Reprogramming Our Financial GPS

By Mark Putnam    //    Volume 24,  Number 3   //    May/June 2016

Will the roadmaps of the past be the roadmaps of the future? I pondered that question in the fall of 2009, shortly after accepting the offer to become a college president. The Great Recession technically had passed, but the aftereffects would clearly continue. Speculation abounded about how quickly things would get back to “normal.” A few pundits described potential scenarios for a “new” normal. Most serious analyses I read at the time indicated it likely would be 10 years before the toxicities released into the global economy beginning in 2007 would be fully processed. Some wondered if there might be more permanent structural changes in our economic future. Amidst all the speculation, what became apparent is that many of the traditional assumptions made by college and university leaders would no longer be reliable—particularly for boards.

For roughly two decades, higher education has settled into a general pattern in financial decision making that is dependent on specific sustained conditions. But as with many industries, the underlying conditions have changed and the pattern has been disrupted. It’s not that colleges and universities have avoided the impacts of economic cycles in the past, nor have these institutions been insulated from demographic shifts resulting from the baby boom–baby bust–echo boom wave pattern of the past 50 years. Rather, the incompatibility of these broad economic and demographic realities, coupled with the long-standing assumptions made by higher education leaders about the conditions of our institutions, has left us with a GPS system that will no longer navigate us to our intended destination.

With that in mind, there are five conditions we must understand and rethink in charting a new path for the future. At present, most of us are doing our best to course correct on an ad hoc basis, depending on the circumstances of the day. However, financial planning in this environment is especially challenging, as short-range conditions too often are informing long-range decisions. Governing boards tend to rely on static assumptions about their institutions and the settings in which they operate. Resetting these assumptions is a high-priority task for all boards serving institutions of higher education.

Enrollment volatility will likely persist for at least the next 15 years. Those of us who entered into presidential leadership in the wake of the Great Recession know much of the first decade of this century was very favorable for higher education. The population of high school students was on the rise through 2009. The pipeline seemed endlessly full, and many institutions touted large classes with increased quality indices and greater diversity. This collective optimism unleashed a growing competition for campus amenities that was fueled primarily by debt, thus adding to the structural costs of operating our institutions.

Yet, too many of us were shortsighted. The drop in the high school population that we are now facing should have been easily anticipated by data readily available. For most, however, the exuberance of enrollment success yielded assurances that market position would not only endure, but also strengthen, despite the downward curving lines on the charts.

We now have demographic projections for high school students out to 2028. The picture is one of fluctuation and pronounced regional differences. The numbers of lower income and racially/ethnically diverse students will increase significantly. Comprehensive projections for enrollment also are informed by growth in the number of graduate and professional students, as well as adult and continuing education students. There is no less volatility in these markets as we witness wide swings in all sectors. There are clearly winners in these market conditions, and there are certain regions—the South and the West, as opposed to the Midwest and the Northeast—or sectors of higher education—such as those offering online or hybrid education—experiencing growth. Some mistakenly feel insulated from these challenging conditions given present circumstances. Yet, when the broad conditions are this hazardous, all would be wise to exercise caution.

Board committees focused on admissions and enrollment should carefully study these projections and be prepared to ask questions about institutional positioning, strategic planning, enrollment goals, price and discount rate, and student persistence, among other topics related to the institution’s enrollment management policies and practices.

Downward pressure on tuition will require restructuring the cost of operation beyond what we currently expect. Decisions about tuition pricing and discount rates have become exceedingly complicated—data released last year by the National Association of College and University Business Officers (NACUBO) indicated that private institutions were discounting tuition 48 percent in 2014. There is obvious market volatility as institutions are beginning again to experiment with pricing beyond generous discounts. We are seeing a renewed interest in tuition resets at significantly reduced levels, tuition freezes, differential tuition rates for specific programs, retention incentives for an eventual “free” year—the list goes on. There is little evidence to suggest any of these will lead to a widespread response across the higher education landscape, yet the willingness to experiment is a signal of some important changes ahead.

If we agree value equals perceived quality/net price, then pricing volatility also is likely to persist for some time as market segments within higher education respond to perceptions of students and parents. Just as a new crop of corn grows and is harvested in a single season, the market for “traditional” students entering college from high school is new every year. This reality, coupled with shifting societal perceptions, likely will result in unstable student markets for years to come. Concerns about personal economic success are paramount; price sensitivity is high, but so are the expectations for services, amenities, and academic quality.

