Improve Facility Utilization

Many universities have been busily constructing new buildings, in spite of the fact that most do not make efficient use of the space they do have. Some are even unable to pay to maintain their existing buildings. Fourteen percent of all campus buildings have been built in the last decade alone, according to Sightlines, a private company that has analyzed space utilization for more than 200 campuses. One architecture firm has estimated that campuses in 1974 had 160 square feet per student while today’s campuses have an estimated 450 square feet per student.322 One issue that is largely being ignored is that while these new buildings are being constructed, the existing ones are underused. In Virginia, a survey of seventeen public institutions of higher education demonstrated that eleven used their classrooms, on average, less than forty hours per week, with six schools using classroom space less than 30 hours per week. On average, the Virginia Military Institute uses its classrooms at the lowest rate in the state: 14 hours per week. In North Carolina, the average weekly hours that a classroom was used for instruction was never greater than 33 hours for all of that state’s four year public institutions from 2003-2007.

Not only is the construction of new buildings expensive, but the upkeep of space is costly as well, meaning that these low classroom utilization rates represent inefficiencies that contribute to higher tuition. The costs of operating and maintaining a college or university’s buildings and grounds is second in expense only to personnel costs at most institutions of higher education. Constructing one gross square foot of building can cost $300, leading experts to claim that every 1 percent of underutilized classroom, lab or office space represents $3.7 million of unneeded construction at large research universities.326 Operating a building after it is completed requires routine and preventative maintenance, energy, utilities and custodial services. Overhead costs include insurance and police and fire protection. To ensure buildings’ continual functioning, universities must set aside money each year for large, planned renovations and maintenance. These are the costs that come after construction and represent the majority of a building’s lifetime costs, further increasing the cost of underused space. The importance of using space efficiently is captured well in a document on the website of the University of Michigan’s Provost, which reads, “[T]he costs associated with expanding our facilities are enormous. If we can make better use of existing space, we can save substantial funds that would otherwise need to be devoted to new buildings.”

Causes of Underused Space

Most explanations for why universities and colleges have suffered from such costly overgrowth focus on three factors: the academic arms race, lax scheduling procedures, and a general disregard or misunderstanding about the cost of space in academic culture. Competition and one-upsmanship among schools have often been cited as key drivers of the past decade’s building boom. One planner at a Boston architecture firm argues that schools believe “each institution needs to be complete onto itself, with one of every shiny toy that it can get,” resulting in unnecessary regional duplication of facilities. A desire to impress prospective students, their parents and faculty compels universities to build large, modern buildings under the perception that such a display projects an image of success. As noted above, the bulk of costs for a building come from its maintenance and operation, costs that big donors are unlikely to enthusiastically support.

This overgrowth has brought on a crisis in deferred-maintenance. The Minnesota State Colleges and Universities system has an estimated $680 million in needed building repairs while Kansas’ public higher education institutions have a combined $1 billion deferred-maintenance backlog. Yet colleges continue to expand their campuses: the very day the president of the University of Minnesota wrote an op-ed in support of federal stimulus money being applied to these deferred-maintenance needs, it was reported in the same paper that the university was building a new basketball facility.

Using available space to its fullest potential is vital to preventing overgrowth and reducing the costs of facilities, but colleges and universities often pay too little attention to utilization rates. Michael Schley, CEO of the workplace management software company FM: Systems, believes that most campuses are unable to effectively manage their space because they do not have good enough information systems to track classroom utilization. Certain practices, such as inconsistent start and end times for classes, can make optimum classroom management difficult to achieve. Yet, even if campuses do have effective scheduling practices, Tom Shaver—CEO of scheduling software company Ad Astra Information Systems—believes that colleges and universities often run out of classroom space due to lax enforcement. At Geneva College, one administrator noted that faculty have a penchant for moving their classes to a location that is “better” than that assigned to them, despite the registrar’s efforts to discourage such practices.

