CFO Survey Reveals Doubts About Financial Sustainability

Hardly a day goes by without some author or commentator predicting that the end is nigh for higher education, or significant portions of it. Such predictions understandably grate on many administrators and professors.

But what do those with the closest eyes on their own institutions' bottom lines -- chief college and university business officers -- think? Turns out they're not particularly upbeat, either -- about their own colleges' futures or the higher education landscape more generally.

In a new survey by Inside Higher Ed and Gallup, barely a quarter of campus chief financial officers (27 percent) express strong confidence in the viability of their institution's financial model over five years, and that number drops in half (to 13 percent) when they are asked to look out over a 10-year horizon.

Asked to assess the sustainability of the business models of various sectors of higher education, they take a more negative than positive view on several of them (nonselective private and non-flagship public institutions, and for-profit colleges).

And more than 6 in 10 CFOs disagree or strongly disagree with the statement that "reports that a significant number of higher education institutions are facing existential financial crisis are overblown."

"This is a 'Houston, we have a  problem’ report," says Jane Wellman, a higher education finance expert. "People who know what they’re talking about think we have a problem down the road if some things don't get fixed."

Inside Higher Ed’s third Survey of College and University Business Officers, released today in advance of this weekend’s annual meeting of the National Association of College and University Business Officers, in Indianapolis, takes the pulse of college and university chief financial officers about a range of pressing topics. The online survey, conducted by Gallup in April and May 2013, was completed by a total of 457 campus and system chief business and financial officers. Only 12 business officers from for-profit institutions completed the survey, so their responses were not explored in depth. A copy of the survey report can be downloaded here.

Among the highlights of the survey, in addition to the CFOs' views on the viability and sustainability of colleges' financial models:

• Health care costs are weighing increasingly heavily on the minds of campus business officers. Asked which issues they were paying more attention to than they were five years ago, the cost of providing health insurance and benefits appeared second only to market limits on increasing tuition. (In 2012, five other issues topped health care, including government mandates and campus infrastructure.) And overwhelming majorities of CFOs agreed or strongly agreed that their institutions had experienced increased health care premiums for employees and students this year, and that they had changed their institutions' offerings (though not who is covered by health plans) as a result.
• Retention is displacing recruitment of new students as institutions' top priority. Asked to cite their most important strategies for increasing revenue in the near future, a full 92 percent of CFOs cited retaining current students, far outdistancing strategies such as expanding online programs or recruiting out-of-state, full-paying or international students.
• Large proportions of business officers want to better-use data to evaluate programs and identify potential problems or solutions. But many of them acknowledge that their institutions do not have the data or the information to make informed decisions in key areas.
• A solid majority of CFOs (57 percent) agree or strongly agree that new spending at their institution will come from reallocated dollars rather than new revenue.
• Nearly half of business officers say their institution has increased its dependence on debt to finance projects. While few officers believe their institutions should take on significantly more debt than they have now, a majority say their current debt levels are appropriate. 

The Mood Darkens

In Inside Higher Ed's 2012 survey of business officers, about half of the respondents said their college was in "good" financial health, and another 17 percent chose "excellent" to describe their institution's current state. And business officers were roughly four times likelier to say their institution would be better off in 2015 than to say it would be in worse shape.

This year, seeking to look ahead, our survey asked CFOs about their confidence in the sustainability of their institution's financial model. Over all, 27 percent strongly agreed, and another 35 percent agreed, that they were confident in their college's financial sustainability over five years, with public institutions expressing somewhat more confidence than private colleges and universities.

But their confidence ebbs over 10 years, with 13 percent strongly agreeing and 28 percent confident in their institution's financial sustainability over a decade. Looking over 10 years, nearly a third of CFOs at private baccalaureate colleges express a lack of confidence in the viability of their business model, with slightly lower numbers in other sectors.

The survey also asked business officers to gauge the financial sustainability of various sectors of higher education. They expressed the most confidence in the long-term prospects of elite private universities (84 percent agreed or strongly agreed that the institutions have a sustainable model), wealthy private liberal arts colleges (67 percent) and public flagship universities (62 percent), followed closely by community colleges (51 percent).

Three other sets of institutions trailed badly: non-flagship public universities (26 percent), for-profit colleges (21 percent), and  non-elite private colleges (17 percent).

Richard Staisloff, a former business officer at the College of Notre Dame whose RPK Group now consults with colleges, said he attributed the "surprisingly high percentage" expressing a lack of confidence in their own long-term sustainability as evidence of increasing "anxiety about going forward."

He cited the business officers' answers to survey questions about which strategies they planned to use this year to cut costs and increase revenues. Of the 14 strategies listed, only four garnered positive responses from even a third of respondents: exploring collaboration opportunities for academic programs with other institutions (65 percent), shifting from a classroom-based to a Web-based model of instruction (41 percent), eliminating underperforming academic programs (39 percent), and reducing administrative positions (36 percent). Many of the others -- outsourcing administrative services, promoting early retirement, shifting instruction to part-time or non-tenured faculty -- attracted less support. (And don't even talk about cutting spending for sports programs: 18 percent.)

