Don’t Shoot the Messenger 

Moody’s Investors Service released its outlook for higher education in 2014. Looking at Moody’s interpretation of a survey of net tuition revenues, Scott Carlson called the report “grim” in the Chronicle of Higher Education. Moody’s suggested that weak economy will impact families capacity to pay. They noted that federal budgetary concerns, including a potential sequestration threat, could affect financial aid.

Moody’s further indicated that the rapid growth of online courses will impact the pace of change in higher education. They also argued most ominously that expenses are outpacing revenue, noting “after multiple years of stagnant capital investment and tightened control of operating spending, pressure is building to invest in capital, information systems, faculty compensation, and program renewal.”

There is nothing new in Moody’s report; indeed, the ratings agencies remain concerned about a crisis triggered by changing demographics, consumer preferences, the lingering great recession, technology enhancements, and an inability and at times unwillingness to innovate effectively and efficiently within higher education.

What was most interesting perhaps in the Chronicle’s report on Moody’s findings was the discussion that followed by the magazine’s readers.

The readership seems split between those who paint the rating agencies as antagonists who fail to understand nonprofit education. Others see a dubious relationship between Moody’s and its clients. A second group spoke with equal measures of passion and sarcasm about the “precious” quality of American higher education, governed by weak, uninformed boards, privileged, out-of-touch faculty, and staff whose principal job is to protect the status quo.

On one level, it’s good to see that the very real needs, rising pressures, and shifting sands upon which higher education is built provoke such passion. But in the end rhetoric must take second place to the facts.

The principal fact is that most American colleges and universities are largely dependent upon their comprehensive fees: tuition, student fees, room charges and board rates. Within these charges, tuition makes up the lion’s share of revenue. And the fact is that net tuition revenue — defined as the amount of tuition dollars remaining after a discount now running over 45 percent at most institutions — is declining.

Moody’s is right. Further, whatever the motivation, the ratings agency is also correct to call attention to this problem. Facts devoid of judgment and interpretation are still facts. One pointing to a statistical decline in net tuition revenue represents a unique and serious problem for higher education.

We can fight the debate over whether American higher education is a service, calling or business some other day. For the moment, what presidents, CFO’s and their senior teams need to convey is that the post recession financing model must be different from what they inherited and practiced before the great recession.

What is most striking is that the pace of change has accelerated. Some of the most pressing questions on college and university campuses today are whether the culture can innovate fast enough, react creatively, move nimbly, and establish acceptable metrics by which to measure success based upon a bar that shifts a little more each day.

Historically, it is possible and even likely that American higher education is facing the same level and bewildering complexity of change as other nonprofit groups like healthcare. It’s not so much that either side in the Chronicle readership is wrong. It’s more that both groups fail to appreciate yet that the solution to a vibrant higher education community is found somewhere in the vast middle ground where ideology, politics, and practicality meet.

If this assumption is correct, then change to accommodate what’s coming in higher education must begin by rethinking priorities within educational budgets. It’s no longer enough to speculate on how a college or university can “wait it out” until the endowment rebounds, the new graduate and continuing education programs kick in, or that one special donor with a rich legacy waiting for them in a probated estate passes on.

It’s complicated. Labor costs typically eat up about 60 percent of available revenue. Colleges are self-contained villages with extensive facilities and substantial depreciation. Revenues rely extensively upon tuition, now heavily discounted. Higher education institutions cannot raise money fast enough from any source, except perhaps at a handful of research universities, to offset flattening revenue elsewhere.

Once labor, capital, and financial aid discounts are subtracted out, there is little discretion left within a budget with which to create or innovate.

Moody’s report is a kind of clarion call. At a minimum, it illuminates the building financial crisis in higher education. The report also is a challenge for higher education to imagine a different future. This future will be based upon a realignment of people, programs and facilities with emphasis on the faculty as the heart of the student centered enterprise. While faculty must be realistic, boards and administrations must be fearless in protecting them as the gold standard of the institution’s future.

It may be that colleges aggressively seek new cooperative partnerships both to do more and do better with less by spreading costs in common. It will likely be important to determine which facilities need to be owned and which facilities need to be leased, rented and operated in collaborative partnerships.

While Moody’s is imperfect, the ratings agency did higher education a favor. On some level, we have known the debate was coming for some time.

So don’t shoot the messenger. Moody’s simply let us know that it’s time to start the conversation.

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