Posts Tagged “budget”
Last month, Rick Seltzer reported in Inside Higher Education about a brewing controversy at Oberlin College, which is facing a significant budget shortfall. The College, including its prestigious Conservatory, faces a multi-million dollar deficit caused largely by lower-than-expected enrollment.
Trustees charged with looking into Oberlin’s shortfall found that the College relies too heavily on cash from gifts. In a letter to the student newspaper, The Oberlin Review, two faculty members argued that it is “inadequate and depressing that neither the board nor the administration has the leadership or imagination to address the crisis in any other way than by eliminating raises for faculty and staff.”
Options for Closing Budget Gap Without Cutting Compensation
In response, Oberlin’s administration pledged to look for new revenue to reduce spending in the short term. This will encourage and permit development of long-term strategies to broaden its appeal to college-bound students, raise money through a new comprehensive campaign, offer early retirement plans, and place stricter conditions on funding for large capital projects.
Is Oberlin’s Campus Culture Hurting Enrollment?
There are two ways to look at Oberlin’s situation. The first is to criticize the school for getting itself into this mess, failing to educate its stakeholders about the crisis and not including them more directly in seeking a solution.
Critics might argue that any financial changes must be more fundamental because Oberlin has a shaky financial model that will be subject to unanticipated cyclic downturns when some combination of enrollment softness, brand weakness, and fundraising failures and endowment shortfalls hit the College in the future.
It is unlikely that Oberlin suffers from an enrollment shortfall, as some contend, because its faculty and students lean toward one end of the political spectrum, even if, in fact, they do. Oberlin appeals to students who are comfortable with the campus culture; indeed, it one reason that 27 % of those who are accepted in the college of arts and science actually enroll there.
An alternative to criticizing campus culture for the current budget woes is to commend Oberlin for facing the tough questions that beset its peers and aspirants across the country. Most college leaders envy Oberlin, with its sterling reputation and a $770 million endowment upon which to base its decisions.
What Oberlin should demonstrate to the rest of American higher education is that serious, purposeful, and inclusive conversations must occur if an institution is to avoid what many less endowed and recognized colleges already face – open concerns about whether they are sustainable.
For most of higher education – public and private – the facts are clear. The operating model doesn’t work, especially if the college relies overwhelmingly on a tuition-grounded comprehensive fee.
At all but a handful of colleges and universities, fundraising cannot keep up with growing demands on the budget. Fundraising is, at best, a long-term solution. Even with the run-up in the stock market, most institutions do not have endowments that are meaningful supplements to tuition revenue.
Auxiliary revenues are flat and typically diverted to pay for academic programs that student tuition cannot finance. At the Division 1 level, for example, only one in eight athletic programs pay for themselves. And most colleges have already made tough decisions on creating basic efficiencies — either through short-term actions like salary freezes or on a more permanent basis, like modifying health and retirement plans.
There is little wiggle room left in budgets that are largely fixed by labor and capital costs including debt repayment, facilities upkeep, and technology. There is almost no discretion left in many college operating budgets.
Some colleges panic, surmising that a shift to new programs at the undergraduate, professional, or continuing education levels will keep the wolf from the door.
Others are thinking more about online programming opportunities. It may be that a solution based on shifts, modifications, and new programming ventures will offset growing financial aid discounts and annual operating increases. It is more likely that such actions will delay the reckoning that will come when discounts make long-term survival an open question.
In the end, what we need to hope for most is that colleges are nimble and creative institutions with long histories that survive the upheavals that they face as these venerable institutions have in the past.
What’s so encouraging about Oberlin is that they are asking the right questions.
The road may be a little bumpy until transparency improves, but Oberlin put its future on display to address systemic issues. And it did so before it had no choice.
Change is coming to higher education. Each institution will find a different solution on a path to sustainability. But the solution will be about strategy, not tactics.
In the end, the institutions that survive will not be protected by their money, alumni base, or reputation. They will prosper because they figured out how to remain relevant in the 21st century.
Swirling around the debates over the high sticker price of higher education is a deeper conversation about the broken financial model that most colleges and universities continue to use to pay their bills. While the largest universities have more options based on the scale of their endowment, fundraising prowess, and research support, most public and private colleges are heavily tuition dependent.
State governments have been withdrawing their historic support for public colleges and universities. These institutions now increasingly rely on tuition, fees, and room and board to pay their bills. Each passing day, their finances look more like private colleges.
That’s not a good thing if higher education is to develop a sustainable financial model. Private colleges rely heavily upon a tuition model that presumes that a family pays based upon their ability to do so — that is, wealthy families should not expect to receive financial support from the college that their child attends.
The stated goal behind the model was to improve access and encourage diversity in all its forms by making college more affordable for students who qualify for support. They do so through financial aid discounting practices that places the burden of support on full-pay families to pay for the discount.
College Financial Aid Model No Longer Useful
Today a new reality has set in, based principally on the fact that the student financial aid model has run to the end of its useful shelf life. Until the early 21st century, it was possible for financial aid administrators to cobble together financial aid discounts, state and federal support especially for public colleges, and loans of various types to make a case to families about how they could afford to pay for college. But cracks began to appear in this practice as the gap widened between what colleges could piece together and what families could afford to contribute.
