Posts Tagged “bond rating agencies”

American Higher Education Has a Serious Revenue Problem

Painting a grim picture for American higher education, Moody’s Investors Service recently changed the industry’s outlook from “stable” to “negative.”

This return to negative ratings reinforces a number of trends that bear close review.

The facts are clear and inescapable:

  • The comprehensive fee – tuition, fees, room and board – will approach $70,000 a year at a number of high sticker-priced colleges and universities.
  • Students and their families are voting with their feet, with 46 percent of first-time students beginning or having had some experience in community colleges.
  • Politicians sensitive to anecdote or polling or simply worried about the price of a higher education degree, promote policies that reinforce this optic.
  • Recent efforts to tax wealthy endowments to skew higher education spending priorities, often towards demands for moderated tuition or increased financial aid, illustrate this point further.

Higher education has taken some steps. Efforts have been underway to trim rising costs and achieve basic efficiencies since the Great Recession. These efforts vary widely depending upon the urgency felt within an institution, its level of creativity and nimbleness, shifting demographics, and the relative strength of the net tuition revenue it receives.

Trimming costs or enrolling more students, however, cannot cure what higher education faces. America’s colleges and universities have a revenue problem.

Fixed costs in land, labor, and debt repayment and rising costs in health care and financial aid largely determine a college’s operating budget. Labor alone might be sixty percent of a typical small college’s budget.

Most colleges are heavily tuition dependent. There is little or no discretion in the operating budget. For some of them the financial aid discount rate now approaches seventy percent. Dorms will be full until the institution, desperate for revenue, closes, merges, or is acquired.

Many of these colleges rely on other sources of support. Auxiliary revenue sources like residence and dining hall fees cover some of the territory lost to declining tuition revenue.

Endowment income also helps, but most colleges do not have sufficient endowment revenue to make a significant difference. Comprehensive campaigns and research grants and contracts address longer-term needs but do little to fund short-term revenue problems.

College Operating Model is Outdated, Unsustainable

The truth is that colleges rely on an older, archaic operating model where tuition increases historically matched expenses to balance an annual budget, often aided by auxiliary services revenue. For many schools, it was that simple. As new financial, cultural, demographic, consumer, and program pressures build, these “Mom and Pop” shops do not have the flexibility or capacity to meet the new demands.

What’s the path forward?

There are a number of changes that must be made immediately to offset this growing crisis:

  • College governance is weak and ineffective and must be immediately adapted to meet new oversight demands, with the faculty playing a more important role in creating an innovative educational enterprise.
  • Colleges must understand the institution’s value proposition, if the mission is still relevant and differentiated from its peers, and where the college wishes to be in out years. Why should the college exist in the 21st century?
  • The “Mom and Pop” operations must give way to a newer, more flexible model that accounts for changes in how colleges use tuition, re-imagine underutilized real estate assets, re-configure capital campaigns to meet shorter-term needs, re-think the use of temporarily-restricted funds, and seek additional partners to produce new revenue streams.
  • Higher education institutions must set aside older enrollment strategies in favor of newer financial aid analytical models that differentiate academic programs, emphasize student life, expand when practical the traditional 18-22 year old applicant pool, and focus on outcomes through stronger career counseling networks that create a lifelong affiliation.
  • Stakeholders must work much more aggressively at retention and graduation strategies, using student life, including athletics, as an enrollment tool to increase student fit and the level of satisfaction.
  • Colleges must determine what facilities footprint the institution can afford. Its leadership must grow/shrink the college to create a better fit among people, programs and facilities.
  • Institutions must get out of those business arrangements that are eating up financial capacity for which there are better service providers. If the college can use its legal, accounting and student life teams to create a robust residential life program, for example, does it really need to own its housing, with its corresponding debt, that might otherwise go to academic support?
  • The campus community must think of technology as an ongoing operating lease rather than a draw against remaining levels of debt capacity.
  • Its supporters must remember that a college is both an educational enterprise and an economic engine for its region, and seek strong public private partnerships to mutual benefit.

Despite the dismal forecasts, the decentralized and complex higher education system remains a cornerstone of American ingenuity, creativity and promise. The task ahead is to imagine the possible.

