- The Washington Times - Monday, August 11, 2014

America’s college students aren’t the only ones on campus struggling to pay the bills and facing an uncertain future these days.

Colleges that long enjoyed rising demand and a seemingly unlimited ability to raise tuitions are starting to falter as operating expenses are outpacing their traditional sources of revenue.

Major new market analyses published in recent weeks suggest that the future of higher education is a rocky one, with many universities likely having to resort to alternative sources of funding when state appropriations simply aren’t sufficient.

The combination of rising university costs and stagnant or even decreasing state funding could force a shift from public to private standing for many of the nation’s higher education institutions and far more market pressures for harried college presidents and boards.

“We’ll see many more ups and downs than we have in the past,” said Jennifer Delaney, an education professor at the University of Illinois at Urbana-Champaign. “The cycles will tighten, and the unpredictability coming into institutions will increase.”

Added Thomas G. Mortenson, a senior scholar at the Pell Institute for the Study of Opportunity in Higher Education: “There is a lot of change, an enormous amount of change, in what we have taken for granted as a public university. They simply cannot continue to operate the way they have in the past because state funding is drying up.”

The financial pressures facing the U.S. model of public and private college education were dramatically underscored with the release this summer of negative reports from two of the nation’s leading credit rating agencies. Analysts at both agencies said that, despite the continuing strong demand from middle-class families for a college education, the economic pressures and bottom line worries for America’s colleges and universities will only increase in the near future.

Among those pressures, according to a report last month from Moody’s Investors Service, were state financing contributions that are not keeping up with operating expenses; more and more marginal institutions falling into “acute financial distress;” rising pension and health benefit costs for retirees; tuitions at top-level schools at $50,000 to $60,000 a year reaching the limit of what even well-off families can afford; and the inability of both public and private institutions to sustain annual operating revenues increases of 3 percent, the rating agency’s standard for stable financing given today’s inflation climate.

The five-year bull market in stocks has helped mask some of the problems with the basic financial model, but any sign that the market was about to turn could expose even more institutions to financial pressures.

Standard & Poor’s has issued a “negative” outlook for the U.S. not-for-profit higher education sector, pointing to many of the same pressures.

“While many institutions have been able to manage through the financial pressures to date by trimming budgets and changing tuition, financial aid and operations at the margins, some are considering larger adjustments that are more difficult and take much longer to implement,” S&P said.

“We expect that, in 2014, [university] management teams will continue to wrestle with how to demonstrate, prove or improve the ‘value’ of their offerings. As they make and implement these strategic decisions, operating margins and financial resources may erode.”

And the Moody’s analysis sees an emerging division of haves and have-nots among private colleges more heavily dependent on tuition and endowments to pay the bills: “There is a growing disparity between tuition-dependent colleges and market-leading universities with diverse revenue sources,” according to the ratings agency’s new analysis.

While state investments in higher education increased nearly 6 percent in the last fiscal year, those slight increases haven’t matched the pace of growing operating expenses.

What to do?

Some analysts believe colleges may look toward growing endowment funds when finances are tight, but such an approach could threaten the public standing of many public universities, Ms. Delaney said.

“The practice of growing endowments makes public institutions look more like private institutions,” she said. “They’ll look to auxiliary enterprises, making housing self-supporting [and] athletics self-supporting.”

College and university endowments increased by an average of 11.7 percent in fiscal year 2014, according to a study released earlier this summer by the National Association of College and University Business Officers and the Commonfund Institute, a dramatic turnaround from an average loss of 0.3 percent in fiscal year 2012. Endowments make up, on average, 8.8 percent of university operating revenues.

Of the 20 universities with the largest endowments, only five are public institutions. Harvard tops the list with an endowment of $32.3 billion. Yale, the University of Texas System, Stanford and Princeton round out the top five. The public institutions among the list included the University of Texas System, Texas A&M, the University of Michigan, the University of California and the University of Virginia.

And tuition discounting is on the rise for a number of public colleges at a time when nearly 25 percent of regional public universities have seen a decline in tuition revenue.

“Tuition discounting is more common in private, nonprofit institutions but is becoming more common in four-year, public universities,” Ms. Delaney said.

Mr. Mortenson, the Pell Institute analyst, said that what’s happening now is “only the tip of the iceberg in terms of whether our public universities are going to remain public.”

While “the state may own the land and the buildings,” endowments are responsible for producing critical revenue, he said.

Reports from Moody’s and the Center on Budget and Policy Priorities both note that these financial troubles heightened after the Great Recession, and experts are unclear of how long it will take for a new funding model to emerge.

“I don’t see a period of recovery,” Mr. Mortenson said. “There’s no prospect that I can see for restoring state funding to public higher education.”

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