The Crisis in How We Fund Higher Education

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A survey of the state of American higher education in 2014 presents a distressing picture. Enrollments are off --in some cases seriously -- translating to substantial and unbudgeted revenue shortfalls. Higher education is labor intensive with up to 60 percent of the budget at some colleges tied to labor. Labor costs, along with health care and retiree benefits, continue to rise well ahead of inflation.

While many institutions converted variable rate to fix rate bonds successfully as the great recession deepened, their bond capacity is severely diminished. Moody's downgrade of higher education as a sector is a broad brush analysis of a complex industry but it is a telling indicator of stress. Many colleges delayed new capital projects. The pent-up new capital demands written about widely in the trade publications cannot be fully met by traditional financing.

Perhaps most troubling is that American consumers have lost sympathy with higher education costs. While insiders can blame media pundits, politicians using polling data, and a fickle public for the diminished respect accorded to higher education, the fact is that colleges and universities are slow to change. As tuition driven schools, consumer mindset can have a dramatic effect cumulatively on a college's bottom line. How much longer are colleges able to justify tuition increases even a point above inflation?

And then there is management. Let's be clear that there are many institutions whose CFO's and presidents are thoughtful, progressive, work closely with faculty leadership, and develop financing plans that address short term concerns and longer term sustainability. But there are precious few of these institutions left. These colleges may be swimming up stream against a current that is driven much more by what is happening beyond the college gates. But at least they are calling the question.

A few even have enough money or large enough endowments to manage effectively and even innovatively.

For the rest of higher education, it's more like a Groundhog Day version of the children's game of Whac-a-Mole.

For these institutions that are typically heavily tuition driven, the solution is to delay and "do more with less." Since 2007, many found that the easiest route was to defer capital improvements, postpone capital projects, and increase financial aid. A few tinkered at the margins asking faculty and staff to pay more for health care or prescription plans. Others flatlined pay increases, postponed hiring, or cut back on travel.

They now find themselves in a significantly weakened position compared to the early years of the 21st Century. Further, the restoration of state appropriations, resumption of the patterns of student aid support, and other promissory band aid strategies will not even remotely fund these institutions back to pre-recession levels.

The central problem is that we are changing the way that America funds higher education. No longer can we expect some combination of tuition increases, depreciated dorms retooled as institutional cash cows, and state and government support to pay the bills. It is equally unlikely that drawing down on bond capacity will meet depreciation and fund new capital demands. And there is not enough money philanthropically to move a lumbering ship of state toward mythical comprehensive campaigns as a panacea for systemic problems.

What are the options?

They begin with a professionalization of business and senior administrative leadership. Surprisingly, most colleges and universities operate like "Mom and Pop" shops, operating on an academic year cycle of effectively nine months. The new senior leadership must think about how colleges and universities are financed short- and long-term. They must lead the charge moving business operations from a culture of inertia to a culture of innovation.

Further, higher education must come clean about the state of higher education. Nothing is ever as dramatic as when colleges face a crisis but it is clear that change is coming. Tell the faculty and staff now. Begin the process of preparing them for change and ask for their investment in making change happen. Most faculty and staff would rather work in an environment where they feel momentum rather than be surprised when the options narrow and layoffs occur.

Look for help. Technology should not replace good teaching but it can enhance it and perhaps even drive some efficiencies. Key partnerships in business across higher education communities can create economies of scale. Recasting colleges and universities as economic engines can open up new revenue, tax credits, and lessen demands for higher tax payments from tax-exempt colleges and universities.

And finally, what does it actually take to train bright, untutored minds? Is it essential, for example, that colleges and universities own their dormitory facilities? If depreciated residence halls are the cash cow that make the books balance, perhaps it's more important to make the internal decisions necessary to build admissions into a tool to make the academic program self sufficient. Then it becomes possible to execute the social contract between the student and the institution rather than own the building in which the social contract is executed.

In fairness, we cannot expect faculty to submit to wholesale program changes when antiquated insight dominates business operations. Let's continue to presume that our politicians value the breadth of what our students learn, including those who are art history majors. We can win this debate on the facts.

What we cannot permit is a bad business model that puts everything at risk.

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