Without state funding, the Anderson School would gain autonomy. But would it abandon its public mission? The debate could be an MBA case study.
FORTUNE -- The state of California has a dilemma. Its UCLA Anderson Graduate School of Management, which is part of a vaunted public university system statewide, wants to forgo state funding and be free to behave more like a private institution. It's about money and independence. After a year of debate, the state is slowly nearing a decision whether to grant Anderson's request. It's the kind of controversy that makes academic hullabaloos so much fun to watch: windy memos, overlapping turfs, trifling jealousies. But at a time when public universities across the country have been looking to slash costs, it could set a precedent for other prestigious professional schools hoping to go private.
On one side of the debate is Judy Olian, dean of the business school. A year ago she proposed "self-sufficiency" -- which means giving up any state funding. In return she'd get greater autonomy to keep raising tuition -- at more than $52,000 for non-Californians, it's within striking distance of what other elite business schools charge (in-staters get a 14% discount) -- and to hire and pay faculty stars whatever the academic market demanded. The rise in tuition and earnings from a presumed growth in the endowment would make up the shortfall. The business school would also be able to plan better without having to worry about appropriations catfights in the California legislature.
The salary process has been a particular bugaboo. "Our intent is to gain managerial flexibility," Olian explained to the faculty senate, adding with subtlety, "and to align decision-making authority with those in the best position to make those judgments." Currently, she said, "certain salary decisions require multiple levels of approval from entities that lack an intimate knowledge of our competitive marketplace and academic disciplines." UCLA's central administration understandably supports Olian: It says that what she gives back would return to the general coffers of UCLA, which could use the funds for starved academic programs like the humanities.
On the other side of the debate are various faculty governance groups outside the business school. Though the central university would lose no actual dollars from the proposal, opponents still say it's economically unfair. The Anderson proposal, according to a faculty senate report, "does not account for the asset value of the school and the investment value to California taxpayers ... from 75+ years of state support"; as an example, the report cites hospitals that terminated their nonprofit status and were required to repay forgone taxes. But the larger complaint is philosophical. They say "self-sufficiency" is "privatization" by any other name -- which ought to be anathema to a school claiming a continuing "commitment to the public mission of the university." Olian responds that the business school would still be tethered administratively to UCLA, including its curricular standards and final say on faculty tenure.
The truth is that UCLA's business school is already largely self-sufficient. In the 1970s more than two-thirds of its annual budget came from the state; the $5.6 million it currently gets is roughly 6%. And it may be that a business school that teaches marketplace principles ought to be given leeway to operate by those principles. Moreover, a few professional schools elsewhere have already surrendered state funding -- like the University of Virginia's Darden School of Business, which has been self-sufficient for almost a decade; so, too, its School of Law. The Sandra Day O'Connor College of Law at Arizona State says it expects to be off the state dole by 2015.
The Darden School's experience may be especially attractive to UCLA. Even with "strong sentiment" that Darden pricing ought to be based more on "access and affordability" than markets, says current dean Bob Bruner, the school was given self-sufficiency. Since then, the school has increased the size of the student body by about one-third, raised tuition and fees to $52,000, and pretty much taken control of its own budget.
Darden still pays back to the central university about 10% of its revenue. That despised "tax," as it's called, is common at many business schools. The tax is one of the reasons that Bruner, whom Olian has consulted, says Darden is "not private" and has declined to follow the advice of some benefactors who urge real privatization. (UCLA says it does not now impose any tax on the business school and would not do so under "self-sufficiency"; the school would pay for centralized services it used.)
But before Mark Yudof, the president of the overall UC system, grants UCLA's request to transform itself, he ought to consider the signal it offers to others. UC remains the jewel of American public universities. Berkeley has the Haas School of Business. UCLA itself has superb medical and law schools. Critics say "self-sufficiency" concedes fiscal defeat and abandons the spirit of a public university. The Anderson School's plan is intriguing. But the critics may have it right.
This article is from the September 26, 2011 issue of Fortune.