Posts Tagged “financing”

Faculty are Chess Pieces in College Budget Game

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.

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.

Dismal Endowment Returns Highlight Higher Ed’s Unsustainable Financial Model

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.

 

 

 

 

In Face of Failing Operating Model, Thinking Creatively About College Finances

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.

When the Going Gets Tough for Public Universities: Go Private?

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.