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After a Pounding, New Grounding

Sparing no sector, the recession has had independent institutions on the ropes. To fight back, leaders sweat the small stuff, rethink the rules, and even accept some corporate-world coaching.

Catalyst for Change - The Economic Downturn Reshapes Higher Education

By Sandra R. Sabo

*Florida Institute of Technology found itself in the midst of a major construction project in 2008, just as lenders began tightening credit and interest rates in the bond market started climbing. Lacking permanent financing but needing to complete the three new residence halls and a research building, the institute and its financing partner took the budgetary hit and put money up front for the project. 

“We finally closed on the permanent financing in November 2009,” recalls Jack Armul, vice president for financial affairs and chief financial officer at Florida Institute of Technology (FIT), Melbourne. “It took us 18 months to find appropriate financing, something that normally would have taken three or four months in the old days.”

An Unexpected Advantage

Measured by a calendar, only about two years have passed since those good old days. In that relatively short amount of time, however, much has changed for private institutions. With both cash and credit harder to come by—for the institutions, students’ families, and donors alike—personnel and programs might need trimming, financial aid begs for an increase, and capital projects move to the back burner. 

Faulkner University has experienced all those effects of the recession, says Wilma Phillips, vice president of finance and director of financial planning and budgets for the 3,200-student university in Montgomery, Alabama. For its 2010 budget year, Faulkner instituted a salary freeze, suspended its matching portion of retirement funding, and put a library expansion on hold. Its fledgling football team still doesn’t have a permanent home, although Faulkner plans to build a football field this summer, minus the originally planned stadium.

“To prepare for a possible downturn in enrollment, we also built a $1.3 million contingency into the budget. That was a real stretch for us because we always run close to the wire,” explains Phillips.

Fortunately, actual enrollment matched expectations and that enabled Faulkner to give all employees a bonus in FY10 and reinstate the retirement match for FY11. Enrollment translates into tuition revenue, which accounts for approximately 80 percent of the university’s operating budget.

As for many other private institutions, Faulkner’s heavy dependence on tuition rather than on endowment helped avert severe financial distress. “You can’t get hurt too much by limited endowment earnings if you don’t have much to start with,” says Phillips, only half-jokingly.

“Three years ago, would anyone 
have predicted that underendowed private institutions would be the strongest financial performers within higher education? Yet we are,” observes Harold Hewitt, executive vice president and chief operating officer of Chapman University in Orange, California.

“We suffered ill effects of the stock market downturn, to be sure, but not as much as some better-heeled institutions that were 40 percent or more dependent on their endowments for operating support,” continues Hewitt. In Chapman’s case, net tuition provides 90 percent of its revenue.

The recession has placed considerable pressure on some private institutions, particularly those that made long-term spending commitments as their endowments soared, says Michael McPherson. He’s president of the Chicago-based Spencer Foundation and coauthor of College Access: Opportunity or Privilege? (College Board, 2006).

“Well-endowed institutions will feel significantly less rich for a time and become less bold with their spending as a result,” McPherson believes. “A bit of leveling occurs when the stock market goes down—there’s a move toward greater equality within the sector.

First Aid 

No matter what the size of their endowments, private institutions are experiencing more demand for financial aid. With U.S. unemployment still hovering around 10 percent and the value of home equity continuing to languish, the many families feeling a sharp financial pinch are looking to colleges and universities for relief.

Consequently, aid budgets have soared. Chapman University, for example, had an unbudgeted increase of more than $3 million in institutional aid last year, all attributable to undergraduates whose families experienced losses in wages or in access to equity lines of credit.

“The infusion of financial aid was needed to retain the families we had, which led to lower undergraduate net tuition than we had projected 
for 2009–10,” says Hewitt. Overall, Chapman experienced favorable-to-budget net tuition revenue thanks to the overperformance of its graduate programs—something the university expected, based on the economy. 

Tuition discounting is much on the mind of Phyllis Whitney, senior vice president and chief financial officer of Iowa Wesleyan College, Mount Pleasant, who has noticed more students essentially shopping for the best deals on institutional aid. “Students—and their parents—know we give discounts and have become better consumers. More and more, students are asking what we can give them compared to other schools,” says Whitney.

