Sullivan’s Plan Optimizes UVa’s Institutional Self Interest

Construction on UVa’s South Lawn project.

by James A. Bacon

As I argued in my previous blog post, perhaps the University of Virginia ought to go with the primal instincts of its faculty and administration by chucking its mission of providing an affordable, high-quality education to Virginians — what’s so special about them anyway? — and chasing the dream of rising in the ranks of the nation’s elite universities by converting to a private institution. In this blog post, I’m going to follow that idea. As I sit down to write and organize my thoughts, I don’t know where this is going to go. I’m just going to follow the flow of logic.

The University’s problem is the necessity of keeping tuition low for in-state students comprising 69% of the student body, even as the General Assembly tightens state financial support. Peer institutions, especially the elite, private universities, can charge what the market will bear. Even after accounting for the need to provide more financial aid, this line of thinking suggests, those institutions come out ahead financially.

Let us assume that Mr. Jefferson’s University decides to slough off the shackles of public ownership and become a 100% private university. What would that look like?

For purposes of comparison, I assume that UVa would adopt a model something like Duke University, a private “Southern Ivy” institution in a neighboring state with whom UVa has long-standing athletic ties. Duke has roughly two-thirds the number of students of UVa, and it couples its university with a medical system. The size of the institutions’ endowments are comparable: $4.8 billion in 2012 for UVa, $5.6 billion for Duke. Moreover, Duke is ranked No. 8 nationally in the US News & World-Report national university rankings, which means it has achieved a status to which No. 24-ranked UVa aspires.

In the 2012-2013 school year, Duke charged $42,308 in tuition (not including $12,000 in room and board). Fifty percent of all students require financial aid, which averages $37,400 per grant. The net tuition revenue for Duke works out like this:

$617 million nominal tuition revenue
– $273 million financial aid
= $344 million net tuition revenue

Here are the comparable numbers for UVa in the 2012-2013 school year:

$407 million nominal tuition revenue
– $40 million financial aid (Access Virginia)
= $367 million net tuition revenue

Here’s what it would look like if UVa shifted to the Duke model, charging what Duke charges for tuition, granting financial aid on the same basis, and foregoing any state support:

$893 million nominal tuition revenue
– $395 million financial aid
– $130 million state aid
= $368 million net tuition revenue

Whoah, I didn’t expect that! I was fully expecting UVa to come out way ahead financially under the Duke model. A a gain of only $1 million is hardly worth the political blow back of abandoning its traditional mission and converting from a public to a private institution.

Based on this back-of-the-envelope analysis, it appears that UVa’s institutional interests are best served by tweaking the current model as President Teresa Sullivan proposes — charging close-to-market prices for out-of-state students, aggressively jacking up tuition for in-state students (whose tuition will increase more rapidly under Sullivan’s proposed plan than for out-of-staters), dispensing a parsimonious level of financial aid and continuing to pocket the state contribution, all the while lamenting how chintzy the state is.

I have cobbled together the numbers from Internet sources, and there may be important financial considerations that I am overlooking. I freely admit, this is a quick-and-dirty analysis — and that may be describing it generously. Moreover, I am open to the idea that I should have picked a different university than Duke for purposes of comparison. But if I’m close to the mark, it appears that Sullivan’s plan is better calculated to advance the institution’s interests than any other. Whether the chosen path optimizes the aims of the students is a different matter entirely.

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25 responses to “Sullivan’s Plan Optimizes UVa’s Institutional Self Interest”

  1. reed fawell III Avatar
    reed fawell III

    Jim, even assuming your back-of-the-envelope analysis (which is a big assumption), your approach rests on the assumption that the state of higher education today is essentially static. Quite likely its highly volatile. And so current models of success such as Duke’s or Virginia’s may lead to ruination.

    Thus I find Sullivan’s view of the future naive, and her solutions formulaic. It’s the work of a technocrat who’s blind to the challenges facing her institution. And so her report obscures rather than reveals. Thus, it’s also highly political. Either naively so, or cynically so. Or paradoxically both.

    A related matter: university’s administrators and faculty apparently see the State’s slow withdrawal of funds as evidence of a growing power vacuum. They intend to take that power for themselves.

    Thus the question: should that vacuum of power exist, are the school administrators and faculty now the best custodians of that power?

    The president’s report casts doubt on any suggestion that they are. The University of Virginia was created for students. Not for school administrators or faculty. This is the key of the University’s past success. It’s also the University’s endowment for its future. Not Big Data.

