Posts Tagged “financial model”

As the Ivy League Goes…So Goes American Higher Education?

Brandon Busteed, the executive director for education and workforce development at Gallup, wrote a stimulating and thought provoking op ed earlier this month. The article’s title captured Busteed’s summary opinion: It’s Time for Elite Universities to Lead in Non-Elite Ways.

Mr. Busteed argued that America’s colleges and universities have traditionally followed the lead of America’s most elite institutions, an approach he argues has produced an “arms race of extensive new facilities, substantial growth in administrative staff, and the expansion of postgraduate degrees and programs.”

ivy covered wall and window
Citing the Wall Street Journal, Mr. Busteed reports that these trends caused 30 years of unprecedented growth in tuition rising “more than 400 % since the early 1980s and far outpac(ing) the cost increases of all other goods and services during the same time frame.” Busteed concludes, rightly so, that the pace is unsustainable.

For Mr. Busteed, the solution is for elite institutions to lead in non-elite ways. This does not mean simply ratcheting up financial aid since more aid is not the same as reducing costs. Instead, he asserts: “the real conversation should be about how to reduce the actual cost of college – and that is the difficult conversation higher education leaders don’t want to have.”

His solution is for elite colleges and universities to both talk the talk and walk the walk. Specifically, they should offer “associate degrees, certifications, non-accredited boot camps, employer- or industry-specific workforce programs, and even build…active partnerships with their local K-12 school districts.” He wonders “whether elites will have the foresight and the will to lead us in that direction.”

Change Often Moves at Snail’s Pace Especially at Elite Colleges and Universities

First, Mr. Busteed is right to infer that America’s colleges and universities are often places of cultural inertia. On most college campuses, process overrides other considerations. Shared governance among trustees, staff, and faculty often produces thoughtful change.

But change can move at a snail’s pace, especially at the handful of well-heeled elite colleges and universities relatively unconstrained by financial, political, or cultural pressures.

It’s a kind of “rule by committee” at times in which winning the debate can be as important as settling on the policy direction. The process can look more like the production of sausage even if the end result is appealing.

Less Wealthy Colleges & Universities Often Most Innovative

Second, change is hard. But the advocates for change face unique and idiosyncratic differences on every campus. Rather than argue that less wealthy colleges follow the elites, it may be just the opposite.

Under-endowed colleges and universities are the most willing to make change. Simply put, they have no choice.

These institutions are tuition-dependent and their survival requires some mix of planning, gambling, and luck. American higher education is not a monolithic pecking order in which the less fortunate emulate the wealthy. Those days ended in the last century when financial aid discounting disrupted archaic financial planning models to produce the current financial crisis in higher education.

Third, American higher education is highly decentralized. Expanding graduate and professional degree programs means very different things at a major research university compared to a rural, four-year liberal arts college. Further, colleges identify what they do and what programs they offer by their mission and purpose. Each category – indeed, every college and university – has a different purpose. Not all of them train America’s workforce in the same way or contribute to local and regional economic development in lock step.

Active Community Partnerships are Part of Most Colleges and Universities

Fourth, it is wrong to assert that colleges and universities are failing to build active community partnerships. In fact, most of America’s colleges and universities are eager and integrated community participants, deeply involved in basic education locally, and active in promoting regional, social, cultural, and economic initiatives.

Where would West Philadelphia be, for example, without the decades-long work of the University of Pennsylvania and Drexel University in their local community? There are hundreds of these examples across America.

That’s not to say that America’s colleges and universities must not evolve to match their programs to develop the workforce and assist in economic development based on the pressing needs their regions face.

In fact, the mission and purpose of any institution must always reflect the society that surrounds it. Yet these institutions must also help set the agenda for where society will head.

Colleges & Universities Must Plan Individually and Act Collectively

It’s not enough to follow the trends sanctioned by the actions of elite institutions. It’s critical to have the courage to lead locally based on what challenges face them at home. To do so, America’s colleges and universities must plan individually and act collectively.

Higher education is not a monolithic industry with a defined and inflexible pecking order but a collection of decentralized colleges and universities – large and small – that reflect the genius, strengths, and pitfalls of 400 years of history.