The inefficient use of space is also partially a product of academia’s culture. Ronald Ehrenberg, economics professor and former administrator at Cornell, has argued that Say’s law—a generally disproven argument that supply creates demand—may in fact apply to space in academia. His experience as an administrator demonstrated to him that shrinking departments seem to always find use for the same amount of space and that there are always protests of unmet space needs whenever some space becomes available. Academic departments often obsessively guard their space. Deborah Blythe—the manager of classroom space, offices, meeting rooms and laboratories on all 19 of Pennsylvania State University’s campuses—refers to department heads as being “protective of every closet and cranny.” In one instance, a department at Penn State rearranged a room used to store chairs and other forsaken items to look lived-in, right down to nameplates of nonexistent people. At Boise State University, few departments who had proprietary rights over classrooms were willing to put these rooms into the university’s general pool in return for renovating the seating, carpet and technological resources.

Internal Markets in Private Industry

One explanation for academics’ attitude towards space is that few non-profit campuses provide any incentive to economize on space. The for-profit business model of minimizing capital inputs may provide a method for increasing space utilization on college campuses. Recent literature in the business field has explored the organizational-level use of internal markets as a mechanism for efficient capital allocation. Classrooms, laboratories and offices are the backbone of a university’s physical capital, and establishing internal markets for these spaces will provide the proper incentives to increase efficient utilization and slow the new construction that significantly adds to a university’s costs.

Internal markets have become more common among for-profit companies as electronic technologies have made it possible for large amounts of information to be shared at little cost. The central idea of internal markets is that they decentralize information gathering and decision making. This allows managers at all levels of a firm to make well-informed decisions that are appropriate to their local circumstances, rather than be bound by the centralized allocation of decisions.

Thomas Malone cites two advantages of internal markets for allocating capital. First, all employees can see the bigger picture. With bureaucratic decision making, different divisions may share the duty of allocating assets, just as both university departments and the registrar may be responsible for scheduling classes. In this arrangement, no one can see the whole picture and decision makers at the top of a hierarchy may not receive all of the information necessary for efficient allocation. With internal markets, Malone writes, “all prices for all products in all future time periods are visible to everyone.” Second, the decentralized trading of internal markets allows a company to respond quickly to change. Whereas a bureaucracy might have to review and reformulate standing plans, internal markets allow efficient adjustments throughout the company to occur simultaneously. The overall result of these two advantages is that resources are more likely to be allocated to their highest valued use. While internal markets face the same collective action problems endemic to external markets, managers can provide supplemental incentives and rules that keep the market structure consistent with the long-term goals of the firm.

An example of a firm that has successfully employed internal markets is British Petroleum (BP). BP instituted internal markets in an effort to reduce its company-wide greenhouse gas emissions. Essentially an internal cap-and-trade system, BP gave each business unit a target reduction but allowed units to buy and sell “permits” for emissions. Units that could easily reduce emissions below their targets could sell their unneeded permits to units that had more difficulty meeting their targets. In this way, the company found the most efficient way to meet its company-wide target reduction without the cost and inefficiency of centralized planning and intervention from upper-level executives. In 2001, BP business units traded 4.5 million tons of emissions rights amongst themselves and met their original target reduction nine years ahead of schedule.

Market Incentives on Campus

As Frederick E. Balderston has noted, the “typical practice of universities is to allocate office and laboratory space through administrative negotiation, not to regard space as an economic asset that should be priced and budgeted. An academic department or research organization has little or no incentive to admit excess capacity or to give up space unless forced to do so… Putting the allocation of space in a more disciplined, market-like framework would make departments, [Organized Research Units] and other units behave somewhat more rationally.” Some universities have tried to institute market-based incentives with some success in improving resource allocation.

In the 1980s, the chair of the economics department at Arizona State University used a sealedbid auction to assign offices when the department moved into a new building. Faculty members could submit a sealed bid for the right to choose their office, with the property rights to that office belonging to each faculty member for as long as he or she stayed at ASU. When the “owner” was away from campus, the office could be rented to others, but the proprietary right stayed with the purchasing member. Whenever an office was rented or subleased, half the proceeds would go to a graduate scholarship fund, but the other half would be provided to the faculty member in his or her budget allocation. This system eliminated rent-seeking among the faculty in the original allocation of offices and provided incentives for offices to remain occupied and productive at all times.

Ehrenberg argues that academic departments can be incentivized to efficiently use space by placing prices on its use and requiring that units trade off space for operating budgets. Such a model carries the same advantages as the commonly-used “chargeback” system, in which units are charged for services they receive from other units on campus, such as maintenance or IT. This chargeback system introduces accountability for each unit on campus; it ensures that no unit is given more resources than needed to meet the demand for its services and that each unit is responsible for its own productivity. In this way, charging departments for space would ensure that they are not consuming more resources than they need to efficiently operate.

