Financial Problems in Universities

Copyright 2009 by Ronald B. Standler

state budgets

Since the 1970s, state legislatures have addressed state budget problems by failing to allocate adequate amounts of money to state colleges and universities.

federal budget

In parallel, there was a separate financial problem faced by all research-oriented universities, both state and private. During the 1950s and 1960s, the federal government gave generous financial support to professors who were doing research in physics, electrical engineering, and other disciplines. As a result of the generous financial support, many universities hired large numbers of physics and engineering faculty in the 1960s, and paid their salary from research grants or contracts. Not only did research grants and contracts pay for the salary of professors and stipends for graduate students, but also the overhead on these grants and contracts paid for part of the general operating expenses of the university, such as acquisition of books and journals for the libraries. When the federal government began drastic reductions in financial support for scientific research in the 1970s (continuing during the 1980s and 1990s), universities were stuck with tenured professors who were not needed to teach classes and who were now unable to pay their salary through grants or contracts.

In my August 2004 essay on the history of funding of scientific research by the U.S. Government, I tersely sketched the rise of funding during the 1950s and 1960s, and the reasons for the drastic decline of funding in the 1970s, 1980s, and 1990s.


Private universities generally invested their endowments (i.e., gifts from wealthy alumni and other charitable donations) in the U.S. stock market. Investments in stocks generally appreciate in value faster than investments in bonds or money-market. However, the stock market sometimes crashes (e.g., in 1929, 1987, and 2008-09) and money invested in stocks can disappear when the company ceases business. Even if the company continues in business, it can take years after a crash before the stock recovers its value before the crash.

A university that relies on income from its endowments will suddenly face a shortfall in income during, and immediately after, a stock market crash. Such a dramatic loss of income must be met by cutting expenses or increasing tuition, or both.

In the current recession, by Feb 2009, the Standard & Poors 500 Index had lost more than half of its value at its peak in Oct 2007. This lost value means that many universities were unable to use income from their investment in stocks to pay for scholarships for needy students.

University response

In response to these financial restrictions, universities tended to:


In December 2008, the Associated Press distributed a news story about how tuition increases had made a college education unaffordable to children of middle-class parents in the USA.   This is not news to the higher-education community.   These tuition increases are a direct result of less government support for scholarly research since the 1970s.

The high tuition costs are obviously a problem for the current generation of students.   In states with large agricultural or ranching industries, the lack of college education may mean that a generation of farmers or ranchers does not receive an education in scientific ways to operate and manage a farm or ranch, which could increase the cost of food in the future.   There is also the more general problem of a democratic society that lacks educated people who have learned the lessons of history, and who know how to use scientific information to design an enlightened public policy.


During the 1950s and 1960s it was unquestioned that investing in our children's future — including giving them the best possible education and also generously funding scientific research as the way to a prosperous future — was the right thing to do.   But beginning in the 1970s, America lost sight of this long-term investment goal, while pursuing short-term solutions to one crisis after another.

10 July 2009: University of California

Legislators in California cut US$ 0.8 billion — approximately a 20% reduction from the previous year — from the funding for the ten campuses of University of California, amongst the best state universities in the nation. The president of the University announced (1) essentially zero new hiring, (2) furloughs of 140,000 employees, (3) budget cuts by discontinuing existing programs and classes, and (4) increased tuition for students. A furlough is when the University will give the employee several unpaid "holidays" each month, but with no reduction in workload, which is effectively a salary reduction between 4% and 10%. Instructors are expected to choose furloughs on their nonteaching days.

Consequences of the budget cuts in 2009 and previous years include: larger classes, fewer classes, higher tuition charges, fewer students admitted to study, fewer services for students, and famous faculty leaving the Univ. of California to take higher paying jobs at other universities.   In short, students would pay more and get less.   California is killing its future.

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created 15 Feb 2009, modified 12 July 2009

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