QUALITY, VALUE, AND ACCESS:
THE DYNAMICS OF TUITION RATE SETTING
AT THE UNIVERSITY OF PITTSBURGH

The University of Pittsburgh has made remarkable progress in recent years in student demand and quality, research funding, and private support. Between 1995 and 2000, applications for the fewer than 3,000 slots in the freshman class on the Pittsburgh Campus increased by 71%, to nearly 13,500. The quality of the enrolled students improved significantly: since 1995, the percentage of entering students in the top 10% of their high school class increased from 21% to 34%; and SAT scores are up by 50 points, to 1189. Nearly a quarter of the entering class is Honors College eligible, up from 14% five years ago. Research funding, a measure of the competitiveness of the University's faculty and programs, is up a remarkable 41%. Private voluntary support, a demonstration of the confidence that individuals and foundations have in the University, increased by 83%. The University's endowment has grown by 112%--well above the national average--to over $1 billion. Clearly, the perceived value of the University has increased considerably.

Such success has been achieved through a relentless focus on quality-in teaching, in research, and in service. Continuing improvements in quality are critical for the University to attract the talented students and faculty that the Commonwealth requires to develop the new economy and to compete in world markets. While such significant improvements have required considerable additional financial investments by the University, those investments were coupled with a comprehensive program to reallocate resources from lower to higher priority areas, to improve efficiency, to control costs, and to develop multiple revenue sources. This strategy has paid off, as the upgrade in the University's bond rating by both Moody's and Standard and Poor's from upper mid-grade to very high grade/high quality has demonstrated. If the University were a private company, the significant gains in both revenue and net assets per faculty and staff position would be portrayed as important examples of budget discipline.

Pitt in Partnership with the Commonwealth

Much of this success has resulted from the strong and growing partnership with the Commonwealth of Pennsylvania, which has made key investments in the University. Annual appropriations have been increasing, growing by a cumulative 23% since 1995. Although a significant portion of the increase has been in the form of one-time funding and has not therefore met fully the University's needs in operating and salary support, progress has been made in such critical areas as student competitiveness, laboratory modernization, facilities renovation, and information technology enhancements. While these focused investments play an important role, a pressing need is greater permanent base support upon which the long-term vitality of the University depends.

The funding of the modern public research university requires a balancing of public and private benefits. Both the public at large and the enrolled students receive significant value from the programs of the university, and both properly contribute to its support. The relative distribution of that support involves the complex interplay of state and federal higher education policies. The federal government, for example, is the primary source of funding for basic research; the individual states provide basic institutional operating subsidies to ensure access to residents from diverse economic circumstances. The practices of the various states, however, vary widely, and each institution has to set its funding strategies, particularly with regard to tuition, in the context of its environment.

As Dennis Jones of the National Center for Higher Education Management Systems (NCHEMS) stated in an earlier appearance before this Committee, Pennsylvania higher education institutions spend at approximately the same rate per student as comparable public institutions around the country, but the costs are divided quite differently. As a result, Pennsylvania has a reputation as a high tuition, high aid state. The impact of this funding approach is displayed on Chart 1, a 1996 study that contrasted the revenue of the University of Pittsburgh with those of the other 31 public research universities that are members of the American Association of Universities (AAU). The most striking feature of the comparison is that, while all the institutions derived 47% of their revenue from the combination of tuition and state appropriation, the relative percentages were nearly reversed at Pitt, which received 18% of its revenue from the Commonwealth as compared to the average 28% at the peer universities. In more recent years, Pitt still has a pattern of funding that is atypical: in 1999, for example, at neighboring institutions like Maryland, Ohio State, and Rutgers, the average state appropriation provided 28.3% of total revenue and tuition 23.5%. For Pitt during that same year, Commonwealth funding provided only 15% and tuition 26% of total revenue.

Cost Drivers of Higher Education

The primary drivers affecting overall costs at Pitt are quality improvements, inflation, the nature of the academic programs, and location.

