Monday, September 1, 2014

Policy-Induced Death Spirals - The PASSHE Story - Part 8

PASSHE Money-Hoarding Continues Even as More Death Spirals Loom

Two weeks ago, we noted that Board of Governors Policy 2011-01: University Financial Health contained two totally contradictory provisions.
On the one hand, the policy requires each PASSHE university to maintain a “fund balance,” a.k.a., “unrestricted net assets” balance, of between 5% and 10% of annual revenue.  In effect, this provision requires universities to maintain what might be called a “savings account,” or what less charitable critics might call a “slush fund.”  But in any case, this provision of the policy puts limits on both how small, as well as how large this fund balance should be, with 10% of annual revenue being the policy maximum.
On the other hand, that same policy requires each PASSHE university to maintain an annual “operating margin” of between 2% and 4% of annual revenue, meaning that universities are directed to spend only 96% to 98% of their annual revenue.  As a result, universities complying with the “operating margin” provision of the policy will be adding from 2% to 4% of annual revenue to their fund balances each and every year and will soon violate the 10% policy maximum required by the “fund balance” provision.
The first provision limits the maximum amount the universities are permitted to have in their fund balances; but the second provision forces them to put money into their fund balances every year! 
Since it is impossible to satisfy both provisions of that BOG policy every year, we posed this question:  “In view of the contradictions, one wonders how the PASSHE Board of Governors and the Office of the Chancellor ever intended to administer such a conflicted policy.”  We then offered the following answer:

“The data suggest that they avoided all contradictions by simply enforcing only one-half of the policy (operating margins) while ignoring the other half (fund balance limits), thereby encouraging still more and more PASSHE money-hoarding.”
That answer was based on official PASSHE fund balance data that ended with fiscal year 2012, the first year since BOG Policy 2011-01 went into effect.  We recently obtained 2013 Right to Know information from PASSHE that confirms PASSHE is enforcing the operating margin requirement while simultaneously ignoring the fund balance requirement, with the predictable result—still more PASSHE money hoarding.
PASSHE Fund Balance and Operating Margin Data for FY 2013

The figures cited below regarding PASSHE fund balances and operating margins are taken from documents provided in response to two recent RTK Requests to PASSHE. ¹ˉ²

PASSHE’s total fund balance is the sum of fifteen (15) different fund balances, including one for each of the 14 universities, plus a fifteenth entity known as “the Board of Governors plus the Office of the Chancellor,” or the (BOG+OOC) fund balance for short.  Between 1993 and 2013, PASSHE’s total fund balance grew exponentially³ from a low of $120 million in 1995 to a high of $597 million in 2013, corresponding to an average annual growth rate of 9.32%/year for 18 years, a rate which if continued, would cause PASSHE’s total fund balance to double to $1.2 billion in just seven and one-half more years.
Despite BOG Policy 2011-01 which purportedly restricts individual PASSHE universities to fund balances between 5% and 10% of annual revenue, official PASSHE data show⁴ that not a single PASSHE university in FY 2013 had a fund balance that fell in the required range!  One university had a fund balance below the 5% minimum, and 13 other universities had fund balances in excess of the 10% maximum.  The data show that the fund balances for those 13 PASSHE universities range from a low of 12.2% to a high of 59.3%, with a PASSHE 14-university average of 36.4%.
The fund balance history for the entity known as (BOG+OOC) is even more telling since, unlike the 14 universities, the maximum annual revenue permitted to that cost center is limited by law (Act 188) to one-half of one percent⁵ of PASSHE’s total operating budget, which is currently about $1.5 billion. One-half of one percent of that figure is about $7.5 million most of which—one would expect—is needed to pay for PASSHE’s many employees in Harrisburg, with little left over each year to put into a fund balance. 
But official PASSHE data show⁶ since 1998, the (BOG+OOC) fund balance has routinely reached levels higher than PASSHE’s legally-permitted annual revenue.  In fact, in 2005, the (BOG+OOC) fund balance reached the astronomical figure of $68 million.  That 2005 fund balance figure is nine times higher, and the 2013 figure is 4.5 times higher, than the maximum permitted annual revenue to (BOG+OOC).
The future has already arrived. It's just not evenly distributed yet.”
                                                                                                               William Gibson

PASSHE’s total fund balance now approaches a staggering $600 million, while other recent PASSHE data regarding university operating margins suggest that the very same policy-induced financial death spirals that struck six PASSHE universities in the last two years are now looming over other PASSHE universities.
In particular, operating-margin data for fiscal years 2011, 2012 and 2013 reveal⁷ that something ominous has suddenly begun to occur to a majority of the 14 PASSHE universities.  In 2011 and 2012, only one (1) university recorded a negative operating margin, and the average operating margin for all 14 universities in both years was an identical 5.19%, well above the required “maximum” of 4.00%.

