NZ University Funding Over The Last Two Decades

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Working Paper Series 2/2000
ISSN 1175-2254; ISBN 0-908719-31-0

NEW ZEALAND UNIVERSITY FUNDING OVER THE LAST TWO DECADES

W Guy Scott1 and Helen M Scott2
July 2000

(1) College of Business, Massey University at Wellington and Independent economist.
e-mail: G.Scott@massey.ac.nz and Guy.Scott@xtra.co.nz
(2) Independent researcher, Wellington. e-mail: Helen.Scott@xtra.co.nz

Disclaimer: The views expressed in this publication are the responsibility of the authors and not those of the University
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NEW ZEALAND UNIVERSITY FUNDING OVER THE LAST TWO DECADES
W Guy Scott
College of Business, Massey University at Wellington
Helen M Scott
Wellington

Abstract

The aims of the study were to investigate trends in university funding per equivalent full time student (EFTS) over the last two decades (1980 to 1999) and to compare New Zealand university funding from public sources with OECD countries for which data were available. A university price index was developed and used to deflate nominal data on expenditure per EFTS.

Between 1980 and 1999 real Ministry of Education funding in 1999 dollars per EFTS fell at an annual average rate of 2.3% or by $3,821 (36%). The EFTS to staff ratio increased from 12.5 in 1980 to 18.4 in 1998, an increase of 6.0 students per academic staff member or 48%. Over the period 1980 to 1998, for every $1,000 reduction in Ministry of Education funding per EFTS the EFTS/ staff ratio deteriorated by 1.7. In 1995 New Zealand spent US$3,192 less per EFTS than did Australia.

The findings of this study highlight a number of concerns for New Zealand. If present trends continue, New Zealand universities may experience difficulty in matching academic salaries with those in other countries, student/ staff ratios will continue to rise, and the quality of teaching and research could decline. Rising student fees may result in a reduction in the number of students from lower socio-economic groups able to access university education. Failure to build on the nation’s stock of human capital will reduce New Zealand’s ability to compete internationally.

Key words: Education, university, funding, policy
1. Introduction

The Ministry of Education (1999a, 1999b) acknowledges that a high-performing tertiary education sector has a pivotal role in enhancing New Zealand’s human capital and international competitiveness. Treasury (1999) also notes that tertiary level investment in expertise benefits both individuals and firms.

Over the past two decades Ministry of Education funding levels per student have been falling in real terms. Universities have attempted to cope with the reduced Ministry of Education funding by increasing student to staff member ratios, raising student fees, increasing income from other sources, and by careful budgeting to hold operating costs.

The aims of this paper are to investigate trends in university funding per equivalent full time student (EFTS) over the last two decades (1980 to 1999) and to compare New Zealand university funding with OECD countries for which data were available.

2. Method

Government funding (Ministry of Education) for the period 1980 to 1990 related to grants covering the operations (exclusive of capital works) of universities. The EFTS funding system began in 1991. From 1980 to 1987 funding was derived from government expenditure estimates (Estimates of the expenditure of the government of New Zealand). Calendar years 1980 to 1987 were estimated by calculating a weighted average of the relevant financial years ending March (for example, calendar 1980 = 1979/80 expenditure multiplied by 0.25 plus 1980/81 expenditure multiplied by 0.75). Expenditure data for 1988 and 1989 were from Deloitte Ross Tohmatsu (1990) and 1990 onwards from the Ministry of Education Tertiary Charters and Funding Section (1990, 1993 & 2000). Numbers of EFTS were obtained from the Ministry of Education (Education Statistics News Sheet 1999 and Tertiary Charters and Funding Section, 1990, 1993 & 2000) and price and wages indexes were from Statistics New Zealand (2000).

In an earlier study (Scott, 1991) a university price index (UPI) was constructed using Statistics New Zealand data. Since that investigation was undertaken some of the data series have been discontinued and new indexes that are more specific to education have been introduced. It was therefore necessary in this latest study to select, link and weight the most appropriate indexes available from Statistics New Zealand.

The new UPI was based upon a number of Statistics New Zealand indexes for (1) wages and (2) non-labour inputs prices. These indexes and the method of construction follow.

Education wages
• March 1980 - December 1992: Prevailing weekly wage rate index, central government sector, professional technical and related occupation group, series identifier PWIQ.S1211
• December 1992 - December 1999: Labour cost index, all sectors combined, salaries and wage rates, teaching professions, series identifier LCIQ.SB53B3

Both of these series were converted to a common base (that of the link quarter, December 1992 = 1000). The labour cost index for teaching professionals was the most relevant series for university wages but as it was not introduced until December 1992 it was necessary to link it with the most appropriate earlier series. The labour cost index for teaching professionals was spliced on to the prevailing weekly wage index and the base of the resultant linked series was changed to March 1980 quarter = 1000.

