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February 5, 2021 | Cost containment strategies

Here’s the truth about the campus budget crisis

With the fall semester behind us, recently released data is beginning to bring greater definition to the impact of the pandemic on colleges and universities and what institutions should anticipate for 2021.

The final fall 2020 enrollment estimates from the National Student Clearinghouse Research Center reported fall undergraduate enrollment dropped 3.6% compared to 2019 with steep declines in enrollment at community colleges, which saw a decrease of 10.1%, and freshman enrollment, which dropped 13.1% nationally and 21% at community colleges.

Additionally, financial outlooks released by Moody’s Investors Service and Fitch Ratings predict operating revenues will be down 5% to 10% across the sector in 2021.

But the real budget crisis isn’t a matter of declining enrollments and operating revenues, it is an over-burdened cost structure that struggled to be solvent before COVID and is now in further distress with the surge in expenses associated with responding to this public health emergency.

Time for difficult cost conversations

To understand why, look at how the money works. Higher education’s open secret is that both public and private institutions tend to run structural deficits, where operating revenues do not always cover operating expenses, and institutions depend heavily on non-operating revenues to balance budgets.

Imagine approaching your family’s finances that way. It would make many of us very nervous for our income not to cover our annual expenses. But this is commonplace in higher ed.

At some institutions, tuition revenues do not even cover cost of instruction despite regular tuition increases. Even if presidents had a DeLorean they could set back a year, their universities would return to an unsustainable “normal.”

The pandemic upended higher education budgets, which have been tenuous from the start. Most institutions have variable revenue streams that fluctuate every year but a fixed cost basis that does not.

Tuition and fees tend to contribute slightly north of 20% of total revenue at public, four-year institutions, and slightly more than 30% of total revenues at private nonprofits, per data from the Integrated Postsecondary Education Data System.

The other 70% to 80% comes from auxiliary revenues (e.g. room & board), government grants and contracts, investment and endowment returns, gifts, and state and federal appropriations. COVID has devastated these additional revenue streams, which are volatile in the best of circumstances, and it’s no longer viable to increase tuition and fees.

Costs are rising too, compounding revenue issues. Annual cost increases of 3% to 5% are standard. Now during a pandemic, additional costs like technology, sanitation, and COVID testing amplify the budget gap. The numbers don’t add up.

The result is a budget crisis that cannot be solved by turning to the old playbook. For too long, college financial sustainability efforts have focused predominantly on growing enrollments and student retention rather than addressing the cost structure of the institution.

While an institution could squeak by this way pre-pandemic, that isn’t an option anymore. Supporting student success is always mission critical but now attention must also be paid to costs. These are incredibly difficult conversations, but they can no longer be avoided.

I say this not as another prognosticator foretelling higher education’s demise. Quite the opposite. I have great empathy for the circumstances many institutions face today, because it is familiar. The path forward isn’t well worn, but it has been traveled before.

No sweeping budget cuts

Six years ago, when I was vice president of analytics at the University of Maryland Global Campus, enrollment dropped nearly 20%. The data showed the institution’s financial viability was in question.

The current financial challenges colleges and universities are feeling are uncomfortably close to dÁ©jÁ  vu. What others can learn from the Global Campus’ experience is financial sustainability is not about enrollment and tuition revenue alone.

The Global Campus came back from the brink but it required tough choices to match operating costs to operating revenues more closely. Higher education is mission-driven, but its financial model must abide by basic business principles, so it must consider costs.

I’m not advocating sweeping budget cuts. Cutting too much too quickly and without proper data and insights exacerbates the problem. Instead, colleges and universities need to build a strong fiscal foundation through strategic decisions and investments.

While there is no one-size-fits-all solution, what I have found works best is to start by organizing efforts around three core objectives: drive student success and grow revenues, maximize returns of academic programs, and optimize administrative spend. This gives university leadership a framework of guiding goals as well as a blueprint of where to focus efforts.

This is a holistic approach that includes stakeholders across campus working together to collaboratively and transparently advance progress toward each goal simultaneously.

Ultimately, this makes administrative and academic operations as efficient and effective as possible, accelerating the journey to financial sustainability. This work is difficult but it can also be a purpose driven endeavor that enables colleges and universities to secure their future.

The pandemic has thrown college and university finances into chaos, and it’s likely to cause even more in the future. However, while no one wanted this current situation, it can be the necessary catalyst for cost rationalization and the long-overdue shift to more sustainable models. Otherwise, even institutions that weather COVID may not fare so well in the next storm.

Darren Catalano is the former vice president of analytics at the University of Maryland Global Campus. He currently serves as CEO of HelioCampus, a company born out of the University System of Maryland that provides strategic decision support and insights to colleges and universities through an enterprise analytics platform, benchmarking, and data science services.

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