But in 2013, eight (8) PASSHE universities recorded negative operating margins, and the 14-university average plunged to 0.55%, well below the minimum of 2.00% required by BOG Policy 2011-01.

This sudden change in the average operating margin for the 14 PASSHE universities—from 5.19 to 0.55 in a year—suggests PASSHE’s money-hoarding stratagem is about to collapse in the face of economic reality.  Recall that “the PASSHE system as a whole has been sinking, “financially speaking” since 2002.”  And the Board of Governors’ ill-advised policy of controlling tuition rates for political, as opposed to economic, reasons will continue to drive PASSHE universities into death spirals not of their own making.     

Monday, August 25, 2014

Policy-Induced Death Spirals - The PASSHE Story - Part 7

Widely Different University Cost Structures

While it is true that each of the 14 PASSHE universities is subject to the same laws, policies and labor contracts, it is also true that those laws, policies and labor contracts allow for variances at the individual PASSHE universities—and those variances can and do lead to widely different university cost structures.

Act 188

Consider this excerpt from Act 188, Section 20-2010-A. Power and Duties of Institution Presidents:
“Subject to the stated authority of the Board and the council, each president shall have the following powers and duties:

(1) Except insofar as such matters are governed by collective bargaining agreements entered pursuant to the act of July 23, 1970 (P.L. 563, No.195), known as the “Public Employee Relations Act,” and subject to the policies of the Board, to appoint such employees, professional and non-instructional, graduate assistants, etc. as necessary, to fix the salaries and benefits of employees, professional and non-instructional, and to establish policies and procedures governing employment rights, promotion, dismissal, tenure, leaves of absence, grievances, and salary schedules.” (Emphasis added.)
BOG Policy 1984-14-A: Terms and Conditions of Employment of Senior Policy Executives

Act 188 grants individual university presidents the authority to “fix the salaries” of employees, subject only to existing collective bargaining agreements and Board of Governors (BOG) policies.  In practice, this authority is handled differently for unionized and non-unionized PASSHE university employees. In both cases, however, presidents retain the discretion and authority to “fix the salaries” of employees. 
For managers, who are also said to be “non-represented” employees, presidents retain substantial discretion with regard to both the initial salary at the time of hire, as well as to the size of occasional salary increases, provided that they fall within an approved range set by Board of Governors’ policy.
For faculty, presidents exercise discretion over the starting salaries of new hires by selecting the initial “rank” and “step” on the CBA-approved faculty pay scale at the time of hire.  Though, after that, any future salary increases are determined by other provisions of the Collective Bargaining Agreement.
However, because raises in faculty salary tend to be negotiated as percentages, total faculty salaries tend to compound themselves exponentially over time, meaning that even slight differences in starting faculty salaries at one university will, over time, compound themselves into substantially higher total salaries which, in turn leads to widely different university cost structures, as official State data show.   

The Joint State Government Commission (JSGC)

The JSGC is a bipartisan and bicameral research agency serving the General Assembly of Pennsylvania.  The Commission produces an annual report entitled “Instructional Output and Faculty Salary Costs of the State-Related and State-Owned Universities.  As suggested from its title, that report¹ compares the salary costs of eighteen (18) universities that receive appropriation funding from the Commonwealth of Pennsylvania: the 14 PASSHE or “State-Owned” Universities; and Pennsylvania’s four “State-Related” universities, Penn State, Pitt, Temple and Lincoln Universities.
The attached spreadsheet² is based on a the annual report of the JSGC issued in February of 2013 which includes data for the six Fiscal Years 2007, 2008, 2009, 2010, 2011, and 2012.  Both the JSGC report¹ and the spreadsheet provide faculty salary data for the eighteen universities listed in the report.   
The spreadsheet and the JSGC report on which it is based reveal that the average faculty salary costs over that six-year period differ greatly, both within PASSHE, as well as between the PASSHE six-year average and the six-year averages of Penn State, Pitt, Temple and Lincoln Universities.
These results provide compelling evidence that the cost structures of the fourteen PASSHE universities differ significantly, with the six year average salary ranging from 7% above the PASSHE average to 11.6% below the PASSHE average.  And since the faculty at all fourteen PASSHE universities are paid according to the same pay scale in the collective bargaining agreement—once the initial salaries at the time of hiring have been “fixed” by presidential appointment—any large difference in average faculty salaries is typically attributable to variations in the starting salaries at the time of faculty hiring. The only exception is the case of an aging faculty in which most, if not all, faculty are approaching the end of their careers. 
The Role of Pennsylvania Geography

