How to Achieve Financial Sustainability Amid Declining Enrollment

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0:00:12.5 Speaker 1: Hello and welcome to Office Hours with EAB. Today’s episode is focused on a topic that has been keeping higher ed leaders up at night for many years, namely how to help ensure their institutions are financially sustainable, the fall enrollment dip isn’t helping matters any and despite a record setting year for endowment growth, their quest remains as daunting as ever, today’s guests look at both sides of the institutional budget ledger to examine possible areas for cost cutting as well as potential sources of revenue growth. Thank you for listening and enjoy.

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0:00:53.6 Jeff Martin: Hello and welcome to Office Hours with EAB. My name is Jeff Martin, I’m the senior director on the strategic research team. Spent a lot of my time actually with university fundraisers, and I’m the principal architect behind a new initiative we have called the Revenue Health Index. So I am delighted to be here with you today to talk about revenue, cost and financial sustainability in higher education. I’m not doing it alone though I’m joined by my colleague, Scott Winslow. I’ll let Scott introduce himself. How are you doing today, Scott?

0:01:26.9 Scott Winslow: Doing well, Jeff, thank you very much. Scott Winslow, senior director on our research advisory services team. So I spend my time talking with our partners trying to offer advice, what do we think they should do based on the problems and challenges they’re facing, my corner of the higher ed terrain is actually the administrative function, so finance, HR, procurement, IT, facilities, research administration, all things having to do with spending money at a university, so Jeff and I today, I think are going to come at the issue of financial sustainability, really from a revenue and a cost or efficiency perspective. So happy to join the conversation and share what I have been hearing.

0:02:11.8 JM: Wonderful, thank you, Scott. So this conversation I’d say is happening at an auspicious time for higher education as the country is “Open back up,” I know there was a lot of optimism about students returning to campus and hopefully some of the tuition dollars the colleges and universities lost across the past year, due to students not enrolling would start coming back, but I say it’s an auspicious time to have this conversation because just across the past couple of days, National Student Clearinghouse came out with their analysis of how fall 2021 has trended and it’s not looking pretty right now, big decreases across higher education, especially in the non-profit sector, although not hit nearly as hard as the two-year sector and the for-profit sector. Dr. Scott I was hoping you might be able to give us a little bit of insight. The tuition lifeline that many institutions were crossing their fingers for doesn’t seem to have materialized, what will this mean for the business model, what will this mean for the balance sheet for higher education, what sorts of choices and trade-offs will university leaders have to make in the face of diminishing tuition revenue?

0:03:31.3 SW: Unhappy and unpleasant choices are usually the options here. Universities, colleges, universities, higher education at large is a relatively straightforward business model, but it’s mostly a fixed cost model, so most of the costs at a university are fixed from year to year, and the vast majority of the operating expenses within a typical university’s financial statement are people, they are the instructional staff that we have, they’re the administrative staff who support them. They’re the advisors and the others who are helping students, and if there is less revenue, we need to have less expense, and obviously, as you mentioned, the biggest revenue driver for a college or university is tuition, tuition dollars, and those tuition dollars flow directly from students, students coming and wanting to learn at our institutions. And as you said, the National Student Clearinghouse numbers just came out. I’ve not had a chance to go deep into the report, I’ve looked at the headlines here, and just looking at the fall 2021 numbers, total enrolment is down 3.2% across the 12-month period from fall of 2020 to fall of 2021. 3.2%, fewer students, roughly roughly is gonna translate to 3.2% less revenue, and 3% here, 3% there. As they say, soon you’re talking about real dollars.

0:05:05.4 JM: Now, I know that this past year, the blow from diminished tuition revenue was offset to a great degree by federal dollars. Can you tell us a little bit about your expectation of whether that lifeline will come higher education’s way again or not?

0:05:28.1 SW: Predicting the future is always a little bit of a dicey game because I don’t have 20/20 insight into what will happen next week or next year, not even what’s gonna happen next day. The politics of this are that there are a number of different bills that have been put forward that will provide funding for colleges and universities, community college, tuition-free community college was one of the choices. Increasing the amount of money that will go toward HBCUs and minority serving institutions, coming up with a number of different mechanisms to direct more funding to colleges and universities. Laudable objective, trying to make sure that there are more resources available to educate more Americans. The problem is that it is one among many competing priorities that legislators are weighing, and the political reality is that tradeoffs will need to be made and choices will need to be made among those requests.

