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.
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.