Leaner, Meaner State U.

August 1, 2012

NATIONAL HARBOR, Md. -- Public university employees can expect two things from their universities over the next few years: new programs with an emphasis on increasing tuition revenues, and a whole host of “operational efficiency” initiatives designed to get more bang for each buck.

Much of the focus here at the annual meeting of the National Association of College and University Business Officers has been on how public universities, particularly large research institutions, can change their underlying financial models to accommodate a "new normal” of decreased state appropriations and increased emphasis on tuition revenue, while dealing with increase political pressure to constrain tuition prices.

“If we are going to change how we deliver higher education, it is going to require new ways of thinking,” said Elson Floyd, president of Washington State University, at a session entitled “The Changing Financial Model of Public Universities.”

Business officers and other meeting attendees here have presented along two major themes. They discussed working with the academic side of the house to identify the programs within institutions that can generate revenue and investing in new programs that can do that. The other half of the conversation has been about how to better use institutional data to figure out where there are inefficiencies in universities and eliminating those so that other leaders can help make the case that a university is worthy of investment -- whether that be from politicians, students and families, corporations, or donors.

The combination of these two trends reflects a shift among public universities and their administrators, driven primarily by the disinvestment of state dollars but also by changes in the potential student market. While these institutions used to think about themselves as state agencies, they are now being forced to operate like more market-oriented private entities.

“As we move ahead to more self-dependence, it is going to be critical for us to think about what kind of institutions we are and what type of market we’re facing,” said David Strauss, principal at the Art and Science Group, a consulting firm that works with universities to evaluate their current and potential markets.

The idea that financial priorities could soon be the major factor in which programs are offered and which students are targeted at public doctoral universities is likely to be controversial, since these institutions have traditionally let academic priorities determine which programs are necessary. The tension is likely to be exacerbated as a handful of market-leading, wealthy private doctoral peers, unconcerned with some of the issues facing the publics, have the resources to go in a variety of directions at the same time, without making deep cuts.

A “New Normal”

Presenters over the past three days laid out the litany of changes in the economic and political world that indicate that public universities are in a fundamentally different financial position than they were even five years ago.

Among the changes discussed were the decrease in per-student state appropriations and appropriations as a percentage of institutional budget. “State appropriations are never going to come back to the portion of operating costs they once represented,” Strauss said. 

Presenters this week have also hit on the increased concern among the public and politicians about affordability, the increase in public accountability at the state and national levels, increased demand among the public, and, in some states, the concern about raising tuition to subsidize the funding of other students. The list of problems has been repeated so often that many presenters made jokes about it.

A fairly negative report by Moody’s Investors Service released last week that hit on many of these topics said the outlook for all but the market-leading institutions is negative. Many public flagship institutions teeter on this line between “market-leading” and not.

Presenters and attendees seem resigned to the belief that their financial condition is not going to improve. In a survey of college and university business officers released Friday by Inside Higher Ed, finance officers at public doctoral universities were less likely than those in other sectors to expect to be in either a better or worse financial position in three years. While 41 percent of private university financial officers believe they’ll be in a better place in three years, only 18 percent of public university financial officers believe the same.

Pricey Questions

NACUBO 2012 Meeting Sessions

On revenue growth:

“Growing revenues in the face of federal funding cuts.”

“Budget models and process: Challenges facing institutions today.”

“The changing financial model of public universities.”

On cost containment:

“The relentless pursuit of institutional effectiveness.”

“A progression of cost-savings initiatives.”

“Proactive analytics.”

“Reducing costs and improving services with shared business centers.”

“Models for operational efficiency and practice improvement.”

Much of Floyd and Strauss’ session, in which they were joined by John Cavanaugh, chancellor of the Pennsylvania State System of Higher Education, focused on revenue growth.

While presenters and audience members briefly touched on auxiliary revenue sources or philanthropy, tuition revenue dominated the discussion of how universities can rework their financial models, particularly because tuition is one of the few areas over which many public colleges have control.

