Starting this fall, tuition at San Francisco community colleges will be free.
How will San Francisco pay the bill? By raising taxes on the wealthy. Specifically, by raising the real estate transfer tax on properties selling for more than $5 million.
Warning klaxon: political debate inbound! But instead of battening down the hatches, take a moment to set aside existing political beliefs and keep a more open mind. This story sounds simple on the surface, a classic question of “should we tax the rich more to pay for more resources for the poor,” but like most stories worth telling, there’s more than meets the eye.
How Will San Francisco’s Model Work, Exactly?
Last fall, San Francisco voters approved a ballot measure to raise real estate transfer taxes on properties selling for over $5 million. The transfer tax rate rose from 2% to 2.25% for properties selling for $5-10 million, rose from 2.5% to 2.75% for properties between $10-25 million, and rose from 2.5% to 3% for properties over $25 million.
The City expects the tax hike to rake in an extra $45 million every year.
That money goes into the City’s general fund, to be spent however the City desires. But one of the promises that the City made, in order to sell the tax hike to voters, was that it would offer free tuition for the City College of San Francisco. Of the $45 million/year they plan to collect from the tax hike, they’ve pledged $5.4 million/year to the City College.
Making the initiative even more progressive, the City College will actually pay lower-income students to attend. Well, sort of. They’re offering $500/year to help cover auxiliary expenses like text books and commutes.
There’s one more kicker: The only requirement to receive free tuition is having been a resident of San Francisco for at least a year. That means that even undocumented/illegal/whatever immigrants are entitled to free college tuition.
A Budding Trend?
San Francisco is far from alone in exploring free college tuition. Remember all those strident statements by Bernie Sanders on the campaign trail about “making college free”? He may not have won the nomination, but he certainly won plenty of attention and adoration among younger, left-leaning voters.
New York governor Andrew Cuomo announced last month that he intends a similar initiative in New York. According to his proposed plan, tuition would be free at city and state colleges across New York for any students whose families earn less than $125,000/year.
Tennessee also started offering free community college tuition in 2015 and is planning to expand the program this year. Meanwhile, Rhode Island’s governor is pushing her own initiative.
“Free college” is a rallying cry with legs—and little wonder, with college tuitions and fees having risen 63% in the ten years from 2006-2016. Nor does it end with tuition; college textbook costs rose 88% in that time. University housing costs rose 51%.
Skyrocketing education costs are frankly alarming. No matter your political stripe, everyone can probably agree that education costs have spun out of control.
We can all understand the urge to halt this explosion in costs. But are people like Bernie Sanders, Gov. Cuomo and the voters in San Francisco attacking the symptoms or the disease?
Roots of the Problem
If we as a nation are serious about containing this tuition outbreak, we need to look beyond the emotional rallying cries of “college should just be free!”
Why have college costs risen so much? What are the roots of the problem?
I’m a real estate and personal finance expert, not a higher education expert. But even laypeople like you and me can look at some basic numbers and use a little deductive logic.
Maybe the cost of labor has gone up for college professors? Nope. Professors’ salaries have barely kept pace with inflation for the last ten years.
Some pundits assert that states have pulled back on funding for state universities. But state funding today is much higher per student than it was in the 1960s and 1970s in inflation-adjusted dollars. And if state funding were the root of the problem, why have private colleges’ tuition quadrupled in the last 30 years?
Are janitors and landscapers suddenly earning $100,000? What’s going on?
There’s a strong case to be made that tuition costs have skyrocketed because of administrative bloat. Colleges administrative positions inflated by 60% between 1993-2009—ten times faster than the increase in tenured professors.
Ultimately, students are paying more for colleges today because they’re willing to pay more. In fact, some analysts argue that if the federal government stopped subsidizing student loan rates, students would balk at education costs and colleges would be forced to charge less. That would certainly benefit students more than lower-interest loans to pay higher bills.
Does Free Translate to Better Results?
Here’s a question that San Francisco may not have bothered asking: Was tuition the primary factor preventing students from enrolling?
After all that discussion above about skyrocketing tuition costs, that might sound like a no-brainer. However, San Francisco’s City College was already heavily subsidized and dirt cheap, at $47/credit.
And do people even value what they don’t have to pay for? Heck, look at high school attendance rates. Is it possible City College was underutilized not because of the $400-600/semester tuition, but because lower-income residents struggled to get through high school, much less attempt college?
Consider the following statement from educational nonprofit Attendance Works about primary and secondary schools: “Low-income students are four times more likely to be chronically absent than others often for reasons beyond their control, such as unstable housing, unreliable transportation and a lack of access to health care.”
Perhaps offering to cut $47/credit off tuition isn’t the best way to create new economic prospects for low-income families? There’s a case to be made that the $47/credit wasn’t the real reason why not everyone in San Francisco was leaping to enroll in college.
Will San Francisco’s Plan Work?
Even if you wave away the question of whether tuition was the real inhibitor at City College, there’s another big problem for anyone serious about improving the prospects of low-income families. How will success be measured? If we want to know if San Francisco’s plan will “work,” don’t we need to know what “work” means?
According to the U.S. Department of Education, only 15% of full-time students who start community college actually graduate with a bachelor’s degree within six years of starting. Before you ask, that number is only slightly better for two-year degrees: Twenty percent of full-time community college students achieve an associate’s degree within three years of starting.
Even if San Francisco bothered to give a nod to accountability and promised improved graduation rates, that still misses the point. The point is reducing the skills/needs gap between employees and employers. We have plenty of men in this country who’d love to work in a manufacturing plant, but few manufacturing jobs. We also have plenty of companies who need web development work, but not enough trained, experienced web developers.
If San Francisco is serious about improving career prospects for its lower-income residents, how about holding itself accountable for this funding? Think about how powerful it would be if San Francisco went on record and committed: “By 2025, our City College will have raised the employability of 150,000 residents by placing them in middle-income jobs upon graduation.”
Any Impact on San Francisco Real Estate?
San Francisco offers an extreme case study: plentiful high-skill, high-pay jobs without enough lower-skill, lower-pay jobs. It’s been a story of rapid gentrification (for better or worse, depending on who you ask) and a story of rapid housing appreciation.
Even so, the real estate market in San Francisco seems to have overheated. In 2016, rents dropped nearly 5%, contrasted with 4.5% growth in 2015 and a precipitous 13.5% leap in 2014.
Nor is it only rents. Sales in San Francisco fell 13% in the first nine months of 2016.
None of this has anything to do with the tax rate hike on higher-end homes. But it calls into question the prevailing attitude around San Francisco’s city hall. “We want to spend even more money? No problem, we can just keep opening the cash register of high-end real estate.”
San Francisco is an attractive place to live, given its thriving tech industry, mild weather, and convenient location near beaches, mountains, agriculture and abundant waterfront—yet even tech workers and companies have started leaving the Bay Area for cheaper cities to call home. For all that San Francisco’s city council has trumpeted its concerns over gentrification, they certainly haven’t minded the increased tax revenue. If anything, it’s boosted their appetite for more money to spend.
But sooner or later, housing markets in San Francisco will correct, the job market will equalize, and eventually the City of San Francisco will open its cash register drawer of tax hikes one too many times. When that day comes, I hope that San Francisco really has improved job prospects for its lower-income residents. But with no clear metrics for success, I doubt we’ll ever know.
Whew! Holy politics, Batman! Who’s ready with a barbed quip to put this writer in his place?
I’m sure the opinions will blaze in faster and furious-er than Vin Diesel. I’ll try not to take it personally—I truly am curious about everyone’s thoughts on this initiative!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.