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Page 1: Spending More

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   ©   S  c  o  t  t   M  e  n  c  h  i  n   /   I  m  a  g  e  s .  c  o  m

18 Change ● November/December 2008

THE HIGHER EDUCATION

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The rich and famous are much in the news these days—col-leges and universities that is, the ones with endowments in the

hundreds of millions or more and whose run-up in assets has

raised questions about their non-profit status from both state

and federal lawmakers. The U.S. Senate Finance committee

wants to know, for example, why institutions that are reported to average 20

percent annual increases in the market value of endowments of $500 million or

more still need to raise tuition and fees every year. And the Internal Revenue

Service is preparing for intensive audits of more than 400 institutions, looking

at revenue-generating activities housed within them and how those activities

fulfill the public or charitable purposes of the institutions. Meanwhile, legisla-

tion has been proposed in Massachusetts to levy state taxes on the Common-

wealth’s wealthiest non-profit private institutions.

Media and policy attention to the wealthiest sector of higher education might cause

the public and policy makers to think that most colleges and universities are awash in

money—and looking only at the Ivy League and the biggest public research universi-

ties, it would be hard to argue that they’re mistaken. But the focus on revenue masks

the bigger story in higher education finance in America, which is a story of growing

gaps between rich and poor institutions, greater clustering of low-income students in

poorly financed institutions, and disinvestment in teaching. Any one of these trendsby itself would be disturbing; the three together spell real trouble for our future capac-

ity to reverse America’s decline in postsecondary performance.

Spending More,Getting Less

 Jane Wellman is the executive director of the Delta Project on Postsecondary Costs, Productivity

and Accountability, a non-profit organization in Washington, DC, whose mission is to develop

better data and metrics to improve cost accountability and productivity in higher education. Previ-

ously, she served as a senior associate at the Institute for Higher Education Policy in Washington,

 D.C., vice president for government relations with the National Association of Independent 

Colleges and Universities, deputy director of the California Postsecondary Education Commission,

and staff director of the California Ways and Means Committee.

www.changemag.org 19

By Ja ne V. Wellman

FUNDING DISCONNECT:

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Consider the following:

The rich are getting richer, and the poor 

are getting poorer.

There is growing stratification with-

in higher education: rich institutions are

getting richer, poor institutions are get-

ting poorer—and poor students increas-

ingly are ending up in the institutions

with the least to invest in their success

(see Figure 1). The largest enrollment

growth in the last decade has been in

public two-year colleges, which dispro-

portionately enroll low-income, His-

panic, and black students. Nationwide,

only 7 percent of students are enrolled

in institutions that spend $25,000 or

more on them per year—in contrast to

the over 45 percent where spending is

below $10,000 per year. Inequality by

itself might not be an issue if it weren’t

for the compounding problem: histori-cally, students in public community col-

leges face long odds against completing

a baccalaureate degree, and nationwide,

transfers from two- to four-year col-

leges are declining.

Prices are rising, but spending on

students is not.

College tuitions have grown by 2

to 3 percent per year above inflation

for the last 15 years—beating almost

every other major commodity (now

behind the rise in fuel prices, but more

even than health care). Higher prices

don’t translate to increased revenues

in the public sector, however—there,

tuition dollars are replacing declin-

ing state support. Fifteen years ago,

every tuition dollar in public commu-

nity colleges was matched by $3.70

in state and local appropriations. By

2006, that had dropped to $2.20 (see

Table 1). Similar declines occurred in

public four-year master’s and research

institutions, where state funds are now

a minority of all revenues. Even so,

state subsidies per student are still high-

est among public research universi-ties—an average of $7,574 per student

in 2006—than either in public master’s

institutions ($5,763 per student) or

public community colleges ($6,622)

(see Figure 2).

Spending for educational and related 

services is down.

Across higher education, the pro-

portion of spending for educational

services is declining over time (see

Table 2). For example, public research

universities’ total revenues increased

by 11 percent between 2002 and 2006,

while spending on education and re-

lated expenses grew by only 1 percent.

In community colleges, educational

spending suffered absolute reductions

during this time.

