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Special Report: Higher Ed and the Economy

It's definitely not business as usual for colleges and universities. Here's what campus leaders are doing to help keep their institutions on top of the hill.
University Business, Mar 2009

WHEN BILL CLINTON'S 1992 PRESIDENTIAL campaign strategists came up with “It’s the economy, stupid,” which underscored that Clinton had a better understanding of issues facing the country at the time and therefore was a better choice than George H.W. Bush, the phrase quickly became popular in American political culture.

These days, intellectual capacities aside, just about everybody, certainly including the nation’s higher education leaders, understands that the current economic crisis is having a severe impact. Less clear is what to do about it.

It will be largely up to President Barack Obama and the new Congress to determine how best to respond to the pleas of the higher ed community, particularly public colleges and universities, and all the other sectors of the economy that are experiencing financial difficulties and seeking aid. The way they’ve responded so far may be an indication of the course the new administration will take on postsecondary issues overall in the months and years ahead.

In his campaign statements, Obama indicated strong support for improving postsecondary education, including expanding the use of community colleges and boosting financial aid and tuition tax credits. But at least at the start, higher education probably will have low priority on an overwhelming presidential agenda that includes U.S. involvement in two wars, a flare-up of Middle East fighting, urgent health care needs, and failing banks, automakers, and other large sectors of the U.S. industrial economy.

Most of the attention the new administration can give to education will be focused on the K-12 level, particularly on the future of the No Child Left Behind Act. Obama signaled that in his choice of Chicago Public Schools Superintendent Arne Duncan as the new secretary of education.

Facing stark economic realities, colleges and universities of all types—public and private, large and small, two-year and four-year—are taking it upon themselves to do what they can to maintain operations and survive. From cutting costs to searching for new revenue sources and new ways to sustain their enrollments, they are digging in while waiting for the government to offer them a helping hand. For example:

— In a letter to staff and faculty members in December, Stanford University Provost John Etchemendy said he, President John Hennessy, and several other top administrators would take immediate 10 percent salary cuts as part of a plan that probably will include layoffs as well.

— After state officials cut $30 million from its budget, The University of Georgia announced in November moves including a hiring freeze, shorter hours at a student learning center, less overtime by campus police, and the cancellation of 20 percent of its library subscriptions.

— Dartmouth College, where “revenue is down significantly because of declining endowment performance,” will have to make sustainable adjustments in projected expenses by up to 10 percent, or $40 million over the next two fiscal years, President James Wright told members of the Dartmouth community in a letter in November.

— Even as Arizona and the rest of the nation face a critical shortage of nurses, Arizona State University announced in October that it would cut enrollment at its nursing school because of an anticipated drop in state funding.

— The California State University system announced plans in November to reduce enrollment, and one of its 23 campuses, Fresno State, suddenly stopped taking applications three weeks before its initial February 1 deadline.

“We’ve been through recessions before, but I think this one is deeper and probably has more consequences than any one prior to this, and universities are feeling the brunt of it. It’s almost a ‘perfect storm,’ with state appropriations being cut back while people are losing their jobs and investment portfolios are dwindling,” says Sal Rinella, vice president of the STRATUS division of Atlanta-based Heery International. STRATUS, comprised of former senior university officers, helps institutions create competitive advantages by leveraging assets. Rinella, previously president of Austin Peay State University (Tenn.), also is president of the Society for College and University Planning. But he and others who work in or with the higher ed community see actions colleges and universities can take—and many are taking them—to mitigate the problems they’re experiencing while waiting for the economy to improve.

The basic line of thinking is that it will take federal funding, a lot of it, to make things right again at the country’s public colleges and universities. As 2008 ended, a coalition of 30 national higher education associations called on Congress to make higher ed a critical part of a massive stimulus package that Obama and congressional leaders already were considering. Spearheaded by the American Council on Education, the higher ed coalition proposed a series of federal investments in student aid and campus infrastructure to provide both immediate benefits as well as long-term investments.

Some public institutions are raising tuition, 'substituting tuition dollars for state dollars.' -Joseph Marks, Southern Regional Education Board

As 2009 began, a group of Democratic governors called for a $1 trillion economic stimulus that would include $250 billion for education at all levels, from pre-kindergarten to postsecondary. Without aid like that, said Wisconsin Gov. Jim Doyle, “we will see a great restriction of university education or such soaring tuition that ordinary hardworking families will be unable to afford it.”