This op-ed first appeared on The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education.

Will Higher Education Heed Bond Rating Agency Warnings?

Moody’s and Standard & Poor’s recently released their updated outlooks for American higher education. The news is not good.

Moody’s revised its 2018 outlook for higher education from stable to negative “as aggregate operating revenue moderates while expense growth increases.” Moody’s vice president, Susan E. Shaffer, elaborated: “the annual change in aggregate operating revenue for four-year colleges and universities will soften to about 3.5% and not keep pace with expense growth, which we expect to be almost 4%.”

Private Colleges May Outperform Publics, But Cost-Cutting is Needed

Moody’s expects private institutions to outperform their public sector counterparts. But about 15% of universities will be forced to cut costs in response to stagnant or weak revenue growth next year. The ratings agency believes that support from tuition and related fees, research funding, and state appropriations will remain weak. Further, net tuition will be depressed over affordability concerns and slow enrollment growth.

While private universities will have revenue growth of about 3% – 3.5%, these numbers will be considerably less robust in small- and mid-sized colleges and universities. This is especially dangerous since so many of them serve low- and moderate-income students. They draw from the same regions in which the students and their families live.

Moody’s notes that the recruitment demographics are horrible and that higher education is subject additionally to changes in its relationship with the federal government.

Moody’s speculates that federal tax reforms, the levels of research support, and changes to the Pell Grant and subsidized federal loans in the future could profoundly impact affordability and access.

Higher Education Flexibility is Limited in Face of Fiscal Challenges

Standard & Poor’s makes a similar finding. Presented as grim, the S&P outlook finds that higher education’s flexibility “in programming, financial operations, enrollment, resources or student draw” is limited. Like Moody’s, S&P cited the recent federal tax on colleges with large endowments, together with growing consumer skepticism and demands for lower sticker prices and more effective services.

Significantly, Standard and Poor’s also warned of lasting damage to college and university reputations in the current political climate.

S&P offered some encouragement, however, finding that higher education institutions could improve their standing if they established new partnerships, peeled back their reputation for cultural inertia, and increased their efforts to recruit non-traditional students.

Writing on these subjects for EducationDive, Jeremy House summarized that “all parties seem to agree that a myriad of issues haunt higher education.” He noted that the American Association of State Colleges and Universities (AASCU) “called 2018 one of the most uncertain years for higher education.”

Future of US Higher Education Depends on Ability to Innovate

Mr. House reported that the common agenda driving the future of higher education in the S&P and AASCU positions is a call for innovation. He further suggested that colleges could grow their student body by serving more post-traditional students, enhancing strengths and partnerships, embracing data analytics, technology, and online learning.

For those of us who work at imagining ways to strengthen American higher education, these are good and necessary tactics. But by themselves they are insufficient, roughly equivalent to the proverbial Dutch boy plugging the holes in the dike. Further, it’s not so much that the dam threatens to break but more that consumers will find new, alternative ways to find and use the water effectively.

The success of American higher education will depend heavily on innovation. That’s why the warnings from Moody’s and Standard & Poor have special urgency.

Those institutions that are the most adept and nimble will likely craft the best path to sustainability. It starts with these colleges and universities developing a clear value proposition and sense of self. That’s quite different from remembering their history, although working their history and traditions into their value proposition is unmistakably necessary.

Future Strategy Must Combine Principle and Practicality

What’s most needed is a sharper strategy that combines principle and practicality. American higher education must anchor a seamless pathway to a lifelong education that prepares Americans for rapid change in a global economy. It must bridge the chasm between formal education and employment by preparing its graduates with a worldview that is able to imagine their contributions to society.

But strategy alone is insufficient.

The plain hard fact is that higher education operates on a mid-20th century business model that is unable to anticipate 21st century changes. Many colleges and universities run like the “Mom and Pop” corner variety stores that ultimately failed because they could not compete and adapt as the world changed. For them, it was more about a failure in process and delivery than in the quality of the product.

Indeed, the biggest obstacle facing American higher education is the cultural inertia that permeates many campuses to reinforce an antiquated, incremental business model.

Can the business side of higher education keep up with the educational innovation that now energizes its research and teaching?