Among private institutions, the de-

cline is a relative one because of higher

spending beyond instruction, despite

annual increases in instructional spend-

ing averaging 2 to 3 percent per year

above inflation. Among all types of 

public institutions, it is a real decline,

due to the use of part-time and non-

tenured faculty—which allows institu-tions to cut instructional spending even

when giving some high-flying faculty

superstars compensation packages that

rival those for Division I football and

basketball coaches. There is no sector

Figure 1. United States, Average Spending on Education and Related Spendingper Student, Compared to Enrollments, by Sector of Enrollment (2006)

Source: Delta Cost Project, funding information from Delta Cost Project-IPEDS Database, 10-year matched set; enrollment from IPEDS enrollment database.

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0Private Private Private Public Public Public

Research Bachelor’s Master’s Research Master’s Associate's

Average Full Educational Cost per FTE Student Total Headcount Enrollment

   A  v  e  r  a  g  e

  e   d  u  c  a   t   i  o  n  a  n   d  r  e   l  a   t  e   d  s  p  e  n   d   i  n  g  p  e  r   F   T   E

   S   t  u   d  e  n   t   (   i  n   2   0   0   6   d  o   l   l  a  r  s   )

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0

TotalHeadcoun

tEnrollment

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in higher education where spending for

faculty and other departmental educa-

tional expenses is more than half of op-

erating expenditures, not even in those

whose primary mission is teaching rath-

er than research. And since these mea-

sures count spending for the portion of 

faculty salaries dedicated to unfunded

(“departmental”) research as “instruc-tional,” the real situation is likely to be

even worse than the numbers imply.

Changes in functionality accompany

revenue shifts.

As state budgets are being cut, in-

stitutions are scrambling to find new

revenue sources. But very little of the

new money (other than tuition) is used

to educate students. Spending is grow-

ing instead where the new revenues are:

outside of the instructional programs, in

federally funded research, hospitals and

clinics, public service, and auxiliary

operations. These aren’t bad things—

knowledge creation and community

service are important for our economy

and for local communities—but no one

actually decided they were higher pri-

orities than spending on teaching anddegree production.

And it’s not immediately clear why

these functions need to be performed by

public and non-profit private colleges

and universities rather than by busi-

ness and industry or even the non-profit

service sector—which is why the IRS

is interested in learning more about

what higher education revenues pay for.

This is an important inquiry about the

distinction between public and private

purposes and what it means to be a non-

profit entity. It’s unfortunate, though,

that the terms of the conversation are

likely to be defined by auditors rather

than by higher education’s leaders.

The Funding Problem

Despite a spate of reports decrying

the “dysfunctional” state of the financ-ing system for higher education (the

one critique from the Spellings Com-

mission on the Future of Higher Edu-

cation that didn’t get much push-back 

from the higher education community),

we still don’t have a coherent or con-

sistent diagnosis of what the funding

problem is, much less what to do about

it. To develop one, we need to shift

our attention from revenue generation,

tuition, and financial aid to how the

Table 1. Median State and Local Appropriations per FTE Student and NetTuition Revenue Per FTE Student at Public Sector Institutions, 1991–2006(in 2006 CPI adjusted dollars)

1991 1998 2006

Community Colleges Net tuition revenue $1,445 $1,930 $2,539

State/Local

appropriations

$5,346 $5,633 $5,585

State/Local

appropriations

per $1 in tuition

revenue

$3.70 $2.92 $2.20

Masters’ Institutions Net tuition revenue $2,445 $3,432 $4,770

State/Local

appropriations

$5,956 $6,210 $5,809

State/Local

appropriations

per $1 in tuition

revenue

$2.44 $1.81 $1.22

Research

Universities

Net tuition revenue $3,293 $4,521 $6,410

State/Local

appropriations

$8,714 $8,837 $8,113

State/Local

appropriations

per $1 in tuition

revenue

$2.65 $1.95 $1.27

Source: Delta Cost Project, IPEDS Database, 20-year matched set. Median state and local appropriations per FTE student vs. net tuition revenue per FTE student.

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money gets spent in higher education

and how that spending either does or

does not support teaching and learning.

We also need to expand the analysis,

which often focuses on private colleges

and research universities, to include the

institutions where most of the students

go—public master’s and community

colleges.Ultimately, of course, this isn’t just

about money: the funding problem in

American higher education is as much

about focus and priority as it is about

revenue. Looking at spending patterns,

one has to conclude that our highest pri-

ority in higher education is to increase

not student learning but revenues, in

order to expand institutional activities

such as research, management of hospi-

tals, or auxiliary enterprises.That is not the path that we should

be taking if we are serious about in-

creasing educational performance.