America’s colleges must find new ways — and new words — to describe their importance and differentiate more sharply their contributions to society. But the pronouncements and policies of a handful of elite colleges and universities is only one place among many from which the majority of higher education’s institutions can find and refine their future.

Follow The Money: The 2017 College Business Officer Survey

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.

Will Mergers and Acquisitions Dominate the Future of Higher Education?

A hotly debated topic making the rounds in higher education now is whether American colleges and universities – public and private – face a round of mergers and acquisitions over the next several years.

There are a number of reasons that the discussion of this topic had gained momentum.

Tuition discount rates are creating revenue squeeze for colleges

First, many colleges, especially small private colleges, are seeing their tuition discounts — now at 50% on average for every tuition dollar received — rise while their net tuition revenue remains flat or continues to fall. In fact, there are some colleges where the tuition discount now approaches 70 percent.

Financial health of many schools is questionable

Second, federal composite credit scores, which reflect the overall relative financial health of institutions along a scale from -1 to 3, have shown a good number of institutions to be in questionable financial health. A score greater than or equal to 1.5 indicates the institution is considered financially responsible. Colleges with scores of less than 1.5 but greater than or equal to 1.0 are considered financially responsible, but require additional oversight. These schools are subject to cash monitoring and other participation requirements.

The Chronicle of Higher Education reports that 177 degree-granting private colleges failed the U.S. Education Department’s financial-responsibility test, which seeks to quantify the financial health of proprietary and nonprofit institutions, for the 2014-15 academic year. That’s 18 more than failed the year before.

Further, of the 177 failing institutions, 112 (63%) are nonprofit and the rest are for-profit. For the previous year, 58 percent of the 159 failing institutions were nonprofit.

Third, Moody’s has revised its outlook for U.S. four-year higher education to stable from negative, reflecting the expectation that the sector’s business environment will neither erode significantly nor improve materially in the next 12-18 months. Until this latest ratings change, higher education had received a negative rating since January 2013.

Moody’s rating suggests that higher education is at best treading water and not in a robust recovery from the impact of the Great Recession.

Fourth, there is growing anecdotal evidence of a struggle over financial health. Nearly four of ten private colleges reported that they still had available seats in their upcoming admissions class last year. On the public side, some states are considering closing or merging small and underperforming (often rural) campuses. The number of students entering community colleges is also dropping. Years of underfunding public sector institutions have produced problems like the collapsing infrastructure and structural deficit issues at respected institutions like UMass Boston.

In addition, much of the public discourse over projected closures like Sweet Briar College, failed merger attempts, and persistent rumors of financial distress continue to feed the higher education gossip circuit.

The cumulative effect is to pit trustees, staff, faculty, students, and alumni against one another as the blame game over failed efforts at transparency and worse indications of poor stewardship shake higher education’s foundations.

Free tuition at public schools could be detrimental to private institutions

The newest wrinkle addresses the likely impact that variations in the free public tuition proposals might have in the 35 states where such proposals have arisen. In New York, for example, a number of private college and university presidents with whom I have spoken recently wondered what will happen when the state uses the program to encourage New York State families to vote with their feet for four-year public colleges. The impact on the state’s private and community colleges could be detrimental, lasting and severe.

There’s little question that American higher education is now going through a period of chaos and uncertainty that is upsetting the otherwise glacial pace by which higher education has historically evolved.

But history also tells us that there have been at least two other periods characterized by the same level of disruption. In each case, higher education grew and adapted but did not suffer from an agonizing collapse. It is possible to imagine the possibility and to see the potential amidst the chaos, even if some of it is self-inflicted.

Disruption in higher education may spark creative, positive change

And perhaps this is ultimately the point. Higher education will need to change the way that it operates. Leadership at all levels must modernize and re-think financial models, operating principles, and governing structures. It is likely that American colleges and universities will not be able to rely on traditional state and federal partnerships in the way that they have in the past.

It is essential that institutions begin to imagine broad cooperative efforts that cut across rigid but now outmoded divisions as “public” and “private,” research and teaching, and two-, four-, and graduate-level institutions. Education must be a seamless, lifelong pathway.

