Definitions of Private and Public Higher Education
Private higher education institutions are those, typically nonprofit, entities owned and operated by the private sector. These private colleges and universities may be affiliated with other organizations, such as religious orders or other sponsors, or they may be totally independent of any other organization. They typically have their own board of trustees or have a governing group responsible to a broader oversight group, such as a religious order's regional board. Private colleges are usually single institutions without regional systems (as contrasted with public institutions). However, some private institutions develop partnership-style arrangements with other private colleges.
Public institutions, on the other hand, are those established, supported, and controlled by a governmental agency, most often states. By definition, unlike private institutions, public colleges have no affiliation. They are considered to be "owned" by the citizens of the state in which they are located. Most states operate two, and sometimes three, tiers of public colleges. One tier is the community college, which awards two-year degrees. A second tier is the "four-year college," which awards bachelor's and, in most cases, master's degrees. Many states also have a third-tier public university, the research institution, which offers doctoral and advanced professional degree programs. Within a particular public system, students may move around fairly easily, say from a community college to a four-year college. The network of public institutions within a state is referred to as the public college "system" within that state (as contrasted with the typical stand-alone private university).
It should be noted that even though private institutions are not considered to be tied directly to the public, it is state governments that charter and enable them to operate as nonprofit entities. Further, the federal government grants the tax-exempt status to those institutions operating as such (most colleges and universities are not profit-oriented entities). Finally, private institutions often receive grants from state and federal governments. Therefore, the apparent independence from the control of either federal or state governments is somewhat relative. Governing boards and college administrators must take their fiduciary and ethical responsibilities seriously to sustain institutional independence.
Governance
Because the governing bodies of higher education institutions ultimately are responsible for their entities' budgets, a word about the differences in governance structure between private and public institutions is relevant to a discussion about the differences in budgeting.
Private institutions typically are governed by boards composed of "independent" members, individuals selected not because of any specific public representation. These private board members often have some relationship to the private entity, perhaps as alumni, donors, or local/regional community members (including individuals from local industry). While a private institution has its own governing group, this board may be responsible to a broader oversight group as previously noted. Although private institutions do not represent a specific public interest, "in this era of heightened public scrutiny and demands for accountability on the part of leaders at all levels" of all institutions, even private universities represent the general public to a degree (Asin 2010, [paragraph] 1.) The Association of Governing Boards of Universities and Colleges (2011, [paragraph] 1) notes that, "regardless of the size, mission, or source of support of the institutions they serve, all higher education boards are accountable to and accountable for the ... public interest and public trust."
Since public institutions are established, supported, and controlled by a governmental agency, they have boards composed of "public" members, individuals often selected by the state or other governing agency. These board members may be either elected or appointed. Because of their broad constituencies, the boards of public institutions are scrutinized more intensely than those of private colleges and typically must adhere to "sunshine laws" that require most board business to be conducted in venues providing public access. As a result, special-interest groups of many types are able to place demands upon the boards of public institutions, sometimes diverting attention from core oversight responsibilities. A critical budget challenge relating to the governance of public institutions involves how best to position the institution so that it receives its share of the limited public resources that must be allocated among many competing social needs and political agenda items. The Association of Governing Boards of Universities and Colleges reports that, despite this broad exposure and the fact that public institutions enroll more students, public colleges typically are governed by smaller boards than are independent universities: "average board sizes [are] 29 at private institutions and 12 at public institutions" (Bass 2011, p. 36.)
Governmental (Typically State) Support
The most distinctive difference between the budgets of public and private colleges and universities is the governmental subsidy(ies) received by public institutions from their supporting government--in most cases in the United States, the state in which the college or university is located. These subsidies come in three main forms: (1) funding to support the operating budget, often based on enrollment numbers of citizens from that state, (2) capital funding for specific building initiatives, and (3) grant funding for specific programs. The State Higher Education Finance early release report for fiscal year 2008 by the State Higher Education Executive Officers (SHEEO), notes that for fiscal year 2008, "state and local governments invested $85 billion in public higher education," representing 64 percent of total public institution's educational revenue (State Higher Education Executive Officers 2008, [paragraph] 3.) Public institutions also sometimes receive pass-through funds from other state agencies to partner, for example, in offering educational programs such as Upward Bound to low-income students. These typically are not major institutional revenue sources but often help ensure that institutions visibly fulfill their public service expectations.