In her 30-year career, Whitney has seen discount rates rise steadily from the low 30s; with an enrollment of 850, Iowa Wesleyan currently budgets at a 42 percent discount rate. In addition, the college now caps institutional aid at $12,000 per year for an undergraduate. For adult students who attend evening classes, Iowa Wesleyan simply discounts tuition up front.

“Schools can get in trouble by increasing their discount rate to a point they can’t sustain,” Whitney believes. “If you’re giving away 60 cents of every dollar you bring in, and the students aren’t paying full price, eventually you’ll reach the point of no return.” 

Phillips and her colleagues at Faulkner University have similar concerns. Consequently, the university recently hired a new vice president for enrollment management and a consultant to revisit and perhaps revise its awarding of financial aid. “We’re spending close to 50 percent on scholarships right now, and we want to be sure we’re spending that money wisely,” says Phillips.

(For more on tuition discounting, read “Tuition Discount Shake-Up” in the June 2010 issue of Business Officer or refer to the 2009 NACUBO Tuition Discounting Study.)

Campus Concerns      

The jury is still out on how and when the U.S. economy will shake off all effects of the near-collapse of the financial and housing markets. As McPherson observes, “The financial recovery, so far, has been surprisingly fast. But there are question marks about the real economy—the employment economy. That has recovered more slowly and may even stall as the national and state governments move to declining spending.”

Where does that leave a private college or university? Here are some trends emerging as the economic future unfolds.

Reined-in tuition increases. Almost a decade ago, in his book Tuition Rising (Harvard University Press, 2002), Ronald Ehrenberg predicted a period of continued rapidly increasing tuition levels. To the consternation of parents everywhere, he was correct. At Cornell University in Ithaca, New York, for example, where Ehrenberg is both a professor and director of the Cornell Higher Education Research Institute, tuition as a share of median family income has risen from 28 percent in 1980 to almost 60 percent today.

“Private institutions won’t be able to continually increase tuition at 2.5 to 3.5 percent more than the rate of inflation, as they’ve done in the past,” Ehrenberg now says. “The political pressure is on to hold down increases so that tuition does not become an obstacle to higher education as a vehicle for social mobility.”

Phillips acknowledges the inherent tension between what a student can afford and the funds an institution needs to serve that student effectively. She says, “We’re always balancing the need for higher tuition—increased student revenues—with the realization that we could lose the student if we increase tuition too much.” In recent years, Faulkner University’s tuition increases have ranged from 5 to 6 percent annually.

At FIT, in the wake of an unprecedented 9 percent tuition increase in 2005, tuition increases have been kept equal to the Higher Education Price Index. Last year, the institute’s 2.3 percent increase was the smallest percentage increase in 25 years, Armul reports. “We want to give our students the opportunity not to be overly burdened with debt,” he adds.

With U.S. unemployment still hovering around 10 percent and the value of home equity continuing to languish, the many families feeling a sharp financial pinch are looking to colleges and universities for relief.

Rethinking recruitment. In years back, the football program served as the driving force for Iowa Wesleyan’s recruitment efforts. The end of the football season typically coincided with the end of college for athletes unable to make the grade academically; they were then replaced with new recruits the following fall. Year after year, the expensive recruitment cycle continued.

“We don’t do that anymore,” Whitney emphasizes, adding that retention costs much less than recruitment. “We’ve raised our academic requirements and now focus on recruiting students who are a good fit for the institution and therefore more likely to stay.”

Emphasis on annual giving. Iowa Wesleyan recently received one donor’s last payment on a $15 million matching gift to renovate the campus chapel and complete several capital projects. Given the stock market declines in the last few years, Whitney believes such major gifts will be much harder to come by and predicts that private institutions will enter a perpetual fundraising mode.

“Rather than focusing on raising a small number of big gifts from a few people, as has been the attitude in the past, the focus will shift somewhat to raising lots of smaller gifts from many people—especially annual or unrestricted gifts,” Ehrenberg concurs. Attracting these gifts, he adds, will require institutions to become more accountable to donors by being transparent about how the funds are used.

