Bursting the American tertiary education bubble

Academic critics and media commentators have suggested that the United States' tertiary education community's decades of unprecedented growth is a bubble that has or will shortly burst. The US public tertiary education community is widely said to be in crisis.

The decades of unquestioned governmental financial support of public institutions has steadily waned in recent years. Private tuition-dependent education institutions face similar revenue challenges.

Two of the nation’s premier financial consultancies, Bain and Company and Moody's Investors Services, have questioned the sustainability of up to a third of public and private tuition-dependent institutions, or TDIs. Except for the elite and well-endowed institutions, the outlook is bleak throughout America’s tertiary education community.

Tuition fee increases moderated by larger enrolments coupled with external subsidies have been TDIs’ most reliable sources of revenue required to meet annual escalating operating expenses.

A sampling of chief financial officers, or CFOs, indicates that they generally agree financial sustainability issues have replaced the green concerns that were in vogue in the recent past.

Earlier this year the US trade paper Inside Higher Ed and the Gallup Organisation renewed their annual online survey of the tertiary community's CFOs. The sponsors reported that a majority of the 457 respondents appeared to align with Bain's and with Moody’s observations that a large segment of the tertiary education community faces a challenging financial future.

In aggregate, their optimistic outlook, reflected in the 2012 survey assessment, has rapidly faded. Just a year earlier nearly half of the business officers rated their institution’s current financial health as good, with nearly 20% suggesting an excellent rating.

A year later, 60% expressed disagreement or strong disagreement with the Pollyanna idea that the claims that a relatively large number of institutions face financial challenges are exaggerated.

Furthermore, only 27% of respondents had strong confidence that their own institution’s financial plan was sustainable over the next five years. Their confidence fell to 13% when the forecast was extended to a 10-year outlook.

Balancing the books

Whether they are responding to Bain's or Moody’s assessments or their own realities, something has got their attention.

With problem recognition being a prerequisite for finding the path to solutions, the CFOs’ responses are promising. Balanced operating budgets were manifested as trade-offs between expected revenues and costs. Survey data revealed the CFOs’ mix of favoured revenue-producing and cost-cutting strategies.

Increased retention of enrolled students was clearly the most favoured strategy, with 92% of the respondents selecting the option. This drew the majority support, with the appeal of other revenue enhancement strategies rapidly falling off: 62% favoured enlarging endowments, 58% employing online programmes and 53% attracting more philanthropy.

The appeal of each method of revenue enhancement speaks more of a mindset than remedies tailored to current realities. Each will require varying amounts of additional expense in an attempt to attract and retain more students.

Amenity wars waged among institutions, fitness facilities, Sushi Wednesdays, and double beds – these have already been identified as a financial drain, as has the rapid growth in student services.

The respondents uniformly agreed that new spending at their institutions would henceforth be funded through reallocation rather than the traditional reliance on increased revenue.

But their favoured cost-cutting strategies do not prompt much confidence.

Among the cost-cutting strategies, none rose to a majority and four out of the five that were reported involve technology.

Forty-five percent favoured employing technology and analytics identifying potential programme improvements and reallocation opportunities. In spite of a record of unmet promises, 41% favoured reducing instructional costs through technology.

Centralising and consolidating administrative functions and greater reliance on the ‘cloud’ drew 39% and 24% support respectively. Less than a quarter voiced support for increasing full-time faculty teaching loads.

The favoured technology alternatives will undoubtedly carry some amount of additional expense to implement and maintain. One can speculate that the margins between the added revenue generated and the costs incurred in the process will vary.

The blame game

The sponsors reported that the CFOs identified two external influences – unfunded mandates and rising healthcare costs – as major drivers of escalating operating expenses.

Blame shifting does not contribute to solutions. All industries are subject to unfunded mandates flowing from all levels of governments. The CFOs’ complaint does not lead to a solution within their control. Aside from appeals for fairness, there is little that can be done to moderate these mandates.

Conversely, rising healthcare costs are susceptible to a more proactive response if the internal cause rather than the external symptom is addressed. Ultimately, these costs are driven by the underlying employee base. Institutions have control over their benefits plans and could use it.

While some will rightly say that this survey too narrowly framed the alternatives, in aggregate the weight of the responses suggests a dogged reliance on revenue enhancement, with relatively weak support among the cost-cutting alternatives offered.

This misalignment suggests that the sustainability of many institutions will remain in question until rigorous cost-cutting measures are aligned with increasingly uncertain revenue streams.

* William Patrick Leonard is vice dean of SolBridge International School of Business in Daejeon, Republic of Korea.