The most important change will be to build an aggressive, unapologetic defense of what higher education represents, why what it does is important, and how its colleges and universities contribute in unique ways to American society.

Disruption makes anything possible. Now is the best time to think about how to manage this disruption rather than simply react to what’s coming.

Perilous Path to Financial Sustainability in Higher Education

The results of the most recent Tuition Discounting Study from the National Association of College and University Business Officers (NACUBO) are telling and worrisome. The study, released last week, examined how much colleges and universities awarded students in scholarship and grants and how deep tuition discounting has become.

The NACUBO study found that the average institutional tuition discount rate for first-time, full-time students hit an estimated 49.1 percent in 2016-2017, up from 48 percent the previous year. The discount rate was highest at small institutions, where the first-time, full-time freshman rate was 50.9 percent for 2016-2017. And perhaps most troubling, more than 25 % of the institutions surveyed have rates well above 50 percent.

Why Does College Tuition Discounting Matter?

Why does this matter?

As Inside Higher Education’s Rick Seltzer points out, the tuition discount rate is defined as institutional grant dollars as a percentage of gross tuition and fee revenue. Translated, a discount rate of 50% means that fifty cents of every tuition dollar never makes it to the college’s bottom line because it is dedicated immediately to financial aid. All but a handful of American colleges and universities are highly dependent on tuition, although they also work to supplement tuition revenue through fundraising in areas like student scholarships.

The problem is that endowments do not fund much institutional grant aid. In 2015-2106, for example, endowments funded only 12.4 percent of institutional grant aid provided to students. In general, 79 percent of aid awarded went to meet need, regardless of whether that need was classified as need-based or merit-based.

Need for Financial Aid Increases but Tuition Revenue is Flat

Mr. Seltzer notes that as tuition prices continue to increase, the share of students with financial need will also likely rise. What’s especially concerning is that the percentage of first-time, full-time freshman receiving institutional grants is estimated to be 87.9 percent in 2016-17. That doesn’t leave much space for the tuition from full-pay students to make much of a dent in the financial aid budget.

The overriding fact is that net tuition revenue per full-time freshman – the cash that supports the college after financial aid — is essentially flat, rising only 0.4 percent in the past year. Worse yet “well over half of survey respondents, 57.7 percent, reported a decline in total undergraduate enrollment between the fall of 2013 and the fall of 2016.” Further, just over half of schools surveyed reported a decrease in enrolled freshmen. The respondents blame price sensitivity, increased competition, and changing demographics as the primary reasons for this decline.

That leaves many colleges in a precarious position. If net tuition revenue is flat, discount rates are rising, the economic headwinds are blowing against them, and their enrollments are declining, financial options are narrowing at most colleges and universities.

A college or university can no longer depend on rising tuition or increased demand to grow its way out of what is now a systemic financial problem.

Discounting Strategies Aren’t Sustainable; Schools Know It but Few Admit It

Yet the most curious result in the survey was on the question of sustainability. In the IHE study, 44 percent of schools reported that their discounting strategies were not sustainable over the long term. Of the remainder, 32 percent said that they were sustainable over the short- but not the long-term. But only 9 percent “were willing to say that their strategies were not sustainable.” They presumably believe that some combination of new programs, better recruitment, and improved marketing strategies could work to improve their competitive position.

Financial aid is a complex question. Many of the colleges now suffering from their discounting practices have increased their discounts, for example, in an effort to serve more financially needy and diverse students. There can be time-specific reasons as well like the development of major new program initiatives.

But the inescapable fact is that American higher education continues to rely on outmoded and archaic financial strategies that used their primary source of revenue – tuition, fees, room and board – to balance out their expenses.

It’s an expense-driven model in which most of the large expenses – financial aid, cost of labor, technology, health care, and debt on capital expenditures – determine the revenue needed, effectively setting the tuition. Any institution increasing tuition much above the cost of inflation, now running at less than two percent, is effectively kicking the can down the road.

