Galloping to Insolvency

Peter Wood

The spiraling rise of component costs in higher education is helping to inflate the higher-education bubble. One of the reasons those costs are out of control is that colleges and universities see no merit in keeping track of some of the larger ones. You cannot exercise fiscal discipline if you have no idea what you’re spending. Higher education has at least two major cost drivers that it hides from rational oversight: diversity and sustainability. In Green Acres, I wrote about a new Solyndra-like scheme for getting taxpayers to underwrite the cost of a massive expansion of campus-sustainability programs. A new report from the College and University Presidents Climate Commitment, Second Nature, and the National Association of College and University Business Officers enunciates this ambitious way to farm out the virtually unlimited expenses.

The bubble also crosses paths with the pursuit of “sustainability” in another report, recently issued by Sterling Partners and Bain & Company. (No, not that Bain. That’s Bain Capital.) The Financially Sustainable University isn’t about the sustainability movement at all. Rather it deals directly with the higher-education bubble through an analysis of endowments, liabilities, expenses, and revenues of 1,700 public and private nonprofit colleges. Sterling and Bain’s straightforward idea is that colleges and universities shouldn’t let increases in expenses outrun increases in revenues, or countenance significant declines on assets relative to liabilities. Both happening at the same time ought to be especially worrisome: Somewhere in that direction lies financial insolvency.

The Chronicle article on the Sterling and Bain report notes that the period of study, 2005-2010, included one very bad year for college endowments, which may have skewed some of the results. Some colleges and universities are so wealthy that they are practically immune from those losses and, anyway, their endowments have since recovered. But Sterling and Bain stand by their larger claim that about a third of American colleges and universities have unhealthy financial outlooks. In a word, they are unsustainable.

The details are of considerable interest. As the Chronicle summarizes: Growth in college debt and the rate of spending on interest payments, plant, property, and equipment “rose far faster than did spending on instruction from 2002 to 2008 for the colleges studied.” The Chronicle continues:

long-term debt increased by 11.7 percent, interest expenses by 9.2 percent, and property, plant, and equipment expenses by 6.6 percent. Meanwhile, instruction expenses increased by just 4.8 percent.

The report itself puts these figures in the context of what’s happened to the revenue streams that colleges and universities relied on as more or less ever-blooming:

In the past, colleges and universities tackled this problem [rising liabilities] by passing on additional costs to students and their families, or by getting more support from state and federal sources. Because those parties had the ability and the willingness to pay, they did. But the recession has left families with stagnant incomes, substantially reduced home equity, smaller nest eggs and anxiety about job security. Regardless of whether or not families are willing to pay, they are no longer able to foot the ever-increasing bill, and state and federal sources can no longer make up the difference.

For the most part Sterling and Bain are quiet about what is driving those increased costs. They are more interested in the cake than in the ingredients. But they do capture some of the ingredients. They speak for example about “the Law of More,” i.e. “the assumption that the more they build, spend, diversify and expand, the more they will persist and prosper.” But the Law of More has met its match: “The opposite has happened: Institutions have become overleveraged.”

Sterling and Bain offer mostly anodyne solutions along the lines of “stay true to your core business” and say no to expansion that takes you outside that business. They allow that “the history and culture of universities” makes that difficult but they call on trustees and presidents “to put their collective foot down.” Cuts should be made “farthest from the core of teaching and research.”

To my ear that sounds like “diversity” and “sustainability” should be on the list for special scrutiny, but the report judiciously steers clear of saying what lies out there in the target-rich world of “farthest from the core.” Rather it notes the “fragmentation” of data-center management, “redundancy” in procurement, “unneeded hierarchy” in the form of “too many middle managers,” “misaligned incentives,” and unnecessary “complexity.”

I see nothing to disagree with in that list, but Sterling and Bain have dodged the problem of what pulls universities away from their core “business” of teaching and research. The magnet that pulls the compass off true north is ideology. Let me go back to that report I wrote about in Green Acres.


Advocacy organizations such as the American College and University Presidents’ Climate Commitment and Second Nature push an agenda (in the case of these two, “sustainability”) that doesn’t acknowledge that the institution serves any higher or better purpose than the ideals of the advocates. ACUPCC and Second Nature make that explicit. Second Nature’s mission statement, for example, declares:

Second Nature’s mission is to create a sustainable society by transforming higher education. We accelerate movement toward a sustainable future by serving and supporting senior college and university leaders in making healthy, just, and sustainable living the foundation of all learning and practice in higher education[Emphasis added]

NACUBO is best known as a sober-sided organization of business officers, but it too has been infected with ideological enthusiasm. Among its publications is Ben Barlow’s Financing Sustainability on Campus, “developed in partnership with Second Nature,” and offering dramatically un-business-like counsel. The book “shatters the myth of funding first, operational change second.” The path to sustainability apparently lies through the pleasant valley of unfunded liabilities. NACUBO’s president John Walda is a sustainability enthusiast who has made the topic a major focus of the organization, which has produced a stream of books such as Boldly Sustainable: Hope and Opportunity For Higher Education in the Age of Climate Change, and Critical Path Issues on the Way to Carbon Neutrality.


The recommendations that NACUBO, ACUPCC, and Second Nature have offered in their report seem unlikely to travel very far. But it is hard to tell. Some of the recommendations might be within reach of Presidential fiat or administrative rule-making. The report argues that what is needed in the case of grants is not new legislation but Congressional action to fund a section (section 471) of the 2007 Energy Independence and Security Act.

But these advocacy organizations are just one dimension of the problem. “Diversity” and “sustainability” have achieved a kind of magical immunity on many campuses from cost-benefit analysis and even rational scrutiny. I was astonished when one comment leaver on the Green Acres article declared:

I would submit that whatever it costs to be sustainable and diverse is immaterial, as these profit everyone in many intangible ways – we call it serving the common good.

And found my sights too “narrow” and “cynical” to take in the sheer niceness that the pursuits of diversity and sustainability achieve, free of the soul-crimping pettiness of the bean counters.

Of course, diversity and sustainability have real costs, even if they aren’t properly counted or disclosed, and such ideas can and should be subject to critical scrutiny. I’ve been doing my part in developing critiques of both movements. The dysfunctions in higher education’s financial model seem likely to make these matters more urgent. The “common good,” as my correspondent phrases it, isn’t achieved by pretending that we can ignore costs and bypass reason. Ostriches may achieve a certain moral clarity but we would do better from a higher vantage point.

This article originally appeared in the Chronicle of Higher Education's Innovations blog on August 10, 2012.

Photo by Alan Crowhurst/Getty Images Europe

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