Rerun: Higher Ed 101: College Budgets Explained

Hi, it's Jeff Salingo. As Future youe takes its usual summer break, we're spotlighting some of the most downloaded and informative episodes from season eight. In this one, we dig into the financial engine that keeps colleges running, from tuition to endowments to rising expenses. It's a no jargon behind the scenes look at how college budgets actually work. Whether you're a higher ed leader, a faculty member, or just someone trying to understand where all the money goes, this episode is a great place to start. Be sure to stick around to the end where our guest Rick Stasloff lays out how we can bring more insight to college budgets. We're returning to one of our most popular episode formats, higher ed101. We've used this over the seasons to bring on experts to explain everything from the rise in different kinds of credentials to accreditation. Today, put on your green eyeshades because we're going deep on how a college budget works on this episode of Future you.

This episode of Future U is sponsored by the Bill and Melinda Gates foundation, working to eliminate race, ethnicity and income as predictors of student educational success. This episode of Future youe is sponsored by Ascendium Education Group, a non profit organization committed to helping learners from low income backgrounds reach their education and career goals. For more information, visit ascendiumphilanthropy.org subscribe to future youe wherever you get your podcasts and if you enjoy the show, send it along to a friend so others can discover the conversations we're having about higher education.

Hi, I'm Michael Horn.

And I'm Jeff Salingo. I can't tell you how many times I've heard from the boards I visited with over the years that higher ed budgets don't work like anything else in the business world. And there's a reason for that. Colleges are mission driven institutions, but they're also a business as we see with all those institutions unable to keep up in closing as a result. Result. So today on Future you, Michael and I are welcoming Rick Stasloff to break down the fundamentals of a college's budget. I've known Rick for probably a decade plus now. He's the founder of the RPK Group, which is a consulting firm in higher ed. In that role, Rick has worked with major associations and philanthropies, including the American Council on Education and the Gates foundation on sustainable business models for higher education. And before rpk, Rick served in various financial leadership roles at colleges in Maryland. He really got his start on the money and Higher ed side for the State of Maryland, as a finance policy analyst for the Maryland Higher Education Commission and the Maryland House Committee on Ways and Means. Yes, we know that taking a deep dive on money could be deadly boring. But stick with us today because we think Rick really explains how a university budget works. We'll start with terms you might hear on occasion. Rcm, a popular budget model, and high higher ed, that stands for Responsibility Centered Management, essentially a decentralized budget. Rick will talk about how many leaders in an institution aren't really given a sense of what good looks like when it comes to what they're supposed to be achieving budget wise. And there's sometimes no accountability. We'll try to answer the question about whether institutional financial aid is an expense or a foregone revenue as a discount off the top. And then after a break, we'll go deeper on expenses. It's all about the people, of course, but we really don't know how they allocate their time across a complex institution. The buckets of spending in higher ed are large, as you'll hear Rick say. And for a long time generations, colleges didn't really need to worry about their budgets because state spending and enrollment grew. Now we need better business intelligence, which is where the role of ERP systems come in. Those are enterprise Resource planning systems that run everything from the finance operations to human resources and student information. And now with that out of the way, Michael, let's get to the main event with Rick Stasloff, shall we?

Rick, so good to see you. Welcome to Future youe.

Hey, it's great to see both of you, Jeff and Michael, thanks for including me.

Absolutely. So let's start at the most basic level. We're going to ask you to generalize a bit, or maybe a bit more than that, even. But speaking about today, the current state, what are the different ways that colleges put together their budgets?

Yeah, it's actually an important question, isn't it? Because it not only speaks to the rules of the game, but I think it really reflects an institution's philosophy on where decisions should be made. So, you know, the truth is the overwhelming majority of institutional budgets are still centralized. You know. Why is that? Well, one, it offers a lot more control. Right. Especially in situations where resources might be scarce, where monitoring's not real robust. I think it also is probably a reflection of a CFO culture of having to control things. Right. So it is where most of the world lives, where the decisions on where the money comes from and where it goes is made by a very few Number of people in a very limited number of global offices. Now from those more traditional, highly controlled budget models, we kind of move to this continuum of decentralization. That's how I think about it. From hybrid models where we're taking money off the top to support base funding for administrative services, insurance, buildings, keeping the lights on, etc. Right. But also institutional priorities all the way up to these full responsibility centered management models. These RCM models, they get called. And interestingly, as we think about that continuum, I'm actually seeing a move away from full RCM models in the current environment, especially at the less research intensive institution. So those RCM models where really all the money is going into schools, colleges, they are then paying, whether directly or they get taxed for those administrative services. A lot of institutions moved to RCM over the last, say decades or so and found that they really didn't need that level of complexity. They were very burdensome to administer. And here was the even bigger issue institutions were running into as they moved more on the continuum to that RCM model. There wasn't enough funding available to fund the institution wide initiatives, to fund the big strategies that institutions wanted to go after. So they're having to pull back from those models. Maybe not all the way to a fully centralized model, but to something that's a bit more of a hybrid model.