While in some states governments provide scholarship funding to their citizens who attend in-state private institutions, the funding amounts typically are not nearly as significant as the operating budget subsidies provided by these governments to their public institutions. Also, the mechanics are very different, in that the public subsidies flow straight to the institution, while the private subsidies actually flow to specific students as payments or "tuition assistance grants" on their college or university accounts (and not as funding over and above that received as tuition, as in the case of governmental funding to public institutions).
It is also helpful at this point to mention one additional governmental support distinction for public community colleges. Often, in addition to state support, community colleges receive significant operating budget support from the counties/localities within their service area.
Student Tuition and Fees
Another significant budget difference between private and public colleges and universities relates to student tuition and fees. Private institution tuition and fees (particularly tuition) tend to be higher per student than at public institutions. This differential results because of the governmental support described previously. That is, since public colleges and universities receive governmental subsidies, they are less pressed to generate tuition and fee dollars from their students. On the other hand, private institutions often find it necessary to generate a large percentage of their revenues from their core business--in this way, behaving much like a commercial entity.
Another public/private student tuition distinction that is often evident is that public institutions frequently charge a much higher tuition rate to students from out of state. In fact, many public universities give their own state citizens priority in admissions, have fewer admissions spaces for out-of-state students, and/or have more stringent admission requirements for out-of-state students. While some private institutions also have a similar tuition premium for out-of-state students, this situation is rarer than in public colleges and universities. Private colleges may consider residency status for diversity purposes in order to admit students from a variety of states, but residency typically is not a factor in the tuition rates charged. A public institution's differential tuition rate based on residency results from the state subsidy. In-state students actually pay less than the cost of their education because the state government subsidizes their tuition and fees. The subsidy is given based on the premise that public institutions are enrolling and educating citizens from their own states; therefore, out-of-state students must pay a premium. In many cases, out-of-state tuition levels may be comparable to private college tuition rates. It should be noted that some states have reciprocal in-state agreements with neighboring states.
While the governmental operating subsidy to a public institution is frequently based on in-state student enrollment numbers, it also may be based on performance indicators, other formulas, or a mix of mechanisms.
Student Financial Aid
Of course, both public and private institutions offer scholarships that result in per-student net tuition levels that may be significantly less than published tuition levels. This financial aid practice is often termed "tuition discounting." Historically, private institutions generally provide more financial aid to students than do public institutions. Private institutions also tend to award more of their aid to students in the form of grant scholarships than loans; these grants offset the typically higher tuition rates that private colleges charge. As a result, it is not uncommon for the net cost for a student to attend a private college to become much closer to the net cost to attend a public university.
Public institutions often are more closely monitored than private institutions as to their methods for awarding financial aid; therefore, they rely more frequently on the federal calculation to assess a student's need based on the family's ability to pay when allocating financial aid. Some public institutions actually guarantee low-income students enough financial aid to graduate either debt-free or with maximum loans not to exceed certain amounts. Private institutions often have more leeway in calculating financial aid awards, using an institutional calculator to allocate scholarships and making significant financial aid awards based on merit as well as need.
Constituent Support
In general, the constituent support base is broader for public institutions than for private institutions. This is because public institutions have the indirect interest of their funding community--in the case of a state-funded public institution, the citizens of that state are potential supporters as well as potential naysayers. (This is also true for national academies such as the U.S. service academies.) This typically is not the case for private institutions, at least not to the same extent. From a budgeting perspective, the broader constituent base means that, in addition to providing taxpayer support through the public funding process, citizens may be interested in donating personal funds in support of their state's public institutions. Private institutions do not have this automatic constituency base; while some private colleges and universities have a broader base than others, it still tends to be much more regional (that is, local to the institution). From a budget monitoring perspective, of course, the public constituency also means that many more eyes are watching how the public institution spends its money.
Privatization of Public Institutions
Throughout the United States, beginning particularly in the 1990s, state funding of public higher education began to decrease, if not in outright dollar amounts then in the percentage of the budget supported. In response, some public colleges and universities, or parts thereof, have begun to evolve to a more private model, making the concept of a "public" university somewhat ambiguous in certain cases (Dill 2005). These public higher education entities have drastically minimized or totally eliminated their share of state allocations, instead obtaining their support mostly or exclusively through tuition, fees, and private funding. This scenario is called the "privatization" of public institutions. By definition and their understood mission to serve the public good, such institutions typically still are considered to be public for reporting purposes. This concept of privatization is different from the routine striving of public colleges and universities to enhance their revenues through profit-making ventures such as entrepreneurial development and sale of research and related products, provision of distance education modeled on a private institution example, and the licensing of logos and other items.
