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OU pulls away from troublesome trends in higher education economics though some questions remain

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OU President James Gallogly talks to a reporter in his office in Evans Hall Feb. 7.

Editor’s note: Read this story in print in the April 2019 Crimson Quarterly magazine.

In the past year, it became widely known that OU was close to $1 billion in debt.

During the past six years, four new residence halls, some accompanied by restaurants and shops, opened on OU’s campus, and the Gaylord Family-Oklahoma Memorial Stadium was renovated.

Since the 2006-07 school year, tuition increased by nearly 69 percent at OU.

And from the fall of 2005 on, OU’s out-of-state student population has increased by roughly 8 percent, to around 39 percent of all undergraduate students on the Norman campus in fall 2018.

These actions place OU, along with hundreds of other public universities all over the country, in the midst of a broader economic trend in higher education: Learning how to finance operations as state funding declines.

Former OU President David Boren dealt with declining funds by a process experts are calling “financialization,” or turning to a blend of private donations, bonds, investment returns, tuition raises and out-of-state students to pay for basic functions while also trying to strengthen the university’s prestige.

But after Boren’s retirement last June, current President James Gallogly is pulling OU away from this trend.

Gallogly has publicly decried the debt, criticized the building of new residence halls, held tuition flat for the first time in years and announced plans to give more scholarships to in-state students.

It’s left OU in a state of monetary limbo as it transitions its financial philosophy.

As a public institution designed to serve state tax payers, OU must now answer two questions: How this university and others in the state will find sustainable solutions to declining state support, and who state universities are meant to serve overall.

Emerging national trend

Financialization is like a large money game, one that is constantly fluctuating as universities across America try to build revenue streams beyond public funding.

From general debt to recruitment of more out-of-state students to costly amenities, universities have tried to become the biggest and the best, despite the financial realities many of them live.

Public colleges and universities rely on complex and multi-layered sources for funding, which include state tax dollars, donations, tuition, commercial revenues and more, according to the study “The Financialization of U.S. Higher Education,” by Charles Eaton, a sociology professor at UC Berkeley.

During times of economic downturns in states, higher education institutions are generally viewed as state budget items that can handle a cut in appropriations because they can raise tuition to make up for lost funds. But as costs have continued to rise for static budget items due to inflation and state dollars have continued to decrease, universities are getting creative to try to maintain their operations outside of tuition increases alone.

“Public and private schools both are competing with each other for student dollars, increasingly courting wealthier students with fancy amenities built with borrowed money,” according to a 2016 study by the Roosevelt Institute, a New York-based think tank.

Historically, this creativity has been easier for private universities to accomplish. With their large endowments, huge networks of wealthy alumni and elite reputations, institutions like Yale and Harvard have been able to successfully borrow money to strengthen research and faculty pay, as well as continue growing their endowments overall.

Many public colleges have tried to emulate this strategy for success within their own financial constraints. One limitation is how money in endowments is often restricted at public universities, said Guy Patton, director of the OU Foundation, which oversees OU’s endowment.

Patton said private institutions are able to leverage their endowments as part of more general cash flows. But at public institutions, which recently started growing endowments due to declining state funds, funds are often donor restricted, so they can only be used for a specific, donor-intended purpose.

These smaller, more tightly restricted endowments mean that public universities usually rely on the commercial revenue expected to be generated from capital projects they borrowed for in the first place — new dorms, restaurants, parking lots, athletic centers, cafeterias — to pay off their bond debt.

Universities like OU assumed that room and board, parking passes and luxury ticket sales, among other things, would cover the construction debt, and the new amenities would help attract more wealthy, out-of-state students to pay full prices, eventually bolstering general financial operations in the long run.

But for many public institutions, including OU, this is not what always happened.

“Part of what universities are doing is that they are copying the next university up on the totem pole,” Eaton said in a phone interview with The Daily. “You look at an institution near you that you think of as a competitor, you see what they’re doing and you copy it. But you don’t necessarily think through if copying them makes sense for your particular university.”  

Many schools overestimated what their public school constituents could afford. And when dorms go unfilled and luxury tickets don’t sell, public universities are left to pay off their debt through a continued cycle of increased tuition, state funding pulled from other areas, high recruitment of out-of-state students and more.

Nationally, the debt for public and community colleges has doubled in the past decade, reaching $151 billion, Eaton’s study says. In most cases, the growth of debt has outpaced enrollment growth, and nearly half of borrowed money has gone toward amenities that have not met their financial projections.              

For example, in the mid 2000s, UC Berkeley, one of the largest public universities in the country, borrowed nearly $500 million to build a sports stadium. The university hoped to sell thousands of long-term season tickets and make millions, but the buyers didn’t surface. Now, Eaton said, the university is dealing with the consequences of debt repayment plans that will span decades with no substantial funding source.

Public universities are trying to survive declining budgets while also continuing to elevate the value of their degrees, but this has left economically disadvantaged students behind in the middle of an “amenities arms race,” according to the Roosevelt Institute.

Amid it all, experts point to the mission of public institutions: To educate workforces, build regional economies and foster class mobility. And by studying the financialization of higher education, they hope to warn how current financial strategies to combat declining state funding might push that core mission out of sight.

“Public research universities are dedicated to the public: That is their mission; it is the value that animates all of their activities,” a 2016 study by the American Academy of Arts and Sciences said. “But it is the public character of these institutions that the current financial model has put at the greatest risk … Without careful and sustained attention, we not only risk blurring the line between public and private research universities, we also risk magnifying other social divides.”