So what are the pros and cons, if you will, of being deeply centralized versus the more decentralization?

Yeah, I mean back to where we started, kind of laying out the continuum. The big advantage of a centralized model is fewer surprises generally because you're accounting for everything right in one place. The trade off is you're not inviting people into the conversation and the decisions about how to best put resources to use people, time and money. So you may not be capturing things from a fully transparent way. You may not be tapping into opportunity, you may not be tapping into the creativity at that level. The flip side on the RCM model is that resources can get trapped at too low a level. And so we may well be meeting the needs of the College of Arts and Sciences, but we may not have the funds to invest in new areas of opportunity and we may not adequately be investing in more institution wide initiatives, whether they be around salary or facilities or whatever the case might be. I think the reality is it's probably like a less centralized RCM sometimes. That's how it gets painted. And there's probably we could pull from the good things we find in all these models in Rick Stasloff University. What would I Like to see a really strong business intelligence environment where we have the data we need, capacity's been built to understand it and make decisions, and there's good transparency and accountability. I would start there. And by transparency and accountability, you know, what do I mean, hey, what are the targets I'm supposed to hit? What's the enrollment? How much revenue am I supposed to generate from where? What's the expense side? What's the net revenue I'm supposed to generate? I'm always struck at the institutions we work with, at how seldom deans, chairs, budget unit heads outside of instruction are given a clear sense of what good looks like and what they're supposed to be achieving. So I would start there. Good business intelligence. Secondly, that we have those clear targets on where people are supposed to be going, and then that there's accountability that, look, if you want to be in an academic or administrative leadership position, this is part of what you're going to deliver on. And if you don't, well, then we're going to have to find some other people to do that.

So, Rick, let's talk a little bit about the implementation of these. Right. So you just talked about the pros and cons. But, you know, some of these are. Some of these budget models are implemented well, some of them not so well. Some get into habits that are not really good. So what do you most often see in terms of these different models? Maybe the habits that people take on. And what would you like to see? Maybe the innovations that you would like to see within these models.

Sure. So I think one common sin that gets committed often, Jeff, is that people spend 95% of their time on the math of putting their budget model in place. You know, I mean, it, it gets really. We like, wait a minute, we charge a fee, you know, for art supplies. And are we going to get all that or some of that, or, you know, getting into indirect cost recovery. How much goes to the provost's office and how much goes to the library. You know, it's. It's all these pennies that we're moving around, but we don't step back and have the more fundamental conversation. You know, a budget model is just a tool to get you somewhere. So we don't have that conversation around. Where's the institution trying to go? What are the strategies it wants to invest in, which decisions should be made, at what level of the organization? How will we know those decisions are getting made? Well, et cetera. Right. That's part of, I said earlier, kind of the philosophy of how you think about resource allocation happening. So we don't start with that and we spend all the time on sort of the pennies. I think secondly, once the budget model is elected, decided, we think the work is done. We don't go back and iterate on it and say, okay, we just finished our first year under our new model. How close did we come to where we thought resource allocation would land? And third, we don't take it to the step where we're really talking about return on investment and outcomes. So it's not, gee, in the model I got $100 and good, I didn't spend $101. We don't go back and say, what did I get for that $100? How might we be using differently? Which takes me to my last point that too many models don't allow for change. So resources can be moving between areas of need. So I think that's part of where we get stuck.

So let's break this down. You've sort of given us the big picture, if you will. And let's start to go into the component parts now. Budgets start with revenue, at least as they're presented. And most colleges are tuition dependent, meaning students pay tuition and other fees to cover the costs. But colleges, of course, are giving out institutional financial aid, some of which is covered by the endowment or other current use gifts, and some of which is simply a discount, if you will. Should we view this as an expense or as a foregoing of revenue?

