Will Higher Education Heed Bond Rating Agency Warnings?

February 12, 2018

Moody’s and Standard & Poor’s recently released their updated outlooks for American higher education. The news is not good.

Moody’s revised its 2018 outlook for higher education from stable to negative “as aggregate operating revenue moderates while expense growth increases.” Moody’s vice president, Susan E. Shaffer, elaborated: “the annual change in aggregate operating revenue for four-year colleges and universities will soften to about 3.5% and not keep pace with expense growth, which we expect to be almost 4%.”

PRIVATE COLLEGES MAY OUTPERFORM PUBLICS, BUT COST-CUTTING IS NEEDED

Moody’s expects private institutions to outperform their public sector counterparts. But about 15% of universities will be forced to cut costs in response to stagnant or weak revenue growth next year. The ratings agency believes that support from tuition and related fees, research funding, and state appropriations will remain weak. Further, net tuition will be depressed over affordability concerns and slow enrollment growth.

While private universities will have revenue growth of about 3% – 3.5%, these numbers will be considerably less robust in small- and mid-sized colleges and universities. This is especially dangerous since so many of them serve low- and moderate-income students. They draw from the same regions in which the students and their families live.

Moody’s notes that the recruitment demographics are horrible and that higher education is subject additionally to changes in its relationship with the federal government.

Moody’s speculates that federal tax reforms, the levels of research support, and changes to the Pell Grant and subsidized federal loans in the future could profoundly impact affordability and access.

HIGHER EDUCATION FLEXIBILITY IS LIMITED IN FACE OF FISCAL CHALLENGES

Standard & Poor’s makes a similar finding. Presented as grim, the S&P outlook finds that higher education’s flexibility “in programming, financial operations, enrollment, resources or student draw” is limited. Like Moody’s, S&P cited the recent federal tax on colleges with large endowments, together with growing consumer skepticism and demands for lower sticker prices and more effective services.

Significantly, Standard and Poor’s also warned of lasting damage to college and university reputations in the current political climate.

S&P offered some encouragement, however, finding that higher education institutions could improve their standing if they established new partnerships, peeled back their reputation for cultural inertia, and increased their efforts to recruit non-traditional students.

Writing on these subjects for EducationDive, Jeremy House summarized that “all parties seem to agree that a myriad of issues haunt higher education.” He noted that the American Association of State Colleges and Universities (AASCU) “called 2018 one of the most uncertain years for higher education.”

FUTURE OF US HIGHER EDUCATION DEPENDS ON ABILITY TO INNOVATE

Mr. House reported that the common agenda driving the future of higher education in the S&P and AASCU positions is a call for innovation. He further suggested that colleges could grow their student body by serving more post-traditional students, enhancing strengths and partnerships, embracing data analytics, technology, and online learning.

For those of us who work at imagining ways to strengthen American higher education, these are good and necessary tactics. But by themselves they are insufficient, roughly equivalent to the proverbial Dutch boy plugging the holes in the dike. Further, it’s not so much that the dam threatens to break but more that consumers will find new, alternative ways to find and use the water effectively.

The success of American higher education will depend heavily on innovation. That’s why the warnings from Moody’s and Standard & Poor have special urgency.

Those institutions that are the most adept and nimble will likely craft the best path to sustainability. It starts with these colleges and universities developing a clear value proposition and sense of self. That’s quite different from remembering their history, although working their history and traditions into their value proposition is unmistakably necessary.

FUTURE STRATEGY MUST COMBINE PRINCIPLE AND PRACTICALITY

What’s most needed is a sharper strategy that combines principle and practicality. American higher education must anchor a seamless pathway to a lifelong education that prepares Americans for rapid change in a global economy. It must bridge the chasm between formal education and employment by preparing its graduates with a worldview that is able to imagine their contributions to society.

But strategy alone is insufficient.

The plain hard fact is that higher education operates on a mid-20th century business model that is unable to anticipate 21st century changes. Many colleges and universities run like the “Mom and Pop” corner variety stores that ultimately failed because they could not compete and adapt as the world changed. For them, it was more about a failure in process and delivery than in the quality of the product.

Indeed, the biggest obstacle facing American higher education is the cultural inertia that permeates many campuses to reinforce an antiquated, incremental business model.

Can the business side of higher education keep up with the educational innovation that now energizes its research and teaching?

Originally published on February 12, 2018 on Edvance Foundation.

Brian C. Mithell. Founding partner of Academic Innovators, a solutions company. Author of How to Run a College. Former president of Bucknell University