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College Financial Viability: The View of Campus CFOs

While the primary function of universities is to produce and disseminate knowledge, ideas, and forms of creative expression, it takes resources to run them, and the chief financial officers (CFOs) probably have the best perception among the leaders of the university community regarding the financial viability or sustainability of their institutions. For several years, Inside Higher Ed, working with Gallup, has annually surveyed several hundred CFOs of private and public schools. The recently released latest iteration of that survey suggests that concerns some have that there is a higher education bubble about to burst has some support from CFOs, a bit more so at private institutions. Ever since World War II, some observers have believed that the days of the private liberal arts college are numbered. Those schools have confounded the pessimists, but are things changing? While their imminent demise is not predicted by most college financial officers, concerns seem to be rising.

Only 44% of the private school CFOs predict that their own institution will clearly be financially stable over to the next decade, a percentage that has fallen materially in recent years. While that is troubling, what is equally interesting is the survey reveals that the CFOs believe many in the campus community are clueless about the extent of the problem. While most senior administrators and trustees are aware of the financial situation, even that proportion is falling. One reason is the notorious lack of transparency and the cult of secrecy in higher education—a sector that ironically exists to create and spread knowledge. Some 28% of private schools and 33% of public schools, for example, do not provide regular (typically monthly) statements of financial condition to their governing board or finance committee, and very few (10-15%) provide similar information to such key campus players as the faculty governing body (e.g., Faculty Senate).

The ignorance arising from not sharing information has other negative implications, many CFOs apparently believe. Many of them, for example, believe their school does not even have good enough shared information to evaluate the efficacy of academic programs –should we eliminate major field X or expand offerings in field Y? At their recent annual meeting CFOs raised concerns about the lack of support of the college community on financially troubled campuses for needed turn around programs.

The problems at private schools have reached the point that about one-fourth of the CFOs surveyed said that campus discussions were occurring about merging with other institutions. A sizable number of other schools are beginning joint programs with other colleges to share costs and risks, stopping short of full merger. Adding to the sense of urgency is the fact that a sizable majority of the private school CFOs believe that the currently extremely high amount of discounting student tuition fees (often exceeding 50%) is not sustainable in the long run.

Universities are often obsessed with sustainability, and typically brag about how sustainability efforts are reducing costs, such as electricity bills. Yet far more CFOs believe that these initiatives are having little positive impact than those believing they create meaningful savings. A greater sense of skepticism about some campus programs is prevalent among many financial officers. Indeed, more than one-fourth of the CFOs believe that their schools are capable of making significant budget reductions without sacrificing quality.

I think the generally moderately pessimistic perspective of the financial officers is justified. The United States is in the 10th year of economic expansion, with tight labor markets. Usually at this stage of the business cycle, higher education is relatively flush with resources and optimistic about the future. But we are in an era of diminished economic growth, rising national public indebtedness, and soaring health care costs. Birth rates are at a rate that, absence immigration, suggests population will at some point start declining. The macroeconomic environment, in short, has become much less favorable for American higher education. We are even by some ways of measuring, over-invested in colleges and universities. If this is so, they need to become more responsive to change, and above all, more efficient. As public support of colleges wanes somewhat, colleges no longer can maintain their old costly ways of doing business. The business officers seem to have a greater awareness of that that most in the academy, but their ability to foster change is unfortunately rather limited.

Richard K. Vedder is a Senior Fellow at the Independent Institute, Distinguished Emeritus Professor of Economics at Ohio University, and co-author (with Lowell Gallaway) of the award-winning Independent Institute book, Out of Work: Unemployment and Government in Twentieth-Century America.

From Richard K. Vedder
CAN TEACHERS OWN THEIR OWN SCHOOLS?: New Strategies for Educational Excellence
In Can Teachers Own Their Own Schools?, Richard Vedder examines the economics, history, and politics of education and argues that public schools should be privatized. Privatized public schools would benefit from competition, market discipline, and the incentives essential to produce cost-effective, educational quality, and attract the additional funding and expertise needed to revolutionize school systems.