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When the small, nonprofit St. Catharines College announced it would close this spring, the California-based university's president partly blamed the cash shortage on “abnormal inflation.”
St. Catherine You are not alone in your grief. Over the past few months, Pittsburgh Institute of Technology, Delaware College of Art and Design, Wells College and Goddard College They also cited inflation or rising costs when announcing their decision to close the institution.
Even universities with somewhat better conditions are suffering from inflation. The University of Minnesota's interim president's recent budget proposal included: The word inflation appears 25 times, In particular, we cited increased costs for food, services, and labor.
Although higher education inflation has slowed over the past year, institutions' costs remain well above pre-pandemic levels. It's putting financial pressure on universities, especially those that don't have the funds to overcome the challenges. However, the need for investment in the institution remains essential, which further adds to the bind the university is a part of.
Now, many people are saying, in effect, “We can’t cut costs anymore. We have to invest in people, in staff, in facilities.” Timothy Yates Jr., President and CEO of Commonfund OCIO., providing asset management services Higher education institutions and other nonprofit organizations. “The cost-saving part of the equation is already done.”
College Inflation Calculation
Over the past 40 years, the cost of higher education has differed from that of the economy as a whole. That's one of the reasons The Commonfund Institute calculates its own index for the sector each year. ~ was called Higher education price indexOr HEPI.
Since the mid-1980s, HEPI has been decoupled from the Consumer Price Index, and in most years, the costs of higher education institutions have increased at a higher rate than the CPI.
“We believe it is more expensive to run a university than to run a family. Both are very important,” he said. George Suttles, Executive Director, Common Fund Institute.
The largest component of HEPI is personnel expenses, which include salaries and benefits for faculty, clerical, administrative, and service workers.
shuttle and Yeats The university noted that it uses HEPI for budget planning. Endowment managers also use this metric to help set investment return targets, which typically must take inflation into account.
Determining the rate of inflation that a university will face is a very important issue. Yeats said.
“Should your contributions keep up with high inflation, or just CPI inflation?” Yeats “In most cases, the CPI does not reflect the cost structure of the universities we work with,” he said.
HEPI vs. CPI since 2000
In recent years, the higher education price index has generally outpaced the consumer price index.
Last year, higher education institutions faced the following challenges: Inflation rate 4%According to HEPI, that figure is down from 5.2% in 2022.
In 2022, nearly every cost area tracked by HEPI grew at a much higher rate than the previous year. The sharpest increase was in supplies and materials, up 21.5%. Utilities, a historically volatile category, rose a notable 43.1%.
The Commonfund Institute estimates that HEPI will grow by 3% in 2024. This would bring the bill back into normal high inflation territory for the past decade. But that means costs are still rising significantly, even after the recent surge.
‘Margins are shrinking’
These rising costs put added financial pressure on universities already struggling with declining enrollment and budget deficits.
For universities, it has been pointed out that inflation means a loss of cash. Chuck Ambrose, senior education consultant at law firm Husch Blackwell He has served as CEO at several universities.
The impact of rising costs is felt more strongly at smaller, non-elite colleges and universities that lack the revenue base and endowments to absorb the pressure.
“The universities that are not hit as hard are the ones that have the endowment,” he said. Stacey Linderman, consultant with the National Association of College and University Business Officers. “They can rely on that. And some of the other institutions will be affected if they don’t receive large gifts.”
Let's take the case of Wells College in New York I saw As profits falter, costs rise. In recent years, While running a deficit. From fiscal 2021 to 2022, costs increased by just under 14.9%. In 2023, it increased again by 11%, while sales fell by more than $1 million (about 5.4%).
During recent periods of soaring inflation, companies in other sectors have responded to rising supply chain and labor costs by raising prices to consumers to recover some of their lost margins.