Our country’s future economic success

will depend on our ability to generate

human capital. Whereas we used to

be number one among OECD nations

in young adults’ attainment levels, by

2005 we had dropped to number 10,

mostly because other countries have

been increasing their performancewhile we have rested on our laurels.

And cuts in spending on instruc-

tion are deepest in the institutions that

serve the majority of first-generation

and low-income students, many of 

whom arrive at college with learning

and skills deficits that require develop-

mental attention before those students

can get to college-level work. So the

spending patterns exacerbate the big

problem in American higher education:

the achievement gap that keeps far too

many of our first-generation and low-income students from getting into or

through college.

We are never going to have the de-

gree attainment increases we need un-

less we get serious about getting more

students to graduation, and that won’t

happen unless we close the achieve-

ment gaps. And that won’t happen until

we make improvements in student suc-

cess our highest fiscal priority. To focus

intently on student learning, teaching,

and degree attainment, institutional and

policy leaders need to connect the dots

between spending and results and makespending on teaching and learning their

first priority.

Figure 2. Net tuition vs. Subsidy Portion ofEducational Costs Per FTE Student by CarnegieSector, 1998 and 2006

Source: Delta Cost Project. Net tuition vs. subsidy share per student.

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$01998 2006 1998 2006 1998 2006 1998 2006 1998 2006 1998 2006

Research Master’s Associates Research Master’s Bachelor’sPublic Private

$8,969

Net tuition portion of education and related costs

Average subsidy portion of education and related costs

$4,858

$7,574

$6,301

$6,428

$3,713

$5,763

$4.999

$7,033

$2,098

$6.622

$2,752

$14,409

$16,172

$18,542

$18,490

$4,429

$11,176

$4,434

$13,460

$8,838

$10,481

$9,401

$12,239

Table 2. Only a Portion of Revenues go to Pay for Educational Spending ...and that Portion is Declining.

Average Total Operating Revenues per FTE

Student

Average Educational Spending per FTE

Student

2002 2006 % change 2002 2006 % change 

Public Research $37,498 $42,724 14% $14,135 $14,375 2%

Public Master’s $17,298 $17,735 3% $10,753 $10,762 0%

Public Associate’s $13,144 $13,350 2% $9,589 $9,374 -29%

PNP Research $68,267 $105,934 55% $33,342 $37,032 11%

PNP Master’s $22,877 $28,609 25% $16,260 $17,893 10%

PNP Bachelor’s $26,606 $37,704 42% $20,115 $21,640 8%

Source: Delta Cost Project IPEDS Database, 10-year matched set.

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Institutional Actions

Do we have a clue about how to do

this? The short answer is yes, we do.

But it requires serious commitment to

a change agenda from institutional and

policy leaders, and most haven’t yet

made such a commitment. But tak-

ing cues from those who have, it is

clear that such a change includes 1)

setting sharp-edged goals for degree

attainment, 2) looking at spending and

aligning it with those goals, 3) improv-

ing degree productivity by focusing on

ways to reduce excess credits and short-

ening the time to degree, 4) improving

public accountability for costs, and 5)

improving governing board oversight

of spending. Examples of places where

this work is being done follow.

Setting goals for increased degree

attainment based on public needs rather 

than institutional interests.

We need to begin by establishing

the public agenda for higher education,

one that is equally relevant to public

and non-profit private institutions. Cur-

rently, institutions have every incentive

to build market position by increasing

admission selectivity and extramural

revenues, even if this means diverting

resources from meeting public needs

for low-income access and improved

degree-attainment levels. To guard

against this, leadership at all levels

needs to define the public agenda forhigher education not just as research

and economic development but in terms

of access, degree attainment, and learn-

ing outcomes.

This requires attention to clearly de-

fined goals and outcome measures for

access and degree attainment, as well as

for learning, and public accountability

systems that monitor progress toward

meeting those goals. This seems obvi-

ous, but it’s a far cry from the usual

measures of performance, which are

success in meeting fundraising goals,

increasing admissions selectivity, andmoving up the U.S. News and World 

 Report or National Research Council

food-chain.

