Published on 2012/07/27

Revamped Funding Models Desperately Needed in Higher Education

Bain & Company unveiled an analysis of nearly 1,700 public and private not-for-profit colleges this week, and reported that one-third of the institutions are on an “unsustainable financial path” while an additional 28 percent of institutions are “at risk of slipping into an unsustainable condition”.

The analysis, which was conducted in partnership with Sterling Partners, found that over the period of 2005 through 2010, operating expenses had been getting increasingly higher at colleges across the country and institutions are less able to cover their spending.

Jeff Denneen, a Bain partner who leads the firm’s American higher education practice, accepted that the results may be perceived as overly alarmist. After all, the analysis was based on college’s expense ratio—measuring changes in expenses as a percent of revenue—and equity ratio, which is based on the change in the value of institutional assets, including its endowment, relative to its liabilities. The final year of the period studies, though, saw endowments hit with record losses. However, Bain and Sterling maintain the study should send a sobering signal.

“Financial statements have gotten significantly weaker in a very short period of time,” Tom Dretler, an executive in residence at Sterling, told Goldie Blumenstyk from The Chronicle of Higher Education.

The paper shone light on a number of worrying trends at colleges; long-term debt increased by 11.7 percent, interest expenses climbed 9.2 percent and property, plant and equipment expenses rose 6.6 percent. At the same time, instruction expenses increased by less than five percent, which led the paper to recommend greater oversight from campus leaders.

“Boards of trustees and presidents need to put their collective foot down on the growth of support and administrative costs,” the authors wrote. “In no other industry would overhead costs be allowed to grow at this rate—executives would lose their jobs.”

Ultimately, the analysis and accompanying paper are an indication of Bain and Sterling joining a growing list of observers who are demanding that higher education institutions rethink their administrative practices. The paper suggests that colleges begin to generate revenue through their real estate, energy plants and other capital resources that could be used to fund academic investments. Additionally, the paper is critical of the number of “middle managers” at colleges.

Dretler and Denneen say the joint paper and analysis should encourage colleges to go down a road that would see less spending on items that are not central to their missions, focusing instead on academic programming that would increase enrollments and inspire greater affordability.

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