As these public institutions minimize or eliminate their state subsidies, they also seek to disconnect themselves from governmental regulation and control. For example, personnel policies, contracting, and ownership of land and buildings may revert from the states or other public agencies to the institutions. Dill (2005, pp. 4-5) suggests that "both state ownership and state control of research universities are becoming less meaningful as well as less effective.... [The] move down this slippery slope of deregulation ... lessens the traditional distinction between the public and private university" However, Lombardi (2006, [paragraph] 4) notes that "in the real world, most of public higher education takes place in state and community colleges that remain often 80 to 90 percent funded by public sources.... [These institutions] are not at risk of becoming private."
Accounting
A comparison of private and public higher education budgeting would not be complete without at least mentioning the difference in accounting for these two types of institutions. Knowledge of the accounting regulatory bodies involved will help the budget planner understand how the operating budget is reflected in the financial information reported in many data releases.
For accounting purposes, private institutions are governed by the Financial Accounting Standards Board (FASB). Public institutions are governed by the Governmental Accounting Standards Board (GASB). FASB governs accounting for private entities, including for-profit and nonprofit commercial and charitable organizations, while GASB governs accounting for public entities, including all governmental organizations (such as municipalities) and their supporting/supported entities (such as public higher education institutions). Most GASB entities are nonprofit.
The major difference between FASB and GASB regulations involves the grouping of financial activities for accounting purposes. FASB accounting differentiates between three types of organizational activity: unrestricted (which captures the operating budget, among other activity), temporarily restricted (which includes restricted gift activity and restricted endowment payout), and permanently restricted (which records endowment activity). On the other hand, GASB requires even more separation between activity types, including specific groupings for budget activity (unrestricted current funds), temporarily restricted gift funds (restricted current funds), nonoperating funds (primarily state/governmental appropriations), plant/facility/ capital activity, loan fund activity (public debt issuance activity), and the endowment or permanently restricted funds.
Concluding Comments
Private higher education institutions are those entities owned and operated by the private sector, while public institutions are those established, supported, and controlled by a governmental agency, most often a state. Key differences exist between private and public institutions that affect budgeting in critical ways. Such differences include governance, governmental support, student tuition and fees, student financial aid, constituent support, and accounting regulations. However, when all is said and done, both public and private institutions must be careful to fulfill their fiduciary responsibilities because higher education overall is essential to the public interest.
References
Asin, N. 2010. Educating Boards about Conflict of Interest. Board Professionals Newsletter, Winter. Retrieved July 20, 2011, from the World Wide Web: agb.org/bpnews/2010/winter /educating-boards-about-conflict-interest.
Association of Governing Boards of Universities and Colleges. 2011. Board Accountability. Retrieved July 20, 2011, from the World Wide Web: agb.org/knowledge-center/briefs /board-accountability.
Bass, D. 2011. The Facts about Foundation Boards. Trusteeship, March-April, 36-37. Retrieved July 20, 2011, from the World Wide Web: agb.org/sites/agb.org/files/datafiles/datafile _tship_2011_march_april.pdf.
Dill, D. D. 2005. The Public Good, the Public Interest, and Public Higher Education. Paper prepared for the conference Recapturing the "Public" in Public Higher Education or Blurring the Boundaries: The Changing Dynamics Between Public and Private Higher Education, New York, NY, April 22.
Lombardi, J. V. 2006. Public and Private: What's the Difference? Inside Higher Ed, Mar. 6.
State Higher Education Executive Officers. 2008. State Higher Education Finance Early Release FY 2008. Retrieved July 20, 2011, from the World Wide Web: www.sheeo.org/finance /shef/SHEF%20FY08%20Early%20Release%202.pdf.
Sarah Beamer, CPA, MBA, is vice president for finance and administration at Bluefield College in Bluefield, Virginia. She also works as an independent consultant, focusing on strategic and capital planning and financial advisory services, particularly for nonprofit organizations and especially for those related to higher education. Prior to entering independent consulting, she served as chief financial officer of Emory & Henry College, established the internal audit department for Virginia Polytechnic Institute and State University's (Virginia Tech) related corporations, and worked in public accounting for KPMG. She taught national courses for KPMG, was a discussion leader/presenter for the Virginia Society of Certified Public Accountants, served as adjunct faculty for an intensive adult bachelor of business administration program, was a developer and charter faculty member for the Planning Institute of the Society for College and University Planning, and presented at various professional conferences on the topic of planning and budgeting.