Yeah, you know, I think for a layperson, Michael, you would naturally think of financial aid as an expense. But in the accounting finance world, you know, we treat it as a deduction from tuition revenue. So that's why, you know, we often talk about net tuition and fees revenue, an important topic. It's one that's been front and center for decades now. And the headline is tuition discounting, meaning how much are we actually collecting of each dollar we charge? That discount keeps going up and up and up and up. And we live in a world now where we have hit a 60ish discount rate, certainly on the private side and with those institutions so institution getting 40 cents on the dollar, it's important to know even on the public side, I mean, we're at about a mid-30s discount rate. So when you think about yes, enrollment and what's happening with declining enrollments, in many cases, when we think about a lack of ability to increase price in many cases because price sensitivities have increased and families candidly are having a hard time writing the check, the discount becomes critical in Terms of how much money do I really have to work with from what is on the private side still the largest share of revenue, A critical component in terms of. On the public side as well.

So, Rick, how can we think about the unit of revenue in. In higher ed? Right. We. We tend to talk, as you said, about net tuition revenue per student, usually. Right. But we also have these things called credit hours that technically students are paying for. Some get to bundle it up. Right. They, they pay a price and they could take 12 credits or 15 credits or 18 credits other places. Right. You're really, truly paying by the credit. How do we think about the unit of revenue?

Yeah. So, you know, you said an important thing first and foremost, Jeff. One, we've got to get into unit cost, unit revenue. When we're really trying to understand financial health at an institution, you have to be able to break that down. And culturally, in higher ed, we tend to have a very lumpy view. Right. Total revenue, total expense. So we have some kind of bigger breakouts on expense side. People costs, not people costs, revenue. We have a few breakouts. You've got to get down to these unit levels. Now, looking at cost per student revenue, per student cost and revenue per credit hour both have their place. Generally speaking, I feel strongly that institutions have to get down to a credit hour understanding of revenue and expense. It's sort of the most versatile unit in terms of being able to move it. And we might want to talk about this later in terms of why don't institutions better understand their cost and net revenues? It's because we don't get down to those kind of unit levels. So credit hour works well and it connects best to an understanding of financial sustainability.

So what are the other major categories? And so we've been talking a lot about tuition and fees, for example, but what are the other major categories of revenue for tuition dependent schools? You know, I'm thinking of auxiliary revenues here. Right. Room board activities, fees, athletics, summer programs. Anything else they're using their campus for?

Yeah, well, no question. You know, back to our conversation about net tuition and fee revenue critical, but actually net tuition and fee revenue has been declining both at public and private institutions as a percentage of total revenue over a decade plus. That's not to say it doesn't play a critical role in the bottom line. On the public side, what do we see? State and local appropriations are actually growing. That runs counter, I think, to the headline a lot of people carry around along with federal appropriations on the public side, on the private side, while tuition is still the Largest source of revenue. Auxiliary revenue is really the next most critical part of making the bottom line work. Auxiliaries, as in dining, residence halls, bookstores, et cetera.

So are you saying then that some schools might be quote unquote, making money on auxiliaries while kind of losing money on. And I know those are not the proper financial terms. While losing money on tuition.

Well, I would hope there's not an institution in America that's losing money on the tuition side. Even though discounts are going up, we are still making some amount on each of those dollars that are spent. Part of that is also a function of is that discount funded or not? It's one thing that does not collect it. It's another if I have the Rick Stasloff Endowment fund for future CFOs and I'm funding that scholarship. On the auxiliary side, though, it is often what makes the difference between being in a deficit or being able to break even for an institution. It is that important, particularly for private institutions.

Okay, so is there room for growth or is there growth right now happening in auxiliary revenue is that we're institutions are kind of pressing the pedal to the metal.

Yeah. The tricky issue on the auxiliary side right now with dining room and board, which is where most of it is, is over capacity. You know, in the current enrollment environment is there's fewer students and fewer of those students are residential students. It's just a lot of beds that aren't filled. It's also a function of older housing stock which just doesn't fit students expectations. And it's, you know, it's often not cheap to live on campus. And yet you're not getting what would be considered sort of a market level of amenity in those facilities. And institutions may not at this point have the capacity to make the investment to bring them up to more of a market level.

So we've been talking a lot about tuition dependent auxiliary revenue. Research is another area of big funding for some schools. Also a lot of this conversation over the last winter and spring, as you know, have been around indirect costs. But talk to us about how these research grants work and the revenue they bring in to cover administrative overhead. How does that all work as a system?

