Commonwealth and student contribution reforms create a harder cap on ‘priority’ than ‘non-priority’ courses

My previous post examined how, for many disciplines, price signals to students and universities contradict each other under the Tehan reforms. Without demand and supply incentives lined up, enrolment patterns by discipline may not match the government’s ‘national priorities’.

The overall price signal for the university, the total per student funding rate for each full-time equivalent enrolment, is made up of two components. These are a Commonwealth contribution, paid out of the Commonwealth Grant Scheme, and a student contribution, a university charge paid by students up to a legislated maximum amount. Most students use HECS-HELP loans to pay their student contributions.

This post looks at what separate effects the Commonwealth and student contributions might have on university behaviour, independently of how they combine to form a total funding rate.

Apart from their levels for each discipline, a key difference between them is that total Commonwealth contribution payments are capped, while total HECS-HELP payments for student contributions are uncapped.

Trade-offs within the Commonwealth Grant Scheme

Under the Tehan reforms, the Commonwealth Grant Scheme will operate as a block grant. Under block grants, universities decide how to spend a fixed or semi-fixed sum of money. This contrasts with a demand driven system, which fixes payments to enrolments rather than a specified amount; or a central allocation model, where the government specifies exactly what student places each university will provide for its fixed funding (this is not common in Australia; medical student places are the only long-term example).

Compared to the other systems, block grants require universities to choose how to allocate finite CGS money between disciplines. In a demand driven system total resources aren’t capped, so trade-offs between disciplines are not required; in a central allocation system the government makes the trade-offs.

For university leaders under block grant systems, unless additional money is allocated, increasing enrolments in one field of education means decreasing them in another. It is a political decision with winners and losers. This makes adjusting course provision difficult. Faculty deans and department heads fight for their share; they may enlist external constituencies in their cause. Due to the political cost of change, block grant systems tend towards conservatism. The status quo keeps the peace.

Commonwealth contributions that differ between fields, a feature of both the current and proposed funding systems, complicate these trade-offs. This is because aside from the total dollars implications of moving resources between fields, movements between funding clusters (groups of disciplines with the same Commonwealth contribution) are not neutral on student places.

As the chart below shows, for example, under the current system it would cost 6.1 management and commerce places to create one student place in allied health. In making trades most universities will consider their implications for local participation and attainment rates. Trades with a high cost in total student places are less likely to happen.

By moving from eight to four Commonwealth contribution clusters the Tehan reforms increase the number of field-of-education trades with neutral student place implications – creating one new place in a preferred field costs only one place in another field in the same cluster. That should be a positive for flexibility. Teaching, allied health and IT, for example, are in different clusters now but would be in the same cluster next year.

But the Tehan reforms also increase the ratios between the lowest funding cluster and the others. The per EFTSL payment for law, business and non-language arts students is $1,100, half the previous lowest amount. The price in student places of shifting money from these fields would be double or more what it is now, as the chart above shows.

As a result, one scenario is that, although these $1,100 fields are not government priorities, the Commonwealth contribution reforms may help lock in their student place numbers. The loss of student places from shifting money on any scale to high Commonwealth contribution fields would generate too much resistance from the affected faculties, and would be too large for universities with participation missions to countenance.

Conversely, it becomes harder to allocate additional places to priority fields with increased Commonwealth contributions. Each additional place would consume more than it does now of the university’s limited CGS funding. The affected fields include English especially, but also foreign languages, architecture, maths, IT, education and nursing. This puts caps on how many additional places can be offered in these fields.

A de facto demand driven system in some fields?

But perhaps universities can avoid the difficult trade-offs I described above. The $1,100 fields have a very high student contribution of $14,500. Maybe universities could just ignore the $1,100 Commonwealth contribution and enrol students on what would essentially be a full-fee basis.

By not spending CGS money on some or all fields with $14,500 student contributions a university would minimise the need to cut places in those fields, and free up CGS funding for fields that aren’t viable on student contributions alone. This could give universities an enrolment profile that better matches student preferences, both in aggregate number and by field, than if they followed the funding logic of the Commonwealth contributions.

How likely is that enrolments could happen on student contributions only? Viability would vary between universities, but based on the Deloitte Access Economics cost analysis, inflated by 6 per cent to get estimated 2021 costs, 14 universities have average costs for society and culture courses that would breakeven or make a profit on the new student contribution alone. Thirteen can breakeven or profit in psychology, 11 in management and commerce, and 5 in communications.

As noted previously, field-of-education aggregation problems in the cost data suggest caution in inferring the costs of disciplines that were mixed in with fields of education with different funding histories, organisational structures or pedagogical methods.

But it is worth noting that for management and commerce, law and non-languages humanities the proposed student contribution exceeds their total current funding rate. If offering places in these courses was feasible at the 2020 total funding rate, chances are that it will also be feasible at the 2021 student contribution rate.

