This morning I received an email that exposes one of the roots of one of the foundations of the funding crisis in California higher education. It was an electronic newsletter from Cary Nelson, the President of the American Association of University Professors calling for national unity in support of the efforts by the University of California, the California State University and the California Community Colleges to fight state efforts to reduce their budgets.

The column discusses the potential reduction in the number of students who will possibly be able to attend the state’s public universities and calls for all faculty members across the nation to rise up, sign a petition and enlist their friends to fight the cuts to higher education in this year’s budget. Its primary focus—making sure that the public subsidy in higher education is maintained at its current or even higher levels.

This is precisely the problem. These actions are necessary because of the state’s huge subsidy of its higher education institutions and thus their fiscal dependence on the state budget. The state preserves artificially low tuitions (they call them fees) for its students and makes up the difference by indiscriminately and formulaically subsidizing ALL student attendance at each campus.

Higher education funding in California has always been one of the few areas in the state budget the legislature actually has some flexibility and thus it is almost always one of the main areas of debate when the budget is tight. Historically, this means that whenever the budget is tight, student fees go up. Also, when the budget loosens, student fees go down. Time and again, we have seen this cycle. And it is unfair to students to see their fees randomly set, not by an intentional policy, but by the randomness of the business cycle.

At the same time, much of the problem exists because of those who oppose the “privatization” that Cary Nelson decries in his newsletter. Privatization simply means that the revenues for the institutions come from tuition revenues instead of the public dole. Now before you leap up in arms and think this will restrict access to higher education, consider how private universities handle this issue. They charge high tuition and offer high aid. Institutions like Pepperdine and USC offer aid to more than 2/3 of their students.

Why does this make sense? A high-fee, high-aid approach to school finance allows universities to capture each student’s full ability to pay for their education. Students coming from wealthy families receive little aid in this model, while students from very poor families receive full support. Contrast this with our current system where students who come from the highest income families in the state receive exactly the same public subsidy as those from poorer families. In fact the University of California is one of the biggest subsidies of the wealthy in the nation. While this may be fair given the severe progressivity of the California tax code, it flies in the face of good public finance.

In the community college system, the fees are not even high enough to take full advantage of the subsidies provided by the federal government in the form of education tax credits in the tax code. Ironically, increasing student fees in a consistent and realistic manner would likely expand access to educational opportunity in the state, rather than reduce it.

If fee increases were coupled with a public commitment to provide adequate aid to meet the full economic need of students, institutions could actually have larger and more consistent revenue streams from which to operate. The danger of such an approach—public universities would have to care more about their students and their interests and needs and less about the needs and interests of faculty and administrators—also called the marketplace. Private universities successfully face these pressures every day.

Some campuses who don’t do a very good job meeting the needs of their students would either have to improve their performance to continue to operate as they do now or find a way to address the needs of their smaller student populations. Others who do a great job may even have to expand to meet the demand for their high quality programs—and they would have that ability to do so.

There is one important side effect worth noting– the bragging rights of campuses like UCLA and UC Berkeley who advertise how many students apply and are turned away would be undermined. Their selectivity instead would have to be measured as a function of the quality of the educational experience they provide, not how attractive they are when priced at 25 percent of their market value with the difference made up by California taxpayers. Imagine how many people would want to buy a new (high MPG) $40,000 Mercedes for $10,000 if it were offered.

In 1960, California made a historical commitment to provide access to all Californians who could benefit from higher education. The result of that model is an assemblage of some of the greatest postsecondary institutions in the world and their products fuel important segments of the state economy. The public finance system that saw the construction of this system is not the system that will be able to see its maintenance and advancement.

The current finance approach undermines part of the Master Plan’s commitment by not making the best use of the resources available. A limited version of the privatization bemoaned in Cary Nelson’s essay coupled with a full, explicit commitment by the citizens of California to its next generation of STUDENTS (not institutions) will be important tool to ensure that its public postsecondary institutions remain the anchors of the economy they are today. As for fiscal stability, the state’s institutions should know that it will be much harder for taxpayers and the legislature to say “No” directly to students in difficult fiscal times, than it is to say “No” to its postsecondary bureaucracies.