With this post on our Sustaining Higher Ed blog, we are pleased to introduce Disha Venkatesan, a new Vice President in Kaufman Hall’s Higher Education practice. Disha comes to Kaufman Hall from Syntellis Performance Solutions and is based in Charlottesville, Virginia.
Inflation has reached the highest level in 40 years. The Federal Reserve has begun the process of raising interest rates and reducing the size of its asset holdings to cool the economy, a process that likely will continue well into next year. Congress has passed the Inflation Reduction Act, although the act’s impact on inflation may be negligible. There is speculation that fundamental changes in the global economy may be ushering in a new era of higher interest rates, weaker economic growth, and more frequent recessions.
Inflation has a disparate impact on colleges and universities, but many institutions are feeling its effect. Small schools, with fewer than 1,000 students, may not have the financial flexibility to absorb a cost increase of 7% to 10%. Even at larger schools, the not-for-profit nature of higher education leaves little to no buffer. Penn State, for example, recently announced a “strategic hiring freeze” as the combined pressures of inflation, constrained state funding, and lower enrollment have produced a projected $191 million deficit.
With no immediate end to inflation in sight—and the prospect of a potentially long run of economic volatility—college and university leaders must take a strategic approach to address these economic realities. Here are nine options to consider for immediate, near-term, and longer-term action.
- Reevaluate capital projects: Many institutions cut back on capital spending during the pandemic and will continue to evaluate and reprioritize where spending is necessary and where it can be deferred. One client institution has underspent on deferred maintenance by an estimated $25 million to $30 million over the past five years to ease the impact of declining enrollment. Maintenance and essential capital spending can be deferred for only so long before these investments become mandatory or deferred spending begins to negatively impact the bottom line: for our client institution, the impact of underspending has led to a 10% to 15% reduction in dorm revenue. Leaders should view capital deferral as a short-term strategy to provide temporary budgetary relief but ensure that the institution’s longer-term planning accounts for these important capital needs.
- Secure supplies for labs and student housing and dining: Given the likelihood that costs will continue to rise, working with your institution’s vendor partners now to secure supplies at a lower rate can be a strategic approach to mitigate cost increases. Your procurement team will need to hold its ground in the next negotiation cycle as vendor partners try to pass on their own higher costs.
Over the Next Six Months
- Analyze non-essential open positions and freeze hiring: Many institutions may be tempted to pull this lever immediately, but we recommend analysis and restraint to ensure that hiring freezes are targeting appropriate positions and that there are efficiencies that can be realized to compensate for reduced staffing. Potential consequences should be thoroughly assessed (e.g., student retention and graduation rates may be negatively affected by underspending in student-facing jobs) to ensure a focus on reducing redundancy and increasing productivity. Also consider trade-offs: at one client institution, we are exploring whether hiring lower-wage administrative staff can reduce faculty administrative burdens and allow for increased teaching loads.
- Negotiate with suppliers of housing, dining, and custodial services: Suppliers are facing significant competitive pressures, which opens negotiation opportunities for colleges and universities. Almost all your suppliers are in the private sector and offer incentives to key partners based on volume and for preorders. Negotiate payment terms for long-term commitments as another lever. Request cost breakdowns to identify lower-cost alternatives for high-priced items.
- Rethink organization structure for efficiency: In particular, look for opportunities to combine departments, units, or programs within the institution to save on management salaries and benefits without degrading productivity, efficiency, and support for student requirements.
By Next Year
- Increase staff and faculty productivity: Rather than thinking about people, consider processes and technology. If you want to improve productivity, it is possible that investment in technology and acceleration of your digital transformation may help realize those results . For example, at one large public university, its highest-paid faculty were logging into seven different systems to manage their students, people, finances, and learning. Could a more streamlined process boost faculty productivity? At another institution, student service administration was underperforming in the areas of registrar, undergraduate admission, and academic advising, according to our benchmarking assessment. The paper process was redundant and time-consuming. In this situation, redesigning processes and adding technology could reduce staffing needs by half while improving the end-to-end student experience
- Assess leased and owned real estate opportunities: Is leased space being fully utilized? If not, consider opportunities to combine similar program needs (e.g., laboratory space) under the same roof. Also, a full assessment of your institution’s owned real estate portfolio is a truly value-added activity. If you have an underutilized urban space, for example, your institution may be able to develop partnerships with other institutions or between departments to improve space utilization. More efficient use of leased and owned facilities may also create opportunities to sublease or sell unneeded space.
- Identify new revenue sources: Assess the profitability of the current academic portfolio, focusing especially on larger programs where the greatest opportunities may be available. Closing programs costs money, but running unprofitable programs drains resources that could be used for growth. This assessment should also consider where existing programs could be expanded or new programs added to meet market demand. A well-articulated growth strategy will not only help increase enrollment, but also will help secure philanthropic and grant opportunities.
If All Else Fails
- Raise tuition: Many institutions raised tuition by 2%-4% for the 2022-23 academic year to combat inflation and that trend is expected to continue, according to Fitch Rating. Recognize, however, that there are limits to how much tuition can rise—this year’s increases, for example, were significantly below the rate of inflation—and those limits will vary by institution. All institutions face the reality described by Boston University President Robert A. Brown, who said the university is caught “in an inflationary vise between the institutional pressures and the impact on our students and their families.” Institutions that are facing declining enrollments as we near the “demographic cliff” typically rely on heavy discounting to attract students. For these colleges and universities, the impact of tuition increases on bottom-line net tuition revenue will be much lower than the announced increase. As such, serious consideration should be given to the potentially counterproductive effects of an announced tuition increase on recruitment, enrollment, and retention. Some institutions are working to mitigate the impact of higher tuition; at Purdue University, for example, innovative Back a Boiler income share agreements are designed to help lower student debt.
Finally, all members of your leadership team should be tasked with identifying additional areas of opportunity unique to your institution.
We should assume that inflation will be with us for some time. Your institution’s integrated strategic financial planning process should include best- and worst-case scenarios for inflation’s impact not just over the next year but over the next five years, as well as specific goals to mitigate that impact. By hoping for the best but planning for the worst, you can help ensure that inflation does not erode the financial health of your institution.