Everyone knows there is something wrong with a system of higher education that churns out graduates with debt exceeding their grandparents’ mortgages, into an economy offering relatively few decent jobs. It’s no wonder that default rates on student loans were 9.1% as of the beginning of October 2012 and delinquency rates exceeded 11% for more than 90 days past due, as of the end of November.
But colleges and universities have their own financial problems: ballooning debt, runaway expenses, falling enrollment. The Great Recession hobbled endowments, while other costs like employee health care and technical, medical, and scientific equipment continue to rise. Competition for students, who expect more than a no-frills education for the tens of thousands of dollars they pay each year, has pushed many colleges to go into hock for posh dorms, pristine campuses, and winning sports teams.
The days when state legislatures could afford to cut the check for most institutional expenses at public colleges are long gone, given the precarious condition of state coffers. The recession forced many state and local governments to make painful cuts in education. At The Ohio State University, for instance, state funds accounted for 60% of its budget 20 years ago; today it’s a comparatively paltry 28%. The shortfall is being picked up by students, their parents, and their banks.
Add it all up, and it’s no wonder that overall college debt levels are more than twice what they were in 2000, according to a recent study of 500 institutions by Moody’s Investors Service, on behalf of The New York Times. At the same time, the usual array of pledged gifts, cash, and other investments that colleges rely on fell more than 40%, compared with what they owe.
Coming to the rescue is a new breed of college CFOs, who both understand the challenge and are primed to meet it. They’ve implemented a wide range of lean management, continuous improvement, expense control, and revenue-boosting tactics to get the train back on the track and running smoothly. As Geoff Chatas, senior vice president and CFO at Ohio State, puts it, “We’re trying to do more with less, something that many institutions historically have not done. We simply have to.”
He’s got that right. According to a 2012 survey of 1,692 colleges and universities co-sponsored by Bain and Sterling Partners, 60% have weakened financial portfolios that render them vulnerable to collapse, and only 40% are “financially sound.” Approximately one-third are “spending more than they can afford,” the report discloses.
College endowments shrank drastically during the recession years, and many have not regained the lost value. Harvard University’s endowment, for example, withered from $37 billion prior to the recession to $26 billion in 2009 (it has since risen). “A lot of schools took a 15% to 20% hit in their endowments, creating a set of bad choices: either find ways to raise the tuition, or cut programs, staff, and other expenses that will reduce the quality of what the school offers,” says David Feldman, chair of the economics department at the College of William and Mary and co-author (with Robert Archibald) of a recent book, Why Does College Cost So Much?
“It’s a delicate balance,” he adds.
Cash Flow 101
Such a balance is being struck at Simmons College, a small university with 4,800 undergraduate and graduate students in the heart of Boston. Stefano Falconi, senior vice president and CFO, began by changing the mind-set about how to operate the institution. “We needed to ensure that at all levels of the organization, everyone was focused on cash flow — cash walking in the door and out the door,” says Falconi, who has occupied high-ranking finance and administrative posts at Harvard, the Massachusetts Institute of Technology, and Carnegie Mellon University. With some very simple changes, Simmons College achieved significant improvements in liquidity and overall operating results.
Falconi began by requiring all budget managers to justify in writing any request for expenses of $5,000 or more, as well as the timing for each payment. Simmons’s fiscal year begins on July 1, and payments for many of the college’s significant annual expenditures, such as library journal subscriptions and software license renewals, come due at that time — just when cash is at its lowest annual point. Tuition receipts for the fall semester don’t begin to arrive until August. “Getting through the summer months required significant use of the college’s line of credit,” Falconi says.
The solution was to shift both the subscription and license renewal periods and the vendor payment terms and align them more closely to the fall, when tuition dollars start rolling in. “That alone saved us $160,000 annually in interest expense charges,” says Falconi.
Simmons also revamped its resource-allocation process to align with its projection of future revenue growth, rather than simply giving each unit the same percentage of the budget as the previous year. For instance, if a particular school or department has an opportunity to significantly increase enrollment or make the top national rankings, it could receive a bigger slice of the budget than another department with more-modest ambitions or opportunities.
A similar tactic was employed by 12,800-student Pace University in lower Manhattan and Westchester County. “We’re primarily recognized as a business school, but here we were in the Big Apple with a performing-arts school that was growing like gangbusters,” says Toby Winer, executive vice president and CFO. “We decided to invest in a new performing-arts space to increase enrollment, offering what we believe is a reputable alternative to New York University and [The] Juilliard [School]. Our enrollment in the school is up by 300 students.”
