Whither Higher Education in Montana? An Economic and Organizational Analysis

John Rutland
Business Information Technology
University of Montana-Mont. Tech

Montana's relatively low average wage rate over the past few years is a concern to all. Whether this relative decline is a result of environmental forces beyond the control of Montanans, such as the failure of mineral and agricultural prices to keep up with other prices, or a deterioration of the stock of human capital in Montana is a question of fundamental importance. Unfortunately it is a question to which we are unlikely ever to get a definitive answer. Answer or no, one thing is sure. Montanans collectively can do very little about environmental changes wrought in the global economy (witness the five cents per pound pork in Choteau a couple of years back). But together Montanans can do a great deal to improve the stock of human capital in the state.

Low wages of course mean low tax revenues and hence limited public resources to devote to education. This is a matter of serious concern because it is almost universally acknowledged that left to make their own choices, individuals will tend to underinvest in their own education. This is true for two main reasons: 1) Most people fail to appreciate the magnitude of the likely payoff from education, and 2) the benefits to the economy of more human capital are greater than the benefits to the individual. For example, a medical doctor might earn ten million dollars or more over a forty-year career. The ten million dollars would be the return on the doctor's investment, but it pales in comparison to the value of that doctor's services to the 100,000 patients he may see over that forty years, many of whom will experience much longer and better quality lives because that well-educated doctor was there when they needed him. One-hundred million dollars probably falls far short of the value of that doctor to his patients. Similar calculations can be made for most human capital intensive occupations from accountant to nuclear physicist.

But these arguments have been well-documented elsewhere/1/ and gone unheeded. The government of Montana has stipulated how much will be spent on public higher education through its appropriations and its limits on the amount of tuition which state institutions of higher education may charge. This paper assumes that, given their economic situation, the people of Montana have made a rational choice regarding such spending despite the many potent arguments to spend more. Assuming that the spending limits are correct, this paper will address issues related to the structure of Montana's public institutions of higher education.

Given that the resources to support this important type of investment are as limited as they are, it is important that Montana use them as efficiently as possible. The first step in building efficiency is to consider the purposes which education institutions are to serve. In a sense there are as many purposes as students, but as a practical matter, there are only two types of students, 1) people preparing for a career, and 2) students seeking to advance in their careers. While career advancement is an end which institutions of higher education may well serve, it is not the place to expend public dollars when those resources are as limited as they are in Montana. The rationale for this is that people established in a career 1) are in a much better position to see the potential payoffs from more advanced education, and 2) have personal resources from working, which can be used to pay for education.

A person undertaking a new career must consider several costs, which are conservatively estimated in the table below. First and most significant is the loss of the income that would have been earned if the individual had worked instead of studying. At the least, this would be minimum wage for forty hours per week or about $7000 per academic year in today's market. Second is the cost of upkeep (food, clothing, housing, etc.) while going to school. For the most part these are "sunk costs," irrelevant to the decision of whether or not to attend school. That is, eating and dressing are functions which are necessary whatever one does. Housing, on the other hand, may be a real cost of going to school if the student must move to attend school. Living at home with Mom and Dad, while perhaps not ideal, is a lot cheaper than the $100-$500 cost per month of paying for your own accommodation. In today's market in Montana the reasonable cost of student housing is somewhere between $1,000-$5,000 per academic year. Books and supplies add another $500+ to the costs.

In addition to the cost born by students and their families, the state of Montana presently chips in a sizable subsidy for residents who attend state institutions. This subsidy comes in two forms, 1) capital, and 2) an operating grant. The capital consists of the land, buildings and some of the equipment of the various state institutions of higher education. The capital subsidy is difficult to estimate. For example, some of the university system's buildings are more than 100 years old. While the capital stock of the educational system is important, it is a fixed cost of providing education, and in many cases it is a "sunk cost" and therefore not relevant to the decision to offer or pursue higher education.

The operating grant, on the other hand, is relatively easy to estimate. In the state of Montana, it runs between $4,500-5,500 for four-year institutions. Comparing this figure to the students' cost from the table, it is roughly correct to say that, capital costs aside, the state of Montana picks up about 25% of the costs of higher education, and the students themselves cover about 75% of the cost.

But the state is not the only subsidizer of higher education in Montana. Churches also make important contributions. Approximately 7% of Montana students in 1999 attended church-supported institutions. While 7% may seem like a small number, church-supported schools are the only four-year institutions in Helena and Great Falls. The importance of having an institution of higher education in local communities is difficult to overestimate. I am reminded of a friend whose grandfather deliberately chose to buy a house near a large state university because he figured it was the best thing he could do to encourage his children to pursue higher education. He ended up with three doctors and two lawyers in the family. Would his children have been as successful if he had decided to live on the other side of town? Of course, no one can say, but there is little doubt that being able to walk to classes from the house you grew up in makes it a lot easier to secure advanced education. While relatively small, the church support for higher education in Montana is crucial in Helena and Great Falls.