In mid-February, Obama and the Congress took a significant step toward satisfying both constituencies when lawmakers passed, and the President signed, a $787 billion stimulus bill that includes about $100 billion for education at all levels. Among other things, the American Recovery and Reinvestment Act of 2009 increases the maximum Pell Grant for needy college students by $500, to $5,350 this year, and $5,550 in 2010. It also provides a tax credit up to $2,500 of the cost of college tuition and related expenses this year and next.

In addition, the package includes $53.6 billion for states to use for education purposes. That type of support “could relieve some of the pressure that might result in higher ed budget cuts at the state level,” ACE Senior Vice President Terry Hartle suggested earlier when Congress and Obama were in the initial stages of developing a stimulus plan.

Community colleges in particular stand to be hard-hit and could benefit significantly by a reduction in that pressure—ironically, at a time when they are under pressure to accept more students who want to enroll. Historically, community colleges see higher enrollments in an economic downturn as laid-off workers seek to upgrade their job skills or learn new ones.

“That’s the favorable impact of what is happening in the economy. But it gets to be problematic because community colleges get a high proportion of their funding from state and local governments. Except for the Pell Grants, we get a very small percentage of our funds from the feds,” says Norma G. Kent, vice president for communications at the American Association of Community Colleges.

More families that otherwise might consider four-year institutions for their children also are likely now to shift to community colleges because they cost less, according to a report, “Impact of the Economy on College Enrollment,” released in January by Longmire and Company, a Kansas-based marketing, research, and consulting firm that works with colleges and universities on enrollment issues. In the decisions families will make about colleges, says President Robert H. Longmire, “cost is an overriding factor, more than we have seen over the years.”

Joseph Marks, director of Education Data Services at the Southern Regional Education Board, explained in December at a seminar in Atlanta for higher ed reporters that as state funding levels decline, some public institutions are raising tuition, “substituting tuition dollars for state dollars.” But “to keep college tuition affordable, don’t let it go up faster than family income levels in your state,” advised Patrick Callan, president of the National Center for Public Policy and Higher Education, also a speaker at the seminar, which was sponsored by the Hechinger Institute on Education and the Media at Columbia University’s Teachers College.

While public institutions await government support, private colleges are left largely on their own to find ways to maintain operations as close to normal as they can while hoping for an economic upturn that will restore the value of endowments already significantly reduced, jump-start lagging fundraising, and otherwise stimulate fiscal growth. In mid-February, Harvard administrators announced buy-outs for non-faculty employees in light of a 22 percent drop in its endowment, which supports about 35 percent of the university’s operating budget, and the potential for continued declines.

A survey of private college and university presidents conducted late in 2008 by the National Association of Independent Colleges and Universities found that fundraising, endowments, the availability of student aid, institutional debt, and student enrollment led the list of their economic concerns.

One way to address these concerns is to cut costs. Half the presidents responding to the NAICU survey reported that they had frozen staff hiring or plan to. Other cost-cutting steps they have taken include slowing construction and renovation projects, restricting staff travel, reducing salary increases or benefits or freezing salaries altogether, delaying maintenance, laying off faculty and/or staff, cutting student services, freezing institutional student aid budgets, and cutting academic programs.

Finding new revenue sources is the other way schools are maintaining operations. Slightly more than two-thirds of respondents to the NAICU survey said they were planning to increase tuition for 2009-2010, while two-thirds said they were focused on increasing enrollment. Others were planning to create new academic extension programs or continuing education options.

Beyond the survey results, NAICU reports that a growing number of private colleges and universities have announced new measures to help students and families during the economic downturn. These include limiting tuition increases to the lowest levels seen in years (even decades, in some cases), freezing tuition levels, expanding programs that replace loans with grants, lowering the amount of loans that students are expected to take out, matching public university tuitions, discontinuing tuition for alumni and others who have been displaced from their jobs, and guaranteeing that students will graduate within four years and will be employed or enrolled in graduate school within six months of graduating.

The Pell Grant boost in the new economic stimulus package will help respond to “a huge uptick” in the number of people seeking financial aid, says Longmire.

Some schools are responding on their own. Hampshire College (Mass.) made an additional $400,000 available for middle-income families and dropped the application fee for students applying for the fall 2009 entering class. Vanderbilt University (Tenn.) announced it will replace loans with grants for all eligible students beginning in 2009-2010. New York University launched a $400 million capital campaign to support financial aid.

