• October 31, 2014

Few Finance Chiefs Are Optimistic in Face of Slow Recovery

Loss of state support and trouble raising tuition worry leaders

Fewer than one-third of college chief financial officers are more optimistic about the state of the U.S. economy today than they were a year ago, according to a new Chronicle-Moody's survey of nearly 500 college CFO's. Yet when it comes to the financial prospects of their own institutions, a tad more than that—39 percent—are more optimistic today.

The survey suggests that colleges are still quite a ways from easy street, following the worst financial decline in decades. While 60 percent of the CFO's said it was "very unlikely" that their institutions would make layoffs in the coming year—and an additional 18 percent said layoffs were "somewhat unlikely"—nearly 39 percent said it was still very or somewhat likely that their institution would freeze hiring for nonfaculty positions.

As they begin the 2012 academic year, CFO's of community colleges and other public institutions rank the decline in state support as far and away the most worrisome factor facing their institutions. "Northern Arizona University is becoming a semiprivate university," said its vice president for finance and administration, Jennus L. Burton, who responded to the survey on economic conditions and agreed to be interviewed. In 2007 state funds covered about 34 percent of the university's budget; for the 2012 academic year, state funds will cover 24 percent. Although the recession has officially ended, the anemic pace of the recovery is for Mr. Burton and others a continuing source of unease. Projections suggest it could take three or four more years before the economy gets back to 2008 levels.

"That's not great news," said Mr. Burton. For CFO's at all institutions, declines in federal financial support and concerns about their ability to raise tuition remain top worries. CFO's at private and public four-year institutions said competition for students—and at private colleges, the additional problem of tuition discounting, or the proportion of tuition revenue they use to pay for the costs of student aid—is a major financial concern.

And three years into an economic downturn that has forced staff layoffs and budget cuts at campuses across most of the country—while generally shielding faculty members from the worst of the impact—many of the CFO's homed in on the issue of faculty productivity as the greatest obstacle to cost cutting.

Asked in the survey last month to select the one strategy they would use to cut costs or raise revenue if they didn't have to worry about the consequences, nearly 38 percent chose "increase teaching loads," and an additional 17 percent said "eliminate tenure."

Raising tuition claimed about 19 percent of votes, while none of the other choices—instituting mandatory retirements, cutting student services, hiring more adjuncts, or increasing enrollment by changing admissions standards—claimed more than 11 percent.

Frustration With Faculty

That the CFO's focused on faculty productivity is a "really good window into the reality of the business model of colleges," said John C. Nelson, who heads the higher-education practice at Moody's Investor Service.

"That's the last big area where there are really material efficiencies" to be had, noted Mr. Nelson. Since the financial crisis hit, in 2008, many institutions have been overhauling purchasing, instituting energy-savings programs, curbing costs on maintenance of buildings and grounds, and "attacking the costs of staff," he said, but they haven't changed how the biggest corps of their employees spend most of their time. "It's the last area to go for really significant productivity gains."

Larry Goldstein, a consultant who works frequently with CFO's, said the sentiment in the Chronicle-Moody's survey jibes with the concerns he frequently hears from college finance leaders. They aren't (for the most part) saying that faculty members don't work hard, said Mr. Goldstein. But they question the current form of the faculty model, which still allows for senior professors to teach underenrolled classes and degree programs and gives administrators little ability to dictate when and how classes are taught, and whether that model can be sustained financially.

The survey results and the frustration reflected in the anonymous comments of some of the CFO's—tenured and tenure-track faculty account for less than 30 percent of the professoriate, yet one CFO wrote that tenure is "morally unfair and economically strangling institutions"—are a sign, said Mr. Goldstein, that CFO's believe "they've pruned everything they possible can. They're just at their wits' end."

John W. Sell, a professor of economics and finance at the College of Wooster who served for 18 months as the Ohio college's CFO during the start of the financial crisis, said the findings underscore that the institutions that will "survive better" are those at which administrators and faculty communicate about making academic changes.

"It's a mistake for CFO's to view faculty simply as inputs to be optimized rather than partners to be engaged constructively," said Mr. Sell. And "faculty have to understand that the decisions that they make in their disciplinary spheres have implications for their institutions' ability to compete effectively, and this may call for changes that affect course offerings and the curriculum."