More than 50% of Montanans live in metropolitan areas with four-year educational institutions. The table below summarizes population data for the seven metropolitan areas in Montana. In addition to these populated areas, two four-year institutions are located in small communities. Western Montana College serves Dillon and Beaverhead County, which only had a population of 8,790 in 1999. Northern Montana College in Havre is located in a county that had 17,050 people in 1999.

The obvious underserved community here is the Flathead, with a large population and no four-year institution. Should a new four-year college be built in the Flathead? Can one be built with dollars as tight as they are? To answer these questions, it useful to examine how state funding currently works and consider recent trends in students' choices regarding which institution they will attend.

As a practical matter, the status quo in Montana public higher education is a voucher system. Each school's grant depends on enrollment. The students choose which state institution they wish to attend, and the state pays the school directly. This quasi-voucher system solves a lot of problems. In particular, no private or religious institutions are eligible for funding. Consequently, no church-state separation or "public money for private gain" issues have to be addressed. Furthermore, the state of Montana avoids the need to evaluate the quality of the multitude of programs and institutions which would receive public money in a pure voucher system.

By setting both the grant and the tuition level, the state of Montana has ensured that state institutions of higher education will pursue a cost leadership strategy./2/ Revenues cannot rise except through increasing enrollment. The state, in effect, imposes a price ceiling on public higher education in Montana. This price ceiling is driving the structure of the system.

Cost, leadership and economies of scale are virtually synonymous. Consequently, the Montana University System campuses have found themselves in a market share battle. Because of the basic strengths, social, economic, and political, of each of these campuses this battle has been protracted with Missoula, Tech, Western and Northern making slight gains on Bozeman and Billings between 1987 and 1996. Over this same period four-year institutions' enrollments grew 15.7% while enrollments at the five colleges of technology grew 10%./3/ These two trends together reflect a preference of Montana students for smaller four-year institutions. For example, the growth rate at Missoula, the campus with the largest increase in enrollment, over this period was only 23.7% while Montana Tech and Western grew by 34.6% and 54.7%, respectively. Neither initial size nor population of the local community was the determining factor in this market-share battle over the ten-year period for which comparisons can be made easily.

The two extremes for funding education run from some type of voucher system to a centrally controlled organization. A "pure" voucher system would pay the funds directly to the student, who would then choose where to go to school whether in a public or private institution inside or outside of Montana. A "pure" voucher system would generate a number of difficult administrative problems, most notably in deciding what schools and programs would qualify for state funding. At the other extreme would be a hierarchically controlled higher education system.

There is a large literature which studies the relative efficiency of markets (i.e., "pure" voucher system) and hierarchies (i.e., centrally controlled single state university)./4/ Which is better? Where transaction costs are low, markets are more efficient. However, where transaction costs are high, hierarchies may be more efficient.

The significance of this literature for Montana higher education comes down to who should make decisions about where the dollars will be spent. Should this decision be made by thousands of students or by a handful of administrators? For most of the things we buy, cars, hamburgers, newspapers, soap, and beer, the handful of administrators won out over markets long ago. For a few things, haircuts, auto repair, and fine dining, markets still function.

Both of the extremes may have merit. Vouchers would ensure that students graduate from many and varied institutions. Hierarchies would make a rigorously controlled education process possible. Despite their logic, vouchers are unlikely to be adopted by the state of Montana. If nothing else, the amount of money which the state of Montana has expended per student on higher education in recent years is only about half what one of the leading advocates of school vouchers in America considers to be an adequate amount./5/ The issue really is "what type of hierarchy will control higher education in Montana?" Alternatively, will Montana be better served by a centralized or a decentralized hierarchy? The centralized hierarchy has economies of scale going for it. The decentralized hierarchy has the presumption of the status quo behind it.

The literature offers little help in making the choice between a centralized and a decentralized hierarchy. Ford Motor Company produces all of its U.S. automobiles in the giant River Rouge Plant in Dearborn, Michigan. General Motors produces vehicles in many plants. Both companies are successful hierarchically controlled businesses. What the literature can help us with are the performance evaluation problems which confront these two types of hierarchical structures. The centralized hierarchy is capable of producing a high quality homogenous product. The decentralized hierarchy will have to overcome subunit transfer problems.

One such transfer problem which is often brought up in discussions of higher education in Montana is the transferability of credits from one institution to another. Here the organizational structure literature may be helpful. One of the most efficient structures in the modern world is the air traffic control system. Thousands of planes fly in this system daily on extremely tight time schedules with minimal mishaps. One factor which makes the air traffic control system so effective is that it combines centralized and decentralized features into one hierarchy. Air traffic controllers are centrally located with access to current information and the authority to direct pilots to take certain actions. Pilots, on the other hand, have the option of opting out if they believe the controllers have made a mistake. This combination of centralized and decentralized decision authority in the same hierarchy is credited with making our skyways much safer than they otherwise would be.