It is a fact of history and geography that most, but not all, of the PASSHE universities are located in rural areas where the employment opportunities for spouses and family members of new faculty hires can be very limited.  For this reason, PASSHE universities located in in the most rural areas of the State must offer higher starting salaries to attract the best new faculty members.  Universities closer to major cities also find it easier to attract good faculty members because of their proximity to the research universities that produce large numbers of the doctoral degree graduates that the PASSHE universities seek to hire.
PASSHE universities close to urban areas also have the added advantage that comes with proximity to large population centers, i.e., proximity to more potential students.  This enables those universities to more readily grow their student enrollments, which also grows their operating revenues and helps them forestall the financial death spirals that six of the PASSHE universities have already encountered.
Recall, that the only strategy that can forestall PASSHE’s policy-induced death spirals indefinitely is that of steadily growing enrollments—which for various reasons is unsustainable—meaning that indefinite postponement of the mission failure and bankruptcy that defines PASSHE death spirals is not possible.
Universities with lower cost structures are often the universities with the largest fund balances, meaning that their ability to stay afloat longer than other PASSHE universities should come as no surprise.  But the ultimate fate of each of the 14 PASSHE universities—imminent mission failure and bankruptcy—is preordained unless certain BOG policies, as enumerated in Privatization Without a Plan,³ are changed.  And so far, there is no evidence to suggest the needed policy changes are even beginning to happen.          


Monday, August 18, 2014

Policy-Induced Death Spirals - The PASSHE Story - Part 6

There are at least three reasons why some PASSHE universities appear to be doing well—financially speaking—while others have been forced to publicly declare financial distress.  These include: 1) PASSHE’s Flawed Business Model; 2) Years of PASSHE Money-Hoarding; and 3) Widely Different University Cost Structures.  We already discussed the first of these reasons last week; we will discuss the second reason this week; and we will discuss the third reason next week.

A Metaphor for PASSHE’s Business Model
As shown last week, growing enrollments can keep a few of the 14 universities temporarily solvent, but only by impoverishing all the others.¹ This situation is occurring only because the PASSHE system as a whole has been “sinking,” financially speaking, since 2002.  An apt metaphor for the few “temporarily-succeeding” PASSHE universities might be a few dogged passengers climbing on the backs of their less fortunate companions to reach the higher decks on what is, unfortunately, a sinking ship. 

Years of PASSHE Money-Hoarding
It is quite obvious from official PASSHE data² that some of the PASSHE universities have been hoarding large sums of money for many years—with the tacit approval of the Board of Governors and the Office of the Chancellor—and at dollar levels and percentages of revenue that are clearly much higher than those permitted by BOG Policy 2011-01: University Financial Health.³ In fact, 12 of 14 PASSHE  universities in FY 2011 showed fund balances higher than, and in some cases much higher than, 10%. 
From its beginning on July 1, 1983 until passage of this BOG policy on April 7, 2011, PASSHE operated without a written policy on the amount of money that individual PASSHE universities should retain in “fund balances.”  By definition, a fund balance operates the same as a savings account attached to a checking account does.  So if your total deposits for the month exceed the total of checks written that month, the surplus would go into your “savings account,” or “fund balance.”  If for next month the total of your checks exceeded your deposits, you would ‘dip into’ your fund balance to cover the shortfall.
In the early 1990s, PASSHE circulated a “Draft Policy” on fund balances that required the universities to maintain a fund balance between 4% and 8% of the current year’s revenue.  And although that draft policy was never promulgated, BOG Policy 2011-01 formally mandated a slightly higher fund balance range—between 5% and 10% of the current year’s annual revenue.
Strangely, this same BOG Policy 2011-01 also calls for maintenance of an annual “operating margin” of between 2% and 4% of revenue.  This means that presidents are expected each year to spend only 96% to 98% of their current revenue.  Note the peculiar and inherent contradiction between the “fund balance” provision and the “operating margin” provision of the very same BOG policy.  The first limits how much money you can save going forward; and the second effectively forces you to save every year!
Any university that successfully met the operating margin requirement each year (saving between 2% to 4% of annual revenue) would inevitably violate the fund balance requirement (keeping the fund balance between 5% and 10% of current revenue), and vice versa.
For example, a university starting with a “minimal” 5% fund balance, and a 2% to 4% operating margin would exceed the 10% fund balance limit in just two or three years!  A university at the maximum 10% fund balance would immediately go over that limit the first time they recorded even the minimum 2% operating margin!  So in order not to violate the maximum 10% fund balance limit, such a university would have no choice but to violate the minimum 2% operating margin requirement! 
In view of the contradictions, one wonders how the PASSHE Board of Governors and the Office of the Chancellor ever intended to administer such a conflicted policy.  The data suggest that they avoided all contradictions by simply enforcing only one-half of the policy (operating margins) while ignoring the other half (fund balance limits), thereby encouraging still more and more PASSHE money-hoarding. 
The PASSHE BOG Ignores the Fund Balance while Enforcing the Operating Margin Provision

