Economists like arithmetic. Let’s do some to illustrate the issues. Suppose an instructor who teaches undergrads makes $100K per year and that salary is entirely tuition financed. Imagine that tuition is $8,000/year, pretty close to the current in state number. Suppose the typical students take 5 courses per term in each of the fall and the spring. That makes $800 per course. Imagine that half of that goes to overhead while the rest goes directly to instruction. Then for this to be a break even activity we have
$100,000 = $400 per student x 250 students
Or more generally we can write the break even equation in English so that we can get at the essential ideas.
Instructor Salary = (Dollar contribution per student) x (number of students taught)
The break even number of students taught is determined by the other two parameters of this equation. So we back out the 250 students number by dividing the instructor salary by the dollar contribution per student. In principle one can break out each activity this way to find its break even level, though there are interdependencies, for example in the above in the way the overhead was allocated.
Let’s abstract from that and note that if the instructor taught 250 students but earned say only $80K, then this activity would generate a surplus. Conversely, if the instructor taught only 120 students but continued to earn $100k, the activity would require a subsidy to make up the shortfall. Similarly, teaching graduate courses to doctoral students usually entails a subsidy since these students normally get a tuition and fee waiver and hence for them the dollar contribution per student is zero.
The fact that an activity requires a subsidy to sustain does not mean it is bad in any way, shape, or form, as Massy points out. In fact it means it is a goodie for someone. The issue is whether as the circle gets drawn larger and larger from individual to department to college and then to the campus, the university and the state, whether the transfers that do occur are perceived as the right ones. Well paid faculty who attract innovative commercial enterprise to the state or who provide good works for the inner city may be a great investment when viewed at the many different levels. But if at the state level the campus is perceived as inward looking those same well paid faculty will appear self-aggrandizing and substitutable with cheaper alternatives.
The issue, then, is identifying the subsidized activities and their beneficiaries. This must be done on a recurrent basis and thereby either affirming the commitment to these activities or trimming/eliminating them. We always talk about what a large decentralized place Illinois is. That may not be intended as a euphemism for saying there are zillions of hidden subsidies, but the guess here is that most of the benefit is captured close to where the activity is generated (this is the nature of the Higher Education beast) and especially in tight budgets making overt what has historically been implicit seems like a necessary way to go.