We face the challenge of setting a new course in the design of our curricular and co-curricular experiences for students that will achieve our educational goals in a cost-effective manner. Despite the excessive hype over online courses, MOOCs, and for-profit providers, all of which have encountered some significant headwinds, there is much for us to consider in this new landscape. Most institutions have squeezed all we can from operational efficiency, even as conversations about the scope of the curriculum and methods of instruction have become increasingly common. Our task as presidents and board members is to prepare our campuses for this reality, both before and as it emerges.

Governing boards have the opportunity to change the conversation on campus by encouraging a new perspective. At the end of the day, we cannot simply cut, borrow, and discount our way to success. The short-term effects of these kinds of interventions can be beneficial, but there are consequences. Austerity alone leads to diminished programs and services, which in turn can lead to decreasing enrollment, and the downward spiral begins to take control as budget cuts lead to further losses in revenue. A balanced approach that is highly targeted at redeploying budgets can more effectively generate revenue through reallocation when coupled with reinvestment. Such an approach can serve to strengthen the overall revenue picture over time.

Some argue that we simply need to be tough-minded and demand that management cut costs sufficient to balance an annual budget. However, if the perceived quality of our programs and services erodes too far, then we may have difficulty supporting our pricing (leading to further discounts) and eventually compromise our value proposition. Collaboration on this effort is key as administrators work closely with board members on a multi-year program of reallocation and reinvestment. The shared goal here is the generation of revenue from all sources.

Debt-fueled campus development will become increasingly high risk. As noted earlier, competition has, in part, driven the building of debt-supported facilities and infrastructure. That is, however, not the only factor. Many campuses in the United States expanded facilities dramatically during the 1970s. It was a period of immense enrollment growth for higher education, beginning in the early 1960s and continuing to the mid- 1980s. The challenge we face as leaders today is that these buildings are now more than 40 years old and exceeding their useful life spans. Renewal of facilities and related challenges of deferred maintenance always have been matters of concern. The level of expansion during this earlier era, however, has left many institutions with a deteriorating infrastructure at a time when both economics and demographics are not favorable and may not become favorable at the levels we would hope for some time to come. The temptation is to take on more debt to renew facilities needed for greater competitiveness in the current market.

It is a tough situation by any measure. Some institutions may have more debt capacity available; many do not. If we recognize that our current students and young alumni today are the potential trustees and donors for the future, will we leave them with a debt burden too challenging to manage? Taking on a 30-year debt commitment for an institution, given the enrollment volatility we can reasonably expect, is a difficult call to make. It brings a different perspective to the idea of intergenerational equity. It has long been the view that institutions will slowly inflate their way out of a substantial debt burden as the U.S. economy grows and gradual inflation makes debt service less of a burden in the long run. This may not be a safe assumption to make any longer.

There is another factor that bears comment as well, that of bond ratings. The debt service structures we employed in recent years are very complicated, and many have been restructured to minimize risk. The earlier popularity of variable rate demand bonds, coupled with interest rate SWAP agreements, allowed for money to be borrowed at extremely low rates, while managing risk. But the exposure to interest rate volatility that emerged, in addition to increasing expectations for liquidity as a hedge against potential default risk, resulted in many institutions experiencing downgrades by the rating agencies. Higher education institutions, as a whole, have a lot of debt to work out of the system, and as interest rates invariably rise in the coming years, additional debt will beget more risk. It is also worth noting the pattern we have seen in recent bond ratings is dependent more on non-financial indicators, including enrollment trends, strength of market position, and quality of leadership, among other factors. This may make private placement of debt more attractive to institutions, but it will come at a cost.

Trusteeship is an inheritance. Together, we accept the stewardship responsibility for financial decisions made long ago. We receive the gifts and burdens of our predecessors, but we must always remember that we work for our successors. Debt is an intergenerational responsibility that balances the needs of the present with the unpredictable realities of the future. Increased caution is warranted at a time when the arms race for facilities is simply growing too expensive to maintain.

The purposes of an endowment will be re-examined. The term “intergenerational equity” used above most commonly has been referred to in the context of endowment management. Early in my career, I was taught that the endowment had three purposes: First, to provide intergenerational equity in institutional wealth to serve the needs and interests of future generations. Second, to provide program support and academic investments in the present. Third, to act as a reserve in the case of severe financial conditions. These three purposes made sense when I learned them, and they continue to make sense today.