Yeah, it's definitely been in the news of late. So, you know, at its most fundamental, institutions get funding for research to cover their direct costs. Right. Think of the salary for a faculty member that's doing the research the institution might have that was paying their salary is not going to move that over to the grant that's a direct Cost that's getting supported. But institutions can also get funds on top of that for indirect costs. What, you know, in other parts of the world, we might just build overhead. Right. For federal grants, there's a standard 15% indirect rate. If you want more than that, you have to negotiate for that. And many institutions, and of course, the kind of elite institutions that we read about in the headlines have done that negotiation and have 50, 60% indirect rate, so much higher than the standard rate. So in essence, what the federal government has said is we're going to bring everybody down, what they want to do to that standard 15% rate. And that's taking money off the table. For institutions that were enjoying those larger amounts of funding from the higher indirect rates. Why is that a problem? Well, those institutions getting more indirect funding have built that into their expense structures. Right. Those things have been around, allowed to support facilities and electricity and insurance and lots of things that allow the research to happen. But that also supports other things outside of research. So having built it into your baseline expense, they're now faced with a situation of very suddenly having to pull that expense out of the equation.

So the other, another category I should say is annual gifts. There are also endowments as well. And while at some schools, let's focus on endowments in particular, they provide, you know, just a tiny percentage of current revenue each year at others, and those are often the elite institutions, you know, they can provide up to a third of operating revenue. Talk to us about how endowments in fact work and contribute to year yearly operational revenue. How are they used as a lever and what are the typical rules of thumb around spending down from them that are in use today?

Sure. You know, I sort of unabashedly a big believer in earned revenue. That is, when you look at your operations, the programs and services you offer, what's the revenue you earn from that and how does that relate to your expense? That said, as you just outlined annual giving endowments can be important contributors to financial health. Standard spending from an endowment is 5% of a 3 year rolling average. So you kind of smooth out the ups and downs from your earnings and you let yourself spend 5% of that. That's to allow sort of the core funds, often called the corpus, to continue to grow. So you're just spending ideally from earnings. I think in an ideal world, Michael, those funds from the endowment would support new investments in programs and services. They wouldn't be needed to keep the lights on. That's kind of why I led with my earned revenue point. Because if you got to pay the electric bill. It's part of running your institution. So endowed funds, if you could use them for investment in new program growth, professional development, kind of helping the institution to, to keep bringing its mission forward in new ways. Now that said, at many institutions, especially on the private side, they are a critical part of making the bottom line work.

So let's just hone in on that for a moment because a lot of institutions, particularly the elite end, are using the endowment really to fund core operating priorities. So are they over relying on their endowment or is it part of a diversified funding model? You know, is this a mistake that's they have been making in your view, or is this just prudent diversification?

So, you know, it's probably a good example that we won't spend a lot of time with of why the over focusing on elite institutions kind of distorts our understanding of higher ed finance. You know, what MIT is or isn't doing with its multi billion dollar endowment, it's not really relevant, quite frankly for most of higher education. So for a typical institution that's being prudent, that 5% spending rule is a good one. It allows you to contribute to the financial needs of the institution while making sure funds will be available over time. There can be some instances where it's appropriate to go above that 5% as long as it's done transparently with appropriate governance support. As long as, in my opinion, you're dealing with some kind of short term budget situation or you're trying to smooth out the impact from what's going to be a longer term budgetary change. I think the problem occurs when institutions use the additional endowment spending to avoid making necessary changes. This is where we get into trouble and it's a really expensive way to kick the can down the road.

So Rick, just so I understand that there's. Because there's a number of institutions now that are kind of on the financial bubble that are spending, they have been spending more of their endowment than that 5% number. And a lot of them are claim they're using it as a bridge to get to the other side. But maybe, maybe not, right? Like so that's the question here. It's okay to do it as long as you really are crossing a bridge and you are going to get, you know, making those tough decisions to get to financial sustainability. But you may not know whether you're really going to get to the other side of the bridge and you might just be spending that money to kind of just kick the, continue to kick the can down the, the, the road. Right, that's the, that's the difference here, right. In terms of who's spending more than 5%.

