There’s No Shame in Merging

To confront the facts and take action is wiser than to be nostalgic about a bygone era, argues Frank H. Wu.

April 17, 2018
 
 
iStock/Suat Gursozlu

Many institutions of higher education should be considering a merger, as they are facing an existential crisis. They can merge, close or suffer unremitting deterioration. To admit that the situation is what it is does not assign blame, as no individual at any college or university can control the market forces bearing down on many campuses. 

Whether or not a college can continue to function as it is proud to have done for generations is among the most difficult discussions to begin, much less literally bring to closure. Opening up such a conversation compels campus leaders to acknowledge that the academic enterprise, even if traditionally nonprofit, happens to be a business as well, and that they must develop strategies to deal with the undeniable reality of fewer students, greater costs and increased competitiveness. Payroll must be met, bills must be paid, and the same rules must apply to higher education as they do to other sectors of the economy. Colleges are like newspapers, brick-and-mortar retail stores or manufacturers of internal combustion engines. The disruption that defines our era threatens us all. 

Graphic for Inside Higher Ed Events, part of the 2018 Leadership Series: "Joining Forces: Merger and Collaboration Strategies." Presenting sponsor Strada Education Network. April 19, Washington, DC. Register now.

Faculty members are understandably concerned primarily with the academic quality of the programs that their institutions offer and tend to avoid tough decisions about financial concerns. But today, they must become involved in fiscal matters. Progressive professors understand the argument that it is the students who pay their salaries. They will regret it if they allow others, professionals with different backgrounds and corporate values, to make profound decisions about the entity within which they expect to continue teaching and researching. It would be wrong for a chief academic officer to have less influence than a chief financial officer. But scholars will be subordinate to accountants if they do not demonstrate an interest in reading -- and a corresponding capability to read -- financial statements.

Other stakeholders have their own agendas that keep them from facing the facts. While board members have a fiduciary duty and are ultimately responsible for the sustainability of the operation, they often may be reluctant to eliminate their own roles.  And one of the most disheartening impediments to broaching the subject of merger is alumni pride, as those who previously attended refuse to accept the institution is no longer what it once was.

The temptation for all who are concerned is to believe the superior leader, capable of more effective fund-raising, will take care of everything. Yet the problems are structural. For many colleges, even a 10-fold improvement in annual donations will not make up for a downward trend in tuition revenue. It’s impolite to note, but an objective analysis of some of the “transformative” gifts that institutions announce with fanfare suggests those donations may be turned into a new building, new curricula or tangible benefits for just a handful of selected professors and students. They cannot in the abstract, and they do not in reality, make a meaningful difference in the cost of attendance for the average student.

The math is not a mystery. Law schools, liberal arts colleges that are not among the most prestigious and stand-alone institutions specializing in a limited range of fields are the most vulnerable -- but they are not alone. Among law schools, for example, Whittier Law School is closing, and Valparaiso University School of Law hopes to avoid the same result. The liberal arts institution Sweet Briar College has averted its demise, but only so far. Westminster Choir College, historic and highly regarded but also restricted thematically, has been put up for sale by its parent institution.

A study of the balance sheets of almost all higher education institutions reveals they are tuition dependent even if they pretend to be a peer of Harvard University or Stanford University. The bulk of their revenue comes from what they collect from each enrolled student, reduced by the discount rate. So if college leaders can predict that the number of students will most likely decline, and tuition has reached a natural ceiling, the temptation is for a short-term fix of offering “scholarships” that are unfunded -- rebates or transfers from one student to another based on credentials or other characteristics. But without sizable reserves, that strategy is untenable for anything longer than a brief period. Even with a modest endowment, one can calculate how long until the income is insufficient and the corpus must be invaded.

The predicament of higher education is not new. The conventional responses, however, are no longer as readily available. You can boost tuition revenue by attracting multitudes more or charging them more, but it is not reasonable to believe, given demographic trends and the political vicissitudes affecting international applicants, that the pool of qualified students will grow much. Nor is it feasible to ratchet tuition upward indefinitely, at rates exceeding inflation or any other measure, without giving much of it back via the discount rate. In the worst cases, colleges end up bringing in a class that is smaller and not as highly credentialed and that pays in the aggregate an amount below the preceding year, thanks to “scholarships” that had to be awarded.

A consensus among key campus constituencies that costs ought to be brought under control is insufficient. People who wish for cuts to expenses assume that they themselves are not facing the risk of layoffs. The trouble is that the bulk of the expenses at colleges and universities, especially those that are well run and not spending excessively in capital projects, are for what makes them renowned and distinctive: their human resources -- in particular, faculty members. Ironically, the principles of shared governance often ensure that the administrators who possess the resolve to reform lack the political support to do so and vice versa. 

Ratcheting up pressure, as the economist Adolph Wagner observed a century ago, when societies become more affluent, they expect their governments to offer more services. Wagner’s thesis was that the accumulation of wealth usually tends toward more, not less, taxation as people demand better and better. Higher education exemplifies Wagner’s law. It is labor intensive -- and not only in the actual teaching but also in the support services it offers. “High touch” costs more than high tech, without even taking into account extravagances such as climbing walls and lazy rivers. Unlike a series of gadgets, higher education cannot introduce a brand-new set of features each year for the same price. A seminar is not an iPhone, and it cannot be treated as if it were.

Here are two examples of additional functions imposed on higher education in recent years that exacerbate the dilemma. Both are laudable, and to say that they cost money is not to argue against the dollars being spent. It is only to point out the obvious fact that someone must pay for such mandates -- which generally means the students. (Public support for public higher education is crucial, and its loss is another subject to be taken up.)

First, colleges have to be more “transparent” and demonstrate that they are adding value. For example, government entities increasingly demand they compile, publish even audit statistics on employment of graduates and student learning outcomes. That is good, but data cost money. Staff must be assigned to do the job of finding the facts and tracking down people, some of whom do not wish to reveal their status.

Second, institutions today have a moral imperative to address rampant sexual assault and harassment, providing prevention, investigation and remediation. Title IX has been expanded (though it may contract again). That also is positive change, but it also isn’t gratis. Experts who know what they are doing are required for this type of work. People already on the campus must be trained or new people with the appropriate experience must be hired.

Institutions that are not comprehensive research universities intrinsically lack economies of scale to copy comprehensive research ones. If everyone must submit employment statistics to an oversight agency and put them on the web, the institution with 1,000 students has much more of a burden, on a per-capita basis, than the one with 10,000 students. The costs for virtually everything that has to be done will be greater for the former compared to the latter, once divided up and passed on to the students.

Hundreds of decent liberal arts colleges have inadequate endowments for their plans. They cannot keep up fiscally. They cannot do what Williams College or Amherst College can do. They also do not want to do what their for-profit counterparts are willing to do. What's worse, the institution that is fine but not equal to the elite is locked into a rankings race with those at the top of the list. They are held to the same metrics, evaluated as if only skill in the game would put them ahead.

The task for many of them is not to choose among conventional tactics. If they do not contemplate becoming something altogether different, their alternative will be to cease to be. There should be no shame in proposing merger. It may inspire other creative options. The choice is not black-and-white, because there are intermediate arrangements or affiliations, such as the Claremont McKenna consortium.

The condition of many colleges and universities is not what they would like the world to believe. To confront the facts and take action is wiser than to be nostalgic about the bygone era when the gentleman’s C was as sufficient for higher education institutions as it was for their students.

Bio

Frank H. Wu is a Distinguished Professor at the University of California, Hastings, a stand-alone institution affiliated with the University of California system, where he formerly served as chancellor and dean. He was widely credited for initiating the trend of reducing law school enrollment.

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