From the latter half of the 1990s to the period of the Great Recession, I often heard references to a fourth purpose, which suggested an endowment also was intended to leverage more debt. Terms like “headroom” for managing debt were more common in conversation. Fundraising campaigns for endowment growth primarily were presented as a means for program growth and support, and this was certainly true. At the same time, the conversations in the financial planning sessions also included analyses about endowment levels required to make financial ratios stronger, support bond ratings, and leverage more debt. Despite predictable economic cycles, students were plentiful, tuition pricing was accelerating, research funding was on the rise, and markets were yielding impressive returns. Most institutions were driving endowment-spending rates down well below 5 percent in order to increase the level of the fund as an implied source of collateral. Using the endowment in this way rested on the assumption that the annual operation of the institution could live on current operating revenue more and more, with less and less support from the endowment.

When the Great Recession manifested its impacts on higher education, endowments endured significant losses. Even as there has been a slow, albeit volatile, recovery in financial markets, many institutions are now placed in a bind with downward pressure on operating revenue at a time when debt structures are strained and bond ratings are trending negative. As endowmentspending patterns gradually readjust to support campus needs in the present, we are discovering that using the endowment as a means for leveraging debt is a very high-risk move.

Boards face the challenge of balancing intergenerational demand on the endowment even as presidents value stability and predictability in these times of volatility and uncertainty. Boards can reduce budgetary risk in part by avoiding wide fluctuations in endowment spending based on dated and inefficient spending rules that evolved through periods of relative economic stability. A strong argument can be made for setting annual endowment spending strategically in the context of a multiyear financial plan. Of course, appropriate boundary conditions can and should be set to avoid overspending. That said, boards should consider setting a multiyear fixed dollar amount of endowment spending in the budget (subject to periodic adjustment). This will lead to better budget planning and clearer fiscal discipline.

Living donors will give less from stored wealth and more from current income, as planned giving becomes the principal source of major gifts. Colleges and universities in all sectors of higher education rely on the generosity of donors. The Great Recession, however, also affected how we will approach donors in the years to come. Prior to the recession, I remember hearing increasingly frequent conversations about the willingness of major donors to part with wealth and to lower net worth in service of their philanthropic interests. At that time, market trends were breathtaking, and many were in a position to increase their generosity immediately. What changed? It has been said that those who lived through the Great Depression of the 1920s and 30s tended to be very conservative in managing wealth, had a strong connection to personal property or real estate, and saved everything they could as a hedge against perceived risk. That mentality has diminished in American society as firsthand experience has faded and the members of earlier generations gradually have been marginalized by age and death.

The Great Recession appears to be having a similar effect, though not to the same extent. Many donors I encounter are purposeful in retaining wealth for the combined interests of their later life and for family members in the generations to come. The particular stories vary widely, but the pattern is characterized by a plan to preserve wealth in the face of economic uncertainty and secure a future for those in their care. As a result, generosity remains strong, but more gifts are coming in the form of pledges paid out of earnings over time. There are more complex gifts involving trusts to care for immediate and anticipated family needs. More are thinking in terms of planned giving to both manage the present and secure the future.

At a time when operating revenues are stretched, philanthropy will be a present source. However, donor generosity likely will more often emerge in forms that are deferred, rather than immediate. The work of fundraising has never been more important, but cultivation and stewardship will require more careful planning and execution over a much longer period of time. Despite the immediate financial pressures boards are experiencing, all would be well advised to build a solid base of planned giving for the years ahead. The reality is that in this era of American higher education, the deepest well of resources is not likely to be in the form of debt, high investment returns, increasing state appropriations, or burgeoning enrollments. The best long-term source of support is likely to be found in bequests, as wealth is increasingly concentrated and eventually transferred.


These five conditions describe the key factors boards need to reconsider in reprogramming our financial GPS systems. Taken together, they tell us student enrollments will be volatile across levels and sectors, tuition pricing will experience downward pressure requiring a restructuring of the cost of education, access to debt will be limited if available at all, the pressure on endowments for current needs will expand, and donors will be less likely to part with capital and more likely to fulfill pledges over time through planned giving instruments. We add to this summary an uncertainty about federal- and state-level policies that will impact higher education in the coming years; just for starters, the reauthorization of the Higher Education Act, with broad ramifications for our students and institutions, looms.

My original question has been answered: the roadmaps of the past will not be the roadmaps of the future. The challenge for us now is to reset our thinking as board members, challenge the underlying assumptions of the past, reprogram our financial navigation systems, and watch for changing conditions in the external environment. The task of trustee leadership for this generation is to preserve the essence of our educational missions in a context of immense change.

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