Where is this work being done? As

one example, look at the National As-

sociation of System Heads (NASH)

“Access to Success” initiative. NASH

is comprised of the presidents and

chancellors of the nation’s public multi-

campus systems. “Access to Success”

is a voluntary collaboration, supported

by the Lumina Foundation as part of 

the “Making Opportunity Affordable”

initiative, in which system heads set

“stretch” goals for degree attainment

and hold themselves accountable formeeting those goals.

Not all of the NASH leaders have

chosen to participate, including some

of those heading the most prestigious

public university systems in the coun-

try, but the ones who have count among

their membership systems that collec-

tively serve over two million students

and produce over one-third of the na-

tion’s baccalaureate degrees awarded to

students of color. If they are successful

in this work, it will make a big differ-

ence in national performance.The participating NASH system

heads have made a commitment to

halve achievement gaps separating low-

income and first-generation students

from the rest at every point in the post-

secondary continuum, from enrollment

to certificate and degree attainment.

This multi-year initiative is organized

around several subgroups that are fo-

cused on different parts of the agenda:

financial aid (how to use it to increase

access and success goals), remedial/de-

velopmental education (how to use it to

reduce attrition and cut credits and timeto the degree), and cost management

(how to analyze spending and relate it

to performance). The CEOs meet pe-

riodically to work on common issues,

share successes and failures, and com-

pile a collection of strategies that make

a difference in improving performance.

A specific example of what has been

accomplished by a public institution

can be found at the California State

University at Long Beach (CSULB).

CSULB is a large, urban, public

master’s-level institution, with total

enrollments in 2008 nearing 37,000. Itis one of the most diverse institutions

in the country: 26 percent Hispanic, 23

percent Asian/Pacific Islander, 6 per-

cent African-American, and 30 percent

white in 2006. In just the last 10 years,

it has grown by almost 10,000 students,

and although tuition went up by nearly

76 percent (while state appropriations

per student declined), one-third of 

the resulting revenue was invested in

need-based aid to protect access. Con-

sequently, the proportion of students

eligible for Pell grants grew from 22

percent to 35 percent. Graduation rates

increased at the same time, from just

31 percent to over 52 percent, despitegrowth in remedial needs from enter-

ing students. One could argue that the

institution can and should do more to

increase those numbers, and its leaders

would agree. But that level of progress

in just 10 years is truly admirable.

How did they do it? By setting goals

for access and degree attainment and in-

vesting time and attention in strategies

that help students succeed:

• requiring freshman advising

before class registration, along with

summer orientation for freshmen andtransfer students;

• creating learning communities for

at-risk students needing developmental

preparation in math and English;

• increasing the number of academic

advisors and reaching out to undeclared

students with career as well as major

advice;

• stepping up attention to enrollment

and schedule management to ensure

that all first-year students could enroll

in required courses; and

• closing down or consolidating

under-enrolled courses.A program (“Partners for Success”)

was instituted to ensure that every first-

generation student was placed with a

faculty mentor. And messages about

the importance of graduating and not

dropping out were displayed on banners

all over the campus that proclaimed

“Graduation Begins Today,” while the

university communicated with parents

as well as students about the economic

realities of not graduating.

CSULB also has the advantage of 

being part of the California State Univer-

sity system. It thus benefits from system-level interventions designed to improve

productivity, focus on learning, and

enhance public accountability. Under the

leadership of CSU Chancellor Charles

Reed, the number of credits required to

complete the baccalaureate degree was

reduced to 120 units—a decision made

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because system leaders realized that the

campuses couldn’t demonstrate that the

extra credits resulted in more learning.

The system requires institutions to moni-

tor learning outcomes directly and indi-

rectly through instruments such as the

Collegiate Learning Assessment and the

National Survey of Student Engagement.

And the Board regularly monitors cam-pus progress toward system-level goals

to increase access and degree attainment.

Show me the money: Using cost data to

align spending with priorities.

Thomas Meredith, chancellor of 

the Mississippi Board of Trustees of 

State Institutions of Higher Learning,

has changed the nature of the cost con-

versation within Mississippi by using

spending data to help align spending

to priorities. Instead of the traditional

budget review starting with institutional“wish lists,” the Board now uses the

process to present each university with

an assessment of spending in the major

functional areas, benchmarked to other

Mississippi institutions and to appropri-

ate comparison groups nationally. It has

used those data to raise questions with

presidents about areas that appear to be

out of line, either on the high or low side.