Education non-labour input prices
• March 1980 - September 1996: Producers price index, inputs, central government group, series identifier PPIQ.SIV
• September 1996 - December 1999: Producers price index, inputs, education industry, series identifier PPIQ.SNN01

Both series were converted to a common base (that of the link quarter, September 1992 = 1000). The education series was spliced on to the central government series and the base of the resultant linked index was changed to March 1980 quarter = 1000. The non-labour inputs index covers all non-labour input prices except for ACC levies, government taxes (for example, GST), licence fees, patient fees, royalties, bad debts, and capital expenditure.

The UPI was constructed by calculating a weighted mean of the wages and prices indexes. The weights represented the respective proportions of operating expenses accounted for by wages and by other costs. Expenditure weights for the period 1980 - 1990 were obtained from the University Grants Committee (1989) and for the period 1991 onwards from annual reports of universities (1993 and 1998). Finally, the quarterly university cost index was transformed into an annual index of base 1980 = 1000.

Nominal expenditure per EFTS net of GST was then deflated by the UPI to derive funding per EFTS in constant 1999 input prices. This represents a measure of the volume of inputs funded per EFTS. Information on sources of funding and staff student ratios were obtained from the New Zealand Vice-Chancellors' Committee (1999). GST was removed from the expenditure series because GST is a transfer payment collected by universities and paid to government and is not a part of university costs.

Expenditure per university EFTS and GDP per capita (both in purchasing power parities for 1995) were obtained for 17 OECD countries for which data were available (OECD, 1998) and comparisons made.

The UPI should be regarded as an approximation or best estimate of university input prices and wages. It is based on secondary data collected by Statistics New Zealand to track movements in prices and wages relating to a range of industries and occupational groups. An official index relating specifically to university input prices or wages does not exist. Although OECD data for EFTS expenditure may not have been prepared on exactly the same basis for all countries (and thus must be interpreted with caution), they are never-the-less the best international data available.

3. Results

Between 1980 and 1999 Ministry of Education expenditure (nominal, exclusive of GST) on universities grew by 320%, EFTS numbers by 135%, university input prices rose by 177%, (CPI rose by 220%) and Ministry of Education expenditure per EFTS in 1999 dollars fell by 36%. Over the same period real Ministry of Education funding per EFTS fell at an annual average rate of 2.3%. The first half of the series (1980 to 1990) recorded an annual average fall of 1.5% while the period 1991 to 1999 (in which the EFTS funding system operated) recorded annual average reductions of 2.8% (Table 1 and Chart1). The average annual reduction in deflated funding per EFTS accelerated during the latter half of the decade, that is, between 1995 and 1999 UPI deflated funding per EFTS fell at an annual average rate of 4.2%. The consumers price index (CPI) was also used as a deflator and produced similar results (Table 1).

Between 1980 and 1998 while real Ministry of Education funding per EFTS fell by $3,534 (33%) the EFTS to staff ratio increased from 12.5 to 18.4, an increase of 6.0 students per academic staff member or 48%. For every $1,000 reduction in Ministry of Education funding per EFTS the student/ staff ratio deteriorated by 1.7. The proportion of university operating revenue from the Ministry of Education fell from 73% in 1991 to 50% in 1998, the proportion raised from student fees rose from 14% to 21% and the proportion raised from other sources rose from 13% to 29% (a greater increase than income from fees). (Table 2 and Chart 2).

Over the period 1990 to 1998 the proportion of academic staff to total university staff has fallen from 45% to 40% (New Zealand Vice-Chancellors’ Committee, 1999).

The international comparison showed that total expenditure (public and private combined in US 1995 dollars converted using purchasing power parities) per EFTS ranged from almost $20,000 in the US to just over US$3,000 in Greece. New Zealand recorded US$8,380 which was US$3,192 below that of Australia (Table 3).
4. Discussion and Conclusions

Over the last two decades, real Ministry of Education funding per EFTS has fallen at an increasing rate, the number of EFTS per staff member has risen and the proportion of academic staff to total university staff has fallen. The reduction in the proportion of operating revenue from the Ministry of Education has fallen in line with the reduction in the real level of Ministry of Education funding per EFTS (Table 2 and Chart 2). Universities have reacted by increasing income from fees and other sources.