Absolutely. I think you captured it well. And you know, so if, if the three of us were sitting on boards and many of us do, you know, I think this is the thing you have to think about. If management brings you a proposal and says, hey, we've got this budget gap and we're going to pull an extra X million from the endowment to close the gap, the next thing you need to be asking is help me understand how we're not going to have that gap. What are we going to do? How long is it going to take? And if you have confidence that, you know, over the course of a year, maybe two years max, in my opinion, you, you could really get there. Okay. You know, I think that's an appropriate play if, you know, you keep coming back to the table and we're plugging these holes and we're not making the more courageous decisions about how to reset in terms of the foundation of budget and expense. I think we're kidding ourselves about what that extra endowment spending is doing for us, Rick.

So that's the revenue side of the ledger. When we come back on Future youe, we'll move to the expense side.

This episode of Future youe is sponsored by Ascendium Education Group, a non profit organization committed to helping learners from low income backgrounds reach their education and career goals. Ascendium believes that system level change and a student centric approach are important for our nation's efforts to boost post secondary education and workforce training opportunities. That's why their philanthropy aims to remove systemic barriers faced by these learners, specifically first generation students, incarcerated adults, veterans, students of color, adult learners and rural community members. For more information, visit ascendiumphilanthropy.org

this episode is being brought to you by the Bill and Melinda Gates Foundation. Today's college students are more than just students. They are workers, parents and caregivers and neighbors. And colleges and universities need to change to meet their changing needs. Learn more about the Foundation's efforts to transform institutions to be more student centered@usprogram.gatesfoundation.org okay, so let's move to expenses. You know, people are the driver, right? But departments. Schools are also organized in Byzantine way ways. Some departments are big, some are not. Everyone talks about spans and layers in higher ed as driving administrative costs.

You know.

Can you explain and help us understand what really drives expenditures under that broad category of people of personnel today?

Sure. It's Always interesting to me that people are 60 plus percent of spending at institutions, maybe 70%. But it is where the money goes. And yet we don't have a very good idea at our institutions of how those people spend their time or even, Jeff, the broad buckets of activity that they're pursuing. So let's make up an example here. I have a full time faculty member in the biology department. They could be teaching undergraduate biology and then they could be teaching graduate biology and then they could be teaching courses that support nursing. Very few institutions understand how much of that faculty member's time in compensation goes into the undergraduate biology bucket, how much goes into the graduate biology bucket, how much goes into the nursing bucket. And if you don't know that, then you don't know how much each of those programs cost and whether the programs are covering their costs or not. So it's a huge issue that we have where for the majority of our spending, we don't know where the spending's happening and we don't know what we get for the spending. And therefore we can't talk about return on investment. Right.

And we're going to talk a little bit more about that in, in a little bit. So it's not just as easy as consolidating departments. Right. Or cutting spans in layers that does that get you that much?

You know, so it helps. There's no question that when we look at reporting lines and you see management level positions, whether in the academic or administrative side, and nobody's reporting to them, it sort of begs the question around do we need to make that investment there? And at that level, if we can consolidate departments, it does mean some savings in terms of overhead or what it takes to manage that. You know, all to the good. However, in terms of really solving cost problems in higher ed, it's just not going to get us there. The bigger issue is what's happening down at a lower level in terms of what are we offering? Does it connect with market demand? What's the revenue being generated? How do we streamline academic administrative portfolios so that in essence we right. Size institutions to better reflect both the number of students coming to us, but also what they're asking for. That's really the hard work to be done.

So you just referenced the. What might be considered the paying customer. Not everyone likes that word, but the student who, you know, in many cases operates across an institution. Right. And then there's others, like funders of research, that perhaps are more targeted. Sure. Administrative overhead maybe spreads across, but you know, the intent is more Targeted in many cases in general, how are expenses allocated as revenue comes in?

Yeah. So again, it gets back to the issue we have in higher ed, that expenses are just too lumpy, meaning the buckets are too big. So we can't really get our arms well around activity and tie that activity to the cost to deliver on supporting it, goods and services, programs and services. And we can't then tie that into the revenue that's been generated so that we kind of see how this all works. So we have a problem. You know, it's the. I just invented this now, the financial bucket problem in higher ed. The buckets are too big, so we just can't connect what we're spending, where for what and what we get for it and that. So it's a granularity problem, quite frankly.

So.

So maybe let's get specific of how we would solve it, right. Because today, famously, right. People, you know, boards will say, how much does it cost to produce an English major? How much does it cost to produce a computer science major? And because the buckets are so big, we don't know the answer, how could we get at that answer to really understand how much it costs to produce students in these different buckets?

