Economy of Scale–Save our small colleges

With the increased scrutiny of accreditation and the demands of augmented accountability, our small colleges are being torn from all angles. The looming crisis can be found in an explanation of the concept of “economy of scale” whereby medium and large colleges benefit from the mere fact that they are larger and capable of spreading costs more widely.

In most cases faculty pay for themselves by generating income from the students in their classes. On the other hand, management personnel, clerical staff, and maintenance staff all do not directly generate income but are necessary to the functioning of a college.

Spreading the costs

The most salient example can be found in the insurance industry where risk is spread over a large pool of insured individuals. In a small insurance company a catastrophic illness of one person has a disproportionate effect on the entire pool, while, in contrast, a large insurance company can spread the costs over many covered individuals.

For instance, a small insurance company with total premiums of say, $2 million, when hit by a severe claim of say $200,000 must pay out 10 percent of total assets. A large company with $20 million in premiums finds that only 1 percent is necessary to cover the claim. 

Such is the case with small colleges and a glaring example can be found in the chart below, left. CEO salaries as to dollar cost per Full Time Equivalent student. (FTES)

As you can see from the chart the cost per FTES in a large college comprises only a tiny fraction of the money received for each student, while the small college still needing a CEO spends considerably more.

Another example of the difficulty of providing support services to a small college is evident.

Built-in structural problems

In this chart the number of students supporting services other than instruction is shown. A simple analogy would be the problems of Social Security. When the Social Security System was established, there were five active workers supporting each retiree receiving benefits. In the same manner the chart shows the number of students in each district supporting each individual non instructional employee. As you can see at West Kern, a small college, there are only 12 students supporting each non-instructional employee as opposed to Pasadena where 57 students support the same employee. Assuming equalized monetary value of each student, the smaller district has less of a base to finance the noninstructional employee. Ergo we have a built in structural problem in the small colleges.

This problem becomes even more severe with the requirements mandated by such agencies as the accrediting commission. Small colleges are being threatened with probation or loss of accreditation unless they provide for an institutional researcher or other management personnel such as a human resources director. Again, the small college is at a disadvantage as competent managers are expensive and the costs come from the same pot of money.

Just think of the small college that is in a remote area and must maintain dormitories to enable students from remote areas the ability to attend. These colleges must also provide ancillary services such as food delivery, dorm directors and custodial workers. All services cost money and the smaller colleges are at a disadvantage as there are fewer students over which to spread the costs.

It is well understood that the smaller colleges in the past have benefited from, in many cases, higher allocations per FTES but, with the passage of AB 361 and the attempt to equalize the per FTES allocation uniformly throughout the system, the concerns of small colleges take on a new meaning.

Existence is in jeopardy

There is no question that the existence of small colleges is in jeopardy. But there is also widespread acknowledgement that small colleges are necessary. Take for instance, Lassen College where students would have to travel 120 miles to get to a  college of medium size. Two and one-half hours to either Shasta or Butte Colleges and impassable road conditions during foul weather restrict access to higher education for many students in this town.

Community Colleges are specifically designed to meet the needs of those pursuing higher education who do not have the resources or desires to attend four years at university prices. We as a state cannot afford to tell our residents of remote locations that they are simply out of luck in pursuing further education.

In California, if we continue to squeeze the smaller community colleges the economy of California, and, more specifically the rural areas of our state, will be in severe peril.

So how do we deal with the problem? Suggestions have been made to move toward a consolidation of districts wherein larger colleges absorb the smaller ones and thereby enhance the economy of scale. But this solution smacks of a loss of local control. The community pride that accompanies a small rural college should not be overlooked any more that the uniqueness of programs offered to address regional priorities. (for example, the Gunsmithing program at Lassen College).

A second solution and a more viable answer is to provide financial enhancements to our small colleges. Much in the way the K-12 system has allotted extra money for “necessary small schools” the Board of Governors and the Chancellors office need to establish a task force to effectuate the same concept.

Without this immediate attention the students in rural areas in the state will be relegated to second class citizen status. We cannot allow this to happen.