At some colleges and universities, including often those of very good reputations, the financial aid discount now exceeds 70 percent. It is possible to imagine a scene where their student residence halls will be full but the comprehensive fee received will no longer sustain the enterprise.
The number of “full-pay families” — those who can pay the full comprehensive fee — is decreasing along with the willingness of families to send their children to high sticker-priced colleges. Many of these colleges did not meet their fall enrollment targets in September 2017. Further these institutions often rely on merit scholarships, now extending into the wealthier income brackets. Wealthier families brag about the merit scholarships they receive to encourage their child to attend the college they selected.
When admissions officers calculate financial aid offered to the “set asides” for Division I athletes, academic programs, and special circumstance candidates of various types, there is very little flexibility remaining in a financial aid budget.
Tuition and Fees Aren’t Enough to Cover College Expenses
This aid budget depends on the institution’s ability to meet general college expenses through tuition and fee increases. But this is where the crisis occurs because American consumers have turned against high tuition sticker prices, especially since so few families pay the full price today.
When elite universities charge $65,000-$70,000 annually, the media focus on the extreme rather than on the more moderately-priced institutions that form the majority of America’s colleges and universities. But it is an open question whether the sticker prices over $40,000 resonate with the American public anymore.
It’s a mess with few supporters backing the old financial model upon which American higher education has historically depended to finance the enterprise.
America’s colleges and universities are certainly aware that they face a crisis of confidence, credibility and economics ahead of them. The question is how well and how quickly will they respond to this crisis.
Three things must occur:
The first is that higher education must recognize that its colleges and universities – whether public or private – face a situation that will not be ameliorated by outside factors like an improving economy or rising wages. The fact is that most American families believe that college is a right and not a privilege. They are less likely to devote the personal resources necessary to have skin in the game.
The second is that higher education must have an open, prioritized conversation about how to pay its bills. It is unlikely that a single partner such as the federal government will step in like a white knight on a singular mission to save higher education. A better policy is to determine the range and level of funding sources available to colleges across its historic funders. This includes both operational and capital support from all sources. The most important decision will be whether to keep the decentralized higher education system in place with reinvigorated and better-defined missions and purposes.
Finally, higher education must imagine the possible. It is likely that America’s colleges will see a wave of mergers, closures, and acquisitions over the next 50 years. If so, how will this be managed? For those institutions that have achieved sustainability, what are the terms that bring people, programs, facilities, and technology together to foster common agreement on what higher education contributes to America?
America’s colleges and universities have evolved successfully for nearly 400 years. They are nimble, creative and distinctive. Higher education must go forward with transparency, purpose and urgency. To begin, it must demonstrate its willingness to change and adapt.
The first indications are in on how the academic year is likely to go. In the pomp and ceremony that surrounds the opening of the school year, deep concerns emerge behind-the-scenes in all but the best endowed institutions as the numbers come in. There are no alternative facts to hide what an institution will face. It’s the “is what it is” moment for America’s higher education.
Colleges and universities have known what the composition of their incoming classes will be since last May when a fairly complete freshman profile emerged. They completed summer renovations on facilities and monitored their multi-year building projects. And they have matched their staff, especially faculty, to the size and needs of the incoming and returning student bodies to keep their student/teacher ratios in line.
But the late summer presents more statistical evidence of what is likely to happen in the coming academic year. The most telling evidence is financial:
- What was the summer melt — those who intend to enroll but don’t arrive — of students like?
- Did the freshman class meet the enrollment projections?
- Did the Office of Financial Aid meet or exceed its budget?
- What will federal and state support look like, especially at public institutions?
- Were capital projects delivered on time and on budget?
Financial Questions Dominate College Leadership Discussions
Since most colleges are so heavily tuition-dependent, these financial questions increasingly dominate senior leadership discussions each fall.
The cold facts are that colleges are capital-, technology-, and labor-intensive institutions. There is very little discretion available to them in an annual budget.
And the numbers will likely confirm soon that net tuition revenue is essentially flat for yet another year. Further, many of them, including some very good schools, did not meet their internal enrollment projections.
The financial model at tuition-dependent colleges and universities that support their people, programs, and facilities no longer works.
Clearly, higher education is going through a process in which it must reevaluate how to pay the bills. There are ways to put the financial pieces together differently, drive efficiencies and cost savings, and look to outside partnerships to reevaluate how to make the educational enterprise work without destroying the historical foundation upon which colleges and universities are built.
Student Residential “Palaces” Symbolize Excesses of College Spending
One example is the Taj Mahal residence hall. These are often spectacular facilities with amenities that exceed anything that most students – even those sharing apartment rents – will be able to afford after graduation. The “build it and they will come” theory of facilities design and enhancements has serious drawbacks. Its presence draws attention to the inadequacy of the current financial model.
These residence halls symbolize the excesses of American higher education, especially the failure of a college to live within the means that would dampen tuition sticker price increases.
The facts are that it is unlikely that higher education institutions need to put so much cash into development of these student residential palaces. If they do, private developers should bear the cost of their construction, assuming that they can maintain quality and create efficiencies that a college is unable to do using in-house expertise to moderate the cost.