Yeah. So here's the great news. It's actually possible to do. You can go into an institution and we do it all the time at an R01 level, community colleges, everything in between. To answer that very question, Michael, of what does it cost for this program or this service? However, it's very manual and it's very time consuming because you are connecting across different data systems. Right? From a, you know, you have a system and a set of data around student activity, these student information systems, right. You have a system for tracking people and paying them. You know, all our HR payroll systems, we have registration systems, but we don't have an ability to tie all that together, quite frankly. So there is a tool issue, quite frankly, that would need to be addressed. But also we have to start thinking about more discrete units. And we kind of talked about that a little bit earlier with Jeff's question. So that even for things as mundane as general ledger design, Right. Where back to our example we had of the faculty member in biology, when we pay that faculty member, they hit a bucket called biology. Ideally, when you paid them, you would pay them a piece for their undergraduate biology that they're teaching, there'd be a piece that you're paying them for their graduate biology, there's a piece you're paying them for the nursing. So that at the Time the expense happens, you can see actually where it's going in terms of the unit that it's benefiting. So we'd have to get system alignment from general legislatures on down. We have to get reporting in place and we have to have an agreement, quite frankly, that we should be doing this so that we can have clear roles and responsibilities and it becomes a real issue. If you look right now at the number of institutions implementing new ERP systems, right, these large scale computer systems to track everything that are spending tens of millions of dollars, years of effort, and still are not thinking about this granularity question. So they're going to be able to answer what are some pretty fundamental things? What does it cost us to do the various things that we do?

Who's against making that change? Or why isn't it being tackled?

So I think one is historical, Michael, in that look, for a long period of time, let's say certainly post World War, at least into the 60s and beyond, generally speaking, in higher ed, revenue and expense kind of pretty much worked out because we had a growing number of students or customers. We had strong support within many sectors for, from state and local sources seeing higher ed as more of a public good. We had lower inflationary periods. We were able to expand in new parts of the market, whether it was for graduate students or into adults, et cetera. So should colleges have operated at a more granular level so they could be better stewards of resources? I would say yes. Did they really have to? Well, there wasn't as much urgency. And then when you look at accountability, candidly leaders weren't being held accountable. Right. For even at a board level, I don't think people are saying, do we make or lose money on English versus engineering? As long as the auditor said your audit was clean and the bottom line worked every year, that's not the world we live in anymore. First of all, students are paying, you know, a huge chunk of the cost to go to college. They, they have different ideas of what outcomes are. And colleges don't have the same level of resource anymore in terms of allocating it. So it means they have to have a better understanding of where to put those resources. So there's an historical component. I think there's also a cultural component in that people push back against the idea that we're not going to look at the institution as a whole, but we're going to look at its discrete parts. And you tend to get to more, whether you want to call it winners or losers or growth opportunity areas that you want to Invest more in that can run counter to culture at institutions.

Let's talk about depreciation within the category of expenses. Capital expenditures come out of capital budgets, not typically operating budgets. But then there are maintenance costs. And as we know, they're all too often deferred maintenance that, you know, seems not to get addressed at a lot of institutions historically. Why do institutions put off maintenance so often and create these deferred issues? Is that a cash flow linkage with their budgeting process or is something else going on with how they construct expenses?

Yeah, you know, that growing backlog that of deferred maintenance, which I think the last estimate I saw that Moody's took a shot at this was 950 billion with a B dollars across higher ed. Real money, I believe, is the next shoe to drop for higher ed. And institutions had just not kept up with needed investment in facilities and equipment. So why does this happen? Well, hey, many institutions are struggling financially. And some recent research we did, almost 40% of institutions nationally are not financially healthy. Looking at a set of different metrics. So, look, if you're having a hard time making your budget work, the idea of do I need to fully fund depreciation? Can start to get chipped away at. There's a hidden issue, however, in that many stakeholders don't feel that depreciation is a real expense. Right. When you're paying the electric bill, you got to write a check for the electric bill. You don't write a check for the depreciation bill. But let's be clear, that bill comes due eventually in the form of leaking roofs and antiquated utility systems. So maybe the easy way to say it, it's an easy way to not funding, fully funding depreciation. An easy way to make the budget appear to work for a short period of time until suddenly it doesn't look, and then it's somebody else's problems. You also have the issue that for a long period of time, money was cheap. So if you didn't fully fund depreciation, what did you do? Eventually you went out and you borrowed, and then you replaced your heating system, you fixed the roof, you added on to your facilities, et cetera. Well, you know, money has gotten more expensive, and so that solution hasn't totally gone away. But it's not the same kind of solution it has been for a number of decades.

