Increasing Affordability and Decreasing Costs

The November meeting of the AGB Council of Finance Committee Chairs opened with a welcome from Andrew Lounder, associate vice president for programs, who outlined AGB’s plans for the National Conference on Trusteeship meeting in Boston on March 26, 2024. In particular, he highlighted a three-hour session for all members of AGB’s five councils focused on the key strategic issues facing higher education leadership today. David Bass, AGB’s executive director for philanthropic governance, spoke next about an upcoming 2024 AGB workshop on endowment governance covering, among other topics, organizational structures, research, outsourced CIOs, and the alignment between investment policy and strategy.

AGB’s Interim President and CEO Ellen-Earle Chaffee then also welcomed the council members and expressed her appreciation for the many contributions that the councils have been making to advance AGB’s mission. Mary Papazian, AGB’s executive vice president for strategic planning, offered her own welcome, as well, and said she was looking forward to working with all the councils in the future.

The conversation then turned to the meeting’s primary agenda topic: increasing the affordability and decreasing the costs of colleges and universities. In preparation for the discussion, AGB staff distributed to council members a Wall Street Journal article on the topic and a report from the American Institutes for Research’s (AIR) Delta Cost Project: Trends in College Spending 2003-2013.

The Wall Street Journal piece focused primarily on public research universities, suggesting that their spending increases were primarily driven by major building sprees, investments in athletic programs, and administrative bloat. Titled “Colleges are spending like there is no tomorrow. ‘These places are just devouring money,’” it implied that higher education institutions were making little to no effort to control costs, improve productivity, or root out inefficiencies in their business model. The AIR Delta Cost Project, which examined college and university cost increases and spending patterns from 2003 to 2013, confirmed the relentless rise in expenditures. It reported that spending increased during that period across all categories of both public and private higher education institutions.

In reviewing the data, council members learned that median spending by public institutions increased by 38 percent between 2002 and 2022, while enrollment grew only 21 percent. The jump in spending at public institutions was significantly higher from 2002 to 2012 (30 percent) than from 2012 to 2022 (10 percent). On a per-student basis, median spending rose by 15 percent during the two decades.

Both public and private institutions spent more on instruction from 2003-2013, but the expense drivers that rose the most per student across all types of public institutions were: (1) student services, (2) academic support/institutional support, and (3) instruction, while expenditures on operations and maintenance were uniformly reduced. For all types of private institutions, the leading expense drivers were (1) student services, (2) academic support, and (3) instruction, and most of the cost reductions were in public service and research.

The data also showed that for every $1 cut in state support, public institutions increased their tuition and fees by $2.40. That translated to an average cost increase per student of 64 percent over the period, adjusting for enrollment growth.

Council members also learned that, according to the Delta Cost Project report, “Across all higher education, revenues per FTE [full-time-equivalent] student were higher in 2013 than a decade earlier, but only private institutions and public research universities fully recovered revenue losses from the 2008 recession.” Most public and private four-year institutions funded new spending in 2013 through fairly equal contributions of student tuition revenue and institutional resources—state appropriations in the case of public institutions, and investment and endowment returns and other revenues at private institutions. After four years of sharp cuts, state and local appropriations had largely leveled off by 2013, allowing colleges and universities to stop shifting additional operating costs onto students. Yet tuition revenue still financed a large portion of education-related spending at public and private four-year institutions.

Council Member Discussion

In the subsequent discussion, council members questioned the findings in the WSJ article for several reasons. They noted that the article did not take into consideration the impacts of the 2001–2002 tech bubble or the 2008 recession on college and universities budgets. They also observed that the authors of the article did not analyze the effects of certain state public policy actions, such as capital-spending shifts or increased state employee pension fund costs. Nor did the article consider the financial challenges that institutions experienced related to retaining faculty in highly technical fields like STEM or cybersecurity or the increases in expenditures required to keep up-to-date with technology, offer needed student services, and meet regulatory requirements.

In addition, council members said, the WSJ article neglected to mention that colleges and universities cut or shifted costs internally to cover those high-priority needs and obligations significantly more than they raised tuition rates. It did not acknowledge colleges’ efforts to promote efficiencies—by adopting new learning technologies, adaptive AI-driven remedial programming, and alternative funding models, for instance—or recognize institutions’ heightened efforts to raise more philanthropic support.

While council members found fault with some of the article’s omissions and conclusions, they uniformly expressed the need for higher education to address escalating price increases and costs. The finance chairs generally agreed, however, that the problem is more nuanced than the article would suggest.

AGB staff also shared several findings from a Chronicle of Higher Education article, “Perspective on Generative AI,” to see if council members thought investments in new technologies might help increase affordability and hold down costs. Council members were not persuaded, however, that was a winning strategy. Some said that, in their experience, for every inefficiency that technology resolved, new program and service demands emerged. Others observed that, rather than saving money, adoptions of new technologies had, in fact, led to cost increases at times. Still others commented that cutting costs does not necessarily produce good outcomes, particularly if it diminishes educational quality or reduces or degrades services for students.

Finally, council members shared some recommendations for boards for addressing college costs and affordability. They advised boards to focus on understanding the various lines of businesses in which their college or university is engaged and to evaluate and measure each one independently rather than through a single prism. Council members also suggested that another approach that boards might want to consider is to develop new incentive structures for presidents and senior leadership.

Questions Boards Should Ask

The conversation was far ranging and brought to light several questions that committee and board members should ask when considering their institution’s often-competing objectives of increasing affordability and decreasing costs.

• “Where is the accountability, and what is the role of trustees at higher education institutions?” That’s the question that the WSJ article raised rhetorically in referencing the “out of control” revenue and expense growth at colleges and universities.
• How well does your finance committee understand the fundamentals of the dual challenges of increasing affordability and decreasing costs? What have the board and top administrators done, or are they doing, to bring and keep members of that committee up to speed?
• As the Delta Cost Project report asked, while it is possible to track revenue and expense growth, how can boards assess whether investments are being made in areas that benefit students, improve outcomes, and increase institutional efficiency?
• If the Delta Cost Project were to release a 2013–2023 version of their Trends in College Spending report tomorrow, what would have changed? And what does that imply about the current contours of the affordability-and-cost dilemma?
• The Delta Cost Project reported that institutional productivity increased from 2003 to 2013, a period of growing enrollment. Given that, should trustees expect productivity to decrease in higher education’s foreseeable future due to predicted enrollment declines?
• How have cost shifts and a reduced revenue base impacted institutional budgets, and how might they lead to revenue neutral budget deficits? What are the long-term implications? How might they have played out during the decade since 2013?
• What do board members wish that concerned and responsible people—faculty and staff members, senior administrators, students and their families, alumni, legislators, policymakers, and others—better understood about issues concerning college costs and affordability? Has any board taken on the work of educating those constituencies in a major way?

Stephen T. Golding is a senior consultant for AGB Consulting and the ambassador to AGB’s Council of Finance Committee Chairs.

With thanks to AGB Mission Sponser, Baker Tilly for its support of the Council of Finance Committee Chairs.