Posts Tagged “NACUBO”
At the annual meeting of the National Association of College and University Business Officers (NACUBO) in Minneapolis last week, there was a good deal of attention paid to how higher education should address the steady decline in support for America’s colleges and universities among consumers (that is, students and families) and key external stakeholders.
Indeed, NACUBO took appropriate preventative steps by showcasing a marketing effort designed to make a stronger, broader, and more articulate case for why colleges create value – both practically and philosophically – in American society.
Those of us who care deeply about the future of higher education commend NACUBO for working to get in front of this steady erosion in support.
Sharpening the Case for the Value of Higher Education
It’s clear, however, that we have a great deal of work to do to sharpen the argument and make it more relevant to the audiences with whom we wish to engage.
That may be the most important take-away from NACUBO’s discussions: The value proposition for American higher education must reflect the concerns of those who we are trying to convince. It must also resonate with them.
That’s not to say that we should abandon the older arguments. Historically, the most appealing case made by higher education about its value was that America’s colleges and universities produced an educated citizenry broadly prepared to contribute to global society.
Founded and nurtured by the liberal arts tradition, higher education offered more than narrow technical training. Given the rising nationalism and growing tribalism in American culture, this is a critical argument to make.
In fact, it may be the most important argument to make – a foundation upon which a broader case can be built. But laying the foundation is no longer sufficient, although it is essential that the argument on the broader social good of higher education be strengthened and supported.
It makes no sense either to politicize the criticisms of the argument or to cater exclusively to consumer whims, anecdotes, and polling about why higher education matters.
There will always be a subset of arguments about whether or not higher education has been captured by the left. For those who think in political terms, it’s what matters, and sometimes it appears, it’s the only thing that matters.
Economics, Not Politics, Shape Perceptions of Higher Education
There is some merit to these arguments, but many of us do not believe that the broad middle group of educators is narrowly ideological either by discipline or practice. It’s generally healthy to have these political debates, but it will likely be economics rather than politics that shape American perceptions of higher education in the future.
It’s also wrong to build entirely new justifications based narrowly on consumer whims. But this is where additional work must be done. Colleges are tuition-driven by nature and design. The 94 institutions with endowments of $1 billion or higher control nearly 75% of the $529 billion reported by all institutions.
It is a myth to assume that all colleges are wealthy places, living off draw-downs from expansive endowments. Further, at all but a handful of colleges, the often-touted fundraising juggernauts with impressive campaign totals are typically some combination of aggregated annual fund receipts and deferred gifts that build to a bigger number. There is an open question as to how much immediate benefit comes to a college from comprehensive fundraising campaigns.
The financial and demographic issues facing most colleges and universities are challenging:
- From 2010-2016, the average comprehensive fee (tuition, fees, room and board) rose 43% for private colleges and 68% for public colleges.
- Financial aid discounts now exceed on average 50 cents of every tuition dollar received.
- Significantly, recent surveys show that 46% of graduates from U.S. four-year institutions have enrolled in community college at some point.
In an era of steady or declining demographics, consumers are voting with their feet. In a new survey, one in eight colleges have had merger, closing, or acquisition discussions internally over the past year.
Despite these challenges, the sky is not falling as some doomsday prognosticators predict. For the moment, American higher education has lost the public relations battle with the outcry over high sticker prices and a one-sided read of employment after graduation statistics.
Higher education exists in an increasingly transactional world in which families no longer put “skin in the game” because they view higher education as a right supported by the state and not a privilege in which families must also play a role.
But the foundation of preparing students for a global society in which students must graduate with a pragmatic understanding of how they can contribute is a good beginning defense of the value of a higher education degree.
On to this foundation must be grafted other justifications, however, that build from previous arguments on value. If the rigors of the 21st century demand creativity and imagination, it will be an evolving curriculum within higher education that will provide the entrepreneurial encouragement and training.
It’s already happening in ways large and small throughout American higher education. It’s why our colleges and universities are the basis for imitation and the envy of the world.
Those who advocate for America’s colleges and universities must find words – sometimes different words — that are neither defensive not outlandish to explain their value. It’s a public relations battle that higher education cannot lose.
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.
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.
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.
American higher education’s operational model is based on outmoded — and some (myself included) would argue, unsustainable — revenue and expense assumptions.
In a “Futurist” piece in NACUBO’s Business Officer magazine (July/August 2016), I argue that institutions must look inward to develop a budget format that creates a sustainable financial model appropriate to changing circumstances on college and university campuses.
To achieve financial viability, each institution will have to manage change by developing new financial models after evaluation its own set of strengths and weaknesses. Many institutions will succeed; some will not. …The biggest variable is the experience and innovative capacity of the leadership.
Specifically, it will be critical to match changing financial practices with modernized, streamlined and better informed governance — beginning with how trustees see their role in shared governance.
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