At Cornell, for example, the deans routinely report to alumni how annual gifts have been spent. Measures of success may include the dollar amount of undergraduate scholarships, the number of research internships funded, and the number of travel scholarships provided to students studying abroad.

Frugality. When its spring 2010 enrollment did not meet expectations, Iowa Wesleyan faced a $200,000 shortfall. Whitney provided the deans with a weekly financial update, emphasizing that even though their budgets might show money remaining, no cash was available to back up the budget. In just four months, the college was able to register $250,000 in savings without any terminations, layoffs, or cuts in benefits.

Whitney attributes the deficit reduction to many small savings: A publication that typically costs $10,000 to print was posted on the Web instead. Staff and faculty became more aware of turning off lights in unused areas. Perhaps most important, discretionary spending was curtailed.

“At the end of the year, people tend to say, ‘I have $50,000 left in my budget so I’ll go buy something,’ even if they don’t need it immediately,” says Whitney. “Maybe because we were open and transparent about the situation, no one did that this year.”

Having spent much of her 30-year tenure at Faulkner adhering to a tight budget, Wilma Phillips believes the recent recession will prompt more institutions to learn to live similarly within their budgets. “We’ve learned to quit thinking that next year will always be better financially. Instead, we have to strategically reallocate the dollars we do have,” she says.    

A Fresh Look

If Phillips sounds more like a corporate executive than a university administrator, she undoubtedly has plenty of company.

According to Ehrenberg, private colleges and universities now feel the same type of pressure as for-profit businesses to trim administrative costs and operate more efficiently overall. Smaller institutions, he says, are likely to focus on reallocating resources from programs that are declining in enrollment to those that are growing, and could conceivably generate more revenue. Larger institutions with multiple colleges may need to reorganize overlapping resources so they can achieve the same quality of instruction but at a lower cost.

Cornell, for instance, launched its Reimagining Cornell initiative last fall with the twin goals of ensuring the university’s long-term financial health and positioning it for competitive excellence in core areas. While a consulting firm examined back-office operations, 20 task forces convened to assess the university’s academic areas. Their recommendations were incorporated into a new strategic plan aimed at better focusing Cornell’s academic offerings for its 19,000 students, while accounting for the difficult economic environment.

At the same time, Cornell created its Initiatives Coordination Office. Charged with realizing at least $90 million in annual administrative savings by 2015, this office quickly made headway by identifying a more cohesive and effective procurement process. Other areas targeted for cost savings include facilities (primarily through energy conservation); information technology; finance, human resources, and communications; and organization and management of support activities.

Although Cornell instituted a 5 percent campuswide budget reduction last year, it concluded FY10 with an operating deficit of approximately $100 million and anticipates much smaller operating deficits for the next several years. By 2014, Cornell plans to erase its deficit and have a balanced budget in place for the first time since the economic meltdown.

“Private institutions have to revisit how they do everything, including academic planning and the delivery of classes,” says Ehrenberg. “We’ll undoubtedly see an increase in the use of technology to improve learning and reduce costs, which will dramatically affect the types of faculty hired.”  

New Revenue Opportunities

What’s Ahead?

Several times a year, James Doti draws on his former career as an economics professor to produce a macroeconomic forecast for Chapman University, Orange, California, where he now serves as president. Here are some of Doti’s general observations regarding higher education:

  • In contrast to previous recessions, which have featured a sharp, V-shaped recovery, the most recent recession will have a long, flat, level recovery. Doti does not believe the economy will “double dip” back into recession.   
  • Interest rates will rise in the spring of 2011 as the economy enters an inflationary period. Although it will have a dampening effect on capital markets, this inflationary episode will not be as severe as the one experienced in the early 1980s.
  • Expect little change or perhaps no growth in real net tuition over the next several years, especially among private institutions with weak student demand characteristics. Many institutions reacted to the economic downturn by increasing institutional financial aid to retain students. That, coupled with a well-documented demographic shift that will produce fewer high school graduates, will make it difficult to generate incremental net tuition revenue.
  • Following a steep decline in 2008–09 (–11.9 percent), charitable giving in 2009–10 will increase almost imperceptibly (+1.4 percent projected). Charitable giving is likely to return to more typical levels in 2010–11. Doti projects a 6.6 percent increase in 2010–11 based on projections for both GDP and the NYSE price-adjusted index.

