Avoiding a Fiscal Meltdown in Public Higher Education: The Need for a Pivot

August 31, 2020

By Scott Pattison

Deputy Executive Director of the Multistate Tax Commission

Colleges and universities have been getting a lot of attention as students return to institutions of higher learning either physically or virtually. The media has tended to focus on stories of students partying and creating Covid risks; schools opening their campuses only to abruptly close; and even talk about the poor-quality food being provided to dorm residents.

All important issues. But for state and institution officials in charge of keeping the schools running, the real crisis is a dire long-term decline in revenues. Tuition revenue is forecasted by Moody’s to decline this school year by 5% to 13%.

One reason tuition revenue will decline is that students will balk at paying the same for virtual instruction as in-person learning. At the same time, financial aid needs will increase as students with financial problems have less to spend for schooling.

More ominous for public colleges is the dramatic decline in state and local revenue that will available for higher education in the coming years. The Urban Institute projects at least a $200 billion decline in state revenues for this fiscal year. That’s on top of the losses already suffered since the March stay at home orders began. Thirty-four states saw a 20% drop in revenues in the spring quarter months.

Even during previous downturns, while higher education aid was cut by states, tuition could be increased. Students were willing to borrow and pay the higher tuition rates. State aid and financial aid programs increased as revenues grew.

Times are now radically different. With many potential students and their families in difficult financial straits, there is less ability to pay high tuition and borrow.  Thirty one million are unemployed and many millions more have seen declines in income.

This reality may be unpleasant, but there is an opportunity for universities to begin a pivot toward more efficient financial management and a focus on outcomes and results. Recently I was privileged to join several higher education and finance experts from the HCM Strategies group and the University of Pennsylvania in developing a report that spelled out ways that higher education can take advantage of this opportunity and improve their contributions to students, the economy and society.

One critical action discussed would be to develop state-wide long-term strategic plans for public higher education and delineate the priorities and goals for the institutions. Governors and legislators should charter a Commission to develop these strategies. To ensure success, the highest officials must imbue these commissions with the prestige and power necessary to have an impact.

Most importantly, once the priorities are set, state investment must be tied to the goals of providing education and ultimately employment for disadvantaged students. The recent report stated that “States should focus on high-quality, short-term workforce certificate programs as well as associate’s and bachelor’s degree programs at the places that already excel at this type of education: regional colleges and universities, community and technical colleges, and in some states, independent not-for-profit institutions. Programs should be tailored to upskill individuals to return to their same field of work, or, for those whose jobs have disappeared permanently, to train and educate them for other fields.”

Another consideration: State aid should be changed to create incentives and be tied to outcomes. The old way of basing aid on how many students are enrolled in an institution needs to end. The institutions themselves will need to prioritize and realize they cannot be all things to all students and duplicate programs and services.

That’s why state aid should be prioritized for disadvantaged students and goal of jobs. Therefore, the “public Ivy’s” should be an exception to the many institutions that should keep tuition frozen. Due to their unique status in the higher education marketplace, these public research institutions have the ability to raise tuition. The additional tuition can be, among other things, used to bolster financial aid..

Higher education institutions also must be significantly more aggressive in creating efficiencies and avoiding duplication. Much of the classroom space is sitting empty and unused except for Monday through Thursday during the day. Can this be better utilized for instruction and other activities late afternoons, evenings and weekends? Duplication should be avoided. Some institutions may not need fancy fitness facilities. Some institutions may have an Anthropology department, but do all state institutions need such a department? The choices are not easy, but with less money available, there is no choice but to seek more efficiency.

Higher education also has an opportunity to consider creative ways to finance initiatives. Many colleges use private vendors to provide food services for students with a variety of options and this also brings in additional revenue. Universities should explore additional opportunities for private investment. In addition, the use of debt by higher education should be very carefully considered, but there may be some reasonable use of borrowing to keep effective programs and students.

Higher education needs to re-think its activities and goals for the future. While the financial crisis of 2020 and beyond is not what anyone wanted to be the cause of this process of renewal, it is the reality universities must face. This is the opportunity for positive change, creativity and innovation.