Floyd said the sector needed to develop a better tuition model, one that he said needed to be stable, predictable, fair, and affordable. He said using tuition increases to make up for state budget cuts, which many public universities have done in the past few years, has hurt the sector’s credibility and is not a sustainable model. “We need to begin to create a financial model where tuition increases must and should be more predictable,” Floyd said. 

Strauss said that there’s a belief among public colleges and universities that they have significant room to raise tuition without dramatically affecting their application or enrollment numbers while using increased tuition revenue to provide aid, essentially mimicking the private non-profit sector. That might not be the case, he said.

“For a lot of these universities, their market composition and market position has it boxed in to a certain applicant pool,” he said.

A recent survey by Sallie Mae found that families were increasingly making college decisions based on financial concerns. That same survey found that the average amount families paid for higher education, including student and family savings and loans and scholarships, had decreased for a second consecutive year, a drop of 13 percent.

This issue of state culture, which helps define an institution’s ability to charge higher tuition, could be a big concern for some public universities. Floyd, who has served as an administrator in several states, noted that there is a big difference between a state like North Carolina, where families believe the higher education should be relatively inexpensive for residents (sometimes despite limited state investment) and a state like Michigan, where institutions have been given significant autonomy. 

Floyd and others said institutions need to make a greater push to have the public conversation focus on net price -- what students actually pay after aid -- rather than sticker price.

The Inside Higher Ed survey found that strategies for raising tuition revenues -- such as increasing net tuition revenue, recruiting more out-of-state students (who often bring full tuition), and developing or expanding online programs -- topped the list of revenue strategies at public doctoral universities.

At the same time, however, about 60 percent of financial officers at public doctoral institutions said market limits on their ability to raise fees were a larger concern now than five years ago.

Those seemingly contradictory findings might mean that public universities need to focus on ways to get more revenue from each student without dramatically increasing sticker price or finding new student markets to tap into.

For that reason, several sessions here focused on evaluating academic and other programs to find which ones generate a net return that can be invested in other parts of the institution, a task that seems to be becoming a larger part of the CFO role.

The Cost of Change

The second major theme running through the conference has been a focus on how universities can thin out their operational budgets to either make up for budget cuts or conserve money to reinvest in the academic side of the house.

Several institution that have undergone major efficiency initiatives to reduce expenses, often working with management consultants, gave presentations about what they learned about where institutions can be cut and how to go about it.

While the individual projects these institutions have adopted seem mundane -- projects such as centralizing information technology, human resources support, and purchasing -- each has created an office for continuously engaging in such projects using analytics to highlight inefficiencies.

Presenters from the University of California at Berkeley and San Francisco, the University of North Carolina at Chapel Hill, and Emory University talked about how corporate-style analysis tools had helped administrators identify areas of the university’s administration to cut or information they could bring to decentralized decision makers to influence their conversations.

“When you have that data and make it a part of the conversation, it changes the way people approach budgeting,” said Joe Templeton, a professor at UNC who helps lead Carolina Counts, the university’s institutional effectiveness initiative.

Those institutions did not discuss using data to influence academic decision making, but as the major cost-drivers at such institutions, it seems reasonable to assume that cost and data-driven decision making will begin to be a part of academic and curricular discussion. 

A well-attended session Sunday focused on just that issue, and other sessions on the program also touched on the idea. 

In a survey of chief academic officers released this winter by Inside Higher Ed, provosts at public doctoral university were less likely than their counterparts in other sectors to say that financial concerns dominate discussion about new programs.

But as the conversations over the past three days show, that might be shifting. At a session Sunday, administrators from the Georgia Institute of Technology discussed how they adopted an institutional effectiveness framework that would help them make decisions moving forward. While they have so far only deployed that framework in non-academic areas, they would begin engaging faculty in the fall.

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