    The State may want to reconsider its own withdrawal of funding. Perhaps it generates far more investment return than they appreciate. And does the Commonwealth really want to cut the University of Virginia adrift out to sea. What’s the Commonwealth going to do better with the money?

  2. Peter Galuszka Avatar
    Peter Galuszka

    So, Jim, I gather your notes revealed that privatization isn’t that great a deal.
    Also, didn’t UVa, along with other Tier ONe Virginia public schools, cut a deal throughSCHEV back a few years to accept less in state funding for an understanding that they were be more autonomous?
    Aren’t we forgetting this? Aren’t week forgetting that Casteen raised tuition significantly and was paid considerably more than Sullivan?

    Could it be that older Ayatollah-style Hoos (they shall go nameless but a few are on this very blog) find it much easier to dump on Sullivan because (a) she’s female (b) she’s independent minded (3) she’s not of the Virginia Old Boy Network and (4) she’s easy to kick around?

    1. Peter, do you really think that anyone is dumping on Sullivan and not Casteen because she’s a woman? C’mon. That’s a cheap way of sweeping all criticism under the rug without examining the merits.

      First, I never cut Casteen any slack. I was very critical of him. Second, the reasons Sullivan is under the microscope now are (a) that the BoV fired her and then re-hired her in an incredibly controversial series of events, and (b) a good case can be made that UVa is experiencing an “existential threat” — a threat that was not yet apparent under Casteen (although it was clearly gathering).

    2. reed fawell III Avatar
      reed fawell III

      Goodness, Peter, that’s remarkable commentary. Should it be aimed at me as well as others, here are a few facts found on this website:

      1/ Till now, I’ve consistently supported President Sullivan.
      2/ I have low regard for John Casteen’s tenure as president of UVA.
      3/ I have also have low regard for what you call the “Virginia Old Boy Network” as it pertains to the governance to UVA.

      All this is plainly stated and easily found on this website. So check it out.

      1. reed fawell III Avatar
        reed fawell III

        PS. Peter, with regard to your apparent sensitivities concerning President Sullivan’s gender, please not that that Rector Dragas is also a woman.

    3. DJRippert Avatar

      Casteen was a train wreck. Sullivan is a better president operating in worse times.

      In my opinion, Sullivan lost the political battle when she opposed Bob McDonnell’s goal of capping student aid. McDonnell correctly decided that a public university shouldn’t become an unelected taxing authority.

      Why Bacon thinks Virginia can go private, snap its fingers and suddenly become Duke is a mystery to me. What would really happen is that Virginia would go private, snap its fingers and become … a private version of UVA – #24, not #8.

      The big question (which never gets answered) is why tuitions are rising at twice the rate of inflation.

      1. I don’t think UVa should go private. I was engaging in an intellectual exercise.

        If adopting the Duke model had yielded $100 million or so in net tuition gain that could have been reinvested in building the university, privatization might have made sense (if your goal is to climb the national rankings). An extra $100 million a year would make a big difference over a decade or two. But, my back-of-the-envelope calculation showed that it actually would not change the net tuition yield, so it would not make sense regardless of what your goal is.

        1. DJRippert Avatar

          Why do you think they would climb the national rankings? There are plenty of private universities rated below #24. Going private is no guarantee of improved rankings.

          1. In theory, going private is a means to an end. Under the scenario I explored, I wondered if adopting a Duke tuition/student aid model could generate more net tuition revenue. If UVa could generate, say, an extra $100 million in net tuition, it could recruit a lot of star professors and attract a lot more R&D.

            But my little intellectual exercise showed that the Duke model wouldn’t make much of a difference to net tuition revenues.

            In other words, we agree. Going private would not help UVa climb the rankings. So, why are you taking issue with what I’ve written?

          2. DJRippert Avatar

            The big issue is your belief that generating more net tuition revenue would matter. Is there a strong correlation between net tuition revenue and overall ranking?

          3. Insofar as money allows universities to recruit star faculty, yes more money enables them to climb the university rankings.

          4. DJRippert Avatar

            Then you should be able to correlate national ranking with money. I don’t believe that correlation is true. Virginia already has more tuition revenue than Duke. However, Virginia is rated #24 and Duke is #8.

            I’d guess that your view is too simplistic.

            Sarah Lawrence is the most expensive college in America. Is it the best college in America?