The Board has also instituted a

system-level review of spending for

administrative and support functions.

As a result, it has been able to make

a number of significant reductions inspending in areas such as energy and

purchasing. It also went through a

“barnacle-scraping” exercise, in which

it identified institutes and centers that

had initially received state funds as part

of a matching grant commitment from

an external funder, but where the ex-

ternal funds had disappeared while the

state funding remained.

 Increasing degree productivity by re-

ducing inefficiencies in educational

 production and looking at credits (and 

time) to the degree.Several public institutions are pay-

ing more attention to credit accumula-

tion and time to the degree as key ways

to increase learning productivity by

getting students to their degree goals in

less time and at less cost to the student

and the institution. The University of 

Wisconsin (UW) system is just one

example. Between 1994 and 2004, the

system was able to decrease credits

accumulated for the bachelor’s degree

from an average of 145 in 1994 to 135

in 2004, for a savings in the per-unit

cost of the degree of 7 percent. The sav-

ings to the state from these increases in

productivity opened up an additional12,000 seats in the UW system. The

reduction in credits also meant that

students were able to complete their

degrees in less time, shaving the bet-

ter part of one semester off their time

to the degree. The direct savings to the

students from not having to pay the

additional semester of tuition and fees

was close to $3,000 per student—well

above the cost of (for instance) a 5 per-

cent tuition increase and more than half 

the amount of the maximum Pell grantfor the neediest students.

 Improving public accountability for 

spending.

Starting in 2000, the University Sys-

tem of Maryland (USM) Chancellor

William Kirwan instituted a system-level

“effectiveness and efficiency” initiative

(known as “E&E”) designed to tackle

the perception that its campuses were

not paying enough attention to fiscal

stewardship. Working closely with the

governing board and in constant con-

sultation with faculty and staff councils,

system leaders were able to set system-

level goals to 1) optimize the use of re-sources, 2) protect quality, and 3) expand

capacity. To date, the initiative has:

• increased teaching loads across the

USM by 10 percent;

• limited funding for baccalaureate

degree programs to 120 credits (unless

there is a requirement from a licensing

agency or a specialized accreditor for

more);

• required all students to earn 12

units through some type of off-campus

work—for instance, earning credit

by an examination such as AdvancedPlacement, international study, or

distance learning;

• increased capacity in the compre-

hensive institutions rather than in the

more expensive research university; and

• centralized shared services such as

audit, construction management, and

real estate development.

The system estimates a total of $40

million was saved and strategically real-

located in the last three years alone—

enough to mitigate tuition increases for

resident students over this time. The E&E

effort has helped to persuade the legisla-ture and governor that the system takes its

stewardship of resources very seriously;

as a result these political leaders have

been willing to fund additional enroll-

ments. And last year, when Maryland

faced a budget deficit that threatened mid-

year cuts, the governor used the example

of the need to protect higher education

as part of his argument for a tax increase.

Maryland is an example of a place where

transparency about spending has directly

paid off in increased public credibility

for higher education and a growth in state

support when other states were reducingfunding or raising tuitions.

 Involving the board in the conversation

about spending and performance.

One of the lessons from institutions

that have been successful with this work 

is that it makes a difference if the govern-

Several public

institutions are

paying more

attention to credit

accumulation

and time to the

degree as key ways

to increase learning

productivity ...

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Change ● July/August 2005 25

ing board participates in the discussion

about setting goals, monitoring perfor-

mance, and communicating about results.

Without such oversight, the board can

easily become part of the cost problem

by setting an agenda to increase revenues

without paying attention to what they will

be spent on. And involving the board in

the conversation lifts it from a technical,inside-baseball discussion into a policy-

directed one about spending in relation to

strategic priorities.

Currently, most institutions—private

as well as public—don’t do a very good

 job of engaging boards in discussions

about spending. In 2005, the Associa-

tion of Governing Boards of Colleges

and Universities (AGB) collaborated

with the National Association of Col-

lege and University Business Officers

(NACUBO) in conducting a national

survey to discover the extent and natureof governing board involvement in cost

oversight. They learned that although

all institutions involve their boards in

review of budgets, most spending re-

views focus on subtopics (like faculty

salaries or capital outlay) and not on

spending in relation to performance.