Without any limit on total HECS-HELP lending, universities could accept all applicants in these fields who meet their academic requirements and for whom they have capacity. It would partially restore the demand driven system that officially ended in December 2017.

In making this financial logic argument, I realise that other factors will influence decisions. Public subsidies have symbolic as well as monetary value. For example, the law deans characterised their Commonwealth contribution cut as ‘send[ing] a signal that undervalues legal knowledge and skills’. A newspaper article argued that the ‘government has effectively devalued the humanities as a social good’. This is despite law and humanities getting higher total funding rates under the Tehan reforms than now.

For universities to deprive these faculties of CGS funding would rub salt into the wound left by the government’s changes. It’s hard to imagine that a faculty would be left with no CGS funding at all, even when the student contribution provides more money than the previous total funding rate. But with few easy or attractive options left for university decision makers, student-contribution-only enrolments could help reduce university mission failure and system-level dysfunction.

Harder caps on priority than non-priority fields

Although the $14,500 student contribution could help meet student demand, yet again we are left with doubts about whether the government’s funding system design will support its ‘national priority’ goals.

The national priority fields have relatively high Commonwealth contributions, and therefore rely on the capped Commonwealth Grant Scheme for their financial viability. The lower the student contribution is as a share of the total funding rate, the harder it is to expand enrolments beyond the CGS allocation in a financially viable way.

The right-hand columns of the chart below show priority fields that are favoured by the government but for which ‘over-enrolments’ become less attractive under the Tehan proposal, because the student contribution would be a lower proportion of all funding.

But for over-enrolments in non-priority fields, those in the left-hand columns of the chart, universities would still get 93 per cent of the full funding rate. Whether or not they forgo CGS funding entirely, over-enrolments will be attractive. Even in fields, like communications, where few universities have average costs below $14,500, the marginal students – additional enrolments in courses and classes that already exist – will probably be profitable.

Conclusion

That the de facto demand driven, full-fee $14,500 student contribution fields might generate a workaround to meet student demand does not, of course, mean that the reconfigured Commonwealth and student contributions are good public policy. $14,500 student-contribution-only places are a fix for a problem that we should not create in the first place.

As my previous post argued, the cuts to student contributions in national priority fields are unnecessary to meet skills needs. They should be abandoned and the proposed Commonwealth contributions reduced. This would make it less costly in limited CGS funds to transfer places to national priority fields, and make over-enrolling students in those fields more viable once CGS funding is exhausted.

4 thoughts on “Commonwealth and student contribution reforms create a harder cap on ‘priority’ than ‘non-priority’ courses

  1. Thanks Andrew. It is probably possible for some universities to generate a surplus from the CGS component of Management and Commerce if it was to only fund the teaching, but I wonder if this would be a wise decision when considering the research implications? I would expect it is more difficult at universities with stricter research requirements (e.g. 40% research workload for T&R staff in EAs) as well as longer term industrial implications if long-term casuals/contractors were used.

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  2. Excellent analysis and thank you for unpacking a complex arrangement with the realpolitik of funding allocation within universities. I had a question regarding the decision to use 6% as the growth amount in costs of providing courses from 2018 to 2021. In the 2019 Transparency in higher education report (https://docs.education.gov.au/documents/2019-transparency-higher-education-expenditure-publication-0) the annual increase from 2017 to 2018 was 2.5% for Bachelor degrees.

    Across 2015-2018 the Compound Annual growth rate was 2.6% with an overall growth of 8%.

    Given the same time frame of three years for the (2018-2021) why was 6% determined to be the inflation amount?

    I am planning on undertaking some additional modelling and am interested in the assumptions used to derive the inflation amount – but given the sparse data collection years am unsure of whether 6% or 8% would be more reasonable so am keen to understand why you decided on that figure.

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    • There was some discussion of this issue at the end of this post: https://andrewnorton.net.au/2020/07/07/can-a-block-grant-system-work-on-lower-per-student-funding-rates/. I did not do rigorous analysis to arrive at 6%, but estimated below the recent trend due to low inflation and less generous enterprise agreement pay rates in recent times. At a number of unis, pay rises are being deferred or pay even cut. On the other hand, as I note sacking casuals and getting generally higher-paid to teach will reduce total cash outlays, but increase teaching costs in an accounting sense due to the higher hourly rates of the staff involved. Both COVID and the Tehan reforms will force unis to be much more ruthless with costs.

      Given the inherent limitations of both my inflation assumptions and the underlying cost data my analysis is a guide to the direction and broad scale of potential change, but not a precise prediction.

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      • Thanks for expanding on that reasoning – will go with that adjusted inflator given assumed responsiveness to the factors just outlined rather than treating it as a time series in a vacuum

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