  3. Richard Avatar

    UVA is still the #1 university in Virginia and the one that most NoVa kids from the best high schools want to get into, and they compete for it fiercely. It’s also cheaper by a good amount than Duke or most institutions of its caliber, although it may be losing ground because of its lower tuition. It’s not an Ivy and it’s not a Duke, but that’s because it’s mission is different – it hasn’t served as the next stop for the rich kids in private schools (except for those who didn’t have the connections, grades or money to get into the Ivies – Ted Kennedy comes to mind). Those private school kids start out with a lot, and they make a lot of money, and they have a lot to spare for the alma mater, which opens up spaces for their own children and grandchildren later on. It’s a type of virtuous cycle – rich people begetting rich institutions to serve future generations of rich people, who make the institution richer, etc. etc. etc.

    How should Sullivan be measured? The problem is that the Board of Rectors, the Commonwealth, and the institution of UVa haven’t decided what the University should be about. The Board apparently feels that the University should be a money-making, job-generating, MBA/scientist/entrepeneur undertaking. The General Assembly wants it kids and its constituents to get in without having to pay a lot for it. The institution of the University has traditional ideas about liberal arts, academic freedom, tenure, and teaching. Should Sullivan’s goals include all of this – keeping costs low; admitting mostly Virginians; attracting professors who are productive academically, in the classroom and in the business world; getting jobs for students; getting more money from alumni and increasing the endowment; getting a better football team. These are conflicting goals, althoug you’d think that perhaps with all the history and resources of UVa that it might be possible.

    When you hire a chief executive, you expect him or her to put forth a vision for the organization. When a Board has a conflict with the chief executive, either the Board or the executive has to go. In the case of UVa, it’s not that easy, because UVa is a state institution, with politicians on the Board, plus a General Assembly that is more interested in the football team than world-class professors. Not to mention a flamboyant and grandstanding Attorney General.

    Some will blame Sullivan for not being able to get her way by hook or by crook or her magnetic leadship qualities, and some will blame the Board for being incompetent. I hate to sound like a Republican, but sometimes the best thing to do is nothing at all – that seems to be Sullivan’s approach – wait until she has a more reasonable and amenable Board – maybe after the next election.

    1. reed fawell III Avatar
      reed fawell III

      Richard says: “The Board apparently feels that the University should be a money-making, job-generating, MBA/scientist/entrepreneur undertaking.”

      Richard, where can I validate that claim? Where has the board or any member on its behalf have written or said such a thing?”

      1. Richard Avatar

        Well you’re right that I don’t have data to validate the claim. My impression of the Board’s attitude is based entirely on the blowback and commentary (some of it probably misinformed) from the attempt to oust Sullivan. We don’t really know what the Board was trying to do because most of the discussions were not public, and after Sullivan was reinstated, some of the Board members recanted.

        1. reed fawell III Avatar
          reed fawell III

          Fair enough, Richard. Thanks.

    2. Richard, very good comments. I fear that the question of “What does UVa want to be when it grows up?” will only intensify as tuition becomes even more unaffordable and as new educational institutions pop up, stripping out bureaucracy, utilizing online learning, focusing solely on the educational mission and gaining market share.

      1. reed fawell III Avatar
        reed fawell III

        Which suggests to me that the Sullivan’s plan proposes to build a dinosaur in a time of meteor strikes. It proposes a future built on obsolete idea now driven in part by faculty fantasy that they’re entrepreneurs. In that regard, recall Steve Jobs’ commencement address at Stamford asserting that the start and savior of his entrepreneurial success was dropping out of college. Entrepreneurial success cannot be built on tenure. Our universities need to get back to providing quality eduction at affordable prices to students. Otherwise its quite likely that they will go out of business selling products no one wants or can afford.

        1. reed fawell III Avatar
          reed fawell III

          Correction – “Stanford.”

  4. reed fawell III Avatar
    reed fawell III

    Actually, Richard, President Sullivan’s vision of UVa’s future is “money-making, job-generating, MBA/scientist/entrepreneur undertaking,” although she may not appreciate the import of what her four plan does.

    See Virginiagal2 who voices on this website the faculty view of Sullivan’s four year plan, especially as regards Virginia’s lurch toward research (Big Data among others). In so doing, Virginiagal2 powerfully and clearly expresses where the faculty wants to take the University of Virginia.

    Read Virginiagal2 fully and carefully. (found in comments to Jim’s article Technology and UVa’s Mission for Virginiagal2). Note that this massive investment that Sullivan and her faculty propose is all about “money-making, job-generating, MBA/scientist/entrepreneur undertaking.”