Between FY 1997 and FY 2011, the total unrestricted net assets² (fund balance) for PASSHE, including the 14 universities and the entity known as the BOG-OOC, grew by a whopping 261% (from $141,693,575 to $511,028,132), meaning PASSHE’s total fund balance grew at an average annual rate of 9.61% per year for 15 years.  But that was before the new BOG policy took effect.
BOG Policy 2011-01 took effect on July 1, 2011, the very first day of the 2011-12 fiscal year.  While one might have expected to see at least a slowing down of the rate of growth, if not an actual decrease in the size of PASSHE’s fund balance, official PASSHE data show that during the BOG Policy’s first year, PASSHE’s total fund balance grew to $584,209,183, a one-year increase of $73,181,051, or 14.1%.  This one-year increase was even greater than PASSHE’s average increase during the previous 15 years.  Even at the lower (9.61%) rate of annual growth, PASSHE’s fund balance could top $600 million for FY 2013.

Direct Evidence for the Impoverishment of the Many by the Few
Recent news articles have described a plan that would enable West Chester, Bloomsburg and possibly other PASSHE universities with more than 7,000 students to move to state-related status.⁴ A fund balance comparison for the 14 PASSHE universities for FY 2012 and FY 2013 is very telling.

Financial records recently obtained by a Right to Know request from PASSHE⁵ confirm that between fiscal years 2012 and 2013, West Chester and Bloomsburg universities together added a total of $18.3 million to their unrestricted net assets (fund balances).  At the same time, Clarion, Edinboro, Mansfield, East Stroudsburg and Slippery Rock universities subtracted a total of $12 million from their fund balances.  This is direct evidence for how the PASSHE allocation formula shifts funds to a few PASSHE universities with growing enrollments, while simultaneously impoverishing five PASSHE universities that had publicly declared financial distress in the fall of 2013.


Monday, August 11, 2014

Policy-Induced Death Spirals - The PASSHE Story - Part 5

Last week we cited the apparent contradiction between: 1) Some PASSHE universities declaring severe financial distress, and; 2) Other PASSHE universities touting great financial success.  This week we will explain how both of those things are direct consequences of PASSHE’s current business model.
PASSHE’s Current Business Model

PASSHE’s business model has been in place since July 1, 1983—the day Act 188 took effect.  From that day until the present time some 30 years later, all key decisions affecting all 14 PASSHE universities have been made by 174 officials sitting on PASSHE’s 15 governing bodies, which includes one overall Board of Governors (BOG) with 20 members, and 14 local Councils of Trustees (COTs) with 11 members each.

The version of the bill that would later become law as Act 188¹ featured a “strong Board/weak Council” structure.  That is, almost all key decision-making authority was reserved to the Board of Governors, with very little authority granted to the local Councils of Trustees.

As evidence for the “weak Council” assertion, consider that under Act 188, Councils of Trustees get to approve all university financial expenditures—but weeks or months after they have already been made!  The greatest authority granted to Councils of Trustees may be the power to conduct annual evaluations of sitting presidents or, as vacancies occur, to conduct national searches to identify three unranked finalists for the job. But in both cases, their recommendations go to the Board of Governors for decision.

According to Dr. James McCormick, PASSHE’s first Chancellor (1984-2001), earlier drafts of the Act 188 bill had eliminated local ‘boards of trustees” entirely, even though they had previously existed at each one of the 14 PASSHE campuses for many years.  As Dr. McCormick explained it to the 14 University presidents, the decision to reinstate the 14 local “councils” (not “boards”) was made to preserve the 154 patronage opportunities that would otherwise be lost to politicians of both parties if the councils were totally eliminated.  Also, in Pennsylvania, a “council” ranks lower on the power hierarchy than a “board.”  

Act 188 Created PASSHE as Public Corporation

It is important to note that prior to the passage of Act 188 the 14 “state-owned” universities were part of the executive branch of Pennsylvania State government, with the presidents reporting directly to the Secretary of Education in the Governor’s Cabinet.  Also, prior to Act 188, the university presidents were themselves political appointees, nominated by the Governor and confirmed by the State Senate.

Act 188 created PASSHE as a ‘public corporation,’ meaning that the 14 presidents would, for the first time, no longer be political appointees. Rather, they would be selected through national searches, and would report to a Chancellor who would also be selected by means of a national search.

And while these aspects of the new law would turn out to be huge improvements, and while the law granted a much-needed taste of separation from direct political control, the public corporation now known as PASSHE would itself be governed by a 20-member Board of Governors whose membership consisted of five elected officials and 15 political appointees.