Despite the worrisome results of the NACUBO survey, many of us are still betting on American higher education to thrive. It must change how its financial pieces fit together and think imaginatively about how it can finance itself. It is likely that colleges will abandon long-time efforts to finance their capital expenditures exclusively on debt. It is possible to explore creative ways to manage targeted capital campaigns and rethink annual fund efforts. Change will require consortial efforts that move beyond paper and library purchases to see what can be accomplished in common on health care, retirement benefits, and technology.

The NACUBO study forces three conclusions upon us:

  • Higher education must evolve more rapidly.
  • The broad philosophical debates among staff, trustees, and the faculty must be about institutional sustainability.
  • There is only so much time left to take the first big steps.

When a Major Employer Closes: Local Lessons from St. Joseph’s College

Along with students and alumni, the citizens of Rensselaer, Indiana, expressed shock last week when St. Joseph’s College announced that it would close at the end of the academic year. The small, private Catholic college was founded 128 years ago and was a fixture – and major employer — in the town.

St. Joseph’s president, Robert Pastoor, argued that the College would need about $100 million to be feasible, with an immediate infusion of $20 million needed before the end of June. He stated: “Despite our best efforts, we were not able to escape the financial challenges that many tuition-dependent smaller universities have faced in the past several years.”

Financial Challenges, Decades in the Making, Were Insurmountable

Mr. Pastoor cited extensive debt, fears the College would permanently lose accreditation, depreciated facilities, and pressure from auditors that would limit access to student loans as the reasons for the Board of Trustees’ decision. Last November, an accreditor, the Higher Learning Commission, placed St. Joseph’s on probation through 2018 citing concerns over “resources, planning and institutional effectiveness.”

There are many lessons to be learned from the financial failure of St. Joseph’s College. There are also strong views about the failure of the Board and administrators to demonstrate transparency even if the signs were there after the accreditation actions last November. The finger pointing will likely begin, especially directed to the Board of Trustees, but there’s undoubtedly plenty of blame to go around. The cold fact is that no one expects a college to close even when the signs point to it.

Much of the reporting on the closure focused on the sense of loss felt by students and alumni, who invested their sense of self – psychologically and emotionally – in the place. Students are now scrambling to find a way to complete their education affordably. Alumni feel strongly about their alma mater and wonder if their degrees will continue to hold value.

Impact of College’s Closure on Local Community Cannot Be Ignored

The story of loss that is more often ignored, however, is the impact the closing of a college has on its community. In college communities affected by closures, the economic impact of a college’s business operations suddenly becomes important. In the case of St. Joseph’s, the College employed more than 200 individuals, making it a major employer in a town of 6,000 people in a largely agricultural region. These soon-to-be former employees will face limited options as they begin to think about future employment.

There are also secondary effects on a community when larger employers like St. Joseph’s close. The college is the town’s third largest utility customer after the local hospital and the school district, spending $640,000 last year, according to its Mayor. The ripple effect on local businesses will spread across the region as the employment base shrinks and 900 students spend their consumer dollars elsewhere.

As Melissa Shultz, a local businesswoman and lifelong resident lamented to a Chicago Tribune reporter: “I just don’t want this to become a ghost town.”

The loss to a community is comparable to an auto plant shutting down or a mine closure except for an important distinction. The business of higher education is a public good whose benefits extend well beyond employment. America’s colleges – of whatever size – prepare citizens for the workforce. They are also among the principal economic engines in their region. They bring visitors to Main Street, anchor the quality of life, and provide continuous stable employment in a way that the much touted reopening of the Carrier plant in Indianapolis cannot do.

America can continue to let its Rust Belt deteriorate as demographic shifts depopulate its rural stretches. Or, policy makers can see the impact that inattention has had well beyond the slogans and the politics of nationalism that will delay but not stop globalization. That boat sailed before this century began.

Instead, what is most needed is a kind of Tennessee Valley Authority approach to re-imagining the towns that America’s post-industrial economy will otherwise leave behind.

The closing of St. Joseph’s College is a warning shot to America about the loss of bedrock institutions that defined entire towns.

It was like a death in the family. The solution to solving the problems of the Rust Belt is not simply to find more manufacturing jobs for unemployed workers in new Toyota plants.

In the end, all politics is local.