    Under the plan, the faculty gets all the direct benefits all of which are paid for by Virginia students who get no real benefit at all. That’s the Sullivan / faculty four year plan that will take UVa. into the future. And its not very original, either. It’s typical by the standards of large universities today.

    So the Sullivan / Faculty plan offers UVa. no competitive advantages, and converts the University into just another big research university playing the same old game build of the backs of ever higher student tuition that is forcing students (and their university) deeper into debt for the purpose of buying their faculty their own simplistic dream of a faux Silicon Valley.

    See Virginiagal2 for all the breathless details.

  5. Institutional self-interest is hard to gauge when you’re talking about a mammoth and complex institution, which every state university is. What UVa has revealed is just how disparate the multiple interests are. Nothing makes me chuckle more than the oft-cited “for the good of the university.” Whose university? As times get economically tougher, there’s little value in meting out blame to Casteen, Sullivan or, dare I say, St. Sandridge. What I’d prefer is a plan that attempts something truly innovative for higher ed. How about shifting to a 5-year Bachelors/Masters combination for physics or engineering and a 2-year Bachleors degree for English or Art History majors? Or 6-semesters on Grounds instead of 8? How about all high school graduates enter national service for 2 years, military or other, prior to university?

  6. virginiagal2 Avatar

    Reed, big data is a career field that benefits students more than faculty. Having those capabilities allows you to train students on technology that currently has high demand and good pay for very good jobs.

    How is cutting edge training for high paying jobs not in the students interest? I am not sure if you don’t get my point or if you just don’t care about keeping up with current technology regardless of its benefits to students.

  7. virginiagal2 Avatar

    Also, and I missed this at first, I am not UVA faculty. I am an alum that works in tech and is a partner in a small tech startup.

    I may agree with the plan, but I cannot give the faculty POV on it.

    1. reed fawell III Avatar
      reed fawell III

      Sorry, I remain quite skeptical.

  8. reed fawell III Avatar
    reed fawell III

    This Sullivan four year plan will profoundly alter to the mission of the University as follows:

    1/ It will shift the University’s primary mission from teaching to research.

    2/ The primary focus of the University will become STEM research, namely a heavy emphasis on research in Science, Technology, Engineering, and Medicine. Thus UVa will become Virginia Tech’s great competitor in state.

    3/ This shift of University focus will require very major new expenditures in heavy infrastructure projects, including highly complex and sophisticated scientific labs, equipment and buildings, as well as the costs of training and equipping scientists, engineers, researchers and other technocrats most.

    4/ This conversion of the University will be built on the backs of the students through the raising of tuition on all students as the primary funding source for the heavy infrastructure costs of this STEM research.

    5/ The University is betting the farm on theory that it can “win” an ever larger share of dwindling Federal research grants (including defense) so as to capitalize on its massive expenditures paid for out of student tuition.

    6/ To assure funds above tuition increases necessary to carry out its plans, Sullivan proposes the creation of an Strategic Investment Fund that will skim monies and borrowing power off the University’s normal coffers so as to place those fund outside the control of the Board of Visitors and vest the power over the monies in University administrators and faculty. (For details of the Fund see the last comment to Article “More Big Tuition Hikes ahead for UVA posted on this website on March 28, 2013).

    Beyond the tuition hikes, and establishing a fund outside the control of the Board of Visitors but within the control of the Administrators and Faculty, the Sullivan Plan bets UVa. future on the dubious theory that UVA can win and ever larger share of Federal research grants despite the fact that:

    1/ Monies available for Federal grants are in rapid decline, and will remain so for the foreseeable future given the nation’s financial crisis.

    2. UVA’s income from federal grants are also in decline, as are its returns on fixed costs from such research, given the cutbacks in Federal spending.

    3/ UVA to date has been a minor player in the federal grant business.

    4/ The competition for Federal grants, always fierce, will increase, given across the board Federal cutbacks in discretionary spending, particularly for UVA that is putting itself in the position of having to compete with far bigger more experienced players in fields of government funded research.

    4/ The burden of any shortfall will force raises of student tuition and cutbacks in other university programs. This forced cutbacks will be acerbated by the privileged position occupied by the Strategic Investment Fund to be controlled by the School Administrators and faculty. It will diminish the monies available for other needs, thus putting additional pressure on student tuition, and University borrowing generally.

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