The University of Michigan sought to accomplish a similar goal in its University Budget (UB) model, which has now been in place for a decade. The UB model is an “activity based budgeting” approach under which the costs of operating “General Fund Space”—including utilities and plant operations—are charged to the units and departments that occupy that space. Buildings are metered separately for utilities, so that units can be charged the actual cost of electricity, steam, natural gas, water and sewer. A per-square-foot-occupied charge for maintenance, custodial, and refuse/recycling services is calculated and assessed to the units in a space. Charges are specific to each building and based on its historical expenditures. The document on the University of Michigan Provost’s website notes the goal of this approach to budgeting is to provide incentives to economize on space and to combat the past tendency for units to use as much space as they can acquire, although revisions made at the ten year mark note that these goals have not been entirely successful.

Another way in which classroom utilization can be improved is by offering incentives directly to students. At Kean University, officials decided to offer students tuition discounts of up to 20 percent for courses taken on Friday and Saturday. This increased their classroom use on Friday from 11 percent to 50 percent and on Saturday from 8 percent to 16 percent, allowing the college to enroll 700 additional students without constructing any new classrooms. The increase in enrollment resulted in the university increasing tuition only 5 percent rather than the 20 percent that would have been necessary without the additional students. Similarly, the Richard Stockton College of New Jersey began offering tuition and housing discounts of up to 20 percent for its summer session in 2009, hoping to attract students to its campus during the time when campuses are the most underutilized. The school experienced a 15 percent increase in graduate student enrollment from the previous summer, but a 12 percent decline in undergraduate enrollment.

More generally, institutions should consider creating an internal market. The key feature of such a mechanism would be an auction for classrooms and other space. The central administration could distribute extra money, primarily determined by enrollment, to the departments. The departments would then use this money to bid on spaces that they want. Departments that wanted to use the funds for other purposes could secure a surplus by choosing less prime locations and off-peak hours. Departments that insisted on prime locations during peak hours would likely have a deficit and would need to come up with the deficit from elsewhere in their budget.

While this solution may not provide for rent levels covering actual operating costs under all circumstances, it would likely increase departmental incentives to schedule during non-peak scheduling periods when demand is lower (peak hours on most campuses are MondayThursday 9-3).

Drawing on the information available to each department about current and future enrollment, an internal market for classrooms would efficiently distribute classrooms according to departmental needs. Rather than relying on a complex, costly, and often ill-informed scheduling bureaucracy, a market would more easily allocate classrooms to their highest valued use.

Information about demand for peak hours, classroom technology, size and other characteristics could be derived from the prices of time slots for each classroom, rather than constant surveying and reporting. The decentralization of decision making would allow for more rapid adaptations to changing circumstances—such as increased enrollment in one department or decreased popularity of a class—than if all scheduling were handled by a central bureaucracy only after it had gathered large amounts of information. Additionally, similar models could be applied to office and laboratory space, the former of which occupies far more space on a college campus than classrooms.

Conclusion

Using a market to buy and sell the scheduling rights for classrooms would encourage departments that were able to do so to schedule their classes during less popular, non-peak times, because such time periods would be cheaper to purchase due to their lower demand. Prices would reveal where there was room for growth and when space was becoming so scarce that expansion was necessary. Charging rent for the use of classrooms while providing payments for every student station filled would encourage departments to fill classrooms during the periods for which they own the scheduling rights. If the cost of rent were based on actual building costs, it would also provide incentives for departments to schedule in those buildings that were the least costly to operate.

While market mechanisms may provide incentives that help increase utilization rates, pure markets may have some externalities that are contrary to other institutional goals. Internal markets have the advantage of allowing the administration of a university to regulate in compensation for any market failures that would be damaging to a university’s long-term or educational goals. Each college or university may need to individualize the market model to their needs, but in general the incentives provided by a market-based model can lead to the efficient use of space on a campus while avoiding cumbersome and expensive administrative procedures. Filling up the buildings that institutions already have will reduce new, unnecessary construction and the resulting maintenance costs that make up universities’ second highest expenditure category.