Quality Improvements

The University has invested $32,100,000 in efforts to enhance the quality of its academic and student life programs, its research and regional economic investments, and its information technology. Continued investments are critical in these areas to ensure that Pitt remains competitive in meeting the needs of the citizens of the Commonwealth. Growing demands in areas such as technology transfer require continuing new investments. In developing the new economy, quality will be the key determinative; it cannot be sacrificed in a misguided effort to reduce costs. Initiatives like the Digital Greenhouse and the growing local biotechnology industry indicate that these efforts are beginning to pay off.

Inflationary Pressures

Universities, like everything and everyone else, are subject to inflation. Unfortunately, however, because of the nature of the goods and services they buy, the rate of that inflation is significantly higher than that described by the Consumer Price Index (CPI). Over several recent years, for example, the Higher Education Price Index (HEPI), which tracks on a national level the goods and services purchased by universities, has increased at a rate nearly double that of the CPI. Chart 2, which shows the relative components of the two indices, illustrates why inflationary pressures on universities are fundamentally different than those on individual consumers. Since higher education is by definition a labor-intensive industry, a very large fraction of the inflationary pressure is in the form of compensation. Pitt is unfortunately lagging behind peer institutions in providing competitive salaries for its faculty. Compared with other AAU public research universities, Pitt has lost substantial ground in the annual rate of salary increases for its faculty at all ranks. From 1995 to 2000, Pitt was only able to increase the salary of its professors by a cumulative 12.6% compared to the average 22.5% at the other 32 public research universities in the AAU; similar discrepancies exist for associate and assistant professors. A continuing salary disparity will make it increasingly difficult to recruit and to retain the quality of faculty the University requires to remain competitive over the long run. This problem is exacerbated because of the type of faculty that the University must primarily recruit because of its program emphases-high quality researchers and teachers in science and engineering, the professions, and health care.

One of the most telling examples of the unique inflationary pressures on universities is in library materials: scientific journals have increased in cost by 70% over the past five years, and electronic resources, on which only $120,000 was spent in 1995, will cost nearly $1,400,000 this year. These costs are in addition to the traditional collection development expenses.
br> Over the past twenty years, inflation as measured by the HEPI has increased faster than the increase in the Commonwealth allocation by a cumulative 18% (see Chart 3). It would now require an additional $24,000,000 in Commonwealth funding merely to accommodate the inflationary increase that the University has experienced.

Programmatic Structure and Institutional Mission

All public research universities have varied and complex missions. Pitt shares these missions, but it is relatively unique in its academic program mix, with a heavy emphasis upon graduate and professional education. Such education is more expensive, particularly in the health sciences, both in terms of the direct instructional costs and the associated financial aid required to attract talented students. Since many of these students traditionally choose to live and work in the area after graduation, Pennsylvania has benefited substantially from their enrollment at Pitt. But the fact that 25% of the University's total enrollment is at the graduate and professional level is a substantial cost. Were Pitt structured more like other public research universities, with 85% to 90% of its enrollment at the undergraduate level instead of 75%, revenues and expenses would be structured very differently.

Urban Environment

The city of Pittsburgh is a wonderful location for a university, and the vibrant quality of urban life attracts both students and faculty. But it is also inherently more expensive a place in which to live, work, and do business. The cost of talented employees, particularly in technical areas, is high as competition for their services increases; the higher cost of living puts pressure on all salaries; labor costs in areas like construction, already relatively higher, are increasing rapidly; utilities and services cost more than in more rural areas. The reverse of this situation, of course, is the remarkable contribution the University makes to the economic life of Pittsburgh and southwestern Pennsylvania. The salaries that the University pays are primarily to Pennsylvania citizens; the supplies that it buys are largely from local companies; the recipients of its services are generally nearby; the companies that are created through its technology transfer are primarily Pennsylvania companies. The benefit of the presence of the University to Pennsylvania is enormous.

