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Combating the Bermuda Triangle of higher education

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Climate Risk and Resilience

December 17, 2020

COVID-19, the insurance hard market and social injustice have shaken up the financial balance sheets in higher education.

Financial benchmarks and projection models employed for decades by business and accounting professionals engaged by institutions of higher learning to prepare annual budgets, grow surplus accounts and guide investments have suddenly been rendered useless. Within the first few months of the COVID-19 scare, colleges and universities knew they were in financial trouble as revenue dried up while expenses piled on. Rebuilding financial platforms to project a year into the future is going to be difficult with a war waged on three major fronts: 1) COVID-19, 2) the insurance hard market and 3) the unrest surrounding social injustice. Facing one of these challenges would exhaust any business contingency strategy, but combating this “Higher Education Bermuda Triangle” has already sent up white flags at institutions struggling to remain solvent.

University and college powerhouses will make it through to the next stable period, but small to midsize private institutions with weak endowments will struggle. Even before the pandemic hit, a number of colleges were in trouble financially.

Institutions no longer accepting new student applications, such as the San Francisco Institute of Art, is a tell-tale sign the end is potentially near, and closure is looming. Lawrence M. Schall, president of the New England Commission of Higher Education and a former president, inherited a debt-ridden university. In a recent higher education article, Guidance for financially at-risk colleges1, he stated that an institution must meet nine standards to achieve accreditation, and the failure to meet Standard No. 7: Institutional Resources, means the financial resources can no longer support the college’s mission.

The lack of fiscal management in higher education has made preparing for a crisis extremely difficult. Beyond the historic levels of bureaucracy that stymie necessary quick decisions, the industry as a whole is up against misaligned strategic planning and attitude.

Resources

Most university and college operations are paid for by revenue from tuition. It has been a relatively stable approach over the years with variations in enrollment riding the peaks and valleys of the U.S. economy. Recruitment strategies adjust to capture the ebb and flow of the number of high school graduates, changing demographics and other past data to predict trends and subsequently establish tuition costs.

Endowment business models follow similar strategic planning steps by keeping pace with successful graduates and legacy donors based on data sources. Another part of the funding track comes from government appropriations and grants. There isn’t much control of this process because it lies at the mercy of elected officials. One variable that often separates an institution from its competition is the ability to build an auxiliary financial pipeline through successful sports programs, third-party partnerships, and extending its institutional academic footprint around the world. Although these resources do fluctuate based on various modifiers, the data and the analysis of how that data is viewed mostly remains constant. The stagnant workforce resulting from hiring those who have only worked in higher education leads to scant room for innovation in the business and operations of the college.

Misaligned strategic plans

The mission of all institutions starts and ends with academics. After all, an institution thrives on attracting and educating students to make them successful enough eventually to enable them to give back by donating money or, better yet, enroll their children in the future. It is a cycle that churns the machine, and it requires hiring the best faculty that can be afforded.

The strategic planning process on a campus is designed to identify the necessary components that will shape and grow the institution. It is a widely accepted process that manifests as a document of goals and objectives for the various leaders to complete in order to uphold the mission of the institution. With academics being the central focus, most strategic plans are naturally weighted in that direction. However, the infrastructure that supports the academic model needs the appropriate attention in the planning document to promote the continuation of the institution’s mission. This is the Achilles heel that leaves a university or college vulnerable during a crisis if not enough attention is given to maintaining the infrastructure. Strategic planning documents are littered with terms like growth, advance, positive outcomes, build, develop, generate, increase, etc. What you find is a how-to guide to spending with little attention toward how to pay for it. Keep in mind that increasing enrollment, which in turn increases tuition income, only financially supports the operations of the college and is not intended to pay for the new academic building or residence hall to house the student expansion. This unfortunately also adds to another budget-draining list...deferred maintenance.

