CALIFORNIA, Pa.—Public universities across the U.S. are arguing for freedom to reap more revenue and create more efficiencies to offset dwindling state dollars.

One way, they say, is to raise tuition. At California University of Pennsylvania, a 158-year-old state school serving 9,400 students, enrollment is rising for all but the poorest students, which, in part, has led to a novel idea: replace the "low tuition for all" policy with a market-rate policy.

University officials say students from wealthier families could afford to pay more than the average $5,804 annual tuition at the state's 14 universities. Fresh revenue from the higher tuition, they say, could be used to offer more scholarships to help the neediest students.

Angelo Armenti, president of California University of Pennsylvania, is pressing for freedom to set market-based tuition at state-funded schools. Jeff Swensen for The Wall Street Journal

At the university, which is located in the northern tip of Appalachia and has long served aspiring children of steelworkers and coal miners, enrollment among students whose families earn less than $40,000 a year is falling fast as some are unable to afford it. Enrollment for students from families earning more than $100,000 has risen nearly fivefold over a decade as families increasingly opt for public schools as their reputations improve.

"We are already failing the neediest students who attend our universities," California University President Angelo Armenti told trustees of the 14 state-controlled universities, who are seeing similar patterns, at a conference this fall. "Market rates are the norm in every successful enterprise and should be adopted by higher education if it is to serve all the citizens of the commonwealth."

The Pennsylvania State System of Higher Education, which governs the schools and sets their tuition, declined to comment on his suggestion.

Similar discussions are being held around the country.

Terry Hartle, senior vice president of the American Council on Education, a Washington, D.C.-based group that represents university executives, said in many cases schools were getting modest amounts of state funding but were subjected to a lot of oversight and regulation over tuition, hiring, procurement and capital projects. Regulations, such as purchasing only through state vendors, limit their ability to operate efficiently and get better prices, public universities say.

The rational, but politically complex solution, Mr. Hartle said, would be to let the schools operate more like private, independent units, a change that in some states requires legislative approval. "But state legislations and bureaucracies rarely given up anything without a struggle," he said.

That may be changing, as states face huge deficits and the loss of federal stimulus money. In 2009, state appropriations per full-time student averaged 12% lower than a decade earlier after adjusting for inflation, according to the State Higher Education Executive Officers.

"I'm open to anything," said Rep. James R. Roebuck, a Democrat who is chairman of Pennsylvania's House Education Committee. Pennsylvania ranked 44th among states in terms of per-capita support for higher education, according to an annual survey done by Illinois State University and its Center for the Study of Education Policy.

With state support declining—and likely to continue doing so in the current economy—Mr. Roebuck said, "colleges and universities need to find different ways to raise money and be more aggressive."

Many state officials are concerned about granting public universities more discretion, especially over tuition, because they fear schools might raise prices beyond the reach of struggling middle- and lower-income families—some of the very people that the systems were established to serve. "If the cost goes up, how to we keep it affordable and accessible?" Mr Roebuck said.

Public-university presidents say they have ramped up private fund raising to help needier students and have also cut majors and staff to keep costs down. But they say the savings and funds raised aren't close to making up for the drop in state appropriations.

Getting donors to designate dollars for need-based scholarships, as opposed to those based on merit or for certain departments such as engineering, is tough, universities say.

"Donors want to have an impact that comes when you give to get a better student. They're not interested in building the base," said Alan Merten, president of George Mason University in Virginia.

Mr. Merten said Virginia's state funding per student has fallen 30% since 2000, and given tight budgets, he didn't expect that funding to be restored.

"If the state can't send me money, send more freedom," said Mr. Merten.

He said the state had loosened some purchasing oversight, enabling him to cut costs, but that more was needed.

Virginia's public universities are constitutionally allowed to set their own tuition, but if they exceed suggested limits, their allocation can be cut, he said, adding, "so you are really not allowed to set tuition."

In Wisconsin, public universities are seeking freedom from the state to set tuition, as well as to manage construction projects, purchase equipment and hire staff.

They note that the state funds less than 25% of their operating budget and is more like a minority shareholder. Many new buildings are financed with private dollars and shouldn't have to go through state bidding procedures that often delay the project and are more expensive, university officials maintain.

"Hold us accountable to goals. Don't tell us we have to buy 300 No. 2 pencils with a certain type of eraser," said Kevin Reilly, president of the University of Wisconsin System, which serves more than 178,000 students.

Peter McPherson, president of the Association of Public and Land-grant Universities, said public universities would prefer not to raise tuition. Rather, they want freedom from state rules over such things as selling property, for example, to gain efficiency. "Many states will tell you that they do not have nearly the freedom to act expeditiously," he said. "Universities have said give us more flexibility, especially in difficult times."

Pennsylvania already has a sort of hybrid, public-private arrangement for four of its universities: Penn State, Temple and Lincoln universities and the University of Pittsburgh.

Temple, Lincoln and the University of Pittsburgh had all been private universities but ran into budget issues in the 1960s and 1970s. Concerned about the loss of those universities, lawmakers created a special "state-related" category, allowing them to receive significant state funding, although not as much as state-controlled schools; to set their own tuition; and to have an independent board of trustees, with some state appointees.

"This was an innovative way to help the major universities of the state without frankly unreasonably interfering with the affairs of those institutions," said Robert Hill, Vice Chancellor of the University of Pittsburgh.

In exchange for state support, he said, was the commitment to keep tuition low for Pennsylvania students. Out of state residents pay roughly double the in-state tuition.

The downside to such flexibility is that their funding is nonpreferred, which makes them more vulnerable to budget cuts. Funding for the state controlled institutions comes out of the general fund. "When the state looks for places to cut or save money, they look to the nonpreferred," said Lisa Powers, director of public information at Penn State University.

Write to Clare Ansberry at