Moody’s released their higher education credit outlook report (IHE article, too) yesterday. This is the second year in a row that it’s been a negative rating (used to be “stable”). I found a few interesting points in the report. A quick summary is that low net-tuition revenue growth continues to make for a bleak forecast, and that expenses should outpace that revenue, to boot. We’d have to get to a 3% increase in revenue to get level again, and to get to a stable rating. Privates are forecast to be a bit better off than state schools. The full report, which is for subscribers only, is a lot more illuminating, but I’ll reference information in the linked article only.
Labor remains the biggest cost for higher education institutions, up to 75% of total expenses. A professor at U Wisconsin Madison says that it’s just the “nature of the beast” that it takes a lot of staff and faculty to run a higher education institution. This is completely true, and Baumol’s Cost Disease speaks to the fact that economies of scale are extremely difficult in labor-intensive industries such as higher education (massive oversimplication). If you want an 11:1 student to faculty ratio, you have to hire enough faculty to achieve that result. Faculty salaries go up. Labor expenses go up. There is no way to use scale that doesn’t erode that student to faculty ratio. It’s like trying to make a musical quintet more efficient in labor. You can’t have a 5 piece band with 4 people.
If this truly is the “nature of the beast” then we need to be asking some hard questions about our business model. I don’t mean that in the “higher ed should be run like a business” kind of way – just how we get things done. None of these questions are all that new – different channels for delivery (online), for instance.
There is another part about how colleges and universities are expected to “control those costs in the coming year.” This is about cost containment. Or, in most cases, cutting costs. But that’s a simplistic analysis, too. What if you’ve already cut things to the bone? What if there are few remaining efficiencies to be gained? At this point, I’m slicing a few thousand dollars off our phone bill and calling that a win (there are loads of other places here at the College where we can save money. I’m not the only one trying to contain costs and I’m not saying that all costs have been trimmed. We are not perfect. My point is that this isn’t a winning strategy forever).
It’s an interesting time in higher education, to be sure. Certainly reports such as Moody’s cast a negative forecast on things, but there are a lot of exciting and positive things happening, too. How we react to the forces identified in reports like these will partially determine where we – as an “industry” and as individual institutions – will find ourselves in the coming years.