So while the presidents would no longer be political appointees, the presidents and universities would report to a chancellor who, in turn, reported to a board consisting of elected and appointed officials.

It was thought that Act 188 would provide a buffer between the 14 universities and direct political control sufficient to allow the PASSHE universities and PASSHE students to thrive.  In fairness, the law worked perfectly well for its first 19 years (1984-2002), but it has increasingly failed to work since 2002.²

But that failure did not occur because the law was changed—because it wasn’t—but rather because the Board of Governors since 2002, with its slowly evolving membership, has decided not to deliver the Act 188 statutory purpose of the PASSHE universities: “High quality education at the lowest possible cost to the students.”  Instead, the Board of Governors since 2002 has adopted a policy to maintain the lowest possible tuition (i.e., sticker price) rather than the lowest possible cost to the students (i.e., bottom line). 

This failure by the BOG to follow the law as written—when combined with the steady 30-year decline in State funding—has essentially starved the PASSHE system of universities for the funds needed to deliver PASSHE’s Act 188 statutory purpose, largely accounting for the BOG’s failure to deliver that purpose.
But the “Allocation Formula” which distributes the pool of State appropriation to individual universities basically sets the funding shares to the 14 universities so as to match their respective enrollment shares.  So if a few universities are able to grow their enrollments, they will effectively impoverish those that can’t, speeding up their mission failure and financial demise, and only temporarily postponing their own.  The data show unequivocally that without steadily increasing enrollments—which are not sustainable—each and every PASSHE university is headed for mission failure and bankruptcy in the near term. 
Punctuated Equilibrium

Since it began in FY 1984, PASSHE has enjoyed three decades of “policy stasis,” even as the underlying facts on the ground were dramatically changing.  Consider, for example: 1) FTE enrollments increased by 58%; 2) State funding per FTE student fell by 50%; 3) the State’s share of PASSHE’s budget fell from 63% to 25%; and 4) the share paid by students, parents and alumni donors shot up from 37% to 75%.³ 

During those three decades, PASSHE’s Act 188 policy framework was arguably one of the few things that didn’t change during that period.  And like steadily grinding tectonic plates, this ‘policy/reality disparity’ is a grinding inconsistency that portends powerful sudden change.

Pennsylvania’s key elected officials are not only deciding (legitimately) that State appropriation funding to PASSHE must be reduced, for valid demographic and economic reasons, they are also deciding (quite illegitimately) that PASSHE tuitions must also be kept low, for purely political reasons.

Taken together, these two decisions have created the “death spirals” that five PASSHE universities have recently encountered, and that the other nine will find it increasingly unable to avoid.  


Monday, August 4, 2014

Policy-Induced Death Spirals - The PASSHE Story - Part 4

Possible Faculty Layoffs
As stated in my July 14, 2014 blog post entitled “Policy-Induced Death Spirals - The PASSHE Story:
“In the four month period between August and December of 2013, five of 14 PASSHE universities— Clarion,¹ Edinboro,² Mansfield,³ East Stroudsburg and Slippery Rock—publicly declared financial distress, ballooning deficits and layoffs of tenured faculty.” 
On July 30, 2014, an article appeared in the Post-Gazette⁶ with the following headline: “Notices of possible faculty layoffs go out at five of Pa’s 14 state-owned universities.” The following five PASSHE universities were identified in that article: Clarion, Edinboro, Cheyney, East Stroudsburg and Mansfield.
This latest article may be confusing to some people because, at first glance, it may seem like “old news.” But it is not old news; it is an extension of a grim and unnecessarily tragic story that will linger on the campuses and in the media in the months and years ahead.

Other PASSHE universities, beyond the six that have so far done so, will also announce faculty layoffs as each of the eight remaining universities face their ultimate preordained fate—which is mission failure and bankruptcy in the near term.  But in fairness to the leaders on the fourteen individual PASSHE campuses, the absolute truth of their situation isn't known or appreciated: 
The 14 PASSHE Universities are Trapped in a Death Spiral Not of Their Own Making
There is a big difference between human events and the newspaper stories about them; even when the facts are accurate, the underlying reasons for those facts are rarely understood or reported.
For example, a comparison between the news stories from last year and this year reveals important facts, namely that four of the five universities—Clarion, Edinboro, Mansfield and East Stroudsburg —were included in “potential faculty layoff stories” both years while for 2014, Cheyney replaced Slippery Rock as the fifth PASSHE university on that unfortunate list.
As well, other recent news stories have cited the fact that West Chester University is doing so well in terms of its enrollments and finances that its backers are proposing that it—and possibly a few other PASSHE universities with strong finances and enrollments over 7,000 students—become “state-related.”
One wonders, of course, how it is possible that four of the fourteen PASSHE universities could be facing potential faculty layoffs two years in a row—an obvious symptom of severe financial distress—while one or more PASSHE universities are contemplating joining the ranks of the “state-related” and largely independent Pennsylvania institutions that include Penn State, Pitt, Temple and Lincoln Universities.  One way to make sense of this obvious conundrum is to think of it in terms of “punctuated equilibrium.” 