Interviews with CEO’s and board

officials revealed that these leaders wor-

ried that more board oversight of costs

might mean sending volumes of spending

metrics to the members and involving

them in management decisions that aren’t

appropriate to their role. As a result, theAGB is testing strategies for strength-

ening boards’ spending oversight that

are a good fit with their role in strategic

planning and ensuring public account-

ability. The association is concluding that

improved cost management requires that

boards move away from a focus on bal-

ancing the budget to setting and meeting

long-term goals, discussing value and val-

ues, and using resources to meet strategic

priorities over many years.

The Policy Context

As important as this institutionalwork is, the college cost problem can’t

be solved exclusively by colleges and

universities acting on their own. We

need to have parallel attention to costs

and productivity at the policy level, be-

ginning with a fresh look at historic

patterns of funding higher education,

from the higher subsidies that go to

students in research universities to the

budgetary incentives (or lack thereof)

for increasing retention and graduation.

Unfortunately, there are fewer ex-

amples of engaged and effective change

on the policy side than there are on the

institutional side, because of a general

public policy drift regarding higher edu-cation. States’ capacity to develop and

implement policies for higher education

is weaker now in almost every state than

it was 20 years ago. Meanwhile, the

federal government took seven years to

pass the latest Higher Education Act,

which grew into an eleven-hundred-page

monster that even the most ardent advo-

cate has to concede lacks any coherent

strategic direction for higher education.

When policy work does begin, it too

often focuses on symptoms (tuition in-

creases) rather than causes (privatizationand spending priorities).

In the face of this policy vacuum,

institutions that are in a position to do so

are doing what comes naturally: pursu-

ing revenues and prestige and increasing

admissions selectivity. This may work 

reasonably well in the short term for

some public research universities and

master’s institutions with aspirations, but

it is disastrous when it comes to increas-

ing degree production and reducing at-

tainment gaps.

The good news is that there are a few

states that have started to take on thischallenge, and their work is about to be

significantly leveraged by the Lumina

Foundation’s “Making Opportunity Af-

fordable” (MOA) initiative, the ambitious

and unprecedented multi-year initiative

designed to build states’ capacity to tackle

costs and to increase higher education

productivity. Eleven states have begun

planning work for the initiative now and

will be doing the diagnostic, and goal-set-

ting work needed to anchor deeper work.Depending on its needs, each state will set

goals for productivity increases as part of 

a strategy to increase degree attainment.

They will also be evaluating how current

state funding policies do or do not provide

incentives to meet those goals.

So there’s some cause for optimism.

For the first time in many years, there are

more than a handful of institutional and

policy leaders who are moving from ana-

lyzing the problem to doing something

about it. These leaders know that we’re

not going to solve the higher educationperformance problem by worrying about

the relative handful of institutions with

huge endowments, although they’d dearly

love for those universities to help slow

down the arms race that threatens to can-

nibalize the industry. They also know that

we’re not going to address educational

performance by increasing institutional

entrepreneurship in research and eco-

nomic development. They are ready to

focus instead on the intersection between

access, degree attainment, and finance, as

well as to hold themselves accountable

for performance. It isn’t rocket science,but such an agenda takes leadership of the

highest order. C

Association of Governing Boards, What Boards are Doing (And Not Doing) in

 Reviewing Institutional Costs, available at: http://www.agb.org/user-assets/Docu-

ments/research/costs/WellmanWhatBoards.pdf 

National Association of System Heads, Access to Success, description available

at http://www2.edtrust.org/EdTrust/A2S.htm

University System of Maryland, Efficiency and Effectiveness Initiative, informa-

tion available at http://www.usmd.edu/usm/workgroups/EEWorkGroup/eeproject/ 

index

University System of Wisconsin accountability reports, available at http://www.

uwsa.edu/opar/accountability/achieve08/ae0708.pdf 

 Making Opportunity Affordable , information available at: http://www.jff.org/ 

Content/Current+Projects_Improving+Youth+Transitions_Making+Opportunity+A

ffordable.html

Resources

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