The U.S. Dept. of Education Should Continue to Collect Benefits Costs by Functional Expense

This is a guest post by my colleague and collaborator Braden Hosch, who is the Assistant Vice President for Institutional Research, Planning & Effectiveness at Stony Brook University. He has served in previous positions as the chief academic officer for the Connecticut Department of Education and the chief policy and research officer for the Connecticut Board of Regents for Higher Education. He has published about higher education benchmarking, and has taught about how to use IPEDS data for benchmarking, including the IPEDS Finance Survey. Email: Braden.Hosch@stonybrook.edu | Twitter: @BradenHosch

Higher education finance is notoriously opaque. College students do not realize they are not paying the same rates as the student sitting next to them in class. Colleges and universities struggle to determine direct and indirect costs of the services they provide. And policymakers (sometimes even the institutions themselves) find it difficult to understand how various revenue sources flow into institutions and how these monies are spent.

All of these factors likely contribute to marked increases in the expense of delivering higher education and point toward a need for more information about how money flows through colleges and universities. But quite unfortunately proposed changes to eliminate detail collected in the IPEDS Finance Survey about benefits costs will make it more difficult to analyze how institutions spend the resources entrusted to them. The National Center for Education Statistics should modify its data collection plan to retain breakouts for benefits costs in addition to salary costs for all functional expense categories. If you’re reading this blog, you can submit comments on or before July 25, 2016 telling them to do just that.

Background

Currently, colleges and universities participating in Title IV student financial aid programs must report to the U.S. Department of Education through the Integrated Postsecondary Education Data System (IPEDS) how they spend money in functional areas such as instruction, student services, institutional support, research, etc. and separate this spending into how much is spent on salaries, benefits, and other expenses, with allocations for depreciation, operations and maintenance, and interest charges. This matrix looks something like this, with minor differences for public and private institutions:

hosch_fig1

The proposed changes, solely in the name of reducing institutional reporting burden, will significantly scale back detail by requiring institutions to report only total expenses by function and total expenses by natural classification, but will not provide the detail of how these areas intersect:

hosch_fig2

Elimination of the allocations for depreciation, interest, and operations & maintenance is a good plan because institutions do not use a consistent method to allocate these costs across functional areas. But elimination of reporting actual benefits costs for each area is problematic.

To be clear, under the proposed changes, institutions must still, capture, maintain, and summarize these data (which is where most effort lies); they are simply saved the burden of creating a pivot table and several fields of data entry.

Why does this matter?

For one thing, the Society for Human Resource Management 2016 survey shows that benefits costs have increased across all economic sectors over the past two decades. IPEDS would continue to collect total benefits costs, but without detail about the areas in which these costs are incurred, it will be impossible to determine in what areas these costs may be increasing more quickly. Thus, a valuable resource for benchmarking and diagnosis would be lost.

Additionally, without specific detail for benefits components of function expenses, the ability to control for uneven benefits costs will be lost; it would be impossible for instance to remove benefits costs from standard metrics like education and general costs or the Delta Cost Project’s education and related costs. Further, benefits costs neither are distributed uniformly across functions like instruction, research, and student services nor are distributed uniformly across sectors or jurisdictions. Thus, to understand how the money flows, at even a basic level, breaking out benefits and other expenses is critical.

Here are two quick examples.

Variation at the institution level

First, as a share of spending on instruction, benefits and other items, benefits expenses are widely variable by institution. I have picked just a few well-known institutions to make this point – it holds across almost all institutions. If spending on benefits were evenly distributed across functions, then the difference among these percentages should be zero, but in fact it’s much higher.

 hosch_fig3

Variation by state

Because benefits costs are currently reported separately across functions, it is possible to analyze how the benefits component of the Delta Cost Project education and related costs metric – spending on student related educational activities while setting aside auxiliary, hospital, and other non-core metrics. Overall, the Delta Cost Project also shows that benefits costs are rising, but a deeper look at the data also show wide variation by state, and in some states, this spending accounts for large amounts on a per student basis.

Among 4-year public universities in FY 2014, for instance, spending on benefits comprised 14.1% of E&R in Massachusetts, 20.2% in neighboring New Hampshire to the north, and 30.2% in neighboring New York to the west. The map below illustrates the extent of this variation.

Benefits as a percent of E&R spending, Public, 4-year institutions FY 2014

hosch_fig4

Excludes amounts allocated for depreciation and interest. Source Hosch (2016)

Likewise, on a per student (not per employee) basis these costs ranged from $1,654 per FTE student spent on E&R benefits in Florida, compared to $7,613 per FTE student spent on benefits in Illinois.

E&R benefits spending per FTE student, public 4-year institutions, FY 2014

hosch_fig5

Excludes amounts allocated for depreciation and interest. Source Hosch (2016)

Bottom line: variation is stark, important, and needs to be visible to understand it.

What would perhaps most difficult about not seeing benefits costs by functional area is that benefits expenses in the public sector are generally covered through states. States do not transfer this money to institutions but rather largely negotiate and administer benefits programs and their costs themselves. Even though institutions do not receive these resources, they show up on their expenses statements, and in instances like Illinois and Connecticut in the chart above, the large amount of benefits spending by institutions really reflects state activity to “catch up” on historically underfunded post-retirement benefits. To see what institutions really spend, the benefits costs generally need to be separated out from the analysis.

What you can do

Submit comments on these changes through regulations.gov. Here’s what you can tell NCES through the Federal Register:

  1. We need to know more about spending for colleges and universities, not less
  2. Reporting of functional expenses should retain a breakout for benefits costs, separate from salaries and other costs
  3. Burden to institutions to continue this reporting is minimal, since a) they report these costs now and b) the costs are actual and do not require complex allocation procedures, and c) they must maintain expense data to report total benefits costs.

Author: Robert

I am an assistant professor of higher education at Seton Hall University. All opinions are my own.