The privatization of California’s B-schools

June 27, 2011, 1:12 PM UTC

) — In the past few years, billions of dollars have been slashed from California’s higher education budget. Some have warned that the cutbacks are impacting the quality of a state university system that has long been considered the crown jewel of public higher education.

What has been the impact on the state’s premier public business schools?

Surprisingly, there’s been little to no impact, according to the B-school deans. A year ago, faculty and staff endured a “furlough” that led to a one-time average pay cut of 8%. But the prestige and quality of the full-time MBA programs has been protected as state support of the schools has diminished.

What has occurred is a quiet privatization of business education. The B-schools have pushed through dramatic increases in MBA tuition and fees, stepped up efforts to increase endowments, and added more non-degree executive programs that produce “revenue surpluses” to offset the cuts.

“Basically, all of us have been phasing out our reliance on state funding for many years,” says Steven C. Currall, dean of UC-Davis’ Graduate School of Management. But Currall winces at the notion that he and his fellow deans have “privatized” the business schools.

“Some in the UC system see privatization as radioactive,” he concedes. “I prefer the words financial sustainability. We’re reducing our reliance on state funds, which makes our business model much more akin to a private university….”

Tuition spikes on the left coast

Students have borne much of the brunt of these changes. Over the past 10 years, the largest increases in MBA tuition have occurred at California’s public programs. Berkeley’s Haas School, the highest ranked of the full-time MBA programs in the state, boosted the price of its two-year MBA to state residents by 301% to $86,396 this year from $19,996 in 2001. Non-resident tuition jumped by 142% to $100,356 from $41,404 in the same timeframe. In comparison, the two-year tuition bill at Stanford rose 72.5%, while the price of a Harvard Business School MBA increased by 79.6%.

Ten years ago, a California resident who went to Berkeley paid only 31% of what a graduate student paid at Stanford for the MBA degree. Today, state residents who go to Berkeley pay 78% of what Stanford students pay. The differences are similar at UCLA’s Anderson School and other University of California business schools.

More shocking, perhaps, is how these increases — along with a sluggish economy — have dramatically altered the payback of the MBA degree. Graduates of Berkeley’s Class of 2000 earned median starting base salaries of $85,000. Last year, Haas MBAs earned median salaries of $110,000 each. So while the non-resident tuition bill has risen by 301%, median starting salaries have increased by just 29%.

The public universities in California, of course, have plenty of company. The University of Michigan’s Ross School of Business and the University of Virginia’s Darden School effectively “privatized” their full-time programs long ago.

“Berkeley MBA graduate salaries are among the most competitive, while tuition is still below our private counterparts — and, in the case of California residents, significantly below,” says Richard Lyons, dean of the Haas School.

Lyons argues that for California residents the MBA program at Haas is still a bargain at $86,396 because it’s roughly $20,000 less than tuition for Northwestern’s Kellogg School of Management and $27,000 below the price tag of a Wharton MBA.

Besides, adds Lyons, “our increase in MBA fees has allowed us to make a lot of investments in new faculty, curriculum and student services. The MBA education we are offering is a much stronger product than it was 10 years ago.”

A play for independence amid the budget woes

Some deans also take an optimistic view of the cutbacks in state support. “I’m not thrilled with the cuts, but I am thrilled with the reflection they are causing,” says Currall. “People are having to … accept the fact that we have to have a new business model.”

Still, there’s no question that much has been at risk due to the state’s budget crisis. The B-schools at four of the 10 University of California campuses are among the top 60 MBA programs in the U.S., as ranked by Poets&Quants: Berkeley (No. 9), UCLA (No. 17), UC-Irvine (No. 56), and UC-Davis (No. 58).

To Judy Olian, dean of UCLA’s Anderson School, previous state budget crisis had already put the school on a road toward financial self-sufficiency. “The big hit was in the bust of 2001-2002. That’s when we were cut dramatically in terms of state support,” she says.

Currently, roughly 17% of the Anderson School’s budget comes from state support, but the school also pays to the state a portion of the tuition fees it collects. Olian has proposed a plan to reduce Anderson’s state support to zero. Some $9.5 million would then be redirected to the university to benefit its under-funded programs. In return, Anderson would keep all the tuition it receives from students. Donors, she believes, would then be more likely to give money to Anderson if they knew their tax dollars weren’t supporting the school.“What we’re suggesting as a model is to walk completely away from state support,” Olian says. “In return, we would have flexibility and predictability.”

“Our objective through this has been that our students would not feel that they are in a budget environment,” adds Olian. “We’ve invested in the places that matter–in student career services, in program innovations, curriculum renewal and admissions. ”

Unlike UCLA, which does not have an undergraduate business program, Berkeley annually graduates 350 undergraduates in addition to 240 full-time MBA students. “Our undergraduate business majors pay the same as English majors at Berkeley,” says Lyons. “Roughly 25% of the business slots go to junior college transfers as part of the California Master Plan. It’s a social mobility machine, and it’s an important anchor to our public mission.”

At UC-Davis, about 27% of the school’s revenue comes from the State of California, down from roughly 44% in the 2003-2004 academic year. Currall is of much the same mind as Olian at Anderson. He has submitted a plan to the campus leadership to completely phase out the school’s reliance on state funds over the next 10 years.

“We are not talking about seceding from the university, but our business model has to fit with today’s circumstances,” Currall says.

The way forward

Over the next three years. Currall hopes to increase his open enrollment programs in executive education to five from one and aggressively increase his custom education programs (from just one at Genentech to several).

Currall says he has had no faculty defections and that cutbacks have not been a factor in recruitment, despite the furlough that resulted in a one-time cut in pay in the 2009-2010 academic year.

In fact, the UC-Davis dean is currently investing an extra $350,000 in faculty salaries because the school’s compensation to professors had fallen below others. “It’s better to be preemptive as opposed to nickel-and-diming them and waiting until they get an alternative offer from another school,” Currall says.

“My job is to insulate my students and faculty from this budget challenge,” says Currall. “If that means I have to spend some of my reserve money to do that, I’m going to do that. My job is to raise new sources of revenue to at least break even. So far we’ve done that. I’m still holding 10 to 12% of my total budget in reserve. This is for the rainy day.”

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