0:06:35.5 SW: And I’m a little bit of a pessimist here, laudable as I think these goals are, I tend not to put a lot of stock and expecting them to actually pass and be funded. So while the pandemic last year, saw lots of funds flow to colleges and universities and some schools are still trying to spend those funds, I don’t expect that the same degree of funding will find its way to colleges and universities in the new bills that are under consideration, but that’s my opinion, you can find people who will be very optimistic and expect that those funds will flow to institutions. Take it with a grain of salt.

0:07:20.4 JM: Yeah, I think if I could predict the actions of Congress across the river from where I live, and I’d probably be in a pretty good position, but as you said, that’s a bit of a crystal ball activity. One of the things that jumped out at me from the National Student Clearinghouse numbers though, a bit of a silver lining, it’s definitely a lining it’s not the heart of it, but silver nonetheless is that, we’re seeing, we seem to be seeing pretty strong and persistent growth, the graduate level of comparing fall 2019 to fall 2021 graduate certificate enrollments are up 9%, masters enrollments up 5.6%, first professional degrees, which actually had a bit of a dip in fall 2020 this year, jumped 2% for total 1.3% growth from ’19 to ’21.

0:08:18.9 JM: I anticipate a lot of institutions are going to be eyeing the adult-serving post-baccalaureate market certificate, as Master’s degrees in particular, as big growth opportunities. I know in a lot of the conversations I’ve been having with the university leaders around this new revenue health index that we launched, which looks at various revenue sources and university priorities, graduate education, the Master’s portfolio, those have been topics of intense interest and a lot of planned activity as well, from your perspective, I know you focus a lot on cost side of higher education, and you mentioned higher ed as a fixed cost business, are these sorts of degrees, is a graduate certificate, is a Master’s, new Master’s program, something that a university leader can expect to stand up off of their existing infrastructure? How much investment does it really… If you’re eyeing a particular terrain where a university doesn’t currently have a post-baccalaureate program of any sort to offer, a graduate program of any sort to offer, is this going to add a lot to the cost of the university if you wanna launch something here.

0:09:38.1 SW: Yeah, I’m probably not the expert you’d come and talk to at EAB about this, but I can give you my opinion and what I’ve seen from the institutions I’ve spoken with. If you already offer a degree, undergraduate degree or have some academic expertise in a particular curricular area, obviously much easier to launch a program ’cause you have the pre-existing expertise to be able to offer a degree program there, the amount of investment required to launch a new program is typically underestimated by university business leaders, the marketing attempt, the marketing expense that’s required to launch a program. You can spend as little or as much as you like. Obviously, if you spend more, the expectation is that you will be more successful. You can spend less and still be successful. You can make a low budget film and it can become a blockbuster or you can spend hundreds of millions of dollars on special effects and nobody comes to see it.

0:10:42.3 SW: Much the same effect affect is in play with the marketing of new programs to try and draw students and their tuition revenue to you. The challenge is that this is a very competitive space, there are lots of schools all eyeing what you just pointed to, it’s a growing market, and not surprisingly, independent institutions who are looking for money are all looking at an opportunity, so it may be more challenging going forward to try and realize revenue in this area. One question I wanted to ask you. Obviously, your area of expertise where you spend a lot of your time is looking at fundraising, looking at advancement, and obviously across the last year or more, we’ve seen a marked rise in the overall stock market values, endowment returns are up. Overall value of endowments are up, if I’m a university president and I’m looking at my revenue streams, one of the revenue streams I’m looking at is the funding that can come off of those capital markets gains, is that gonna be a silver bullet here, or is that only for a few institutions?

0:11:57.7 JM: Great question Scott. The truth of the matter is that while endowments have grown very quickly, very few institutions stand to benefit from that growth, and that’s because most endowments, where institutions have endowments and that is a relatively small number of them, most endowments are very small, it’s something like only about 40%, 45% of institutions even have an endowment, and of those that do 50% have an endowment of less than $20 million dollars. So for most colleges and universities we’re talking about a baseline endowment that’s very, very small, even if you’re posting double-digits endowment growth, it doesn’t add up to all that much in the grand scheme of things, and what you have to consider is that the endowment isn’t really a pool of money that you can cash out at a moment’s notice. For most institutions, they’re spending about 4, 4.1% of their endowment every single year, and even then many of those dollars are restricted to specific purposes. So we’re talking about smaller numbers multiplied by smaller numbers, multiplied by smaller numbers. If you’re a Harvard or a Yale, you’re probably popping open a bottle of champagne but for everyone outside of that top group of institutions there are far fewer gains to be had here.

