It has been projected that as many as 40% of United States tertiary institutions have placed themselves on a non-sustainable financial trajectory with chronic high costs and accompanying debt.
For decades these institutions have relied on tuition fee and enrolment increases to generate the revenue needed to meet their ever increasing current expenses. They have required more revenue with each new year to cope with additional expenses accruing from the previous budget year.
Inflation alone boosted expenses that had to be covered in the coming year. When new programmes and amenities designed to sustain competitive marketability were added to the expenses sheet the spread between the previous year’s revenue and current year’s expenses widened.
Higher tuition fees, frequently eased with enrolment increases, worked well for decades. But it reliably appears to have lost utility as enrolment increases have become uncertain and opposition to higher tuition fees has waxed.
‘We will weather this storm as we wait for the return to normality’ is the position that seems to characterise a large portion of the US tertiary education community’s response to the business cycle’s recovery phase that has not fully included it.
That strategy has not been supported by the US’s independent financial critics. The difference between the academy and its financial critics’ assessments is exemplified by two articles in recent issues of US tertiary education trade journals.
The first reports the results from the annual 2015 survey of chief financial officers, sponsored by Inside Higher Ed and conducted by the Gallup Organisation. The second report summarises a Moody’s Investors Service assessment reported in the 2 September 2015 issue of The Chronicle of Higher Education.
The 2015 Inside Higher Ed survey of chief financial officers, or CFOs, was the fifth in the series. Little has changed in the CFOs’ favoured strategy over those five years. With 90% forecasting institutional salvation with continued reliance on enrolment growth, the majority of the respondents appeared confident of a return to business as usual. Only 20% of the respondents appeared to have reservations about their institutions’ mid- to long-term financial sustainability.
In spite of the shades of gloom prompted by the business cycle’s sluggish recovery phase, the CFOs reflect a continued attachment to business as normal and to less painful business strategies.
It appears that formerly effective strategies are difficult to abandon in the face of changing market conditions in the slow-moving post-recession era. A significant number appear to place a strong reliance on enrolment increases coupled with programme augmentations funded from savings.
A darker view of institutional sustainability is reflected in the report released by Moody’s Investors Service. It projects that the number of small college annual closures will triple within the next two years. While the average number of college closures for the period 1999 to 2013 was modest, at just below six, Moody’s projection should not be disregarded.
Neither side’s prognosis is necessarily prescient. The optimistic academic view may be founded on greater familiarity and commitment to the academy’s values and culture. The support for this position appears based on familiar nuanced academic rationales. The financial critics’ dire projections are based on the objective analysis of relatively narrow data sets focused on programme profitability and debt.
At risk institutions ignore the critics at their peril.
In the 3 April issue of University World News, I suggested that US tertiary institutions might improve their sustainability prospects by scaling back from their dependence on tuition fee increases and additional enrolment by purposely shrinking their programmes, services and supporting faculty and staff.
Instead of increasing revenue to align with their expenses, institutions should align their costs with their expected revenues. Rather than trying to retain a shell of the pre-recession era, at risk institutions should slim their organisations down.
Many institutions tend to unquestionably accept that operating costs are givens and hence incontestable. Mission creep with its accompanying cost and debt burdens is often the product of open-ended mission statements framed in language that too often ill defines institutional purpose and goals.
Hence, the mission statement may be the place to start a slimming down process with the goal of better aligning expenses with more likely income streams. With a focused mission statement guiding cost conscious institutions, programme profitability should become a greater possibility.
With a constrained mission statement, annual budgets should become the bridge between aspirations and fulfilment without subjecting institutions to unacceptable financial risks. The language used will rest with the individual institution but should reflect a commitment to a portfolio of financially sustainable value-added programmes and services consistent with its core values.
Allowing for an estimate of inflation, consideration might be given to setting parameters for programme productivity and debt standards. Board members, often more familiar with financial criteria, should become more assertive in performing their fiduciary responsibility and refrain from their tendency of agreeing with the academicians. Salvation lies in the hands of the at risk institution.
William Patrick Leonard is a professor at SolBridge International School of Business in Daejeon, Republic of Korea.
Scale back to create sustainable institutions
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