Universities say funding system broke, lawmakers disagree

It's a simple fact — $12 million is much bigger than $1.2 million.

That's why Oakland University President George Hynd and the Board of Trustees didn't have to really think about the rationale for increasing tuition by 8.48% last week and exceeding a state tuition cap. The Rochester school declined $1.2 million from the state in incentive money in exchange for getting $12 million in tuition revenue.

Eastern Michigan University made the same calculation in June — $1 million is much smaller than $10 million.

The simple math is a why university presidents across Michigan are coming to a similar conclusion: The incentive money attached to a state tuition cap and other performance measures put in place by Gov. Rick Snyder isn't a big enough carrot to keep tuition down.

If OU would have forfeited more money — like $6 million — for going over the cap, a different decision might have been made, Hynd admits.

University presidents said they think more schools will go with bigger increases in coming years unless a new funding system is put in place.

A completely new funding system isn't likely, but lawmakers say there will be talks this fall about tweaks, including increasing the penalty for exceeding the tuition cap.

"I think we've got to come back with some response to a tuition hike that is five times inflation," said state Rep. Al Pscholka, R-Stevensville, the chairman of the House appropriations committee and former chairman of the House higher education subcommittee. "I don't want us to overreact, but we need some response. We do need to put some teeth into it. I think we need to look at base funding and if they are going to increase tuition by X percent over cap, then we need to reduce the base funding. That's an option."

Snyder is taking a wait-and-see approach.

"The governor's office is always analyzing the impact of its initiatives and we will continue to monitor the role performance funding has played in holding down the cost of a college education for both new and returning students," spokesman Dave Murray said.

Hynd — and other university presidents — said they would like to see the funding formula looked at as well. They say they need more funding and blame state cuts — including a 15% cut in 2011 — for making these hikes necessary.

State Rep. Sam Singh, D-East Lansing, agrees more state funding is needed.

"I'm always disappointed by these increases, because you know they will impact students," said Singh, who serves on the state House's higher education subcommittee. "I'm not surprised though. There isn't enough resources dedicated by the state to higher education.

"I hope my colleagues won't overreact and hurt those institutions because it just hurts students."

OU's decision

Last Monday and Tuesday, Hynd and other OU officials spent the day on the phone, talking with lawmakers, trying to make the case for why they were about to exceed the state-imposed tuition cap.

The argument boiled down to numbers. The amount of money needed to do the things Oakland wanted to do — add faculty, increase staff, upgrade technology, improve facilities — was much greater than the $1.2 million being offered by the state under performance funding. An 8.48% tuition hike would raise $12 million, enough to get a good start on what a new strategic plan told them they needed to be doing.

"From a pure dollar point, it makes all the sense to go over the cap," Hynd said. "We're getting squeezed from both ends. The state, over a number of years, has disinvested in higher education, and even though they have added money back recently, still are underfunding us. Parents and students want us to keep costs low.

"I think there needs to be a much larger conversation about how the public wants to fund higher education."

Michigan has two ways of dividing up its pot of money headed to the 15 public universities.

The bulk of the money comes through what is known as the "base," which is money coming to the universities the same way it has been coming for decades. There's no formula for how the money is divided. The amounts were set decades ago in political deals and the differences between the universities have stayed mostly the same.

The amounts range from the $295 million headed to the University of Michigan to the $12 million earmarked for Lake Superior State University.

Then, additional money slated for the universities is divided up based on a formula that looks at performance measures like graduation rates, percentage of students getting Pell Grants and percent of budget spent on instruction, along with several other items. In order to qualify for that pot of money, universities have to stay under a tuition cap, set this year at 3.2%.

This year, $20 million — or a 1.5% increase in total higher education funding — was divided up using the performance funding

Under the formula, Grand Valley State University gets the biggest percentage hike — 3%; while Wayne State University gets the smallest — 0.4%. Two years ago, Wayne State gave up its performance funding in favor of an 8.9% tuition increase and received an additional $7 million in tuition revenue. This year, Wayne State settled for a 3.2% hike.

Snyder introduced the cap and the performance funding in 2012.

