Outlook on Finance: Spending, saving and securing funds

As colleges and universities move into 2016, campus finance leaders may wish for a crystal ball to help with preparations in the coming year.

Unfortunately, a crystal ball is not in the budget.

Most colleges and universities will continue to face financial hurdles, and although there is much crossover, certain issues will be more or less of a concern based on the size of the university and its student population.

One thing is true across the board: Student expectations are changing, and college leaders must be prepared to adapt their financial strategies to accommodate their constituents.

Increased expenditures

With the pool of students shrinking, some experts say more money must be put into recruiting and retention.

Schools will allocate more resources to these areas and focus on earning greater returns on investment, says David Capitano, leader of the higher education group at the accounting firm Baker Tilly.

Liberal arts schools will act most aggressively, though all institutions will take similar steps, he adds.

Costs associated with risk management and cybersecurity, as well as the need for new programs and physical plant maintenance, will also continue to challenge institutions, says Bob Shea, a senior fellow of finance and campus management for NACUBO.

Colleges are typically exempt from paying local taxes, but UBIT, or unrelated business income tax, represents another potential expense. “This is a technical accounting issue where, if you use your college facilities for something outside the normal domain of teaching and learning, you need to pay taxes,” says Shea.

The costs associated with both federal and state regulatory compliance also continue to impact campus budgets. Early last year, the Task Force on Federal Regulation of Higher Education reported that federal oversight of higher ed is more burdensome than ever before, referring to the regulations as “voluminous” and “overly complex,” and that compliance with regulations is “inordinately costly.”

And then there’s the never-ending need to keep up with technology.

“I would think the only area that is moving faster than light is technology,” Capitano says.

Tuition discounting

The steadily increasing cost of tuition and fees will continue to face pushback from students and their parents in 2016. And the common practice of tuition discounting can be treated as an expense or a source of revenue.

“If you can fill up a class with everyone at full price, tuition discounting is an expense,” says Lucie Lapovsky, a higher ed finance expert and principal of Florida-based Lapovsky Consulting.

But because most schools can’t fill classes at full price, it’s often treated as a revenue deduction.

“They’d have less revenue if they didn’t discount because they’d have fewer students,” says Lapovsky, a former college president and vice president for finance. “Tuition discounting is a big expense, but the revenue would not exist if discounting wasn’t done.”

Shea notes that, according to NACUBO research on tuition discounting, it has steadily increased for both freshmen and undergraduates as a whole. As of 2014, 48 percent of first-time, full-time freshmen received a tuition discount, up from 27 percent in 1990. For all undergrads, 42 percent received a tuition discount, up from about 24 percent in 1990.

For the coming year, Capitano expects tuition discounts to increase. “The pressure continues to be on schools to be more competitive,” he says.

However, some schools, he adds, have reduced the discounting and related tuition costs. “The net effect is having a lower overall cost but less discount. There are supporters of this approach and those that don’t see the merit. We don’t see it often, but it is a strategy.”

Saving on expenditures

Operational expenses that make for tight budgets are a fact of life in higher education.

Nonetheless, colleges are continuing to work on keeping costs down. “Several areas where colleges look to be more efficient to control costs include salary or hiring freezes, reduced travel budgets, wellness programs to reduce healthcare costs, and delayed spending around strategic initiatives and capital expenditures,” says Capitano.

Building relationships with corporations, organizations and federal agencies may prove to be essential.

For example, community colleges may team with corporations to fund academic programs to train students for particular jobs, says Capitano.

To expand housing without putting up capital, more schools will likely partner with firms that build and manage student residences.

“Public/private ventures are growing,” says Shea, adding that the relationships are contractual and complex. “The developer takes on the financial risk by providing capital for development and construction, and cash flows from room/rental payments to the developer in accordance with the terms of the ground lease.”

Shared services will continue, particularly for smaller institutions, making such functions as payroll and human resources more efficient through these partnerships.

Shea says leaders are getting more creative about the services shared. Health care plans, technology or even buildings such as libraries are fair game. In the future, universities may pool resources to address compliance issues. For example, they could hire a single attorney to work on similar issues for both institutions.

Revenue streams

Tuition revenue will continue to be extremely important in 2016, says Jennifer Delaney, a University of Illinois assistant professor of higher education who researches finance policy. “Unlike with grants or endowments that are earmarked for particular purposes, institutions can spend tuition revenues on almost anything,” she says. “That flexibility is important.”

Institutions will struggle to keep up net-tuition revenue, Lapovsky says.

As far as donations go, Lapovsky says all schools are working on increasing levels. And they are going up, but not any more quickly than the total budget is going up. “I don’t think that the share of revenue is going to increase in any dramatic way,” she says.

In a November 2015 report based on an annual higher ed tuition survey, Moody’s Investor Service shared that two-thirds of private and public universities project 2 to 3 percent growth in net tuition revenue for fiscal year 2016, consistent with inflationary levels. Universities based in the South and West are predicting stronger growth than their counterparts in other areas of the country.

Neither endowments nor grant revenue are expected to increase, while revenue from foundations will remain stable.

“Schools will be doing well if they can maintain their revenue at last year’s level,” says Lapovsky. “Those who come out ahead will be able to grow their net tuition revenue through higher enrollment and lower discounting.”

State schools will face an increase in performance-based funding, although how much funding is tied to performance varies widely by state. At present, 32 states have such programs in place, while five more states are transitioning to this model, according to National Conference of State Legislatures research.

Performance indicators could include course completion, transfer rates and the number of minority graduates. Overall, state funding of higher education will continue to decline.

Auxiliary services—and the fees students pay to use them—will rise. “Many schools are putting in new dorms, up-to-date technology, the best food services, the best health and fitness centers, the best athletic centers,” says Capitano. “These see higher rates of return.”

Shifts on the horizon

The outcome of the presidential election will impact the future of university finance, which has been a topic of debate among the candidates, Delaney says.

Some candidates are “proposing variations on free tuition; that might really shape how universities structure their finances and where their revenues come from,” she explains.

But then there are institutions just struggling to survive. Smaller, tuition-driven liberal arts schools will remain vulnerable to closure. And a closure announcement could come without much warning. “A shift in enrollment can change the bottom line and viability of the institution,” says Delaney.

The new year may also bring more mergers, predicts Capitano. “It happened in banking and in healthcare; it is going to happen in higher education.”

To survive financially in an increasingly complex industry, colleges must keep pace with ever-changing circumstances. “There is a lot of innovation going on internal and external to higher education,” says Shea. “Those that innovate will do well. Those that want to maintain the status quo will face challenges moving forward.”

Hilary Daninhirsch, a former practicing attorney, is a Pittsburgh-based writer.