This same centralized/decentralized structure could be applied to the Montana University System. It would require that the state devote resources to the evaluation of student performance, but it could be begun on a limited scale and pursued or discontinued depending on how well it worked. A number of courses are taught on most of the campuses of the MUS, mathematics, economics, chemistry, physics, English composition, etc. A system-wide test could be devised for each of these courses with the requirement that for a student to obtain credit for the course, s/he would have to pass the test. Implementing such a structure and control system would have several advantages. 1) Accountability at the MUS system level could be assessed and reported. 2) Professors could be relieved of the often conflicting roles of being instructor and evaluator. An associate once said to me, "I would be suspicious of any course which was both taught and evaluated by the same person." 3) A new measure, pass rate on the statewide exam, would be available to assess the performance of professors. 4) By adopting a "two attempts and you are out" rule on state exams, the state could ensure that its dollars are going to serious students only. 5) Standards could be maintained and elevated. A recent article in The Montana Professor/6/ pointed out the status quo encourages a collaboration between students and faculty members which acts to lower standards over time.

Resource costs for implementing an effective testing system would be high whether or not the state chose to hire testing specialists or allowed those teaching the courses to collectively develop and score the tests. But because the program could be begun on a limited scale, the value of using resources specifically for evaluation of student performance could be assessed as the program developed. It might be cheaper in the long-run than the continuing conflicts which arise over course transferability.

There is a distributive justice issue in public higher education which, to my knowledge, has not been addressed in any state. As pointed out above, there are many advantages to having a four-year college in your hometown. Students who live in Flaxville are by no means on an equal footing with students from Missoula or Bozeman. As a matter of fairness, the state should do something to rectify this situation. One possibility would be to provide transportation and/or housing subsidies to students attending an institution which is more than a set number of miles from their home through tuition discounts or direct subsidies.

Such subsidies, combined with a State Examinations Board, could go a long way toward garnering the advantages of a centralized/decentralized organization structure for Montana. Students would have more freedom to select among the campuses because at least some of their transportation and housing costs would be covered if they elected to attend a campus distant from home. With the State Board in charge of accrediting students for courses, students should gravitate to those institutions which gain reputations for preparing students well for the examinations. In short, Montana public higher education would have a level playing field with an independent authority, as opposed to the professors teaching the courses setting the standards.

One solution which has been hailed as a hopeful prospect for the locational distributive justice problem is "distance learning." As was pointed out in another recent article in The Montana Professor,/7/ the resource cost of distance learning are likely to be much higher than heretofore appreciated and substantially more than the cost of gathering students on campuses to study. Furthermore, if distance learning is viable larger, stronger institutions with more substantial funding will provide it. From a distance learning perspective, it's no further from Boston or Berkeley to Flaxville than it is from Bozeman. From my point of view, it would be much cheaper and potentially more effective to let markets function once we have standards set at a state-wide level and students are free to choose among institutions without regard to transportation and housing costs. Perhaps Montana would end up with a single large state institution, perhaps not. But whatever, the people with the best capacity to make decisions about what is best for them, the students and their families, would be making the decisions based on hard criteria about which schools were providing the best preparation.

It has been said that "luck is what happens when opportunity meets preparation." Montanans can't control the global economy, but we can use the education dollars we have available to provide the best education possible given the resources. Perhaps then, when the global economy gives Montana an opportunity, graduates of the Montana University System will be prepared to grasp it.

Notes

1. See for example, Dennison, George M., "President Proposes a Sales Tax that's not a Plain, Old Sales Tax," Guest Editorial, Main Hall to Main Street, University of Montana webpage <www.umt.edu/urelations/mainhall/900/dennison.htm>.[Back]

2. For a discussion of generic strategies see Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press, 1980.[Back]

3. The source for Montana University System enrollment data is the MUS Board of Regents webpage, "Montana University System Enrollment History 4-Year and 2-Year Schools" <www.montana.edu/wwwoche/docs/facts/ehistory.html>.[Back]

4. The most important single work in this literature is Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York: The Free Press, 1975).[Back]

5. Milton Friedman, "Why America Needs School Vouchers," The Wall Street Journal, 28 September 2000.[Back]

6. Paul Trout, "Deconstructing an Evaluation Form," The Montana Professor 8.3 (Fall 1998): 12-21.[Back]

7. Celia Schahczenski, "Distance Education: Its not for Everyone," The Montana Professor 8.3 (Fall 1998): 9-12.[Back]