Okay, so now we've been through all that. So what's really driving expenses in higher ed? Is it the faculty? Is it administrative bloat, which we hear about all the time, is it the growth in all these staff positions because colleges are expected to be everything to everybody. Is it the cost of all these facilities? What's driving the expense?

So let's be clear. Spending per student has been consistently rising across all of higher ed. I mean, what public private, two year, four year? However you look at it, spending just goes up, up, up, up, up, up, up. When you break that down functionally and you break it down into categories, spending on instruction continues to decline as a percentage of total expense. So you know, of course you could be spending more, but it's a smaller percentage as total spending goes up. So therefore spending on non instructional things outside of the academic side of the house goes up. Now you can talk about administrative bloat. It's a term, you know, that we hear. One thing that strikes me is that inside that administrative spending, there's a lot of things that people probably like and want, like information technology or counseling and advising services that are taking up larger and larger amounts of total spending. To me, what's interesting is this lack of an understanding of return on investment in higher ed. And so again, we tend to focus on total spending and categories, but we really don't talk about what we're getting for it. And when you look at that, for instance, on the academic side of the house, what do we see? Faculty across all sectors are teaching fewer and fewer credit hours. Those lines go down. That's not good. That means we're less efficient and that drives up cost. We see that institutions are adding more higher paid managerial positions on that administrative side without a clear connection to student success and outcomes. So we see contributors in terms of total spending, but also inside total spending. And I think it's because we're not looking at what we get for that spending. I will say, however, there is one bright spot that sometimes gets ignored and that's completions. So I just talked about outcomes a minute ago. Completions are up across almost all of higher education. So good job higher ed. You're getting more students to the finish line. And here's the connection back to spending. The cost to produce those completions is declining. So it means that as more completions happen, at least that rate of change is going up faster than what's happening with increases in spending. And it actually is a bright spot for higher ed. We are producing more for less.

One other question on this, Rick, that I'm curious to get your take on is a lot of times when institutions think about how they make changes to budgets, get operating expenses in line with revenue, they sort of Fall back to fixed versus variable costs. So what are our real levers? Right. To change the expense side. How do you think about fixed and variable costs in a college's budget?

Yeah. So, you know, there is the reality that, you know, we talk about, right. Sizing institutions, and there is plenty of opportunity, in my opinion, across all of higher ed to streamline academic portfolios, scale back on of the right mix of administrative costs and services. That said, you know, at some point you hit the tyranny of one, meaning I need. I need a registrar. Right. I need people in the financial aid office. Right. You can't start to fractionally break that out. I think when I think about levers, degrees of freedom for presidents, certainly at a C suite level, to me, I think it gets back to a more fundamental question around, what are we offering? To whom, how? And so if it's true, in all the research I've ever seen, that generally about 2/3 of students are in 12 or fewer programs, as we look on the academic side of the house, it means we're offering a whole lot more stuff than students are asking for. It gets to be almost impossible to totally create efficiencies when you just have more infrastructure, in essence, that you're holding up. When we look on the administrative side at those services, there are just inefficiencies in terms of the number of hands and how that's being delivered. So we have a core problem, I think, Michael, around. We want to still offer what we offer, the way we offer it and who we offer to. And we're trying to kind of chip away to make the equation work. And I just don't think that that's possible anymore. We've got to get inside the more core questions around programs and services.

So, Rick, let's just combine all these areas together and think about margins. Right? Because I think people in higher ed or people outside of higher ed think that, well, higher EDS are nonprofits, right. They don't make money. But every college or university tries to have a margin, mainly for contingencies. But also then if they have extra money at the end of the year, there's a lot of things they could do with that. Right. As one president recently told us, no margin, no mission. Tuition discounting is done because we're trying to attract a certain number of students and get to certain revenue figures, presumably. How do we think about tweaking on that line, though, where it may be better to have fewer students paying more money for students, or the opposite? Right. How do we think about balancing these things? So that we get to a margin. Because what we're seeing as, you know, a lot of universities are running deficits now. You know, they will hope to get back to those margin days, but I think it's really hard for them to see how, how can we get back to those margin days given, you know, declining number of students, for example.

