CALIFORNIA, Pa.—Public universities across the U.S. are arguing for freedom to reap more revenue and create more efficiencies to offset dwindling state dollars.

One way, they say, is to raise tuition. At California University of Pennsylvania, a 158-year-old state school serving 9,400 students, enrollment is rising for all but the poorest students, which, in part, has led to a novel idea: replace the "low tuition for all" policy with a market-rate policy.

University...