Doti released his most recent economic forecast on June 3. To read more about Doti’s views, you can purchase a copy of the forecast.

Florida Institute of Technology is already well down that road.

Two years ago, in partnership with Bisk Education Inc., FIT introduced an online program that currently offers graduate degrees in business and IT and undergraduate degrees in business and psychology. Approximately 4,000 students in 40 states have enrolled in the online program—more than the 3,000 undergraduates on FIT’s physical campus.

The institute reserves its online programs for students who are at least 22 years old. “We didn’t want to compete with ourselves,” says Armul, “and we felt there was a target market of  older students with family or work responsibilities who wanted to get a competitive online education from home.

“Additionally, some corporations look more favorably on online education rather than on paying for someone to physically travel to a campus,” he continues. The institute removes the age restriction for members of the armed services and for on-campus undergraduates who wish to take online courses during the summer.

Online enrollment has exceeded expectations, enabling the institute to undertake some new projects at its physical campus. The online endeavor has provided a welcome source of funding as well as an interesting set of challenges. The majority of online faculty members, for instance, are adjuncts scattered around the country; they travel to FIT’s physical campus to record their lectures, then handle the rest of their teaching responsibilities via chat rooms and e-mail consultations.

The new breadth of geography affected the institute’s business operations: For example, its business office had to register to do business in 40 additional states and accommodate state differences in payroll taxes. In addition, the online school year required some psychological adjustment.

“Each online course lasts eight weeks, and we offer six eight-week sessions per year. In essence, we never have any breaks,” Armul explains. As for traditional faculty members, some expressed skepticism about the ability to deliver a quality course via the Internet. In response, says Armul, administrators have emphasized FIT’s involvement in developing the coursework and its insistence on hiring faculty—adjunct or otherwise—who are experts in the subject matter being presented.

Although it opted for a slightly different delivery model, Chapman University has also registered early success with courses designed for nontraditional students. In 2009, after two years of planning, Chapman unveiled Brandman University—a new take on its 52-year-old University College for adult learners. Currently, Brandman has 11,000 students enrolled in online and blended (online and in-person) classes in 26 centers located in California and Washington. In comparison, Chapman’s brick-and-mortar campus has 6,400 students, 2,400 of whom attend graduate or law school.

“Private institutions have to revisit how they do everything, including academic planning and the delivery of classes.”

Ronald Ehrenberg, Cornell University

“For-profit companies have sent a clear message to all of higher education that there is a different way of providing education,” Harold Hewitt observes. “Students want access to high-quality degrees they can earn while raising families and pursuing careers, focused on their needs and at their convenience.” Further strengthening Chapman’s resolve was the release of data from the U.S. Department of Education underscoring the educational validity of online programs.

The nonprofit Brandman University operates independently from—but remains branded as part of—the Chapman University system. It offers about 200 graduate, undergraduate, and professional development courses, with a nurse practitioner program launching this fall. Chapman’s administrators view Brandman University as complementing, not undercutting, its traditional operations.

Hewitt describes Brandman, with its separate faculty and offerings, as “a big, entrepreneurial adventure” that has provided the Chapman University system with a new energy, a new focus, and a new direction. And he doesn’t shrink from saying that student-centered learning programs like Brandman may represent what a good portion of higher education will look like 5 or 10 years from now—especially if the recession’s effects are long-lasting.

Here’s how Ronald Ehrenberg phrases the fundamental question that undoubtedly keeps many administrators at private institutions wide awake at night: Is higher education currently experiencing just a cyclical setback, after which everything will return to normal? “Or,” he asks, “are we experiencing a structural shift that, over time, will force us to do business in a different way?”

As the recovery stretches out with no end seemingly in sight, the latter perspective gains ground every day.

SANDRA R. SABO, Mendota Heights, Minnesota, covers higher education business issues for Business Officer.