Meanwhile, the survey suggests that college leaders will continue to protect faculty and academic programs as much as possible. Just over 50 percent of the CFO's said it was very unlikely that they would freeze hiring of faculty members and adjunct professors this academic year, but only 33 percent said the same would be true for nonfaculty hires.

A Broad Look

The survey results, while not a scientific sampling, do include a broad representation from all segments of public and private nonprofit higher education.

The glimmers of optimism among the finance officers about their own institutions are understandable, said Lucie Lapovsky, formerly a college CFO and president and now a consultant. The economy is still faltering and unemployment remains unnaturally high, but factors that directly hit colleges' bottom lines are improving: The stock market that feeds their endowments is up, and interest rates, which determine their cost of borrowing, are low. And while enrollment remains a challenge for some institutions, at public colleges, she noted, "demand has gone through the roof."

Yet as the survey highlights, some financial trends and worries can matter much more to some kinds of institutions than others.

That disparity is especially clear for community colleges. While only 25 percent of all CFO's said they were less optimistic about the financial prospects of their own institutions today compared with a year ago, among community-college CFO's, 42 percent were less optimistic. About 32 percent of community-college CFO's said it was "very likely" their institutions would freeze hiring for nonfaculty positions, compared with 18 percent over all, and 47 percent said they planned to freeze salaries, compared with 31 percent over all.

Community colleges don't have endowments, and they rely not only on state governments but also on local governments, which are hurting in the wake of sagging real-estate values. With their open-access mission, they also have less ability to raise their tuition to make up for cuts in government support, even when high unemployment rates continue to send increasing numbers of students to their doors.

"The community colleges are the sitting ducks," said Ms. Lapovsky.

It's no surprise, then, that concerns about attracting and retaining qualified faculty were a significant factor for the CFO's of two-year institutions, as well as four-year public colleges; 34 percent of the CFO's at those institutions named that as one of their top three internal issues. Only 10 percent of the private-college CFO's named it among their top three issues.

"How can you say, 'Hey, come here. We're going to cut your salary by 5 percent, but we really want you to come,'" said Patty Charlton, senior vice president for finance and facilities at the College of Southern Nevada, a community college that is now entering its third biennium of lower state support. (Part of the answer, at least in Nevada, which is ground zero for the mortgage meltdown, noted Ms. Charlton, is that "they can get a house pretty cheap now.")

Nevada's community colleges don't get money from their local governments, but elsewhere many do. And community-college CFO's were also more likely than their colleagues at other institutions to track housing prices, a fundamental source of local-government revenue, as one of their top three external economic indicators. Over all, only 18 percent of CFO's named it, but 31 percent of community-college CFO's did. The top three indicators over all were unemployment, stock-market performance, and interest rates.

Few CFO's—about 20 percent—reported that their operating budgets would be smaller for the 2012 academic year than in 2011, and most of those respondents were at public institutions.

The survey also asked CFO's about strategies their institutions were using to raise revenue and cut costs. Only about 9 percent said they were very likely or likely to furlough employees. About 24 percent said they expected to offer early-retirement incentives. "I think we pretty much maxed that out," said Mr. Burton of Northern Arizona, where 47 people took advantage of the retirement offer in June 2010 in exchange for a year's pay, but fewer than 15 did so this year, when the offer was slightly less generous.

Ms. Lapovsky said those results, too, made sense. "You can't keep telling people you're not going to pay them for two weeks. It says we're not planning," she noted. And retirement incentives, she said, can backfire. Some institutions offered it "and got rid of more good faculty than they wanted."

With the stock market starting to recover, fund raising remains a source of hope. More than three-quarters of the CFO's said their institutions did not expect to lower annual-giving goals for 2012. That was even true for four-year public colleges, which are looking increasingly to philanthropy to make up for the loss of state funds.

"We made a strategic decision not to cut advancement," reported Randall Powell, interim vice president for finance and operations at Sam Houston State University.

For most institutions, tuition increases continue to be a go-to strategy. Two-thirds of the CFOs reported having raised tuition and required fees by 3 to 6 percent for the coming year. More than 21 percent said they had raised those charges by 7 percent or more.

Fewer private-college CFO's reported increasing their tuition at such high rates. About 63 percent said tuition increases at their institutions were 4 percent or less. Considering that private-college CFO's were most worried about the competition for students and covering their costs of financial aid, that's to be expected.

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