In fact, in many cases colleges should be moving out of the student “hotel” business, using a progressive redesign of their student life program to achieve broader institutional strategic objectives that go beyond these luxurious student residences.
Colleges must also find a way to diminish the need both to treat fully depreciated student housing as a cash cow to shore up their general programming and re-capture much of their upper division students for whom they may not currently provide housing.
Focus on What Students Truly Need in Residence Hall
There are larger questions drawn from these trends. When is more just more? And, what do students actually need?
Let’s assume that students need a residence that has decent square footage and is well-maintained. They should be clean, have adequate electrical capacity for their growing number of technology-related products, quiet HVAC for heating and air conditioning, and private or semi-private bathrooms, depending on the configuration of the facility.
That’s enough. They do not need in-house pools, exercise facilities, cafes, or in-suite laundry facilities. That’s too much.
Technology, Connectivity Top List of Student Needs
In fact, if a college or university thinks strategically about what tops the list of students needs, they are likely to hear that it is technology – and specifically, connectivity.
The ability to connect to the outside world is the great leveler for colleges and universities that break down the geographic, social, and cultural barriers that all institutions face in different ways.
This is an area of continuing concern on college campuses. It is a particularly serious problem on rural campus where social and cultural options are more limited. Technology is a large, recurring expense for most colleges, especially since demands shift and technology changes with amazing speed.
Solution Will Require Partnerships
The solution will require new and imaginative partnerships among colleges, business and industry and their providers. It may be that fewer dollars – or perhaps more private partnership dollars – can be put into non-core, non-academic facilities like residence halls to pay for other expenses like technology.
Whatever the solution, colleges must think strategically by looking to the consumer demands of their students and less to the mindless “rock wall” amenities of their competitors.
In many respects, what a college or university business officer (CBO) thinks about the health of higher education says more about the vitality and sustainability of America’s colleges and universities than the opinions of any other group surveyed. The reasoning is simple: The business officers know where the money comes from and where it goes on a college campus.
In this respect, the new findings released in the “2017 Inside Higher Ed Survey of College and University Business Officers” are sobering.
Stated starkly, most CBO’s recognize that American higher education is in the midst of a financial crisis that is different and arguably more persistent than the higher education challenges caused by the Great Recession.
Let me be clear. It’s not that the sky is falling. And it’s not that America’s colleges cannot find ways to adapt to changing impacts that detrimentally affect their bottom line. Many would say that they have administrative, programmatic, and institution-wide strategic tools that can help weather the coming storm.
But there is a sense that these options are narrowing, that traditional approaches like belt-tightening may not work fully to offset revenue declines, and that the operating models developed in the last century may not translate to adapting to the pressures building on colleges in 2017.
Inside Higher Ed (IHE) surveyed 409 chief business officers from public, private and for-profit institutions. They weighted their results statistically to produce findings that represented the view of their colleagues nationally.
Higher Ed Budget Officers Less Optimistic About Financial Health
IHE’s Doug Lederman and Rick Seltzer suggested that the sunnier opinions shaping findings of earlier survey years had darkened somewhat. They reported:
“The emerging picture is decidedly less optimistic than that of previous years. This year, 71 percent of chief business officers agreed with the statement that media reports saying higher education is in the midst of a financial crisis are accurate.” This represents an increase from 63 percent in 2016 and 56 percent in 2015.
What’s even more amazing is that only 56 percent of those surveyed agreed or strongly agreed that their institutions will be financially stable over the next five years, declining to 48 percent if the timeline extends 10 years.
Tuition, Fees Are Not Strong Sources of Future Revenue
So, how will spending needs be met in future years? Most chief business officers argue that new revenue will not be found either from comprehensive fee increases, including tuition, or from increases in net tuition revenue.
Lederman and Seltzer reported: “Just over 7 in 10 – 71 percent – agreed that their institutions would seek to increase overall enrollment. Nearly a quarter, 23 percent, said they would try to lower the tuition discount rate, a move that would have the effect of increasing net tuition revenue.”
Is Reallocation of Budget Funds “New” Spending?
The alternative strategy is to reallocate money from within the annual operating and capital budgets. Consistent now over three years, almost two-thirds of the respondents indicated that reallocation was the best source of new spending.
Lederman and Seltzer point out, however, that these findings differ dramatically from the past: “The portion of chief business officers agreeing their institutions will try to increase overall enrollment dropped by 16 percentage points from 2016. The portion saying that they will try to lower the tuition discount rate fell 13 percentage points.”
Arguably, reallocating money and redirecting it to other spending priorities is an efficient use of existing revenue, providing an opportunity to create new efficiencies, new investment strategies, needed program review, and potential economies of scale. It also answers questions about whether higher education institutions take their stewardship responsibilities seriously. And it is sensitive to political and consumer demands.
There are some problems, however, with this approach. College operating budgets carry significant fixed costs, especially in areas such as labor, facilities, and technology. They disproportionately employ white-collar workers who command higher salaries. Indeed, the compensation piece of the operating budget may approach up to 80 percent of this budget at some institutions.
After fixed costs, one of the overlooked facts about higher education is that there is very little discretionary money left. Indeed, many colleges squeezed much of the obvious discretion to handle shortfalls in the Great Recession. There isn’t much easy money left on the table.