Sure. So, you know, in terms of the issue with top line thinking, I hear a lot of board members say things like, rick, don't we we just have to grow top line revenue? Well, of course, growing revenues. It's far more comfortable. Right. Than making adjustments on the expense side. I think secondly, there's the danger of institutions proclaiming we hit our targets, we got X number of students that we wanted, we got X gross tuition revenue. And they're not paying attention, Jeff, to that net tuition and fee number. And at the end of the day, look, tuition discounting is just a tool to get to some kind of net tuition and fee number. So we gotta understand those variables. I think in terms of institutional margin, we get back to this granularity question. So see if we can make up an example. If the three of us ran a manufacturing plant and we made refrigerators and bicycles and tires and we saw that margins were starting to slip for our overall manufacturing effort, but I was a cfo and the two of you come to me and say, hey, Rick, are we making or losing money on our tires or our refrigerators or our bicycles? And I said, I have no idea. We really don't pay attention to that. You get real limited real fast to, well, what's the thing I'm trying to fix? So that's really where the margin question has got to move down into a program, into a budget unit level so that we understand what am I fixing. Because it can be different across academic programs and departments and across administrative departments. It's not the same solution.

And Rick, this is where, if we had more sophisticated ERP systems and, or we knew how to use those more sophisticated ERP systems, we could actually get to some of these answers.

Absolutely. That's a function of training and professional development, better use of tools. But again, it's also a cultural issue. So we shift to a place where people say, oh yes, those are the right questions that we should be asking.

So as we wrap up here, colleges have various sources of cash in addition to endowments and the capture they keep in accounts. They also have lines of cash credit. They also can issue bonds. Explain how all these pieces work together in planning a budget, because I think, I think the public. You know, even as a, you know, a first time board member, I kind of got confused a little bit about, well, you have cash on hand, and then you have. You have lines of credit, and then you also have endowments. Can you talk about those things?

Yeah. You know, I think that is a very common confusion, Jeff. And it. It leads to issues in the dialogue. Right. So, you know, in my mind, you know, it's kind of. You can think about it like at your kitchen table, quite frankly. You know, if I'm sitting at the kitchen table with my partner and we're looking at what we earn, you know, in our salary for the year and what we spend, and if we are spending more than we make, what's happening? Well, if we have a savings account, we're taking money out of the savings account. Right. You can think of that as your reserves or maybe like your endowment. Well, that's fine. But if I keep going with that same level of spending, what happens? Well, eventually I run out of money in my savings account or in my endowment, in that example. So one way in the financial world, you think about what are balance sheet issues, cash debt, and how that's handled versus your P and L issues, what's the income I'm earning and the expense. And you need to keep those two things separate. They do come together. They don't come together totally in the budget, Jeff. They come together in terms of your overall financial game plan and how it connects to strategy. So, you know, in the current environment, I go back to this earned revenue idea. That's the P and L. Right. What do I earn? What do I spend? Am I spending more than I make? Got it. But now we broaden that to think about these balance sheet issues. And, you know, one way to think about that is Runway. So when we bring all resources to bear, how much Runway do we have to go do the things we want to do so that we can be sustainable in the long term? And that brings more resources to the table. Because if you have more debt capacity, if you have a line of credit you haven't tapped, if you have reserve funds, the Runway gets longer. And time really starts to matter then, because the more time we have, more ability we have to execute and make these kind of changes.

Okay, so, Rick, we've asked you all these questions. We're going to end on the money question. What. What levers are really available to college leaders to either control expenses or raise revenues? In other words, as you look at the landscape, you know, take the. Just the average college and I realize there isn't an average college, but where are the real opportunities to either bend the cost curve or raise revenue in your view that maybe are not being talked enough about.

Yeah, so you know, I have three that I would lift up. One, get to strong business intelligence institutions are flying blind so they have to have better tools and professional development so they can move to more data informed decision making. Essential. Secondly, adopt a clear set of performance measures. And that starts with this very simple idea of what will good luck like and how will we know all the way down at the lowest level and make sure they're in alignment and that you can track them and hold people accountable. And the third is you have to have the courage to reallocate resources to the things that better line up with your mission, with strategy and, and with the things that help you move to a sustainable financial model.

All very good points, Rick. I think they also all point back to culture, right? There's never really been a culture of business intelligence. Never really been a culture of having KPIs. And you know, Michael and I heard this recently on an episode around, around mergers and acquisitions.