One of the great myths about American higher education is that all colleges are wealthy. If most Americans have an mental image of a college, it’s often a bucolic bricks-and-mortar residential facility separated by rolling green lawns, entered through an impressive if forbidding-looking gate, and populated by attractive students who drive fancy cars.
What they can’t see past the stately columns or newest facility highlighted by energetic tour guides is the level of deferred campus maintenance. They fail to comprehend the amount of debt or the inability for a college to sustain its existing campus footprint. They don’t see is that the average discount – the percentage of total gross tuition and fee revenue institutions give back to students as grant-based financial aid – is now 50 cents on the dollar at most colleges. And they seldom appreciate how reasonable staff and faculty compensation, including health and retiree benefits, the impact of technology, and the rising cost of government regulations and reports constrain most college operating and capital budgets.
On one level, a college is a business. But at the same time, it’s a heavily regulated business that produces – in business terms – a product that requires significant inputs of labor, capital, and technology.
College Revenue Streams Are Drying Up
The problem is that college and university sources of revenue are drying up. Consumers are voting with their feet as over half choose public- or locally-supported options like community colleges, for-profit providers, or certificate programs. The sticker price that “sticks” in the minds of these consumers is the widely-reported $70,000 annual price tag at the most selective colleges and universities.
At most colleges, it’s no longer possible to match revenue to expenses by setting tuition prices to meet annual operating needs.
College Endowments Are Not Magical Money Trees
But what about tapping into the endowment? In the minds of consumers and many public officials, an endowment is a kind of imaginary money tree from which additional needs are met.
The reality is that few colleges or universities have large enough endowments to produce significant revenue. In 2015, the National Association of College and University Business Officers (NACUBO) and the Common Fund reported that the 94 institutions with endowments of $1 billion or higher control 75 percent of all endowments nationwide. If colleges typically draw down five percent on a rolling quarterly average, the amount available to most of the remaining 3,900 institutions surveyed is negligible at best.
The other potential sources of revenue are auxiliary services, like residential housing or athletics, or debt. Revenue from auxiliary services are essentially flat, with many colleges using residential housing to support their academic programs. Only one in eight colleges have sports programs that break even. And debt – often used indiscriminately and for the wrong reasons – is a particularly worrisome source of support. Many colleges are at the end of their debt capacity or find the amount capped by trustee action.
Fundraising Campaigns Aren’t Financial Panaceas
What is left is revenue from fundraising. Colleges will sometimes tie a presidential search to the reputation of prospective candidates as potential fundraisers. But the cold facts are that there may only be about 50 colleges and universities in America where fundraising is anything more than running in place.
The problem is that fundraising has become seen as a panacea to cure all ills that plays out like every college is a major research university with a significant, mature fundraising machine in place. To create momentum and garner visibility, most colleges favor a comprehensive campaign. Under this approach, colleges throw almost everything into the mix, including their annual fund, deferred gifts, and any specially cultivated donations. The college establishes targeted goals in specific categories. The president makes periodic reports at campaign events. The college offers updated reports within a specified time frame about how well the institution is doing to reach its stated goal.
Campaigns are expensive, and at times, counterproductive to the immediate goals that a college needs to meet. To assess the success of a comprehensive campaign, multiply the “all in” amount raised annually before the campaign started by the number of years of the campaign. When this number is subtracted from the announced comprehensive campaign goal, how much is needed to reach the announced campaign goal?
Does it really make sense for colleges to play like the big boys when what they are actually doing is re-characterizing money that they are already raising without the costs associated with a full-fledged campaign?
Targeted, Micro Campaigns are Alternatives to Comprehensive Campaigns
For colleges and universities that do not have the money, staff, and alumni and donor base to run a full-scale, multi-year comprehensive campaign, there may be better, more targeted approach. These institutions should consider putting most of their work into cultivating – that is, growing — the annual fund and deferred gifts.
To the extent that a college seeks the optics of a successful campaign, its leadership should think about micro-campaigns that address specific, identified, and fundable campus needs. College stakeholders can touch and feel these advances. The effect is the same, absent the bragging rights to an inflated comprehensive campaign goal.
One size – or approach – does not fit every college. Success in fundraising relies upon common sense and a clear understanding of what’s possible given the scale and resources available.
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.