Right-sizing American higher education institutions

Many tertiary institutions in the United States are facing an uncertain financial future. A number of articles in the 2 November 2014 edition of University World News suggested that this challenge is not unique to the US.

In sum, tertiary institutions worldwide face a common budget challenge. Their operating costs tend to increase every year. They must respond to inflation, contractual obligations and the need to maintain or improve programmes, services and estate.

They must pay their operating costs from available revenue streams – government subsidies, tuition fee revenue, enrolment growth, philanthropy, auxiliary enterprises plus whatever else they can cobble together.

In the US and a number of other countries, the uncertainties of requisite government subsidies and enrolment growth coupled with mounting opposition to tuition fee increases has prompted concern about the sustainability of many tuition-dependent institutions in the coming years.

Government officials, college students, parents and other traditional supporters appear to be less willing to accept unquestioningly ever-increasing subsidies and tuition fees than they have been in recent decades.

Even the elite University of California, Berkeley’s plan to increase tuition fees by 5% through to the end of the decade has drawn unprecedented criticism.

This waning support suggests three related questions.

What has prompted these once compliant stakeholders, docile students, supportive elected officials and journalists to withdraw their traditional support of annual tuition and subsidy increases? Could it be that the long propelling yet unspoken beliefs that ‘Bigger is better’ and ‘if you build it, they will come’ has led a large portion of the US’s tertiary education community to expand beyond sustainability?

Does supply exceed demand?

For institutions lacking elite status and large endowments, growth propelled by unchecked optimism has inevitably led to ever greater financial obligations in the subsequent years.

The need for more revenue in the coming years has in no small part been fed by the success of attracting more students and adding more programmes, services and amenities in the preceding years.

Could it be that the supply of baccalaureate opportunities now exceeds demand?

If institutional supply of programmes and services and stakeholder demand appear to be misaligned, a major budget adjustment is needed. If an institution is becoming fiscally unsustainable, is it time for it to ask the once unthinkable question?

If perpetual institutional growth is no longer sensible, is it time for many institutions to plan for right-sizing programmes, services, estate and hence staffing based on far more conservative revenue projections of a multi-year horizon?

US institutions have long projected an optimistic sense of growth. Until recently, their business plans have depended on external stakeholders to provide the requisite revenue to support existing programmes and services plus fund enhancements and wholly new ventures.

These institutions rarely attracted the aggregate revenue to fulfill their aspirations. They were, however, sufficiently successful to seek even more in each succeeding year.

The perpetual growth model has become unaffordable. Many institutions appear to be offering more programmes and services than they can financially support. In these current hard times, many institutions have been desperately trying to sustain their established array of programmes and services, with some adding new programmes and amenities to attract additional income.

Institutions facing financial challenges stemming from trying to do too much with too little have exhibited a number of varying responses in the search for alternatives to close the gap and maintain the status quo.

Many have tenuously focused on revenue enhancement. Some have replaced their presidents, chief admissions and development officers in the apparent hope that a new leadership would energise their efforts. Others have concentrated on retaining more of the currently enrolled students or freezing vacant positions and relying on contingent or temporary replacements.

These responses all reflect a confidence that the old normal will soon return.

Revenue-based budgets

While all US institutions will continue to require additional revenue to meet expenses beyond their control, it may be time for many to change their traditional entitlement expectations. Simply put, they need to abandon building budgets from the bottom up by adding their costs and then setting the required revenue needs.

Budgeting should start with a conservative estimate of expected revenue in the coming years. These estimates should be fixed at no higher than rolling inflation rates to maintain an otherwise flat budget.

Programmes, services and projects should be funded from the conservative revenue estimate. Requisite cuts in programmes and services should be based on performance standards and not on optimistic across-the-board reductions anticipating an early return to the old normal. If programme, service or estate additions can be justified, countervailing cuts must be made to fund them.

I am suggesting that the path to sustainability may be found by seeking the institution’s right size bounded by a realistic alignment of its recurring costs with a conservative assessment of probable revenue streams beyond the current year.

The process may take several years to implement fully. It will require courage and discipline.

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