Reallocation of Compensation Budget Pits Administration Against Faculty, Staff
Reallocation therefore implies some effort to address revenue shifting from fixed costs. The largest source might be compensation, setting administrators and trustees against faculty and staff. It’s worrisome, especially since the options on where to allocate revenue from have narrowed so dramatically.
There may be alternatives, especially if American colleges are willing to reimagine how they handle enrollment, the performance of underutilized assets like real estate, and their willingness to engage in broad partnerships that extend beyond the college gates. Need, rather than long-term planning, will likely motivate the higher education institutions that move first. But they could quickly become a model for others to follow.
It will be interesting to see if the most at-risk schools become the most nimble, leading higher education in a direction that others who have the luxury of time must ultimately follow.
As colleges lay out their strategies to become more sustainable over the long term, there are uncertainties that can dramatically affect their abilities to do so.
Some are programmatic, based upon unpredictable market conditions. Others rely on personnel decisions that shape an institution’s ability to be both flexible and creative. A few involve the maintenance, development, and disposition of facilities that determine the level of debt repayment or depend on endowment returns or fundraising success.
Technology Can Be the Great Leveler – or Not
Imbedded within these nagging uncertainties is the impact that technology will have on an institution. If college administrators guess correctly, technology can be the great leveler that neutralizes disparities in wealth and disadvantages in location.
Technology is also a major recurring expense that can undermine a college’s commitment to other institutional priorities.
Let’s explore one area that demonstrates the complexity of the technology issue – the evolution of the college library.
For decades, most college students, myself included, went to the library because that’s where we found the books that professors demanded we read or research. Freshmen orientation often included the college librarian’s explanation on how to use the card catalogue. We learned how to find books, cite them, and avoid plagiarism. It was, in general, a neat and tidy exercise.
To facilitate library use, colleges dedicated a portion of their annual budget to book and subscription purchases. There were some regular complaints about the rising cost of subscriptions, offset at a few colleges and universities by dedicated library endowments to make these purchases possible. As we moved closer to the 21st century, technology made inroads as the computerization of card catalogues and the first digital subscriptions to academic journals made their appearance.
One of the Three Centers of Campus Life
By then, three centers of campus life had emerged. The first was the library, which remained the beating heart of academic life, even if the parameters governing libraries shifted.
The second was the athletic complex – derisively referred to by some as the “jockplex” – where NCAA or NIAA sports co-existed with health and wellness programs for the campus community as a whole.
The last area was the campus dining center, a kind of communal living room with food.
Of these three centers of campus life, none has undergone a more striking transformation than the library.
The transformation began in part with what seemed to be the radical decision to open a café within the library, often a Starbucks or other chain at larger campuses.
The café transformed the library from its historic perception as a stuffy depository of seldom read books to a welcoming reception area for coffee-addicted learners.
Library as Nexus of Intellectual and Social Discourse
Administrators further reconfigured libraries to provide collaborative working spaces, quiet zones, and common areas that aimed to restore the centrally-located library as the “go to” place for intellectual discourse and debate.
In some cases, the strategy worked. In others, the library became a social hearth space more suited to be seen in rather than to study and learn. But technology was the impetus behind the redesign of libraries across American higher education.
Students studied differently than had earlier generations of library users. Professors adapted pedagogy to account for technological innovation. Somewhere in the midst of these dramatic changes, a new concept of the learning commons emerged.
The Emergence of the “Learning Commons”
A learning commons is not a bad thing and demonstrates that even time-bound institutions like libraries can evolve in a way that better suits how students learn. It reflects core perceptions of the liberal arts, which include that students must understand how to work collaboratively and use technology effectively.
But the accompanying administrative changes had confusing implications for college budgets.
At most institutions, libraries remained places to frequent because that’s where the books are. But for new generations of learners heavily influenced by technology and long since acclimated to different learning styles, the college library became a place to access technology. This raises an interesting question for college strategists.
Is the library budget about books or technology?
The answer is clearly both. In an important way, technology is a great equalizer because colleges can implement technological changes without incurring the competitive and often prohibitive costs for books and subscriptions borne by earlier generations. The implications are enormous for the future of the library in a college learning environment.
We should welcome the emergence of the learning commons. At the same time, we should also recognize that the learning commons of the 21st century grew from the college libraries of earlier generations.
The learning commons have emerged as the next iteration of facilities that shape academic life, but the concept of the library remains at their historic core. There is room for books and technology.
It may be that basic cost efficiencies will define subsequent development. Consortia purchasing and sharing practices may end costly duplicative purchases as library books are warehoused elsewhere and made available on request or disseminated via the Internet. Technology will continue to shape the availability and distribution of journals, newspapers, and related material.
Nevertheless, libraries remain the depositories of our oral and written traditions. They house and protect our collective memory. Whatever the delivery mechanism, cost efficiencies created, and budgetary restrictions imposed, the best-designed learning commons must rechristen libraries as academic hearths that blend books and technology more seamlessly together.