Attitude

Higher education has always been a “Teflon” industry when it comes to employee downsizing. In the past when the nation’s economy dipped, most institutions shielded their workforce from layoffs electing to simply freeze requests for new hires. Usually, the faculty was considered untouchable and, therefore, hiring restrictions didn’t apply. The power of employee and faculty unions coupled with a leadership fearful of receiving a vote of no-confidence from campus academia protected human capital from being used as a remedy to balance the budget. This past attitude of not studying this major expense line in the institutional budget when the overall economy is in trouble is catastrophic — especially when the biggest slice of a college’s budget is compensation.

Enter mergers and acquisitions

Some institutions of higher learning have already taken to a path of merging, but the experts agree that merging when there is no cash on the balance sheet leaves little to negotiate with.

Thus far in 2020 alone, the following institutions announced merging all or part of their assets:

  • Pacific Northwest College of Art (OR) to merge with Willamette University (OR)2
  • Martin Methodist College (TN) to become a part of the University of Tennessee System (TN)3
  • Emerson College (MA) to procure the majority of Marlboro College’s (VT) assets after that institution already closed in 20194
  • Wesley College (DE) to be acquired by Delaware State College (DE)5
  • Boston College (MA) to acquire Pine Manor College (MA)6
  • Watkins College of Art (TN) to merge with Belmont College (TN)7

The realities of today’s pandemic, the hardship of the insurance market and the social unrest on campus have revealed that the college business model appears to have outlived its time. Many institutions seem to be financially managed like the federal government, piling up debt faster than determining how to pay for it. Lawrence Schall faced this identical situation when taking the reins of a college, according to the trade magazine Inside HigherED™. His approach was simple: align expenses to match actual revenue, make the board responsible and charge the executive leadership with making it work.

The process of merging entire campus cultures into one harmonious system is indeed a pipe-dream due to the imbalance of power. A college merge usually occurs because one campus can’t survive, and the other college has the capital to take on the debt and in essence, therefore, dictates the terms for the future. That merging of relationships usually doesn’t fare too well, as played out this past fall when the president of the Watkins College of Art was subpoenaed to appear in court over the impending merge with Belmont College. According to an Inside Higher Ed article, the courier who attempted to serve the court papers at the home of the president was met with a gun pointed at him by the husband.8 These are not marriages made in heaven.

Another reality working against survival is the geographic locations of many colleges. Some institutions are clustered within a few miles of each other and struggle to promote what makes them different (and better) than a neighboring school. Small to mid-market private colleges are particularly vulnerable to this threat.

So, is merging really the answer, or is it just a way for a larger predator to devour the competition in its backyard? Some would argue it is a question of campus overload; the smaller schools need to go away because they are outdated.

Remember the statement of aligning expenses with anticipated revenue as a process toward financial sustainability? It seems like Budget Management 101, but the biggest expense on the balance sheet is payroll, and leadership can’t simply hack away at jobs to rectify the issues — plus doing so can create bigger problems. Case in point is the Berkeley Social-Injustice Institute that is slated to close. The leadership sites poor financial stewardship and an aged facility close to collapse as the central reasons. Despite assurances from campus decision makers that they’ve been transparent in the matter and will make efforts to find new locations for the programs, Injustice Institute supporters claim racial disparity in the face of one of the nation’s most liberal college systems.9

Collaboration over merging

Consolidation is more of what higher education needs to do to ward off an impending takeover or worse, a total collapse. But in these turbulent times, the emotional element needs to be removed from the decision making so a proper objective analysis of people, processes and programs can be performed. This also includes the reconstruction of benchmarks and financial standards. Running analytics across many disciplines, including cybersecurity, will quickly add to the process of determining what needs to be consolidated or eliminated. Data doesn’t lie, but it can be misinterpreted through improper assessments by those who don’t want change. Outside experts in actuarial science and data analysis can begin to design a path to recovery without an internal hidden agenda that on-campus evaluators may possess.

Throughout the most recent semester, sports programs have been a big target for reduction or elimination, and with that goes jobs and perhaps large donors. Some schools have gone back and changed their decision to cut sports based on negative publicity. Merging, slicing and dicing without the proper analysis of data is not only foolish, it leads to poor decisions and having to confront another challenge: repairing the reputation of the institution.

