freezing funding shares from the current formula, and regrouping – and it would, without doubt, work only as a temporary fix. It would moderate the potential damage to your most at risk smaller institutions, but it would not ensure their viability in the event of actual reductions in state resources, and it would eliminate the incentive for larger institutions, which can still afford to grow, to do so. Two other strategies – base + and base + marginal funding are presented as ideas that may be of use to you now or in the future.
Truth be told, your problem isn’t your funding formula. Your problem is two fold. First, no funding formula can truly accomplish your objectives of adequacy and equity within Oregon’s current fiscal crisis, because the funding available will simply be inadequate to do so, at least in the foreseeable future. Second, while you have the authority and responsibility to distribute funds, you do not have the authority or responsibility to represent the State’s best interests because these responsibilities lay with the local boards. Your inability to plan on the basis of all funds and to dovetail funding with other relevant policies makes it impossible for you to assure that the State’s interests will be served.
As a result, you must look for what in organizational behavior are called satisfying solutions, not optimizing solutions. As difficult as that is for policy makers, because you do not want to give up your vision of what is right for Oregon, you must reconcile yourself to doing what is the best that is possible rather than what is the best.
One radical approach would be to rethink the State Board’s role, focusing your attention and the State’s limited resources solely in state investment terms. This would require moving from formula driven policy to a decision theory approach, where the Board would weigh established State objectives, as laid out in statute and policy, and target state funding more directly to these State interests and to institutional performance in addressing these interests. Obviously, choosing such a radical change in course would require great thought and discussion, and may not be comfortable within “the Oregon Way”. Whether you move radically or incrementally, though, you must move off the dime because the dime is disappearing.