It’s enlightening to watch what issues surface when the subject of the faculty arises. Education Secretary Betsy DeVos, whose experience in higher education is minimal, offered her first substantive comments at the Conservative Political Action Conference last week when she called out faculty for silencing free speech: “The faculty, from adjunct professors to deans, tell you what to do, what to say, and more ominously, what to think. They say that if you voted for Donald Trump, you’re a threat to the university community. But the real threat is silencing the First Amendment rights of people with whom you disagree.”
Let’s be clear. There is a case to be made that college campus communities need to be more open to viewpoint diversity, especially with speakers and groups with whom many might disagree. College communities must be careful to permit those qualified to address them and be willing to understand and respect different opinions. A wide variety of opinions are likely found on almost every college campus among students, faculty, staff, and trustees. Campus dialogue should present a full spectrum of their different opinions.
But are culture war politics really the best opening topic through which a new Education Secretary can begin a constructive conversation about higher education, given the deep, dividing, and disruptive issues facing college campuses today?
Don’t Paint All Faculty with Broad Brush
Some within higher education might argue that the most troubling aspect of Secretary DeVos’s comments was not her point about free speech, but rather the broad grouping of all academic staff into a single “faculty” category. It is especially dangerous to include adjunct faculty in any assumptions about faculty.
Adjunct faculty face looming employment issues, challenges that highlight the deep and significant financial plight faced by most colleges and universities. Follow the money – or the lack of it.
It would be wiser and more productive for the Education Secretary to open a dialogue about higher education with her in the role of critical thought partner with a seat at the head of the table.
Adjunct Conditions of Employment Highlight Larger Financial Issues
In fact, the great crisis emerging on many college campuses is not what the adjunct faculty teaches but the conditions of their employment and what impact their employment has on quality teaching. Kevin Birmingham, a Harvard writing instructor, laid this point bare in his speech accepting the Truman Capote Literary Award last fall. Reprinted in the Chronicle of Higher Education, his remarks, “The Great Shame of Our Profession” offer a sober assessment of the state of adjunct faculty, especially as their costs are weighed against other rising expenses borne by a campus.
Mr. Birmingham notes the growth and dispersion of adjunct faculty: “From 1975 to 2011, the number of part-time adjuncts quadrupled,” with many teaching classes at multiple institutions. Indeed, a 2014 Congressional study that found that “89 percent of adjuncts work at one or more institution; 13 percent work at four or more.”
As Birmingham noted, the 2014 study and others highlight the low wages and low-income status of many adjunct faculty:
- Median pay per course is $2700.
- Thirty-one percent of part-time faculty members live near or below the poverty line.
- Twenty-five percent receive public assistance, like Medicaid or food stamps.
His analysis is sharply critical of why institutions flood their disciplines with unemployable PhD’s and how the tenure process is structured, offering a pessimistic outlook on the state of his profession.
Adjunct Pay is One of Many Chess Pieces in College Budget Game
Mr. Birmingham’s argument illuminates the plight of adjunct faculty, but it also demonstrates how universities make ends meet. The cost of labor is the largest single expense driver in most college budgets. If a college operates under an older, creaking financial model – and most do — its operating budget effectively illustrates how administrators move the chess pieces across the board.
The cold fact is that colleges and universities are subject to ever increasing fixed costs in areas like technology and declining revenues because of debt load, growing financial aid discounts, flat auxiliary revenues, and weak fundraising, forcing them into eternal comprehensive campaigns. It is hardly surprising that administrators, including deans, look to adjunct faculty to cut costs. It’s a toxic financial mess.
Yet Mr. Birmingham’s argument exposes the problem. Graduate revenue pays the bills and permits universities to cut costs through effective use of teaching assistants and adjunct faculty. Adjunct faculty often staff new programs initiatives, including online education that further increase profits.
Moving the budgetary chess pieces around permits educators to avoid internal political risk, compensate tenured or tenure-track faculty, and kick the can down the road for the foreseeable future.
The problem is that there is a natural shelf life to this approach, one that is now reaching its expiration date. It’s not a political question like free speech, tenure, or academic freedom. It’s about how we can end the practice of using adjuncts to support the educational status quo, including cutting labor costs through the use of adjuncts to support tenured faculty and full-time administrative staff.
Politicians — including but not only Secretary DeVos — who pay attention to polling assume that student debt and high tuition sticker prices are the cost drivers upon which they should focus. There may be others, beginning with a need to modernize operating models and how we finance them.
The federal government can play an important and helpful role in thinking about how to finance higher education by looking at what is driving costs. But its first actions as a thought partner shouldn’t be narrowly ideological by design.
Last week, National Association of College and University Business Officers (NACUBO) and Commonfund released their report on the endowment performance of the 805 colleges and universities who responded to their survey. The outlook was fairly dismal and sheds light on the precarious foundation on which American higher education’s financial model is based.
Endowment Returns Fall to Average Return of -1.9%
According to the report, net return on endowments has continued to decline for the second year, returning on average -1.9% in fiscal 2016. The returns dropped the 10-year average annual returns to 5 percent, down from 6.3 percent in the previous fiscal year. Last year’s average return lowered the five-year average rate to 5.4 percent, down from 9.8 percent a year ago.
Both numbers are lower than the 7.4 percent median annual return that most colleges and universities believe are necessary to maintain their purchasing power – supporting “student financial aid, research, and other vital programs” — over time.
