A Mixed Financial Outlook for Colleges

An annual report from Standard & Poor's anticipates continued budgetary pressure, partially offset by stronger revenues.
February 4, 2005

Health care and retirement costs are soaring and maintenance debt is continuing to pile up, putting added pressure on college budgets. But the institutions' revenue picture is brightening, as endowment growth is up, state budgets are stable, and private gifts are rebounding.

Taken together, those trends suggest a mixed economic picture for nonprofit colleges in 2005, Standard & Poor's said Thursday in its annual report on the financial outlook for higher education.

The mix of cost pressures and revenue growth "could mean that the higher education sector will continue to exhibit more ratings volatility in 2005 than is typical for the sector," the report said. Standard and Poor's notes that slightly more colleges had their bond ratings downgraded than upgraded in 2003 and 2004.

The report offers a litany of trends and developments that could mean trouble for college budgets. Some face employers of all kinds, such as rapidly rising health-insurance premiums, technology upgrades, the growing cost of retiree benefits like health care, and wage inflation. Others are more specific to higher education, like the increasing insistence of students (and their parents) on newer and better facilities.

"Many college students now living on campus have never had to share a bedroom with a sibling, and as a result, the traditional two-student room with shared bathroom facilities for the floor seems outdated for today's college student," the report noted.

In the first half of this decade, those cost pressures combined with "stagnant or declining investment markets between 2000 and 2003, reduced state funding, a drop in gift-giving, and political pressure to keep tuition and fee increases low" to create a brutal economic environment for colleges, Standard & Poor's said.

Fortunately for colleges, the revenue picture is turning around. First, two straight years of investment growth lifted the performance of college endowments in 2004. After an increase in the 2005 fiscal year, Standard & Poor's predicts flat state funding for most public universities in 2006, but still nothing like the declines of the first years of this millennium. And private giving is expected to come close to the levels of 2000, before the economic downturn took its toll on fund raising campaigns.

The ratings agency offers a handful of other predictions and warnings for higher education in 2005. Among them:

  • The report says it is "unclear" whether the increase in philanthropy for victims of the tsunami in Asia will affect giving to American educational institutions. "The base of support for the tsunami appears much broader and not as deep as the traditional giving and major gifts that support colleges and universities."
  • S&P predicts that college endowments are likely to continue to invest heavily in commodities and real estate, "because of the potential for real return that is often countercyclical to equities markets."
  • The agency anticipates intensifying competition for federal research dollars, even as the federal investment in some kinds of research begins to contract. There will be losers as well as winners, S&P warns. "No longer are there just 20-30 top research powerhouses. The number of new research facilities on American campuses is astounding, much of it financed by debt. However, it is expected that those institutions with the larger portfolios will remain large, but those on the margin are likely to contract in a reduced funding environment."


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