Universities Neglect Financial Sustainability

Ashley Thorne

A new study shows that 33 percent of U.S. colleges and universities have been on a financially unsustainable path in recent years. The Bain & Company analysis measures institutions’ increase in expense ratios (expenses to revenues) and their decrease in equity ratios (assets to liabilities). Among those on the list with the worst ratios are CalTech, the CUNY Graduate Center, Dartmouth, Howard, Princeton, Notre Dame, and Yale. 

The data for the survey were for the years 2005-2010. An accompanying report by business executives Jeff Denneen and Tom Dretler with contributions from Chronicle of Higher Education editorial director, “The Financially Sustainable University,” outlines the problem and recommends practical solutions. 

The problem, write the authors, is that colleges live by the “Law of More,” meaning that they tend to continually add new programs without ending old ones. This leads to mission creep, fragmentation (each department runs independently), inefficiency, and skyrocketing costs. 

“Boards of trustees and presidents need to put their collective foot down on the growth of support and administrative costs. Those costs have grown faster than the cost of instruction across most campuses. In no other industry would overhead costs be allowed to grow at this rate—executives would lose their jobs,” the authors write. 

In the past, rising costs were covered by tuition and federal funding increases, but as these sources become less willing to foot the bill, colleges and universities will have to buckle down, focus on what is most important to their missions, and get serious about reducing costs. 

The authors recommend that institutions centralize certain expenses, such as those for IT, and outsource them to professionals. They encourage college leaders to start with the core mission and begin by trimming what’s furthest away from it. Instead of mandating flat cuts across every department, the authors urge serious and honest evaluation of each program’s efficiency and benefit to the institution. Universities’ shared governance structure makes it difficult to enforce top-down reforms, but those in charge of budget can make a compelling case to faculty members for the health of the institution: 

By nature, faculty members tend to have a low tolerance for business administration and change that disrupts their routines. But most faculty members are also evidence-based decision makers who care deeply about the educational mission of the institution they serve, and this is an area where the president and the faculty can find common ground. 

Perhaps the most important message in this report is that colleges are trying to take on too many roles, causing them to lose money—and in the process, to do a poor job educating students. 

In a recent article about the higher education bubble, NAS president Peter Wood made similar arguments. Colleges and universities must recognize that “while the university can serve many purposes, to flourish it must set standards,” he wrote. “It cannot be an all-purpose institution. And to the extent it tries to be an all-purpose institution, it is destined to fail both as an intellectual undertaking and as a viable social enterprise.” 

A report just out today from Richard Vedder at the Center for College Affordability and Productivity (CCAP) presents “Twelve Inconvenient Truths about Higher Education.” Two of those are that college costs are unsustainable and that higher education, contrary to popular belief, is not an “investment” in the U.S. economy or an engine for growth. Vedder asserts that the dysfunction in higher education will soon come to a head and competing enterprises (such as online and open education) will force changes. 

While elite universities and ones with huge endowments have less to worry about, for most, this sort of report is a wakeup call. The numbers from Bain & Company show in financial terms the result of years of wandering away from the mainstays of liberal learning toward trendy programs. The politically correct concepts of acceptance and no-judgment have ensnared universities into thinking they can keep ineffective, inefficient, irrelevant initiatives around indefinitely without facing any consequences. But the bill is coming. 

Mission creep, it turns out, has potentially devastating monetary costs. In recent years higher education leaders have yielded to pressure by outside interest groups to make “sustainability” their top priority. By sustainability they are referring to conservation of natural resources—as well as a more distinctly political agenda regarding social policy, wealth distribution, race, gender, and sexuality. Even as colleges have jumped on this ideology bandwagon, they have neglected to conserve their own resources. A university’s financial sustainability thus seems to have an inverse relationship to its embrace of environmental sustainability. 

What would it look like if American colleges and universities poured all their energy into providing the best and most cost-effective education possible, cut untenable programs, and ignored pressure to conform to politically correct fads? Probably they would come closer to resembling well-run businesses—and probably they would have a better chance of surviving the upheaval heading their way. 

Image: Wikimedia Commons, Public Domain 

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