Posts Tagged “operating model”

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.