This report, part of a project called "Redesigning Higher Education", argues that a set of fundamental changes underlies the growing number of critical difficulties faced by higher education in the United States. It finds the governance structures of American higher education inadequate to deal with a changing and increasingly cost-conscious environment, and suggests that the problem within higher education is that policymakers at all levels are focusing on cutting costs without sufficient regard to defining missions, reallocating resources, and making choices among the present activities in which higher education institutions are engaged. In offering guidelines for dealing with this situation, the report suggests first, that improvements in the governance system can neither be top down nor bottom up: they must be interactive. Second, to ensure cooperation by all academic and administrative units in planning and priority setting, all participants must have a role in forming the rules of the process. The planning and priority-setting process must be university-wide with all units participating. Third, the planning and priority-setting process should be conducted to provide as much open information and discussion as possible. Finally, initial recommendations of faculty task forces and central administrators should be public and preliminary so as to allow affected units to rebut and reply, and appeal mechanisms must be put in place to allow units that are affected by tentative recommendations to respond. The report's five chapters are: Introduction; Higher Education in America; The Changed Environment; Resource Allocation in Higher Education, and New Goverance Systems: Guidelines for Change. (Contains 23 references.) (GLR)