On some level, financialization turns students into dollar signs, and “is not a sustainable model for public institutions dedicated to serving their states, regions and nation,” the study confirmed.

“I think when you cut funding for public universities and those universities turn to financial markets to pursue profit-making business strategies,” Eaton said, “you undermine the public purpose of the universities overall.”

Looking at Oklahoma

The University of Oklahoma follows many of the rules of this financial game, Eaton said. The nearly $1 billion in debt to pay off bonds, the new campus dorms and restaurants, the rising out-of-state student population — it’s a classic example of a university attempting to navigate public funding losses through financial markets.

OU has also increased multiple other revenue areas since Fiscal Year 2015, such as private foundations (418.7 percent), real estate operations (45.8 percent) and athletics and the Lloyd Noble Center (25.5 percent), among others, according to OU’s budget and financial planning office.

Additionally, studies point to universities seeking savings by outsourcing operations, including management of parking lots, residence halls and other facilities. Universities will also streamline course offerings, defer maintenance, minimize administration costs, shutter computer labs, cut positions and even close campuses.

Mary Boren, state senator for District 16, which encompasses Norman, worked for the State Regents for Higher Education in the 1990s, and said she is unsure of the role the state will play in making sure the worst of these don’t happen at OU.

“Oklahoma has typically funded things out of crisis and very rarely proactively. So we usually only deal with the most immediate financial need,” Boren said. “There are some exceptions, but when it comes to the public good in Oklahoma, we fund the most critical, crisis-oriented things.”

Since Gallogly took office July 1, 2018, there have been two rounds of layoffs, employees believe certain departments are on the verge of privatization, administrative positions have been streamlined, contracts have been scrutinized and inefficient research offices have been closed, among many other things.

“I didn't know I'd be doing that when I got here,” Gallogly said. “I didn't know these financial issues existed, but they do.”

More blows to financial projections and assumptions happened when the new upperclassmen dorms on campus, Cross Village and the residential colleges, dealt with low occupancy and general resident dissatisfaction instead of generating healthy revenue. And in Oklahoma on the whole, residents are frustrated with the lack of state funding for education, which culminated into the historic April 2018 teacher strike.

When asked about OU’s financial history and the thoughts behind those decisions, Senior Vice President and Chief Financial Officer Ken Rowe said he was not able to answer many questions because he was not on campus at the time. The two administrators in charge of OU’s finances when many of those decisions were being made were terminated by Gallogly on his first day in office.

In recent years, the most direct and drastic impact for students, though, has been the increase in tuition. Oklahoma has decreased its state support by 20 percent since Fiscal Year 2008, and OU has increased its tuition by more than 60 percent in the same timeframe in response.

Boren said that while the responsibility for funding cuts falls on the Oklahoma Legislature, so too does some of the blame for how universities were allowed to respond.

When colleges were raising tuition year after year in the early 2000s, the state changed the laws to allow institutions to raise tuition on their own without government oversight. In some states, there is specultion that lawmakers felt they needed to shift the focus away from themselves so they would not face political backlash for the state of higher education, Eaton theorized.

“It’s harder to hold lawmakers accountable and hold them directly responsible because they’ve passed the buck to the university itself as a separate entity from the state government,” Eaton said. “So I would say that in many ways, the lawmakers have let the people down by pushing universities in this direction and giving them the autonomy to do this.”

The high costs of attending college and the large number of out-of-state students who generally move away after graduating have also played a role in slow economic development planning, Boren said. A state with a low number of college graduates as permanent residents has difficulty attracting quality outside businesses or providing growth and class-mobility opportunities for low-income residents.

“In Oklahoma, we have a disconnect between what we’re bothered by and what the political consequences are for that. We’re wanting to invest more dollars into common good, we just don’t have that culture here that sees investment in each other as investment in the common good,” Boren said. “We see it more as a negative thing. It makes it harder for low-income students, minority communities and first-generation students.”

There are spots of hope, though. Other universities have found success with private-public partnerships, such as North Carolina State University’s Centennial Campus, a research hub that creates direct partnerships between researchers, students and businesses in various communities.

And in other states, legislatures have begun to limit universities’ abilities to participate in certain aspects of financialization by freezing tuition or mandating the number of out-of-state students stays below a certain percentage, Eaton said. Oklahoma currently does neither of these, but that doesn’t mean it couldn’t change.

“The good news is that the University of Oklahoma is still very much a public institution whose governing body is appointed by elected officials, and so the people of Oklahoma have democratic promises and tools by which to redirect the university to its original public purpose,” Eaton said.

Boren said she has been pleased with some of the actions taken by Gallogly, like holding tuition flat and boosting the Oklahoma Promise program at OU for in-state students. Gallogly also has said he plans to increase research on all of OU’s campuses and explore how to make OU a primary medical provider in the state.

Gallogly said the financialization trend and its impacts have been made clear to him, and his mission is simple: Keep college as affordable as possible, especially for low-income students.

“If we keep adding to your tuition semester after semester after semester, pretty soon you just can't afford to go … My goal is to make it as cheap as possible for you to get that high quality education,” Gallogly said. “Getting in the door if you're poor is also really valuable ... I was a poor student too — I worked full time, but if somebody didn’t get me started, it was never going to happen for me. So I believe in getting people started.”

Kayla Branch is a journalism senior and The Daily's enterprise editor. Previously, she has been the editor-in-chief, a news editor and covered the student government as a reporter.

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