Impact of Cost Drivers on Tuition Policy

Not surprisingly, the impact of Commonwealth funding policies, quality improvements, inflationary pressures, academic structure, and location on University tuition is profound. In 1975, the Commonwealth provided 32% of the University's revenue and tuition only 21%. By 2000, the Commonwealth's contribution had declined to 15% and tuition had risen to 25%. For 2001, despite the significant increase in the Commonwealth appropriation, it will only provide 14% of total revenue. The University has worked extremely hard to increase all of its revenue sources, as Chart 4 illustrates. As a result of these efforts, the percentage of total University revenues that derive from tuition has steadily declined from a high of 29% in 1985 to a projected 24% in 2001.

University Investment Strategy

To understand our current tuition structure, two factors have to be particularly emphasized: the significant quality investments that the University has made in its programs and services; and the extent to which it has maintained access by increasing financial aid.

The Cost of Quality



The inflation indices by design exclude improvements in quality. The University has not, however, been standing still during this period, particularly during the past five years. The investments in quality have been dramatic and significant, totaling in addition to the extensive reallocations that are part of the regular budget and planning process, a specifically identifiable $32,100,000. Were these targeted improvements deducted from the tuition revenue, which total $56,600,000, the net revenue that would remain for other institutional purposes has been only $24,500,000. In other words, 2.5% of the average 4.4% annual tuition increases since 1995 has been directed to funding these specific quality improvements.

The Cost of Access

The University is committed to ensuring access to qualified students. Financial aid increases that have been funded within the budget during the last six years total $22,800,000. Since accounting rules require the University to report tuition revenue as a net of financial aid, the actual tuition revenue that the University has received as a result of its rate increases since 1995 is not the gross tuition revenue of $56,600,000 but the net tuition revenue of $33,800,000. The impact of this additional financial aid has therefore been to reduce the effective tuition increase from an annual rate of 4.4% to an adjusted rate of 2.6%. If one adds the quality improvements to the financial aid increases, they account for almost the entire tuition increases over the past six years. Chart 5 shows the details of the analysis.

Because of the relationship of adequate financial aid to access, it is worth looking at how the University allocates its financial aid resources. Since a large fraction of the University's enrollment is graduate and professional, a significant proportion of its aid was traditionally expended on those students. In 1995, for example, the University budgeted 77% of its total financial aid--$30,600,000--on graduate and professional students. Approximately $9,000,000 was directed at undergraduate students. Because of the University's renewed commitment to undergraduate education, it has increased substantially the resources dedicated to undergraduate financial aid. The result is that for 2001, the budget for undergraduate financial aid has grown to $21,900,000. The annualized rate of increase for budgeted undergraduate financial aid over the past six years has been 23.5%; during the same period, graduate financial aid has increased at an annualized rate of only 4%. As a result of this differential growth rate, in 2001 undergraduate financial aid constitutes 36.6% of total institutional aid, up from 23% in 1995. Both the substantial increase in dollars and the change in their distribution demonstrate the commitment of the University to ensuring access to undergraduate students. University financial aid, coupled with state and federal aid programs (Pitt students receive approximately $30,500,000 in federal and state grants and $134,400,000 in loans), make Pitt highly affordable, particularly in the context of the significant improvements in quality. The value of a Pitt education, relative to its cost, has clearly increased substantially.

Pitt and the New Economy

The new economy Pennsylvania is developing is based on knowledge, discovery, innovation, and internationalism, all of which are at the core of the programs of the University of Pittsburgh. The achievement of that new economy requires continued investment by the Commonwealth to ensure that Pitt provides the talented graduates with the necessary skills and houses the creative faculty with the ability to innovate. One small example of the new costs that Pitt is bearing as part of its partnership with the Commonwealth is reflected in its annual expenditures in the area of technology transfer, a vital component of the new economy, which has increased from less than $400,000 in 1995 to nearly $2,500,000 in 2001. Such an investment will pay off handsomely, but the resources required to support such growing levels of investment must continue to be forthcoming if the full potential of the partnership is to be achieved.

Attachments

Robert F. Pack
August 23, 2000