College and University Expenses Increase Even As Endowment Returns Fall
As endowment returns fall, expenses on college and university campuses continue to rise. It is not surprising, therefore, that most respondents reported increasing the money that they spent from their endowments, boosting spending at an average of eight percent which took most colleges above the rate of inflation.
There are a couple of ways to look at this anemic endowment growth. Colleges and universities hold endowments over the long-term. If endowment performance is cyclical, then historical trends suggest that the problem will self-correct over time. The second possibility is more troubling.
The plain facts are that the world has become a less comfortable place with rules and protocols that are uncertain. While some aspects of the market continue to do well, general global and national volatility and growing income inequality – among numerous other factors — may affect the complexity that impacts endowment earnings.
Should the courts decide against lifting the immigration ban, the impact on labor and enrollment in college and university settings alone could be dramatic and disruptive.
Further, most colleges and universities do not have the $34.5 billion in endowment that Harvard enjoys, even when Harvard has also slashed the number of its employees in its endowment office.
Colleges and Universities with Smaller Endowments at Greater Risk
Small institutions are particularly at risk, noted John G. Walda, NACUBO’s president and CEO, in an interview with Inside Higher Ed: “…if we have another couple of years of stagnant returns…they’re going to have to seriously consider cutting back on the amount of dollars that are spent at their institutions….” The question that logically arises is from where will this money come?
Can Schools Make Up Endowment Losses with Debt?
One possibility is that colleges and universities with some level of endowments could borrow to cover lean times, especially to replace depreciated facilities or build new ones. Yet the picture on institutional debt was not particularly encouraging either.
Almost 75 percent of the colleges and universities surveyed carried long-term debt. Among these institutions, the average total debt was $230.2 million as of June 30, 2016, up from $219.1 million in the previous fiscal year. Median debt also rose to $61.5 million from $58.2 million. Two-thirds of those surveyed reported decreasing their overall debt; however, indicating a reluctance to make new investments in areas like infrastructure.
Raising Tuition or Fees is Risky Proposition in Current Climate
Another source of income is, of course, the comprehensive fee that consists of revenue generated by tuition, fees, room and board. Political and consumer voices make large tuition spikes impractical and even dangerous.
It is unlikely that many colleges will package comprehensive fee increases much above the rate of inflation, presuming that they are competently managed institutions. Next year’s tuition numbers will begin to be posted after board meetings over the next few months.
Cold Truth: Higher Ed’s Financial Model is Unsustainable
American higher education must face up to the cold truth that it is operating on an unsustainable financial model, one developed in an era of different demographics, political and consumer concerns, and funding options that originated in the post-Vietnam era of rapid enrollment growth.
The world has changed even if the way that we imagine college and university finances has not.
But there is a more pressing, immediate question for American higher education to address. Some Congressional leaders are working to link endowment spending to student scholarship and debt levels, the danger of which is aptly demonstrated by the fiscal 2016 endowment returns.
Consumers who vote with their feet to reject the historic value proposition of high sticker priced four-year colleges will also affect this brave new world. And the Trump Administration is casting a heightened level of uncertainty with its first actions on immigration and the possible appointment of special groups to look at “higher education reforms.”
We live in interesting times. Now is the time to prepare for them.
There is a basic, fundamental truth about the American college or university operating model: It doesn’t work.
In the second half of the 20th century, America’s colleges and universities moved toward a similar operating model, depending upon their size, purpose, and funding source. Some scaled up to the research powerhouses that we know today. A few have even become something resembling complex real estate holding companies and investment banks. Most also serve as the “eds and meds” economic engines that power the state and regional economies in which they are located.
On the public side, local jurisdictions and state governments played historic roles in offering subsidies matched by federal student grants and loans. These colleges became the first choice institutions selected by first generation college students, although the selective flagships blurred the family income line as they established programs like honors colleges. Their large, well-connected alumni networks also presented new reasons for wealthy students to attend them.
“Comprehensive Fee” is Staple of Financial Model
But most colleges and universities built their funding off the “comprehensive fee” – tuition, fees, room and board — that remained the staple of the college financial model. States cut back on institutional and student subsidies, demographics shifted, and growing economic inequality fed the fears of American consumers in the Great Recession. Many families chose alternatives like community colleges.
Tuition-driven four-year colleges faced an uphill climb to meet their expenses.
Desperate Search for Stable Revenue Sources
For a while, it was possible to move around the chess pieces in an increasingly desperate search for stable revenue. To do so, colleges and universities turned to graduate and continuing education programs as well as online education to shore up tuition numbers when their net tuition revenue flat-lined. Additionally, they used revenue from fully depreciated college housing to support academic programs. It worked well for a time, but the fix was temporary at best.
The level at which boards of trustees set the annual comprehensive fee became a potentially explosive trigger by the end of the Great Recession as politicians and consumers began to protest high tuition sticker prices.
This year, the sticker price at some well-respected non-Ivy institutions, for example, has reached $70,000 annually. It is an unsustainable number on college and university campuses where deep tuition discounting has become the norm.
Further, fixed labor costs, including retirement and health care, and growing technology and facilities demands severely limit remaining discretionary dollars.
