Moody’s 2016 Higher Education Outlook: This is What We’re Celebrating?

Last week Moody’s Investor Services issued its 2016 outlook for American colleges and universities. The takeaways were: stability and modest growth.

Moody’ suggested that tuition revenue growth is expected to be between 2 and 3 percent for public and private universities, with a 3 percent increase in revenue overall. On the public side, state revenue is expected to grow between 2 and 4 percent.

Moody’s based its estimates on a comprehensive review of the 230 public universities and 275 private universities that are included in its portfolio. The agency notes that between 20 to 30 percent of the colleges that it rates – mostly small colleges with limited economies of scale – will struggle to meet their projections of 3 percent revenue growth.

This is good news. Any positive change in the dismal negative outlook offered in recent years is improvement. The higher education community has something to celebrate, even if the celebration is muted.

But let’s look more closely at the findings.

First, Moody’s rates only a small percentage of the colleges and universities in America; therefore, most colleges were not surveyed for Moody’s assessment. It’s unclear whether the Moody findings apply to the full spectrum of American higher education institutions. If they don’t – and Moody’s calculations represent only an assessment of those they rate – the outlook for American colleges and universities may differ substantially from the conclusions drawn from Moody’s sample.

Second, Moody’s notes that many of the “low hanging fruit” reductions have already been taken by colleges seeking to create economies of scale. They report further that additional cuts are likely to be more contentious. Is it likely that the cultural inertia and defensiveness that characterizes the climate on many American campuses will support tough budgetary decisions when these next round of cuts have real consequences?

Third, Moody’s argues that colleges and universities should be able to increase their tuition rates at levels greater than inflation. Try selling this argument to American consumers or politicians driven by polling who are not afraid to use their regulatory authority to force change. By one estimate, nearly 60 percent of the private colleges and universities did not meet their internal admission targets. A good number of these have also increased their tuition discount rates to 60 percent or higher. Is this really a prescription for stability and modest growth?

Fourth, Moody’s suggests that improving endowment returns and enhanced fundraising will contribute to modest revenue growth. This seems reasonable – except of course for those institutions that do not have measurable endowments or alumni donor bases and fundraising track records to contribute to revenue growth in any meaningful way. As one president responding to this approach said to me recently, “What planet are they on?”

Fifth, Moody’s finds that state revenue to public sector institutions will increase between 2 and 4 percent. This is good news, although many of these same public institutions are looking to “privatize” anticipating longer federal and state funding trend lines that are far less rosy in outlook. How often have we heard that state supported institutions are now more like state-located universities?

Does a 2 to 4 percent increase in state appropriations – while welcome – materially impact a public university budget since the percentage of state revenue in the university’s budget is a fraction of the percentage twenty years ago?

Sixth, Moody’s identifies other challenges that colleges and universities confront, for example, defined pension liabilities are a growing problem for many public universities. They also note that political instability and an uncertain global economy loom ever present on the horizon.

Before we pop the champagne cork, perhaps its time to look comprehensively at American higher education. It’s good to see improvement. But the overriding question must be if this improvement is significant enough to fuel the sustainable growth of a robust and defined educational program on America’s college campuses.

The story told within American higher education is much more gloomy. Consumers have effectively capped the level of tuition increases. Many colleges are weighted down by debt, deteriorating infrastructure, and growing tuition discounts. Governance is an archaic and quaint series of checks and balances in which the overriding authority is in the hands of poorly educated and inexperienced trustee volunteers. The demographics are unfavorable. Senior administrative leadership is pragmatically timid since there is no incentive to be courageous, nor are they trained to be so.

There is a way through the looking glass. But it’s not likely that we’ll get there by buying into the assessment by Moody’s that its schools – even if they enjoy stability and modest revenue growth – represent the state of American higher education.