The period over which the study was conducted was of sufficient length from which to draw valid conclusions. However, consideration of changes between individual years in isolation may not be valid. For example, the wages and prices freeze of the 1980s, and the change to the EFTS funding system in 1991 would have introduced one-off shocks at these times. Using the CPI as a deflator in place of the UPI made little difference to the findings.

Spillover or external benefits are provided to individuals other than those directly involved in either providing or consuming education. An example of a spillover benefit of education is the improvement in the quality and quantity of society’s human capital. In an unregulated and unsubsidised private market the quantity and mix of education services provided will be determined by decisions based on private benefits and costs. Spillover benefits to others will not enter into the decision making process of the consumers and sellers of such services because these benefits will not be relevant from their perspectives. Governments acting as agents for society are able to take a societal perspective which will capture all costs and benefits relevant to society. Education may also be regarded as a merit good to which all citizens should have access regardless of their ability to pay. This has serious implications for efficiency, equity and social cohesion, and government funding may be justified on grounds of both efficiency and equity.

Although New Zealand’s lower level of spending per EFTS (compared with the OECD average) is in part a reflection of the level of GDP per capita the country does spend less than would be predicted from GDP levels. Of concern is the deficit of just over US$3,000 per EFTS compared with Australia.

Over the period analysed the mix of courses and student numbers in New Zealand have changed with a trend away from science and other high-cost courses to courses requiring less infrastructure and capital. Thus it could be argued that some funding reduction per EFTS was appropriate. However, a move away from the high-cost courses could be a direct result of reduced funding and reduced inability of students to meet the increased fees.

This study was limited in its scope and depth by the constraints of time and funding. It would be useful to extend the analysis by investigating some of the following issues;
• the magnitude of the costs and benefits from education accruing to various sectors in New Zealand society,
• overseas funding trends and comparisons across countries,
• more detailed analysis of different funding options for tertiary education,
• reasons for the increase in non-academic staff as a proportion of total staff
• changes in work undertaken by academic and non-academic staff,
• employment opportunities in New Zealand for graduates, and
• changes that have occurred in access to university education by socio-economic group.

The findings of this analysis have a number of implications for New Zealand. Universities may experience difficulty in matching academic salaries to those in other countries and this may threaten the quality of teaching and research. If the number of students per academic staff member continues to rise, less time would be available for research and interaction with students and staff workloads will increase. Rising student fees may result in a reduction in the number of students from lower socio-economic groups able to access university education. Failure to build on the nation’s stock of human capital will reduce New Zealand’s ability to compete internationally.

5. Acknowledgements

The authors gratefully acknowledge a research grant from the Association of University Staff and the New Zealand Vice-Chancellors’ Committee. We also wish to thank a number of colleagues, in particular, Johnathan Boston and Brian Easton for peer review and helpful comments on drafts of this paper.

6. References

Deloitte Ross Tohmatsu. (1990). Appendix to the report to the Taskforce on PSET Institutional Costing: Cost analysis of institutions & modelling of bulk funding proposals - Stage 2 data analysis).

Education Statistics News Sheet. (1999a). Vol 9 No2 p3.

Estimates of the expenditure of the government of New Zealand. Appendix to the Journal of the House of Representatives.

Ministry of Education (1999a). Briefing for the incoming Minister of Education. Wellington: Ministry of Education.

Ministry of Education, Tertiary Charters and Funding Section. (1990). Spreadsheet. EFTS enrolments in tertiary institutions: 1980 - 1990

Ministry of Education, Tertiary Charters and Funding Section. (1993). Spreadsheet. EFTS funding for universities 1990 - 1993

Ministry of Education, Tertiary Charters and Funding Section. (2000). Spreadsheet. Universities bulk and wholly research EFTS funding (GST inclusive) 1991 - 1999.

Ministry of Education. (1999b). White Paper. Tertiary education in New Zealand: policy directions for the 21st century. Wellington: Ministry of Education.

New Zealand Vice-Chancellors' Committee. (1999). Statistical Collection. Wellington

Organisation for Economic Co-operation and Development. (1998). Education at a Glance 1998. OECD. Paris.

Reports of the University Grants Committee and University Institutions for the year 1989. (1989) Wellington: Government Printer.

Scott, W. G. (1991). University funding over the last decade. Wellington Polytechnic, School of Commerce, Occasional Paper No. 3.

Statistics New Zealand. (2000). Information network for official statistics (INFOS) Wellington.

Treasury (1999). Towards higher living standards for New Zealanders: Briefing to the incoming Government. Wellington: Treasury.

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