What options are available to shore up a college’s operating model? There are few left that can have any real impact on a college’s bottom line.
Revenue from Auxiliary Services & Fundraising Not Sustainable
Auxiliary revenues — bookstores, residence halls, conference centers, parking lots, and technology – are essentially flat and can only marginally affect college revenue. Further, at all but a few dozen places, capital campaigns allow institutions targeted relief, but capital campaigns generally are not the comprehensive solution that they are misunderstood to be.
Even more ominously, quick improvements in facilities and technology enhancements undertaken by increasing college borrowing only force institutions to reach their debt capacity with no viable alternatives as debt repayments constrain their operating budgets. Boards can hide the problem by relying on credit lines over rough periods and quasi-endowment draw-downs, if possible, but eventually these options also dry up.
Absent substantial new program revenue, a number of colleges have looked at efficiencies internally and through shared services.
It’s hard, of course, to create internal efficiencies in a conservative campus climate where needs have typically been met by setting the tuition price to whatever revenue number matched expenditures that year.
Cutting Labor Costs is “Third Rail” of Higher Ed Budgets
But most colleges have taken a number of important steps to control costs. It’s hard to spread the pain around when discretionary cutting does not affect the fixed costs in a budget, especially labor. Cutting labor costs is a kind of “third rail” option that requires slow and deliberate community discourse.
Redefinition and Re-imagination of Solutions Needed
It may be that the best solution is one that mixes equal parts of redefinition and re-imagination. Some of the recent reporting by Lawrence Biemiller in the Chronicle of Higher Education last week, for example, suggests that colleges redefine themselves more as a kind of community asset – a learning community for the region. It suggests the need to forge new relationships with the local community as Antioch College has done in Ohio, offering memberships at its Wellness Center, for example.
A second opportunity is to re-imagine underutilized assets, especially non-core, non-academic real estate. The larger question is whether a college can continue to make capital expenditures on residence halls and conference and athletic facilities. Institutions can set up attractive lease-back arrangements or even sell or lease depreciated residence halls to developers with private investment capital to improve and even manage them.
Colleges and universities do not need to own the building to run a meaningful, strategic, college-directed student life program.
Debt should be reserved to improve the academic program, utilizing financial partnerships to address other non-academic needs wherever possible. Most colleges cannot maintain their current footprint and meet their future anticipated facilities needs.
The solution may be to recast how these institutions think about the assets they already have. In this fiscal, consumer, and political climate, it’s clear that something will need to change soon.
Writing in the New York Times last month, Laura Pappano offered a thoughtful analysis of the efforts by public colleges – principally public flagship universities – to find new sources of revenue, diversify their student bodies, and expand their national reputations. It’s an interesting trend that should be watched closely.
America’s colleges and universities have different funding sources. Historically, public systems relied most heavily upon direct state support. Drawing upon the research of Thomas Mortenson, senior scholar at the Pell Institute for the Study of Opportunity in Higher Education, Ms. Pappano notes: “Nearly thirty years ago, legislative appropriations provided 59 percent of core revenues at public four-year colleges. In 2013, the latest year available, states covered 27 percent on average.” Absent historic state support, America’s public colleges and universities have turned increasingly to alternative funding sources, tuition, fees, room, board, additional auxiliary enterprises, public private partnerships, endowment drawdown, and debt.
Out-of-State Recruitment Brings Revenue
As the article suggests, one approach is to think big and move recruitment goals beyond the state’s borders. Ms. Pappano profiled a number of public colleges and universities, including the University of Alabama, University of South Carolina, Miami University of Ohio, Rutgers University, Arizona State University, and the College of William and Mary, to demonstrate how these institutions used various recruiting strategies to expand their base of out-of-state students. The results speak for themselves. From 2010-2015, freshman applications at Arizona State rose 42%, at the University of South Carolina by 39%, and at Miami University of Ohio by 62%.
On the surface, the tactic seems like a good way to balance a university’s budget and replace a dwindling source of revenue from the state. And in fairness, public colleges and universities should not be blamed for seeking such a solution. In fact, it precisely mirrors the tactics used by private colleges and universities with regional and national reputations. It is an entrepreneurial and creative approach. Indeed, for the profiled institutions, expanded recruitment appears to be paying a handsome dividend.
We can set aside, for example, some of the approaches taken by flagship public universities to recruit out-of-state like using merit awards to crack into ZIP codes that in later years might produce additional students, many of these full pay. It’s not so much the tactic but the policy that comes into question. The policy reflects the new realities that public universities now face.
Regional Public Universities Have Less Recruiting Power
First, there is a growing disconnect between flagship publics and the regional public sector institutions. The latter do not have the reputation, alumni base, facilities, breadth of programs, personnel, and resources to mimic the public flagship’s admission recruiting beyond state boundaries.
In an era of stagnant or declining enrollment of traditional age students, the failure to make investments in the rest of the public system will only exacerbate the chasm between the public flagship research university and the other public colleges in the state.
The recent efforts by the University of Wisconsin to separate itself from the Wisconsin system suggest the level of acrimonious warfare that might break out.
Second, changing financial fortunes call into question the historic mission of public colleges and universities. There are at least two ways to think about this issue.