Building partnerships avoids going it alone

The path toward sustainability requires an institution to consolidate and partner with other institutions where duplication occurs and to generate a business model that supports each other. The use of consortiums in risk management has helped lower insurance premiums and provided better loss control among the members. The sharing of facilities is another way to alleviate expense pressure. In Maryland, Loyola University and Notre Dame University share a library. With one facility serving both institutions, the cost savings can help complement any expansion that may be needed. Health centers and medical services can certainly extend resources and services in a non-partisan way to help neighboring colleges. Athletic facilities and services for student and employee wellness programs can be shared and are a good way for some institutions to mitigate the cost of maintaining facilities, employing staff and assuming unnecessary liability. At the Maryland Institute, College of Art, faculty, staff and students could take advantage of the gym facilities of the University of Baltimore, one city block away. There are also auxiliary services, such as printing operations, mail services and café services to name a few, that can share equipment costs along with talent across the thresholds of many campuses. There are strong inter-institutional arrangements in place for building solutions in focused committees based on topics such as admissions, residential life, facilities and event management, athletics, etc. Revenue splits and expenses may require in-depth analytical and actuary expertise to work out equitable and profitable sharing formulas. Also, managerial responsibility, staffing, transportation schedules, etc. all lend themselves to a strong third-party partnership which can be managed by a consortium. It is this type of collaborative effort that may help struggling institutions turn around and begin to thrive again.

Sadly, when all else fails, for some it will be time to consider the M&A (mergers & acquisitions) process — a term once reserved only for private business — as the phenomenon of the Bermuda Triangle of Higher Education will certainly become more prevalent for years to come. Each decision going forward will be tested from a variety of different perspectives; it is paramount to team with a broker or specialist with the global expertise to assist in bringing the right solutions to the right campus.

The one certainty is hope

With the COVID-19 vaccine on the horizon, the immediate future is still bleak for many institutions that have been fighting financial battles for years. The war for them is lost despite the battle that will be won (eventually) warding off the pandemic. For the remaining universities and colleges attempting to stay afloat financially, the framework of the campus culture will require business to be conducted in a way that mirrors the rest of society. This undoubtedly will equate to far more third-party business relationships being formed to prop up institutions and move the needle back in the right direction for the industry of higher education. The days of taking solutions off the shelf or touting a one-size-fits-all approach have passed. It is a new day, especially when it comes to sustaining the financial balance sheet in higher education; each and every institution must find the right path to take the next step.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

Footnote

1 Schall, L.M. (2020, October 13), A head of a regional accrediting agency offers guidance to institutions potentially at financial risk (opinion), Inside Higher Ed. https://www.insidehighered.com

2 McKenzie, L. (2020, September 18), Willamette Announces Another Merger Deal, Inside Higher Ed. https://www.insidehighered.com.

3 Whitford, E. (2020, September 14). University of Tennessee System to Acquire Martin Methodist College, Inside Higher Ed. https://www.insidehighered.com.

4 Jaschik, L. (2019, November 7), Marlboro to Become Part of Emerson, Inside Higher Ed. https://www.insidehigher.com.

5 Alamdari, N. (2020, July 9), Delaware State University signs agreement to acquire Wesley College, Delaware Online. https://www.delawareonline.com.

6 Larkin, M. (2020, May 13), Under Financial Stress, Pine Manor College To Join Boston College, wbur. https://www.wbur.com/edify.

7 McKenzie, L. (2020, January 29), Another Art School Merger, Inside Higher Ed. https://www.insidehighered.com

8 Whitford, E. (2020, March 20), Watkins-Belmont Merger Controversy Continues, Inside Higher Ed. https://www.insidehighered.com.

9 Zehneis, M. (2020, October 11), Berkeley Social-Injustice Institute to Be Shuttered, But Not Without a Fight. https://www.chronicle.com.

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