Merriam-Webster defines “equilibrium” as “a state of balance between opposing forces.”  Such equilibrium can be either static or dynamic.  For example, an airplane sitting on a runway is in static equilibrium because the downward force of gravity on the plane (its weight) is exactly counterbalanced by the equal and opposite “normal” force of the runway pushing upward on the plane.  That very same airplane flying level at 35,000 feet and 600 miles per hour is in dynamic equilibrium in the sense that the downward weight of the plane is now counterbalanced, not by the runway, but by the upward lift on the plane provided by its airfoil wings.
Equilibrium can also be stable or unstable.  A marble in the bottom of a parabolic shaped well is in stable equilibrium at the bottom of the well.  A small push to one side or the other allows the marble to return to its original equilibrium spot at the bottom of the well.  But a marble will balance—at least temporarily—at the top of an inverted parabolic well, with the upward and downward forces totally balanced.  But in that case, the slightest push to one side or the other causes the marble to cascade rapidly away from its equilibrium spot. 
Punctuated Equilibrium

According to Merriam-Webster, “punctuated equilibrium” is characterized by “long periods of stability with short periods of rapid change.” This concept is now familiar from many different branches of both the physical and social sciences.  For example, in geology, tectonic plates and volcanos can exist for eons in quiet states of calm equilibrium, and then suddenly burst out into violent earthquakes or eruptions.
In evolutionary biology, the concept of punctuated equilibrium helps paleontologists understand the fossil record which empirically suggests very strongly that species exhibit extremely long records of “stasis,” interrupted by extremely brief periods of “rapid change.”
In the social sciences, punctuated equilibrium also helps to understand how changes in public policy can come about.⁷ As with the physical science examples just cited, the evidence suggests that social systems also tend to have long periods of stasis, punctuated by sudden shifts in policy.  This in turn suggests a similarity between the “stickiness” of tectonic plates that causes an accumulation of pent-up energy, and the social stickiness of organizations that, benefitting from the status quo, resist any loss of power and perks until that pent up energy becomes great enough to create a new status quo.
Next week we will continue to show how the obvious contradiction in the simultaneous existence of two polar opposites can be possible—namely how: a) some PASSHE universities can be declaring financial distress; while b) other PASSHE universities are touting financial success.  As we will see, the apparent contradiction, yet to be clarified by the media, can be readily explained via the concept of punctuated equilibrium.⁸ 
¹  Penn Live, August 16, 2013.
², September 11, 2013.
³ Penn Live, September 26, 2013., October 30, 2013. Tribune-Review, December 24, 2013.
Baumgartner, Frank and Bryan D. Jones (1993). Agendas and Instability in American Politics. Chicago: University of Chicago Press.
⁸ This note will acknowledge and thank a faithful reader of this blog for suggesting this concept.  

Monday, July 28, 2014

Policy-Induced Death Spirals - The PASSHE Story - Part 3

Last week’s blog post included the following assertion:  “1) PASSHE has not established conditions and procedures under which its mandated statutory purpose can be realized; 2) PASSHE has not been accomplishing its Act 188 statutory purpose since 2002; and 3) by failing via its new Strategic Plan to commit publicly to its statutory purpose, PASSHE is clearly not committed to achieving its statutory purpose anytime soon.”  This week we will address the obvious question:

Why isn’t PASSHE committed to achieving its Act 188 statutory purpose?
The short answer to this question is ‘divided loyalty,’ otherwise known as ‘conflict of interest,’ which Merriam-Webster defines as: “A conflict between the private interests and the official responsibilities of a person in a position of trust.”
The best evidence for the validity of this answer was also provided last week as follows:
The most destructive policy decision by the PASSHE Board of Governors has been its insistence since 2002 on maintaining the lowest possible tuition, i.e., sticker price, rather than the lowest possible “bottom line.”  This perverse decision is contrary to law¹ and, together with the rapid defunding of PASSHE universities by the State, has created the death spirals for six PASSHE universities, with eight more soon to follow. That same decision singlehandedly and simultaneously defeats both ends of Act 188’s promise, by denying funds needed for both “high quality education” and “the lowest possible cost to the students.”   Recall also from last week’s blog post that:
“According to Act 188, the enabling legislation that created the PASSHE system of 14 universities, “Its purpose shall be to provide high quality education at the lowest possible cost to the students.” From the Merriam-Webster dictionary, when used in law the word ‘shall’ expresses what is mandatory.”
To understand how and why the PASSHE Board of Governors (BOG) could have failed to deliver the statutory promise of Act 188—when doing so was made mandatory in Act 188 by the Legislature’s use of the word “shall”—one must look to Act 188 itself, as described in Privatization Without a Plan

