Economic Efficiency in Higher Ed

I greatly appreciated NMSU-Carlsbad President Russell Hardy’s response (4/27/10) to my earlier op-ed (4/24/10) on the costs per student at Carlsbad compared to other state post-secondary institutions. While bringing up several interesting points, his use of cost figures is misleading and distracts from the larger economic questions.

First, I must admit that there is an error in my statement that “while it lost about 8 percent of its students, the college’s total budget increased over 40 percent.” Carelessly, in reading my own spreadsheet while preparing the op-ed, I reversed the full time enrollment (FTE) numbers for fall 2004 and fall 2008. Using these two data points, the FTE increased from 814 to 900. The gain of 86 students (FTE) is a 10.6 percent increase. My apologies for the error.

But in responding to this error, Mr. Hardy makes a much more significant error that continues through much of his article. He cites student headcount growth “from 1,223 to 1,998 students”. Headcounts are a bad metric because they only capture the number of students taking classes, not how many classes are being taken – many students do not take a full load. Headcount numbers are not comparable either year over year at the same institution or among different institutions.

A better measure of student population is FTE, which adjusts the student count for how many classes they are taking. According to data furnished by Mr. Hardy via email, FTE from fall 2006 to fall 2009 grew from 739 to 942 students.

When he discusses the costs per student – using headcount rather than FTE, Hardy finds a much lower cost per student – by about half since headcounts are significantly larger than FTE. Rather than each student in the 2008-2009 costing $3,677, as he finds, we know that the cost is in fact $7,799 per student.

Mr. Hardy writes, “Between 2006 and 2010, the NMSU-Carlsbad annual operational budget increased a total of 51.4 percent…It is important to note that the college’s enrollment has grown…for a total increase of 64 percent over the four-year period.”

So, in this comparison, Mr. Hardy makes it seem as though the budget has grown less than the student population (51.4 < 64). But, he only gets 64 percent growth using head counts. When we use FTE, we find that the student population only grew 27.5 percent. Using his budget calculation and the FTE number, we see that the budget has grown faster than the student enrollment (51.4 > 27.5).

Regardless of what the numbers say, it would be mistaken to conclude that the per student cost numbers are completely adequate indicators of how well schools such as NMSU-Carlsbad are doing in an “economic” sense. We want to know if the benefits are greater than costs. The growth of budgets and student enrollment could represent a wise investment of the state’s financial and human resources, but it could also represent an increasingly wasteful state of affairs if the educations New Mexico is paying for are worth less than they cost.

Mr. Hardy claims, “NMSU-Carlsbad has managed to offset the legislatively mandated reductions by operating as efficiently as possible without cutting any instructional programs.”

Even if this statement is true, and Mr. Hardy’s institution is efficient from a managerial standpoint, it may still be unproductive for the state’s economy. The money could have been invested in alternative projects and the students could have been working rather than studying. These are the puzzles that must be solved, particularly with lawmakers facing a massive budget shortfall and a potential special legislative session to shore up the FY 2010 (not to mention the upcoming FY 2011) budget.

The marketplace provides a solution which is done implicitly and without the need for this kind of debate. The answer is market-determined price signals. One way to generate more market-like information is higher education vouchers. The money follows the students, which creates accounting discipline, but also improves the economic efficiency because it more closely matches means to ends, making for better educational investments. I would greatly appreciate Mr. Hardy’s (and others’) thoughts on these matters as it might be a major step on the road to a balanced budget and improvements in the effectiveness of New Mexico’s institutions of higher education.

Kevin Rollins is an adjunct fellow with New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.