Recent press reports highlight the effects of challenges facing the leadership teams of the nation’s colleges and universities:
- In mid-May, the Board of Trustees of Mills College, in Oakland, Calif., declared a “financial emergency” that will lead to 30-35 faculty and staff layoffs and a new approach to the curriculum, amid a $9 million deficit in a college with an operating budget of $57 million.
- The same day, the University of Missouri released budget details that indicated planned cuts of 400 positions and an anticipated 7.4 percent drop in enrollment, resulting in its smallest freshman class in two decades and a revenue drop of about $16.6 million.
- The same week, the National Association of College and University Business Officers (NACUBO) reported that the average institutional tuition discount rate for first-time, full-time freshman reached an estimated 49.1 percent in 2016-2017, setting a new record for the annual NACUBO survey.
- Additionally, revenue from undergraduate tuition—the historical engine for budget growth—will be impeded by the small growth rate of high school graduates, little indication of a future increase in the percentage of such graduates enrolling in undergraduate programs (according to a recent report from The Chronicle of Higher Education), and stagnant real income among the middle class
As many colleges and universities grapple with smaller fall 2017 first-year classes, populated by students receiving higher levels of tuition support, the financial implications of a drop in top-line revenue are significant. Institutions with low enrollment numbers now must manage potentially lower enrollments in future years. And the 2017 entering class could be on campus for up to six years. Also contributing to revenue drops are tuition losses from those students who discontinue their education or transfer, reduced state appropriations for some public institutions, potentially lower funding for sponsored research, and uncertainty in the financial debt and investment markets.
Spending trends are similarly grim due to the rising costs of employee benefits, higher salaries required to attract top talent, and other factors. Salaries and benefits, which can represent 60 percent or more of an institution’s expenses, become a big cost-cutting target.
These major shifts for colleges and universities point to real challenges that will not go away in the near future. Higher education is experiencing unprecedented financial pressures with no signs of relief on the horizon.
Defining the Path Forward
In times of intense strains, high uncertainty, and rapid change, careful and credible planning and decision making are more critical than ever. Disciplined planning provides the framework that guides leadership decision making to achieve results in all dimensions—strategy, operations, and financial performance.
Development of a solid, multiyear financial plan is highly recommended, preferably one that covers five to 10 years. This plan integrates not only the operating statement, but also the balance sheet in order to provide full visibility into the institution’s financial future. Enrollment trends will be highlighted over multiple cohorts of students, and the impact of related revenue will flow through the institution’s financial statements. Realistic projections for other revenues will provide leadership teams with a thorough understanding of the total revenue picture.
The financial plan also will provide transparency related to the institution’s expenses, and clearly signal expense reductions that may be needed to meet longer-term financial targets. Determining how much to cut and where those cuts should be made takes time, and additional time often lapses before the impacts of cuts are realized. A multiyear financial plan will track these details.
Further, a comprehensive financial plan will show balance sheet resources that may be used to bridge a financial gap to target, or it may highlight the lack of such resources. The plan indicates the institution’s debt capacity—the amount of debt it can support within a desired credit-rating profile. Access to incremental, new debt is a function of creditworthiness, which is a factual analysis performed by agencies that rate higher education debt, and willingness of the capital markets to support an institution’s strategy, which is an evaluative process undertaken by institutional investors and other stakeholders.
As revenues decline, the capacity for the institution to take on additional debt and/or make additional capital investments decreases. Using debt to address financial shortfalls as a near-term strategy places additional stress on the annual budget due to increased debt service payments. Endowment funds are largely restricted and not available to plug a financial hole. Further, drawing upon unrestricted endowment funds erodes support for future operating activities. These effects can be highlighted through sensitivity analyses with best-practice planning tools, which are commonly used in developing a high-quality multiyear financial plan.
Current stresses in higher education demand rigorous, comprehensive financial planning that is visible institution-wide. A long-range integrated financial plan is a must for future success.
For more information, please contact Nick Long, Vice President, Higher Education Management Consulting, at Kaufman, Hall & Associates, LLC, Skokie, Ill., at firstname.lastname@example.org or 224-724-3335.
 Jaschik, S.: “’Financial Emergency’ at Mills.” Inside Higher Ed. May 17, 2017. www.insidehighered.com/news/2017/05/17/mills-college-declares-financial-emergency-and-plans-layoffs-and-curricular-reform
 Jost, A.: “Mizzou Likely to Cut Hundreds of Positions Amid Expected 7 Percent Enrollment Drop.” St. Louis Post-Dispatch, May 16, 2017. www.stltoday.com/news/local/education/mizzou-likely-to-cut-hundreds-of-positions-amid-expected-percent/article_74125e87-a764-505f-872c-a454640d4205.html
 National Association of College and University Business Officers: “Tuition Discounting Rates Hit a New Record High.” News release, May 15, 2017. www.nacubo.org/Research/Research_News/Tuition_Discounting_Rates_Hit_a_New_Record_High.html
 Selingo, J.J.: 2016 the Decade Ahead: The Seismic Shifts Transforming the Future of Higher Education. The Chronicle of Higher Education, 2016. http://chronicle.texterity.com/chronicle/2026_report?pg=1#pg1
 Sussman, J.H., Kim, C., Ard, T., Long, N., and McDermott, G.: “4 Best Practices in Financial Planning for Higher Education.” Skokie, IL: Kaufman, Hall & Associates, LLC, 2016. http://info.kaufmanhall.com/download-ebook-he-fin-planning-kha.html