The Crisis in How We Fund Higher Education

A survey of the state of American higher education in 2014 presents a distressing picture. Enrollments are off –in some cases seriously — translating to substantial and unbudgeted revenue shortfalls. Higher education is labor intensive with up to 60 percent of the budget at some colleges tied to labor. Labor costs, along with health care and retiree benefits, continue to rise well ahead of inflation.

While many institutions converted variable rate to fix rate bonds successfully as the great recession deepened, their bond capacity is severely diminished. Moody’s downgrade of higher education as a sector is a broad brush analysis of a complex industry but it is a telling indicator of stress. Many colleges delayed new capital projects. The pent-up new capital demands written about widely in the trade publications cannot be fully met by traditional financing.

Perhaps most troubling is that American consumers have lost sympathy with higher education costs. While insiders can blame media pundits, politicians using polling data, and a fickle public for the diminished respect accorded to higher education, the fact is that colleges and universities are slow to change. As tuition driven schools, consumer mindset can have a dramatic effect cumulatively on a college’s bottom line. How much longer are colleges able to justify tuition increases even a point above inflation?

And then there is management. Let’s be clear that there are many institutions whose CFO’s and presidents are thoughtful, progressive, work closely with faculty leadership, and develop financing plans that address short term concerns and longer term sustainability. But there are precious few of these institutions left. These colleges may be swimming up stream against a current that is driven much more by what is happening beyond the college gates. But at least they are calling the question.

A few even have enough money or large enough endowments to manage effectively and even innovatively.

For the rest of higher education, it’s more like a Groundhog Day version of the children’s game of Whac-a-Mole.

For these institutions that are typically heavily tuition driven, the solution is to delay and “do more with less.” Since 2007, many found that the easiest route was to defer capital improvements, postpone capital projects, and increase financial aid. A few tinkered at the margins asking faculty and staff to pay more for health care or prescription plans. Others flatlined pay increases, postponed hiring, or cut back on travel.

They now find themselves in a significantly weakened position compared to the early years of the 21st Century. Further, the restoration of state appropriations, resumption of the patterns of student aid support, and other promissory band aid strategies will not even remotely fund these institutions back to pre-recession levels.

The central problem is that we are changing the way that America funds higher education. No longer can we expect some combination of tuition increases, depreciated dorms retooled as institutional cash cows, and state and government support to pay the bills. It is equally unlikely that drawing down on bond capacity will meet depreciation and fund new capital demands. And there is not enough money philanthropically to move a lumbering ship of state toward mythical comprehensive campaigns as a panacea for systemic problems.

What are the options?

They begin with a professionalization of business and senior administrative leadership. Surprisingly, most colleges and universities operate like “Mom and Pop” shops, operating on an academic year cycle of effectively nine months. The new senior leadership must think about how colleges and universities are financed short- and long-term. They must lead the charge moving business operations from a culture of inertia to a culture of innovation.

Further, higher education must come clean about the state of higher education. Nothing is ever as dramatic as when colleges face a crisis but it is clear that change is coming. Tell the faculty and staff now. Begin the process of preparing them for change and ask for their investment in making change happen. Most faculty and staff would rather work in an environment where they feel momentum rather than be surprised when the options narrow and layoffs occur.

Look for help. Technology should not replace good teaching but it can enhance it and perhaps even drive some efficiencies. Key partnerships in business across higher education communities can create economies of scale. Recasting colleges and universities as economic engines can open up new revenue, tax credits, and lessen demands for higher tax payments from tax-exempt colleges and universities.

And finally, what does it actually take to train bright, untutored minds? Is it essential, for example, that colleges and universities own their dormitory facilities? If depreciated residence halls are the cash cow that make the books balance, perhaps it’s more important to make the internal decisions necessary to build admissions into a tool to make the academic program self sufficient. Then it becomes possible to execute the social contract between the student and the institution rather than own the building in which the social contract is executed.

In fairness, we cannot expect faculty to submit to wholesale program changes when antiquated insight dominates business operations. Let’s continue to presume that our politicians value the breadth of what our students learn, including those who are art history majors. We can win this debate on the facts.

What we cannot permit is a bad business model that puts everything at risk.

3 thoughts on “The Crisis in How We Fund Higher Education

  1. I find a number of the assumptions in this essay highly questionable. For example, the notion that enrollments are declining is not true. From 2000 to 2010, enrollment increased 37%, and growth is expected this decade as well ( Enrollment fell slightly in 2013, but that was primarily at for-profit colleges, while the traditional 4-year colleges increased enrollment ( And while I agree that colleges often have a bad business model, I think a lot of blame falls on the corporatization of higher education: the idea of privatizing everything (like dorms) and partnerships with businesses and running colleges like corporations has been a disaster of increased costs and administrative bloat. So, while it’s easy to get everyone to agree that the current model isn’t working well, agreeing on a solution is much harder.

  2. Enrollment issues are affecting smaller private institutions as well as the for-profits. But the steep enrollment declines at the for-profits should be a cause for celebration, not regret. Not only have the for-profits contributed disproportionately to many of the major issues facing higher ed over the last decade and a half–most notably, the student debt crisis, the inordinate emphasis on technological solutions, and the unbundling of faculty responsibilities and the devaluation of faculty–but despite their obvious deficiencies and failings, they have distorted the ways in which many of those core issues are now being framed and discussed.

    On enrollment, it is also worth noting that a record 900,000 international students will enroll in American colleges in universities in 2014, a 50% increase from just five years ago.

    Regarding labor costs, at most institutions, salaries and benefits for all faculty–from tenured full professors to adjuncts–constitute one-fifth to one-quarter of the budget. The remaining personnel costs are the result of administrative bloat–the dramatic increases not just in the numbers of administrators but also in administrative support staff. Indeed, since the advent of office pc’s in the late 1980s, the number of support staff on the instructional side has decreased, on average, by about two-thirds while the total number of support staff has increased by about a third. So the increases in administrative support staff have truly been very dramatic.

    Lastly, the defunding of higher education by state governments has been a matter of radical ideology and skewed priorities. It is not an inescapable or irreversible economic reality. The funding can be restored if the governors and legislatures decide that continuing tax cuts for the most affluent and spending on direct and indirect corporate welfare are less central to the public interest than public education at all levels.

  3. I also wonder about the vagueness and assumptions in this article. How about some clear non-jargon? For example, “Begin the process of preparing them for change and ask for their investment in making change happen.” What change exactly. Or the word “professionalization”: meaning WHAT, exactly? “Culture of innovation”?

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