Is Higher Education on a Crash Course with State Budgets?

Credit-rating firm Moody’s Investor Service continued to keep the negative outlook for higher education into the next year (1). They cite slow job growth, an uncertain labor market, and slow revenue growth.  Such schools are fighting over revenue and have already cut greatly over the past few years leaving them little room to do more.  Personal income is not rising making it difficult with high student loan debt and interest rates to send more people to college.  According to Moody’s research spending is also expected to decline.

Some universities like Minnesota State University Moorland and University of District Columbia are pondering cutting core academic programs based upon needed budget cuts (2).  The trend is part of a need to reduce expenses in expense laden campuses. Decisions include the cutting of academic programs that once made up the core of university learning.  Some are concerned about what this trend means in the long run.

Indiana state universities are seeking to deal with a $141 million revenue shortfall and are pushing for a 2% cut in educational budgets (3).  It is hoped that the impact will be minimal and not damage students. There are some attempts to find new and creative ways around the budget crisis but no concrete concepts have come forward. Regardless, it appears that universities will suffer in the future from a lack of resources and constant questioning of their impact.

There appears to be a number of trends that are starting to be addressed and not all of them have to do with education itself. We know through the budget crisis government is under pressure to increase revenue and reduce waste. They are trying to spur economic development through trade and national development. Changes in spending are likely to impact multiple sectors of the economy in both positive and negative ways. Education will be impacted in this process.

The second major problem is the cost structure of universities themselves. They are large, have great sports teams, expensive facilities, and a limited ability to adjust to the new economic realities. Yet as state revenue squeezes, the costs rise, and their effectiveness becomes questioned in a higher technology and science oriented environment, greater pressure will come to bear upon traditional models.

Universities ability to adjust to this pressure while finding new ways of competing and pushing relevance will impact their viability. It must be remembered that changes in the university systems is not something new and has occurred throughout the life of the country.  Early education was informal and based on apprenticeship.  First colleges were religious and private but eventually moved into public universities. These public universities exploded in size and cost during the good years and may need to change again.

Change must come with quality. Recent educational reports have indicated that American students are falling behind in STEM as well as other areas. High Schools are not preparing students to become researchers, scientists, and technology workers at the same level as they did in the past. Efforts are underway to address this problem and push for changes in educational processes.

No matter what happens, we know that the current path is unsustainable. There will be change, and the decisions that are made today will impact whether this change is smooth or bumpy.  Pro-activity encourages decision-makers to think about what can be changed now and slowly adjust the system to ensure that it is keeping up with current environmental needs. Failure to be proactive means a sure bumpy ride in the near future. Perhaps an educational calamity.

Increases in Higher Education as a Result of Non-Essential Educational Services

Higher Education is changing and may be indicative of some challenges that will need new solutions and better ways of managing the educational system. A report by the Joint Legislative and Audit and Review Commission (JLARC) to the general assembly of Virginia indicates a number of important education trends such as cost, state investment, secondary higher education services, student loan debt, and graduation rates of both Virginia and the nation. Even though the report focused on Virginia it did highlight some national trends and changes. 

A Virginian report indicates that the majority of newer higher education costs are a result of auxiliary services. At 15 Virginia based higher education institutes,  spending increased from $2.6 to nearly $6 billion dollars in the past two decades. Staff salaries, benefits and maintenance were not the majority of these increased costs. Higher levels of spending were found in academic services, research, academic support, student support, housing, dining and sports. 

Since 1991 to 2011 the institutes of higher education collected more revenue than many comparable institutes in other states. In 1991 they collected approximately $16,229 to a national average of $10,952 while in 2011 they collected $35,000 to the national average of $27,000. State funding of this cost declined from 27% in 1991 to 15% in 2011. Thus, even though more money is being collected, more of that money isn’t necessarily making it into core educational functions. 

This is not unique in the sense that most states are investing less in higher education in terms of total percentage of costs. The national average in 2011 was 39% and this has declined to 20% in 2011. Together it indicates that not only Virginian traditional education costs more but also is becoming more expensive nationally. The problem is that the increase in spending is also matched by declines in state spending. It appears to be providing a trend toward a collision course where college becomes strictly a student concern. 

Despite these difficult statistics Virginia has done better than the national average in graduating approximately 46% of students within four years. This is good news as this means students are staying focused and getting out of college faster thereby reducing their costs and increasing their overall productivity to the economy. The faster students can learn needed skills and move out into the working fields the better their rate of investment return. 

Problems do arise when students are shouldering a greater proportion of costs. As state funding has declined students have had to increase their debt load to continue their education. In 1992 the average student loan amount was $3,318 while in 2011 it was $9,893 meaning that there was little or no way for students to attend college without hedging out their current education with future earnings. 

If we take a critical look at this information we may find that increases of costs not based in instruction as well as decreased state spending creates a collision course for student loan debt. As traditional higher education institutes raise their spending in services outside of instruction such as room, board, and student support and sports they leaving behind a proportion of their traditional purposes. Yet these prices come with greater student loan burdens on students who have little to no option but to hedge their future earning power to pay for these services. On a positive note the encouragement of an actual four year degree helps to move students from learners to producers in a quick paced manner. 

REPORT

College CFOs Increasingly Concerned about Sustainable Operations

The 2013 Inside Higher ED Survey of College and University Business Officers surveyed 457 chief financial officers at universities and found less certainty about the sustainable future of higher education. The numbers aren’t dismal but do move into the realm of raising eyebrows and thinking of solutions. In particular, a lower percentage of CFO’s believe their organizations are financially sustainable and a higher percent are taking on debt to run operations. 

-27% strongly agree that they are confident about the sustainability of their institutions financial model.

-21% believe for-profit education (lower page of report) is sustainable while 51% believe elite schools are sustainable.

-49% of polled officers have experienced increases in healthcare premiums.

-92% say that retaining current students is a large part of their strategy.

-45% believe that technology is or will help them reduce operating costs.

-59% stated they were well informed about their jobs before taking them.

-3% believe their institutions should take on more debt and 21% strongly agree that their institutions have taken on more debt to finance operations.

-Few business officers believe faculty are realistic about financial challenges. 

The vast majority of the colleges polled were traditional universities. In order to overcome some of these challenges 37% indicated that they would recruit more international students. The report does not indicate this, but such colleges are limited by legislation on doing so to any great extent. However, online colleges can better offer virtual coursework in other countries through the Internet. There may be some legislative hurdles in these countries but these are not impossible to overcome. Online universities have greater opportunities to expand their markets overseas and create global universities of the future.

The report does highlight the growing concern with the financial sustainability of future traditional education.  Executives appear to be nervous about finding new sources of revenue. Some have opted for fundraising while others have decided that using technology is their best approach. Yet the numbers are particularly low indicating there is no concise strategy in meeting these challenges. It would appear decision makers are still unsure of what is the best approach.

More frightening is the increasing use of debt to fund operations.  When needed this can be a successful short-term strategy but when it becomes chronic there is an inherent problem with cash availability and profitable operations. It is often beneficial to use this strategy during times of transition and restructuring  and not necessarily as an ongoing practice. Doing so indicates that an established entity  is paying interest on monies it should already have available or does not have enough flexibility at the end of the budget year to build a cushion for times when revenue is not coming in (i.e. during semesters). They are paying a premium for operational costs. 

You may obtain your own copy of the report HERE