At Ohio State, CFO Chatas is tapping the school’s merchandising clout to boost the top line. For instance, the university signed an agreement with J America Sportswear, giving the apparel maker the exclusive right to market clothing with the school’s “Buckeyes” logo on it, ringing up $5 million minimum in annual revenue. Also, a 15-year agreement was inked with Huntington Bank, whereby the financial institution gets the exclusive right to market its products to faculty, staff, alumni, and students (other than credit products to the latter).
“They handed over a check for $25 million to us last year, plus a share of annual revenue that came to $1.2 million in the first year of the agreement,” Chatas notes. “The money has been invested in financial literacy training, classroom upgrades, the alumni association, internships at the bank, and other programs.”
Costs have been trimmed via several efficiency measures. When Chatas came to Ohio State three years ago, he blinked at the number of branded pens — 280 — that employees were purchasing from dozens of different vendors. “Going to one office-supply contract and getting everyone to agree to use UPS as our overnight shipper saved $1 million a year in procurement expenses,” he says. “We’ve also signed similar contracts with other vendors and service providers, adding up to $30 million in annual savings.”
Despite the increased emphasis on saving money, many colleges need to make overdue improvements in their facilities and infrastructure. For instance, in the past two years, Beloit College, a four-year undergraduate school in Wisconsin, spruced up its “curb appeal” to increase enrollment, says John Nicholas, vice president and treasurer. Although U.S. News & World Report recently ranked Beloit number six in teaching, its appearance needed a facelift.
“We were looking for ways to increase the college’s reputation through high-impact, high-return items,” Nicholas explains. “So we raised $2.7 million to renovate the football stadium and another $500,000 to erect new plazas and renovate building facades.” (The stadium funds came from a select group of donors, while the building money came from parents.) The college also completed a new sciences building in 2008 and upgraded infrastructure. Nicholas is hoping enrollment will grow at the 1,200-student school by at least 50 students next semester.
Rollins College, in Winter Park, Florida, also seeks to grow enrollment through new construction. The four-year private liberal-arts college, with an undergraduate and graduate population of 3,400 students, built a hotel on campus for parents and prospective students, as well as the general public, to comfortably reside during the annual school visitation period. “Our trustees said, ‘Here we have this beautiful campus, but there are no good places for parents and their kids to stay,’” says Jeff Eisenbarth, vice president and treasurer. “We were given the green light to acquire adjacent land to build a hotel [Alfond Inn].”
Rollins got a $12.5 million grant from the Harold Alfond Foundation to erect the 112-room hotel. The remainder of the $30 million project is being paid out of cash reserves — not debt, a striking departure from the financing frenzy fissuring other institutions. Net proceeds, projected to be $2.5 million to $3 million annually, will be returned to the college to establish the Harold Alfond Scholarship Fund, the preeminent scholarship fund for the college.
Altogether, Rollins owns real estate adjacent to the campus worth some $100 million, a mix of commercial and retail space it currently leases, netting $2.5 million annually. “When strategic properties adjacent to campus come on the market, we pay cash for them,” Eisenbarth says, touting the institution’s $350 million endowment. “Eventually, we will build on this land, as enrollment grows.”
The school’s endowment hews closely to a “corridor” spending policy, used by only 4% of institutions nationwide. The corridor represents the range in which money from the endowment can be earmarked for expenditures, here from 3.5% to 5.5%. Spending thus is not based on market value; just because an endowment is swelling is not an excuse for cutting bigger checks. “It prohibits us from overspending during market growth, and having to cut back during declines,” Eisenbarth explains. “When the recession hit, the corridor spending policy saved us because we did not have to cut any budgets, lay off any people, or eliminate any programs.”
What else are schools doing to lower costs? George Mason University, located just outside Washington, D.C., and ranked by U.S. News & World Report as the country’s number-one up-and-coming institution, has joined in a consortium with other area universities to share course offerings among students of member institutions. Students at GMU can attend classes in specialized areas at Georgetown University (another consortium member), and Georgetown students can do the same at GMU. “We can reduce the number of faculty, thereby saving quite a bit of money,” says Guilbert Brown, assistant vice president and chief budget officer.
To generate additional revenue, GMU leases classrooms when not in use to outside companies. It also leases office and laboratory space to businesses. Among the companies renting space at its Volgenau School of Engineering are Vision Networks, Infamous Robotics, and Millennium Solutions.
