The number one source of income for state and local governments was no longer sales tax, income tax, or property tax. It was the federal government’s $787 billion stimulus package!
Although most news reports emphasized that the stimulus was working, my reaction was more of a, “Wow, that is simply NOT sustainable!”
The sudden nature, size, depth, and length of the recession of the past two years has hit the nation in such a way that virtually all of us have been profoundly affected. That is certainly true of higher education. Wage freezes and cuts, furloughs, buyouts, layoffs, reductions in retirement matching, curtailment of course offerings, and caps on student enrollment have become part of the higher education landscape.
US higher education is looking at one of the toughest periods in its history. There are challenges on every front. Public institutions are facing significant cuts in state support. The National Council of State Legislatures reported recently that 44 states expect a total shortfall of $120 billion in FY2010. And it was going to be higher in 2011. Private institutions have been ravaged by sharp and steep endowment losses. Community colleges are unable to enroll the increased demand of would-be students. For-profit institutions are multiplying and growing. Just look at University of Phoenix’s staggering record enrollment numbers that have surpassed 450,000.
This June (2010), the U.S. Department of Education (DOE) reported that 114 non-profit degree-granting institutions had failed the department’s financial responsibility test. Half of the institutions on the list now must post letters of credit to protect federal grant and loan funds. Failing the DOE test is a reasonable indicator of survival risk, and some sources place the endangered species list at perhaps 250 and growing. Another risk indicator is Moody’s estimate that colleges and universities lost $120 billion in endowment value between July 2008 and April 2009. Several bond-rating downgrades have been announced, and more are on the way.
Significant tuition increases at private institutions do not appear to be an option. In the past 25 years, tuition and fees have gone up 240 percent—about four times the rate of inflation. Over the past decade, the increase was 72 percent for public institutions and 98 percent for private institutions. The number of high school graduates will decline over the next decade. The practice of discounting also seems to be nearing its limits, with the national undergraduate average at 35 percent. Most believe discounting beyond one-third of your tuition income to be a serious financial mistake.
Warren Buffett once remarked, “When the tide goes out, you can see who has been swimming naked.” Well the tide IS out! And a sizable number of higher education institutions will need to invest in new swimsuits.
Did you get caught without your swimmers on?
(c) 2010 Tony Stack
Tony is the Business Solution Manager for IBM Australia