0:13:36.6 SW: Right. So by and large, if you’re expecting revenue support or extra dollars to show up because of what’s been happening in the stock market, unless you are one of the brand name institutions, by and large, that’s not gonna happen.

0:13:54.3 JM: Exactly, yeah, exactly. There certainly will be more money next year that these institutions can fund their operations with, but it might be measured in the hundreds of thousands of dollars or maybe around a million or two. That’s it. For institutions with bigger endowments, if you’re looking at $100 million plus 4% on $100 million endowments, is about four million and nothing to sneeze at. It’s not a silver bullet, but it could fill a bit of a gap between where you are and where you need to be. There’s, of course, on top of the endowment question, the fundraising question. Endowments are fed not just by market growth, but by donors’ dollars as well, and the university as a whole increasingly is fed by donor’s dollars.

0:14:53.9 JM: Just this past March, Inside Higher Ed polled presidents, and over 90% of them said that they were eyeing advancement and fundraise, cultivating new donors as a path to revenue growth. It was actually the number one response in the survey, so there’s a lot of interest, a lot of activity around fundraising, around advancement. About half of those presidents said they were planning on starting or expanding a capital or comprehensive campaign. So we’re keeping a very close eye on the investments these colleges are making to get more fundraisers out there, it’s of course a fortuitous time to be putting fundraiser boots on the ground as the concentration of wealth in the United States, and the growth of wealth at the very top of the wealth spectrum means that they’re more and more major gift opportunities, a lot of mega gift opportunities, now headlines made by institutions that you don’t traditionally associate with mega gift fundraising.

0:16:00.7 SW: Interesting, and as you were talking, that put me in mind of one aspect of revenue generation that I hadn’t given a lot of thought to, but the rising tide of a lifting stock market obviously means that more people have wealth that they could donate or give to an institution. So, is the pool of likely donors also expanding, as well as the amount that those donors can potentially gift?

0:16:31.7 JM: Yes, it is. It’s funny, we see lots of headlines about more money in fewer hands. I was talking with one of our managing directors just the other day about trends in fundraising prospect populations, and she was under the impression, “Oh, there are fewer wealthy people out there nowadays than the past.” But that actually is not the case. The growth of the market, and the flow of wealth towards the top of the wealth spectrum has meant that, more and more households are breaking the million-dollar mark, breaking the five, $25 million mark. And actually, if you look at the numbers from, for example, Spectrum Insight, firm that does market analysis at high-net-worth households, they projected that in 2021, the number of high-net-worth millionaire households would rise to about 11.6 million. It’s about 10% of all US households. Inflation of course, does play a part in this.

0:17:46.1 SW: Sure.

0:17:48.1 JM: But when you run the numbers, you find that the size of the high-net-worth household population growing far faster than the value of an American dollar is falling. So a lot more fundraising opportunities. And of course, on campus, a lot of needs to which to turn those fundraising dollars, a lot of investments in infrastructure, the pandemic of course brought a big shift and big investments in new technologies. Scott, in your work with administrative leaders, how have they been navigating all of the different in-kind investments they’ve had to make because of pandemic-induced disruptions and what’s their plan for the future?

0:18:36.1 SW: Good question, the investments that schools are making while they seem large based on headlines that we’ve seen, who are investing in new technologies, new ways to interact with students in a virtual fashion, new ways to allow work to take place in a virtual fashion. A lot of the technology investments are not as complicated as you think. They’re things like Zoom, right? We’re using Zoom right now. They are ubiquitous and they are omnipresent, but they’re not terribly expensive. So just looking at technology dollars and saying, “Oh my goodness, we’re spending a ton more.” That’s typically not the case. What I am finding in my conversations with cabinets and with board members, is that they are concerned for the reasons that we were talking about at the beginning of our conversation. There’s revenue uncertainty, so uncertainty breeds a sense of pulling back, being a little bit more cautious about any expenditures that have year over year consequences.

0:19:46.9 SW: So some of the large dollar investments that we might otherwise wanted to have made, you know what, let’s put those off for a little bit, let’s wait ’till things settle down and we can kind of get to a slightly more steady state, and not to go on too much about the one-time investments that have been made. The more present conversations are around the overall efficiency of the institution. I use efficiency, recognizing that that’s probably not the best term of art here. But making sure that the resources we have, are being put to their highest possible use, to ensure the institution carries out its teaching and learning and service and research mission. That doesn’t necessarily mean cutting dollars and cutting people, in many ways, what we’re seeing is a recognition that there is a tradeoff that’s often made between the service levels we can provide and the cost of providing those services. It may cost us a little bit more, but the increase in service that we provide to our community, is well worth the dollars that we put into those areas. Some of the funding we were talking about earlier, the pandemic funding, has gone to fund some of these enhancements to community and campus and institutional activity. So a focus on making sure that every dollar we have brings us the greatest impact, is much more of the lens that executives are bringing to the institutions that they oversee.