Georgia Institute of Technology employs many of the same tactics as its peers. Through its foundation, it owns and operates a hotel and conference center on campus and outsources campus dining and the college bookstore, as well as select maintenance activities. The Atlanta-based institution also initiated a number of energy-savings strategies, such as retrofitting buildings with high-efficiency lighting fixtures that automatically turn off after a period of no movement. And it created a central high-performance computing cluster that increases computing capacity and lowers cost to the institute and the academic departments.
These various endeavors were not a one-time fix. Steven Swant, Georgia Tech’s CFO, explains: “I put a lot of energy into sustaining a strategic conversation after the recession to ensure we did not return to our old practices. I didn’t want this to be a situation of merely cutting expenses because we were in a recession, but an entirely new way of thinking about how to operate the school. We now have a process to relentlessly pursue institutional effectiveness.”
Let’s hope other institutions have similar plans.
Russ Banham is a contributing editor of CFO.
For anyone seeking a better future, higher education remains a good bet. On average, a college graduate earns an estimated $650,000 more than a high school graduate over the course of a 40-year career, according to a study by the Pew Research Center. That’s the good news.
The bad news is that college tuition has risen at three times the rate of inflation since 1983. In 2001, tuition represented 23% of median annual earnings; in 2010, it represented 38%. Average annual tuition at in-state public, four-year institutions in the 2011–2012 calendar year was $8,244, up 8.3% from the prior calendar year, according to the College Board. Out-of-state tuition, on the other hand, averages $20,770, 5.7% higher than the previous year, while tuition at private, nonprofit, four-year colleges is $28,500, up 4.5% on average. Now add in fees and room and board, and call the bank.
To come up with the money, students have resorted to debt, which is collectively approaching the $1 trillion mark, although some estimates put it higher. The Center for American Progress estimates that 850,000 individual student loans valued at more than $8 billion are now in default. Given high and variable interest rates, these loans can cost students more in repayment than the cost of tuition itself.
There’s a social cost to all this debt. The inability to make loan payments is causing many students to drop out of college. Soon after dropping out, these ex-students struggle to repay their loans without the earning power a degree may have provided. Despite soaring default and delinquency rates, the parade of students lining up for financial assistance continues — an estimated 10 million seeking loans each year, according to the College Board. — R.B.
Sticking to the Basics
Unlike most institutions of higher learning, Harrisburg University of Science and Technology is not burdened by the legacy of past financial decisions. That’s because the Harrisburg, Pennsylvania-based school is one of only three nonprofit universities launched in the United States in the last decade.
Starting from scratch in 2005 with just $3 million in funding, HU has been able to evade the missteps now burdening many peer institutions. “Universities have become much more than institutions of higher education, taking on things they have no business taking on,” says Eric Darr, interim president. “Like the old mantra in the corporate world, you have to stick to your knitting.”
That knitting, of course, is teaching students, and not necessarily providing the range of services they have come to expect, such as cafeterias offering 27 different food plans. HU outsources that service, along with janitorial, payroll processing, benefits administration, and security. “We have no employees here other than those in academics and administration,” Darr says. “I can’t tell you how much savings this produces by not having payroll taxes, benefits, and overhead for people you just don’t need.”
You won’t find varsity sports teams at HU, either. “Lots of schools will argue that their Division I football and basketball teams are revenue-generating, but how much of that money gets shared with the literature faculty?” asks Duane F. Maun, the school’s vice president for finance. “With regard to Division II and III programs, well, they don’t make much money, if any at all, and cost millions.”
HU also eschews expensive art on school walls and the latest furniture in its dorms, Darr says. “I went to college in the early ’80s at Rensselaer [Polytechnic Institute] and my dorm [room] was a 10-by-10 cinder block, and there were two of us in it. We had a galley-style bathroom down the hall. Today, you could never put freshmen in those circumstances — they wouldn’t go to college.”
Then why go to HU? Academic quality and its $23,900 annual tuition — it’s the lowest-cost private institution in the state, a consequence of its efficient operation. While that may seem high in these penny-pinching days, HU advocates community college as a stepping-stone to a baccalaureate degree. “Seriously, does someone need to pay top dollar at a private institution to take Algebra 101?” Darr says. “You can take all the foundational courses at much less expense and then come here for your final two years. Frankly, we recommend it.”
Evidently, HU is on to something. From that initial $3 million budget, it has since blossomed to boast a $73 million academic center, two residence halls, and a satellite campus in Philadelphia. — R.B.