But higher education may not have that luxury. At least not at this point in history.
in reported last yearFitch Ratings analysts noted that public universities have maintained their tuition rates and predicted that private university tuition growth will slow soon. For the 2023-24 school year, the rating agency concluded that a combination of “soft” net tuition growth and a “difficult inflation environment” will weigh on margins.
This is partly because the cost of attending college is already painfully high.
“There is less tolerance in the market for continued increases in the cost of attendance.” Ricardo Aziz, The director of the Center on Higher Education Mergers and Acquisitions spoke on a panel at the Higher Learning Commission's annual meeting this spring. “There is a limit to how much American families can afford, and we are reaching that ceiling.”
Backend costs are rising while frontend prices are stagnant, so something has to give.
“Margins are shrinking or organizational efficiency is improving.” Linderman said.
And even if colleges can marshal their resources to invest in themselves, inflation can erode the impact of those investments.
“The market's tolerance for continued increases in the cost of attendance has diminished.”
Ricardo Aziz
Director, Center for Higher Education Mergers and Acquisitions
Facility spending provides a vivid example. Investment in existing campus facilities in 2023 Growth of over 26% According to building information company Gordian, on an annual basis, It called the surge in spending a “remarkable transformation” for the sector.
This activity demonstrated that higher education institutions are reducing their backlog of deferred maintenance and managing their existing building stock. But at the same time, inflation in construction services and building materials has been a big part of that spending.
Operating budgets are expected to increase by more than 9.5% from 2019 to 2023. The cost of building materials and construction services increased by 19%, Gordian said.
“Purchasing power has declined substantially,” the company said in a report earlier this year.
Is there any wiggle room left?
Along with struggling to increase revenue, colleges may also run out of money to cut.
At the same time, trying to keep costs stable in organizations where salaries and benefits are often expensive can lead to employee morale issues. Ambrose said.
“It’s not enough to just maintain operational integrity,” he added.
So what can universities do to manage inflation at this time?
Given the complexity and specificity of the cost structure, Linderman She points out the importance of what she describes as “forensic budgeting.”
This involves taking a close look at your spending on items compared to what they cost or could cost you and see if any savings are possible. Linderman said.
In-depth analysis, including third-party consultants, can help organizations identify areas where they can avoid costs. Lindeman said.. This may include instances where “even if you don’t save today, you can save money over the next 10 years.” Linderman He said, “It will really help your agency.”
Often, this strategic budgeting involves reviewing costs in light of potential alternatives, scrutinizing contracts, and examining the details of an agency's operations to see where savings can be made.
“Are we locked into a contract we signed 10 years ago that no longer benefits us?” Linderman “Are there any cost-saving ideas, like turning off the lights when you're not in the room or doing elevator maintenance so you don't end up spending a million dollars instead of $200,000 when the elevator breaks down?”
These ideas tend to be institution-specific. Linderman Added. Depending on the college, costs may be hidden in areas such as information technology systems and contracts, class sizes, legal risks that may become liabilities later, or several other areas.
Colleges may also begin to look outside their institutions for help cutting costs. Ambrose said he expects more employees to be replaced by artificial intelligence applications and technologies or through consolidation in the sector.
“The cost-saving part of the equation is already done.”
Timothy Yates Jr.
Commonfund OCIO President and CEO
Donations can also be a relief. That is, if the institution has a large enough endowment.
“Another lever that universities have is fundraising and development.” Sertle said.
Larger, more sophisticated fundraisers may try to structure gifts and payouts to provide “access to more real dollars” more quickly, he noted.
Given the long history of high and steep cost increases in higher education, fundraising has been used to hedge against inflation by providing scholarships and support to students who cannot afford the dizzying costs of attendance. In that sense, inflation is built into the fundraising process in the same way as an endowment's return target.
According to Suttles, universities can appeal to donors with pitches that highlight the effects of inflation. They can say, in effect, “‘We’re committed to making this college experience affordable for future generations,’ and that resonates with people.”
Editor's note: Ricardo Azziz writes a monthly column on mergers for Higher Ed Dive. His opinions are his own.