0:21:35.4 JM: So talk me through what this might look like for any given university. If I were to parachute into a public university in the middle of a State, in the middle of this country, where might finance leaders, university leaders be turning their sights? What changes would they be making to what campus looks like and what it feels like to be a student or staff member at the campus?

0:22:01.8 SW: Alright. It depends, different schools are experiencing different things. But to give you a broad brush, on average, this is what we’re seeing, we’re seeing schools focus on those areas of expense, which account for the largest outlay of resource. And when you look at a university, most of what we spend money on, are people. And if you look at the university among people, most of the people we have, are instructors, they are instructional staff, that’s what we’re here to do, to educate the next generation in the various academic disciplines that we have. Obviously, there’s research and there are other service activities that universities are responsible for, but every university teaches. In looking at the university as the person responsible for the inflows and outflows of cash, I wanna make sure that I’m using my dollars as effectively as possible in the teaching and learning enterprise.

0:23:09.5 SW: Are we offering some classes to students where frankly, they’re just not showing up because they’re not interested in taking those classes? Why do we continue to offer classes that students don’t take? Maybe we shouldn’t do that. Are we appropriately looking at and forecasting what demand will look like for a class that’s popular but has multiple sections? Maybe we don’t do the seat scheduling as well as we should, and so our sections are 50, 60, 70 percent full, and oh darn, we could have actually not offered two of those sections, and we still could have taught all of our students. Maybe we’ve got some unfunded course releases that we probably shouldn’t let continue, but they’ve been grandfathered in since the Clinton Administration, and the person who granted it isn’t at the institution anymore, and the faculty members are still continuing with those course releases against their time. So there are a number of ways that we can be more judicious in the work that we do to educate our students and the dollars that go into that, and a lot of schools are taking the time to do the basic work of examining what they offer, figuring out if it makes sense and making some choices to say, “Maybe we shouldn’t do that, maybe it would make more sense to take those dollars and spend them here.”

0:24:32.9 JM: I know I’ve seen some headlines, and I think it’s something that a lot of folks that we work with have found concerning, XYZ University shuttering their German Department, closing their History Program, laying off tenured faculty. You’ve touched a couple of times on how the cost of higher education, by and large, are our people.

0:24:57.8 SW: Sure.

0:24:58.8 JM: Is the solution for university administrators to try and reduce payroll?

0:25:07.4 SW: The solution is not to reduce payroll, the solution is to make sure that the people you are paying, are being as effective as possible in advancing the mission of the institution. Every school, doesn’t matter which school we’re talking about, has some programs that cost more money to teach and some programs that cost less money to teach, but it’s just the nature of disciplines. Certain disciplines are expensive, certain disciplines are less expensive, certain modalities of teaching are less expensive, certain modalities are more expensive. But every university has a portfolio of academic programs, a number of different degrees that we grant, and the job of the leaders of the institution, is to make sure that that balance is appropriate. We can’t have all programs that are expensive to teach because frankly, we don’t have enough money for that. Equally, we shouldn’t try and build the university that only has inexpensive programs to teach, that’s going to leave out much of the curricular interests that our students would want, much of the curricular program that our students have interest in.

0:26:20.6 SW: So working to develop a way to build a portfolio of programs that meets the needs that students have, and does so in a financially responsible way, but frankly, is the job of the executives leading these institutions. It’s not to cut payroll, it’s not to get rid of faculty members, it’s not to try to kill the classics or the humanities, as a humanities major myself, I definitely don’t want to see the disciplines that I love sidelined and removed from the academy. What I am trying to do is to make sure that the programs that are offered, makes sense for the students who are coming to those institutions and can be delivered in a way that doesn’t handicap the institution financially.

0:27:14.3 JM: Excellent. Well, I think that’s probably a great point to wrap up on. Scott, thank you for joining me today for this, in my opinion, I’m biased, but in my opinion, fascinating discussion. ‘Till next time.

0:27:25.8 SW: Thank you very much as well. Thanks Jeff.

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0:27:34.5 S1: Thank you for listening. Please join us next week, when we check in with the Chancellor of the University of Wisconsin, Milwaukee, to find out how year one of EAB’s Moonshot for Equity Project has been going at UWM. Until then, thank you for your time.

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