This monograph summarizes the current thinking in the national literature on the subject of cost-containment and productivity in higher education and applies findings to higher education in California. It presents a framework for characterizing the major factors driving higher education costs, outlines potentially promising areas in identifying cost-containment and resource reallocation strategies, and provides examples of several institutions that are improving institutional performance while significantly reducing costs. After a brief introductory section, the second and third sections outline the history and evolution of California's public higher education system and the major current budgetary and demographic challenges. Section 4 presents an introduction to higher education finance in California. Section 5 looks at trends in higher education costs both nationally and in California and addresses the state role in encouraging cost-containment. Section 6 presents a framework to explain the causes of cost escalation and identifies four drivers of cost escalation: (1) the cost disease, (2) the growth force, (3) the administrative lattice, and (4) the academic ratchet. Institutional mission drift is also noted. Section 7 then considers options for improving quality and containing costs including broad-based options and specific options for countering the cost disease, the administrative lattice, and the academic ratchet. Section 8 offers a framework for institutional change based on principles of total quality management and offers a case study of its application at the University of Michigan. (Contains 85 references.) (DB)