On the one hand, America established public colleges and universities as the “people’s schools,” training students for a variety of occupations – many of them critical to the economic wellbeing of the state. They consciously subsidized the tuition charged, thereby making it possible for generations of first-time college bound youth, including immigrants, to receive a college degree. On the other hand, flagship research universities also provide a public good by serving as powerful economic engines that can drive a state and even regional economy. This mandates that they acquire and retain the best talent that they can attract to the state.
Third, every action has a reaction. As the stronger public universities expand their admission recruiting efforts beyond state boundaries, the burden of educating a state’s workforce will fall increasingly on other colleges and universities, notably non-research public colleges, private colleges and universities, community colleges, for-profit institutions, and online educational providers.
Is the effect of out-of-state recruiting effectively to “flip” how a state educates it students, relying on groups like small, regional private colleges to meet the state’s workforce needs?
Finally, what is the cost of out-of-state recruitment? Should public tax dollars be used as merit grants to attract an out-of-state student? To maintain a quality flagship research operation, should public research universities put additional money into expanded programs and expensive research facilities to compete on a national level? If so, is the solution more debt, public-private partnership investment, or a new operating model built to sustain an evolving mission?
Sometimes short-term solutions can cause long-term headaches in higher education. One concern to watch is that public flagship universities might adopt a private higher education operating model that focuses on higher tuition, deep financial aid discounts, and growing debt to fund “turf” war academic and residential life facilities. It may mean in the end that they can win the battle but lose the war.
In The Hechinger Report’s recent story, “University Bureaucracies Grew 15 Percent During the Recession, Even as Budgets Were Cut and Tuition Increased,” reporter Jon Marcus examined the confounding trend that many university systems are showing “new resolve . . . to improve the efficiency and productivity of stubbornly labor-intensive higher education” when “statistics suggest the opposite is happening.”
Looking at a variety of public systems across the country, Mr. Marcus found that “the number of people employed by public university and college central system offices . . . has kept creeping up, ever since the start of the economic downturn and in spite of steep budget cuts, flat enrollment and heightened scrutiny of administrative bloat.” Mr. Marcus reports that this growth happened at a time when states have collectively cut their higher education spending by 18 percent. He also notes that some systems like Maine’s central office grew by 26 percent – despite an enrollment decline and budget cuts.
There is a silver lining according to Mr. Marcus, however, who suggests that “after years of promising to save money by streamlining operations, cutting duplicate staffs and maximizing purchasing power, some university systems have been forced by political pressure and economic realities to finally start doing it.”
In Maine, for example, Mr. Marcus found under a new “One University Initiative” in which the system consolidated the budget, legal, personnel, information technology, insurance, purchasing, and other departments from its seven campuses resulting “in a 37 percent decline in the number of administrators at the universities that will save about $6.1 million a year.”
The findings are modestly encouraging and hardly surprising. Elected officials are increasingly placing American colleges and universities – at all levels – under greater scrutiny especially at the state and federal levels.
There is, of course, an ongoing historic frustration in the higher education community when politicians – most of who are not skilled in finance and who have not run businesses of substantial scale – wade into the management of higher education.
It’s easy for higher education officials to point privately to great gaps in how the state and federal government runs and finances their own enterprises in terms of archaic, disruptive, and conflicting management practices and protocol across all levels of government.
The complaints are not often voiced publicly, of course, because colleges and universities depend on government partnerships to fund student and institutional aid.
The Incremental Inertia of Higher Education
But in the end that may not be the point. The argument still holds that America’s colleges and universities operate in a culture dominated by incremental inertia.
No place is more conservative in its management practices than a college or university campus.
Smaller campuses operate on a time-worn academic cycle which can inhibit transparent decision-making when the campus powers down in the summer and during academic breaks, effectively five months a year at many colleges.
Challenge of Shared Governance
Shared governance is also a problem. The key to good governance is transparency and communication. It’s critical because key stakeholders – trustees, administration and faculty – have important roles to play. It sometimes means that everything takes longer than it would in a corporate setting or in government regulated in the days before the overuse of the “continuing resolution” by an annual budget cycle.
Decentralization Can Make Cost-Cutting More Difficult
Another problem, depending upon the institutional setting, is decentralization. In a decentralized setting without strong administrative leadership, college and university divisions, departments, and programs are their own fiefdoms. It’s impossible to create a standard data protocol because of bad record keeping and the differences among divisions like enrollment, financial aid, alumni, and advancement, or so the argument goes.
At the opposite end, the college’s adherence to state and federal regulation, its need to commit to key residence life programs, including athletics, mental health and wellness counseling, diversity initiatives, and internship and career counseling programs, as well as support accreditors’ demands for tighter accountability standards can cause administrative bloat.
One impact of the Great Recession has also been to “beef up” enrollment and advancement operations – a practice that demonstrates their importance to bottom line revenue so critical in weak admission markets. Should these programs be scaled back?
On any level, an ongoing effort to streamline to create efficiencies and economies of scale is a good idea.
But the practical dimension of the problem is that the operational model doesn’t work anymore for American colleges and universities.
Higher education cannot reasonably address the question of cost until its leadership understands that cost is first about whether the older operational models continue to serve them well.