Act 188

In simple terms Act 188 says—when it comes to funding—that: 1) the Governor and the Legislature get to decide how much State support the Commonwealth can afford to provide to PASSHE in any given year; and 2) The Board of Governors then gets to decide how high the tuition rates must be set in order “To do and perform generally all of those things necessary and required to accomplish the role and objectives of the System,” as the BOG is legally required to do by Section 20-2006-A(a)(15) of Act 188.¹  And, presumably, accomplishing the Act 188 statutory purpose of the PASSHE universities: To provide “High quality education at the lowest possible cost to the students,” would be one of the first “things necessary and required to accomplish the role and objectives of the System.”

Although the Board of Governors has the legal authority, from Section 20-2006-A(a)(11) of Act 188, “To fix the levels of tuition fees,” and despite the fact that the law does not require or even mention any role for the Governor in the tuition-setting process, the Board of Governors has for at least the past 20 years anxiously awaited—together with the 14 PASSHE university presidents, I included—the Governor’s word as to the maximum allowable tuition rate increase for that year! 
Why would 20 different Boards of Governors with slightly varying membership defer every year for at least 20 years to five different governors, both Democrat and Republican—when it came to one of their most important sworn duties—to set tuition rates in such a way as to provide “high quality education at the lowest possible cost to the students?”  Why would they let the Governor decide that, when Act 188 gives that responsibility not to the Governor, but to the Board of Governors?

While the reason must clearly be political—since it always involves the Governor—it is just as clearly not partisan—since it involved governors from both parties serving roughly equal time in office in the 20-year period between 1992 and 2012.
What went wrong?

Act 188 created a two-step process for the annual funding of the 14 PASSHE universities, and from the very beginning, that process was predicated on the need for two very different sources of required funds: 1) State appropriation revenue, provided by the taxpayers; and 2) Tuition+Fees+Other revenue, provided by the PASSHE students, parents and private donors, primarily PASSHE alumni. 
In terms of the annual PASSHE budget share, historically speaking, the State provided 90% in 1950, 63% in 1984, and 25% in 2013, while the budget share provided by students, parents and alumni rose from 10% to 37% to 75%!  This huge shift in the costs of “public” higher education from the State to the students, parents and alumni donors has been called “privatization without a plan.”  And clearly, this cost shifting has been happening relentlessly in Pennsylvania and in many other states for decades.
Under Act 188’s statutory funding process, Pennsylvania’s elected officials get to decide how much appropriation the State can afford to provide to PASSHE in any given year, and then the Board of Governors gets to decide what the PASSHE tuition rates must be in order to achieve PASSHE’s statutory purpose: “High quality education at the lowest possible cost to the students.”
The authors of Act 188 apparently never anticipated that elected officials would insert themselves into the tuition-setting process, with the unfortunate result that the statutory purpose of the 14 PASSHE universities since 2002 has been sacrificed to the political expediency of politicians from both parties. 
There is compelling public evidence that proves³ that, for the first 19 years (1984-2002) of PASSHE’s history under Act 188, the Board of Governors adjusted annual tuition rates so as to more than make up for the revenue lost through a steady decline in State funding.  But in the 11 years between 2002 and 2013, as the decline in State funding accelerated rapidly, the annual tuition rate increases were totally insufficient to overcome the losses in State revenue.
As shown in the attached chart³, half of the increase in the quality of the education experience delivered to the students by the good policy decisions of the Board of Governors in PASSHE’s first 19 years was eradicated by the poor policy decisions of the PASSHE Board of Governors in the last 11 years.         


Monday, July 21, 2014

Policy-Induced Death Spirals - The PASSHE Story - Part 2

Last week’s blog post contained this assertion: “The financial death spirals that have already claimed six¹ PASSHE universities, and will eventually claim all² fourteen, is caused by a defective business model that, in turn, is caused by years of well-meaning but destructive policy decisions at the System level that drive PASSHE’s flawed business model.”  This week’s blog post will address two key elements in this assertion.

