Business Advisory Services Blog

Nonprofit Accounting: Higher Education – Mid-Year Update

As we find ourselves not only past the middle of calendar year 2013, but also the end of the fiscal year for the vast majority of colleges and universities, it seems like an appropriate time to check in on recent industry trends, and update thinking on the top issues facing higher education in the coming months.

The Wealth Effect

With the steady improvement of the national economy has come an uptick in charitable giving. Consider the headlines in just the past few months alone:

  • Stanford University becomes the first institution to collect $1 billion in a single year.
  • According to the Council for Aid to Education, fiscal 2012 contributions nearly reach record levels previously set in 2008 ($31 billion in 2012; $31.6 billion in 2008).
  • $100 million-plus gifts were once the exception; now they appear commonplace.
  • Rice University, with a student population of 5,800, recently announces it has reached its multiyear capital campaign goal of $1 billion.
  • Duke receives a $5 million gift to its athletics program as part of a $3.25 billion capital campaign.

The sudden influx of revenue and cash comes as a welcome occurrence after several years of depleted reserves, sagging endowments, declining government support and, in some cases, headcount reductions. But what is an administrator to do with this sudden wealth? As my article in the Winter 2012 edition of the Nonprofit Standard noted (see It’s Going to Cost HOW Much?), many boards are now looking to re-energize strategic and capital construction plans. But concerns still exist and credit markets continue to be wary of overly ambitious plans. Credit agencies have recently placed a number of schools on credit watch as concerns over enrollment persist. Institutions must remain relevant and provide academic programs that attract students, while being mindful that costly amenities come at a price.

Peaking enrollment

Conventional wisdom asserts that higher education is countercyclical. As we saw beginning in 2008, the number of students enrolled at community and public colleges steadily rose as displaced workers tried to learn new skills necessary to re-enter the workforce. The trend was also seen at private colleges and universities, although, there, price sensitivity somewhat muted the uptrend.

The growing number of students allowed some schools to easily fill their classes, while others moved up on selectivity. Harvard, MIT and others recently announced record low acceptance rates based on the high number of applications received. Other schools report classes with record high standardized test scores.

That trend may have peaked in 2012. While one year does not make a trend, a recent report from the National Center for Educational Statistics shows declining enrollments in 2012. Further anecdotal evidence is seen in published reports of a number of schools missing their fall 2013 enrollment targets. Schools that are heavily tuition dependent will begin to see increasing pressure to build their classes. Those with limited reserves or endowments will find it increasingly difficult to compete on price and we will begin to once again see downward pressure on net tuition revenue.

Cost pressures

Although it seems that for now the debate in Washington regarding student loan interest rates is over, it will not be long before the focus once again turns to the cost of higher education. As noted above, during the recession, many schools faced difficult choices and began to take a critical look at their costs. Many institutions froze new hiring, trimmed benefits and, in some cases, reduced headcounts. The federal sequestration also had a chilling effect on many large research enterprises with schools closing labs and scaling back institutional funding.

However, there is a growing sentiment that higher education is bloated with layers of administrators and inefficiencies. There will continue to be a premium placed on those providers who can deliver a quality education, not for the lowest price, but for its perceived value. The race to build bigger, more consumer-friendly student centers and campus amenities came with a price. The larger operating expense base has to be covered either through net tuition revenue, fees or contributions.

Competency-based education

Recent developments surrounding competency-based education will likely allow more schools to expand their programs. The decision by the U.S. Department of Education to allow federal financial aid to be offered to students in competency-based programs changes the entire tone of the conversation. Now a whole new segment of the student population will be able to more readily access these programs. Time will tell how these evolve, especially in light of improving economic conditions and the disincentive for workers to obtain new skills.

I expect more than a few institutions to use competency-based programs to address what will be a growing class of baby boomers wanting more in their retirement than prior generations. Second careers or simply the desire to learn for the sake of learning will attract more retirees to programs that recognize their prior accomplishments. Those institutions that can satisfy the needs of “second-degree” learners will benefit from a broader alumni base.

MOOCs: The trend continues

It seems no article about the state of higher education is complete without a reference to Massive Open Online Courses (MOOCs). What was once an interesting experiment has become mainstream, with ever increasing numbers of institutions signing up with well-known platforms from edX, Coursera and others. Details are also emerging on pricing and we can begin to see how schools can monetize their association with MOOCs.

But while momentum is building to push MOOCs out, there is also a growing tension on some campuses. At Amherst College, the faculty recently voted not to permit the use of MOOCs in their programs. Elsewhere, conflicts have arisen between the rights of faculty to develop and sell their courses online, and the institutions’ belief that they own the content.

These are interesting times in higher education. While I would not quite call it a crossroads, the pressures being exerted both inward and outward will change the landscape. The pace of change is yet to be determined. That being said, I don’t think the pace of change will be glacial. Campus leaders will need to be nimble and recognize the trends and be prepared to lead, follow or get out of the way.

 

By Tom Gorman, CPA – BDO

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2013). Copyright © 2013 BDO USA, LLP. All rights reserved. www.bdo.com

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