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Show Me New Money

July 15, 2013

INDIANAPOLIS – Looking at the schedules and programs of the annual meeting of the National Association of College and University Business Officers is a peek into the zeitgeist of the financial side of the house.

In 2011, a large chunk of the meeting was devoted to maximizing tuition revenue in the face of increased financial aid demands. Last year, with many public universities accepting the fact that state appropriations were unlikely to return and that tuition revenue would continue to face pressure, much of the talk was about how institutions could operate more efficiently with limited resources.

A major theme of this year’s meeting, which began here Sunday, is rebuilding. After years of budget cuts, efficiency measures and right-sizing, the business sides of many colleges and universities are starting to think about how they can find capital and reinvest money in the programs on which they want to bet their futures. And for some of them, that means getting out of some of the areas they’ve been in for decades.

“What is our business? Our business is the business of ideas,” said Geoff Chatas, senior vice president and chief financial officer at Ohio State University, who led a rethinking of Ohio State’s financial plan in recent years that was featured in a session here. “We all talked about returning to the core -- teaching and learning -- and developing a new funding strategy to support that. When is the last time a parking space found a cure for cancer?”

Much of the talk has been about outsourcing some operations that don’t pertain to that mission -- a strategy that has proven controversial on some campuses. Debt financing, which has also been popular among some administrations in the past few years, was also brought up as a potential way to fund major investment, with finance officials noting how favorable the rates have been in recent years, particularly compared to other investments.

“Although we face this changing funding environment … higher education is still in great demand as an investment,” said John Augustine, managing director of Barclays Capital. “It seems like when times are difficult, people go to higher ed.”

“New Approaches to Funding Higher Education,” “Recruiting and Retaining Top Talent,” “Challenges, Pitfalls, and Success Stories of Outsourcing Higher Education,” and “Transatlantic Lessons in Optimizing Institutional Effectiveness” were just some of the session titles from the first day of the meeting that hit on the theme of freeing up resources to invest in new areas.

Over the next few days, administrators will also discuss how to find new resources to fill the gap in research funding created by federal sequestration, the potential financial benefits of online education and massive open online courses, how to leave funds for the academic mission, and “Proven Strategies to Increase Net Tuition Revenue and Enrollment Success.”

Outlook Negative

Much of this discussion comes in the shadow of continued pessimism about the state of the current financial model for higher education institutions of all sizes, particularly when it comes to revenue.

A report from earlier this year by Moody’s Investors Service, which was rehashed again here, noted that all sources of university revenue -- state and federal spending, tuition, investment returns and gifts, among others -- are likely to face continued pressure over the next few years.

“We are going to start to see some really stressed situations,” said Edith Behr, vice president and senior analyst at Moody's, mentioning that several tuition-dependent colleges have fallen considerably short of their enrollment targets for this coming fall. “There are pressures, and the smaller colleges and universities appear likely to have a more difficult time.”

Loyola University New Orleans announced this month that first-year student enrollment would be about 25 percent short of the college’s goal of 875, producing a financial shortfall of about $9.5 million. St. Mary’s College of Maryland, a public liberal arts college, also saw a significant enrollment shortfall.

In a new survey of college and university business officers by Inside Higher Ed and Gallup, released last week, only about a quarter of campus chief financial officers expressed strong confidence that their institution’s financial model would remain viable over the next five years. When asked whether the model would be viable in 10 years, only 13 percent expressed strong confidence.

None of My Business

Because there is such pervasive pessimism, much of the talk here has been about finding ways to change the underlying business model of colleges and universities, with outsourcing and public-private partnerships playing a prominent role in that discussion.

Traditional areas of outsourcing and partnerships, including residence halls and dining, were discussed. But the crowd and presenters here also expressed interest in exploring more unconventional avenues as well. Officials from the University of South Florida discussed the college’s outsourcing of arena management.

Mary Peloquin-Dodd, treasurer and associate vice chancellor for finance at North Carolina State University, discussed her university’s decision to outsource management of the endowment to the University of North Carolina Management Corporation, which manages the endowment of UNC-Chapel Hill.

She noted that her institution does not have a deep bench of investment talent from which to pull, and that the staff of the investment office was “sufficient to do due diligence, but not much larger than that.” So the university looked to outsource its investment operations. The UNC Management Corporation rose to the top of the list because of the historic programmatic ties between UNC and NC State, the fact that they are part of the same state system, and the overall cost, Peloquin-Dodd said.

One of the major success stories highlighted in two different sessions was Ohio State’s decision to outsource its parking operation. The college leased its parking operations to a private partner for 50 years for a price of about $480 million. Other finance officials said they were “jealous” of the plan.

“We settled on the fact that if something wasn’t core to the university, it was something we should look at if we should do it or not,” said Michael Papadakis, vice president and treasurer at Ohio State.

Papadakis said the university is thinking through other potential services it could outsource, including the university’s golf course, airport and power plant and distribution system, though he stressed that no decisions have been made yet.

Ohio State Plan

Ohio State's various outsourcing considerations are part of a broader rethinking of the university’s business model that Chatas has directed over the past few years.

That effort has led to several cost-cutting initiatives, including centralizing and streamlining some purchasing operations. He said the university has struggled with how to properly motivate cost-cutting behaviors while using some of that money to invest in new areas.

“If you leave all the money at the unit level, it’s not savings you can redeploy,” Chatas said. “How do you leave some so it’s an incentive for the unit to take part, and still take some of it back to the provost’s office to fund things like scholarship and hiring?”

When it comes to growing revenue, Chatas sees three bright spots on Ohio State’s horizon: fund-raising, investment returns and commercialization of research.

The college invested the $480 million generated through the parking deal into the endowment, with much of it going to fund scholarships and new faculty hires in strategic areas. When the college issued a high-profile century bond in 2011,  it invested some of that money in the endowment and used the rest to establish a central bank to fund projects, which would then pay interest back into the university.

Betting on consistent endowment growth might seem like a risky move these days, and groups like Moody’s have warned about potentially limited returns over the next few years. As of June 2012 – the last year for which information is available – many colleges and universities had not seen their endowments return to pre-recession levels. But in presentations and conversations here, several university officials mentioned that their endowments saw growth of between 10 and 15 percent over the fiscal year that ended June 30. If that holds across the sector, it would be a significant improvement over last year’s average loss of 0.3 percent, but still far from pre-recession growth levels.

Officials noted that the strategies employed by places like NC State and Ohio State, such as fund-raising, endowment growth and research commercialization, are not areas in which many small colleges are likely to see success. But Chatas said he’s confident that savings and efficiencies of a similar proportion can be discovered at any college.

He relayed a discussion with Australian higher education officials who joked to a group of American university officials that their institutions could easily be more efficient. “You don’t have low-hanging fruit, you have fruit all over the place,” he said they said.

Even after several years of financial strain, however, some areas of potential cost savings still remain touchy subjects, even in meetings with other finance officials. Increasing faculty workload still seems like a topic few finance officials are willing to broach. The same is also true for program prioritization. “Over 25 years we’ve virtually shut nothing down,” Chatas said.

 

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