A Defective Business Model

Neither a university nor a system of fourteen universities is a “business” but, like all educational institutions, they must pay their bills and otherwise conform to the laws of economics to achieve the purpose for which they were created.  The Middle States’ Association which accredits the PASSHE Universities affirms this inescapable reality³ in Standard 3: Institutional Resources:

“The human, financial, technical, facilities and other resources necessary to achieve an institution’s mission and goals are available and accessible.”
To gain and retain accreditation, Middle States requires the availability of financial and other resources, not because the colleges and universities it accredits are businesses, but rather because institutional purpose, mission and goals in higher education cannot be achieved without the requisite resources.
More specifically, Characteristics of Excellence, a key Middle States guiding document, states³ that to gain and hold accreditation, an institution must meet important criteria, including the following:
1)      that it has established conditions and procedures under which its mission and goals can be realized;
2)      that it is accomplishing its mission and goals substantially;
3)      that it is organized, staffed, and supported so that it can be expected to continue to accomplish its mission and goals.
According to Act 188, the enabling legislation that created the PASSHE system of 14 universities, “Its purpose shall be to provide high quality education at the lowest possible cost to the students.” From the Merriam-Webster dictionary, when used in law the word ‘shall’ expresses what is mandatory.
As many previous blog posts have shown, compelling evidence exists which documents the fact that the Act 188 statutory purpose of the PASSHE Universities: “High quality education at the lowest possible cost to the students” hasn’t been delivered by the PASSHE Board of Governors to the PASSHE students since 2002.  This means that PASSHE has failed to meet the first two Middle States’ criteria above.
The fact that PASSHE’s January 2014 strategic⁵ plan, its first strategic plan in five years, never explicitly mentions its Act 188 statutory purpose: “High quality education at the lowest possible cost to the students,” suggests that PASSHE is not committed to meeting the third Middle States’ criterion either.
The Bottom Line

1) PASSHE has not established conditions and procedures under which its mandated statutory purpose can be realized; 2) PASSHE has not been accomplishing its Act 188 statutory purpose since 2002; and 3) by failing via its new Strategic Plan to commit publicly to its statutory purpose, PASSHE is clearly not committed to achieving its statutory purpose anytime soon.

Years of Well-Meaning but Destructive Policy Decisions

College students and parents shopping for the best higher education bargain quickly learn that there is a big difference between tuition, i.e., “sticker price,” and “bottom line,” i.e., the actual cost of attendance to a particular student.  What they may not realize is that the difference between those two figures is actually made up by a combination of “scholarships” and/or “tuition discounts.”
True scholarships are funded by private donors, while tuition discounts are facilitated by the institutions themselves by means of a “High Tuition/High Aid” financial aid policy.  
Under such policies, the sticker price is set higher than the cost of educating one student.  In this way, families of students who can afford to pay the full sticker price do so, while families of good students who can’t afford to pay it are offered “institutional scholarships,” which are really tuition discounts—awarded to provide educational opportunity to students from families of lesser financial means.
“Institutional scholarships” are usually funded by a combination of endowments and tuition discounting.  
Endowments are typically pools of private donations that, properly invested, spin off scholarships each year in perpetuity.  Harvard University’s Endowment, which was $30 billion in 2012, is America’s  largest and, with a typical 4% spending rule, spins off $120 million in scholarships each and every year.   
For universities without endowments, however, the only other sources of funding for financially needy students would either be: 1) true scholarships, funded by private donors or; 2) tuition discounts, funded by the difference between sticker price and the average cost to educate one student, paid by families whose cost of attendance falls somewhere between the actual cost of attendance and full sticker price.
Act 188 Mandates the Lowest Possible Cost to PASSHE Students—Not the Lowest Tuition

The two ends of PASSHE’s statutory purpose, “high quality education,” and the “lowest possible cost to the students” constitute a significant promise that the Commonwealth of Pennsylvania made to PASSHE students when Act 188 became law.  The language in that law could easily have stated “at the lowest possible tuition” had that been the intent of the two houses of the PA Legislature when drafted, or of Governor Thornburgh when he signed the bill.  The plain language of the law makes it clear the intent of the law from the beginning was to provide high quality education at the lowest possible cost to the students, i.e., at the lowest possible “bottom line,” not at the lowest possible tuition, or “sticker price.”
The most destructive policy decision by the PASSHE Board of Governors has been its insistence since 2002 on maintaining the lowest tuition, i.e., sticker price, rather than the lowest possible “bottom line.” This perverse decision is contrary to law and, together with the rapid defunding of PASSHE universities by the State, has created the death spirals for six PASSHE universities, with eight more soon to follow. That same decision singlehandedly and simultaneously defeats both ends of Act 188’s promise, by denying funds needed for both “high quality education” and “the lowest possible cost to the students.”    
¹ Between August of 2013 and July of 2014, the six PASSHE universities that have publicly declared financial distress include: Clarion, Edinboro, Mansfield, East Stroudsburg, Slippery Rock and Cheyney.
² The remaining eight of the 14 PASSHE universities that have not yet declared financial distress include Bloomsburg, California, Indiana, Kutztown, Lock Haven,  Millersville, Shippensburg, and West Chester.