"The tuition cap was included because the governor wants to keep a college education in reach for all students," Snyder spokesman Murray said. "We know that many students are leaving college with significant debt. Michigan needs to attract more students to post-secondary education, and cost is unquestionably an obstacle for many families."

Eastern's decision

Like Oakland, Eastern's decision to go over the cap was also a simple numbers game.

The university could stay under the cap and get about $1 million in performance funding. Or it could raise tuition 7.8% and get $10 million.

President Susan Martin, who stepped down earlier this month, said the extra money is needed after years of keeping tuition increases down, including no increase five years ago.

"We have a very tight balance sheet," Martin said. "Our balance sheet is too thin. We need to improve our reserves and use the money to help with needed capital improvements. We never have enough money for what we need to do. We've tried to manage as best as we can, but this step was needed."

Eastern is a rare state public university to see a dip in its unrestricted net assets in the past couple of years, financial statements show. Unrestricted net assets are money that the university can spend however it wishes to spend. In many cases, university administrators and boards have targeted the money toward specific projects, but can change where that money is being spent if they wish.

At Eastern, unrestricted net assets dropped from $24.7 million at the end of the 2012-13 school year to $20.9 million at the end of the 2013-14 school year, the latest data available.

Oakland, on the other hand, saw its unrestricted net assets increase during the same time period, from $147 million to $154 million.

"Unspent investment income in the endowment fund was the primary funding source which increased OU's unrestricted net assets in FY2014," Vice President for Finance and Administration John Beaghan told the Free Press in a June e-mail. "Investment income can not be counted on annually to fund base expenditures, therefore, it is not a source of funding that can offset tuition increases."

Change the system?

No Michigan public university president will admit right now that they will raise tuition over whatever the cap is next year. Several, however, said they won't be surprised if there are a couple more universities that go over the cap for the same reasons as OU.

"The university board has the right to react to (the cap)," said Grand Valley President Thomas Haas. "They have the fiduciary responsibility to set the tuition rate and have to determine what is best for their university."

Haas likes the performance funding — "it brings accountability," he said. Grand Valley has done well under the funding formula, ranking first this year, with a 3% increase under performance funding.

But, he pointed out, the bulk of the money is still tied up in the base. And, Haas adds, that base has been cut over the last decade, making tuition the largest revenue source for universities, not state aid.

That's echoed by Daniel Hurley, the CEO of the Presidents Council, State Universities of Michigan.

"If states begin reinvesting, tuition caps are unnecessary," Hurley said.

So how should Michigan fund its universities?

That depends on who you ask.

Central Michigan President George Ross has been the leading advocate to switching to a system much like K-12 funding in Michigan that assigns a dollar figure to each student. Universities then get state aid in a simple formula — number of students enrolled times dollar amount attached to each student equals funding.

"Our funding levels were set decades ago by political decisions," he said. "Dollars should follow students."

Central last year got $3,787 per student in state aid, according to figures from the nonpartisan House Fiscal Agency. That's below the state average of $4,775.

If Central got the average, it would have $31 million more in state aid.

The five lowest per-student schools – U-M-Dearborn, U-M-Flint, Saginaw Valley State University, Grand Valley and OU are the five newest universities in the state. OU has the lowest per-pupil state funding at $2,870. Wayne State has the highest, at $8,414.

Lake Superior State University President Thomas Pleger said the state funding should make sure to fund universities according to missions, including those who keep tuition low.

"Long-term, Michigan needs to have a series of access universities," Pelger said. "The state should invest so they can keep tuition low."

Convincing state lawmakers to change the system will be hard.

"The formula, for the most part, is working," said state Rep. Mike McCready, R-Bloomfield Hills, who is the chairman of the House higher education appropriations subcommittee. "When you create a formula, you need to stick with it.

"At the end of the day, each student will make their choice on where to go to school."

Contact David Jesse: 313-222-8851 or djesse@freepress.com. Follow him on Twitter @reporterdavidj.

Tuition in Michigan

Michigan's public universities have set tuition for next year. Here's the increase and the average sticker cost for an in-state freshmen for a full year.