"The way I read this, they've been using a set of strategies to try to do what they already do better, but they've exhausted the bag of tricks they've been using to try to keep it all together. There's not another rabbit in there," Staisloff says. "They get that the business model isn't working, but they don't quite see the bridge to the next model. And they seem to have some concern that maybe there isn't a bridge."

That last point may be most evidenced in the CFOs' responses to a question about whether the increasingly common predictions that many colleges will be disrupted onto the scrap heap are overblown. (Think Sebastian Thrun's much-discussed suggestion that only 10 universities will rule higher education in 50 years, from which he is now distancing himself. By and large, business officers don't think the predictions are exaggerated (though they almost certainly wouldn't buy Thrun's vision), with only 13 percent agreeing or agreeing with the statement that "reports that significant numbers of colleges face financial crisis are overblown."

On the question of strategies for either increasing revenue or cutting costs, retaining current students far outdistances any other strategy. That doesn't mean that institutions are abandoning their efforts to increase their tuition revenues by enrolling students (international or otherwise) willing to pay full freight, or to expand their student bodies through online education. As seen in the table below, efforts to use technology in instruction remains central to institutions' efforts on both sides of the financial ledger.

Top 5 Strategies for Near Future

But the preeminent focus on retaining current students makes sense to Wellman, especially given the recognition evident elsewhere in the survey that the rather remarkable tuition elasticity of the past two decades may be reaching its endpoint. Seventy-eight percent of respondents agreed or strongly agreed that they were paying more attention to market limits on raising prices than they were five years ago, more than selected any other answer.

"The increasing resistance to tuition increases is clear, and business officers know that they can't keep going to the well," Wellman says. "So it makes sense they'd focus more on holding on to the students they already have. The money we have is the money we have."

That idea is reinforced in the business officers' answer to a question about where they expect any new funds to come from. As seen in the graphic below, solid majorities of CFOs say that new spending at their institution is likelier to come from funds that have been reallocated from elsewhere than from additional revenue.

Benefiting From Increased Attention

As a leading analyst on higher education finance, Wellman has pounded the drum in recent years about the desperate need for colleges and universities to pay more attention to the proportion of their budgets eaten up by employee benefits, including health and retirement. Her exhortations often seem to have gone unheeded, as respondents to past Inside Higher Ed surveys largely played down those issues.

This year's survey suggests some change, particularly on the health care side. The cost of providing health insurance and retirement benefits were high on the lists of issues to which the business officers said they were paying more attention, with 74 percent of respondents citing health care as a key issue (55 percent said retirement costs). 

Other questions and answers provide the reason why: Asked whether their institutions experienced increases in health care premiums in 2013, 49 percent of CFOs strongly agreed and another 29 percent agreed. Nearly as many (46 and 27 percent, respectively) said the same about premiums for students.

The increased cost pressure is causing at least some change in institutional behavior, too. Six in 10 respondents (61 percent) said their institution had changed its health plan design and offerings because of the growing costs -- but only 15 percent said they had changed who is covered by their health plans.

Desperate for Data

A powerful theme throughout the business officers' responses is their desire to focus more of their institutions' decisions on good data -- and the limitations they have in doing so.

CFOs overwhelmingly said they viewed the use of business analytics technology to help them evaluate programs and make decisions as important to their ability to cut costs in the future. But their actual practices show they may be a long way from doing that. 

The business officers split down the middle on whether their institutions use an analytical framework to make decisions on spending. And when asked whether their college or university has the data and information it needs to make decisions in key realms -- the performance of administrative departments, of academic and administrative technologies, of academic programs or majors or individual faculty members -- the results were mixed. Only 34 percent of CFOs agreed that they had sufficient information to judge administrative units, for example, and 42 percent said the same about the efficacy of academic programs and majors.

"There's a pretty clear disconnect there," Staisloff says. "We should be doing more to focus on performance, but the infrastructure's really not there to do it. And even if the tools are there, and even if the data's there, it's not clear that the culture is supportive of it."

Among other highlights of the survey:

• Business officers generally think they are spending wisely and efficiently. Asked whether they believed they were spending more money than their peers in a variety of areas -- on faculty members, support staff, student services, technology, etc. -- larger numbers said no than yes in every case.
• CFOs show little to no interest in the movement to divest endowments from fossil fuels and other forms of ethically infused investing. A majority of CFOs (56 percent) agreed that colleges should "focus on financial issues (not ethical or political ones) when deciding how to invest endowment funds, with even larger numbers from those at public (64 percent) and private (65 percent) research universities. And an overwhelming majority disagreed (24 percent) or strongly disagreed (51 percent) with the push to divest their endowments from fossil fuel funds.
• Nearly half of business officers said their institution has increased the use of debt to finance projects, and slightly more than half (55 percent) said their college or university has an appropriate level of debt. Residence halls (29 percent) and academic buildings (26 percent) were the facilities most likely to be financed with debt, the CFOs said.
• Staisloff says he was surprised that so many college business officers seemed to write the for-profit sector off as dead in the "sustainability" question. "They've taken some knocks, but I wouldn't count them out," he says. "It's dangerous not only because you ignore potential competitors, but also because you ignore places that have produced some of the breakthrough models in higher education."