But Longmire suggests that colleges can do more even if they can’t provide the money. They can provide information. He finds it puzzling that while families desire financial aid, few actually explore the options open to them, and institutions do little to help them. Colleges can boost their competitive advantages by providing a higher level of customer service to prospective students and their parents with more information about financial aid options and even about how to budget for a college education, Longmire says.

The economy notwithstanding, he adds that most families responding to a study his firm conducted would consider more expensive schools for their children if the schools could demonstrate they provide “greater value.” Among other things, says Longmire, they want to know about graduation rates and job placements for graduates. Institutions should “communicate what their graduates do after college. That is a proof of value,” he says.

Rinella proposes some other short-term steps institutions can take to make more money or cut costs. One is to lift traditional class enrollment caps to raise tuition revenue from additional students. Another is to lease unused space to outside organizations. “Space has value and can bring in revenue,” he points out.

Another possibility is to renegotiate long-term debt retirement to spread it out over a longer period of time and thereby lower annual payments. “You can end up minimizing a large expenditure for debt service and use those dollars in other places,” Rinella explains.

On capital projects, universities can make creative financing arrangements with outside developers and financial sources, who will build and maintain facilities such as dormitories while the schools control what happens in them.

But even under current economic conditions, institutions might be able to proceed with capital projects on their own, Rinella maintains. “Interest rates have settled down from last fall, and nonprofits like colleges and universities, which lenders usually consider to be reliable clients, can get long-term loans at this point. There are solid lenders looking for solid partners. There is money out there.”

While basic economic issues preoccupy colleges and universities nationwide, leaders of the higher ed community hope the Obama administration will address some related matters that also could have economic impacts. One is implementation of the Higher Education Act, which Congress reauthorized last year.

It prescribes “a huge array” of new reporting, record-keeping, and regulatory requirements. “How the Department of Education chooses to implement them will have a big impact” on colleges and universities, says ACE’s Hartle. “You cannot imagine the unfunded expenses that the reauthorized HEA adds for colleges,” asserted Susan Flanagan, vice president for government relations and policy development for NAICU, at the Atlanta seminar.

“There is no doubt that we will be facing new burdens, new responsibilities, and that people will have to be hired to accommodate them. But a sensitive, careful implementation is likely to mean a less intrusive and expensive proposition for campuses than if it is a heavy-handed approach,” Hartle says.

Another issue is implementation of the GI Bill that Congress approved in the greatest expansion of that program since it was created in 1944. Higher ed universally hails the measure, but it imposes considerable burdens on the Department of Veterans Affairs, requiring them “to do things they have never done before,” Hartle explains. That includes putting new payment systems for veterans in place by August 1—“a substantial undertaking,” he says.

While the boost to Pell Grants satisfies the desire for increased student aid, the higher ed community should be happy the Obama administration, with congressional support, is following through on Obama’s campaign promises to provide more dollars for major institutions like the National Institutes of Health and the National Science Foundation, which then can fund research projects on campuses nationwide. The final stimulus bill contained $3 billion for the NSF and $10 billion for the NIH. The Energy Department will also receive $2 billion for research programs.

One factor in how Obama’s higher ed agenda plays out will be his choices for two key positions in the Department of Education—undersecretary, the third-highest ranking slot, which includes oversight of postsecondary education including career and technology areas, and assistant secretary for postsecondary education. Although Obama named Arne Duncan as education secretary, he had not yet made the lesser appointments at press time.

Rinella believes that the current economic crisis will cause some higher ed institutions to think long-term and consider revising the “fundamental model” of the services they deliver to students.

At present, he says, in addition to tuition, students pay fees for “a whole bundle of things, like student activities, parking, athletics, and health services, whether or not they want to buy them or can afford them.”

What might emerge over a number of years, he suggests, is a “bare bones” educational model that will allow students to pay only for instructional programs while institutions begin to pull back from some noninstructional services or contract them out.

Rinella likens this to the University of Phoenix model—“straight-ahead instruction with a minimal amount of student support services.” A new, scaled-down model could combine both face-to-face classroom instruction with distance education but “without all those accoutrements that universities can no longer afford to offer and students don’t need or want or can’t afford to buy,” he says, adding that it “doesn’t mean every university should move in that direction.” Rinella does believe, though, that it eventually will emerge initially at a “selective few” institutions, probably in high-population areas. “I have no idea whether anyone is looking at that model right now, but the next generation of higher ed might begin to evolve that way.”

Alan Dessoff, a freelance writer based in Bethesda, Md., blogs about higher education legislative issues for University Business. He is a former reporter for The Washington Post.