Strategic financial planning and higher education institutions.

• Author: Shao, Lawrence P.

1. INTRODUCTION

   A university president recently spoke to his Board of Governors and indicated that lawmakers and citizens have the wrong view of higher education (Rosenberger, 2010). He spoke about how education is viewed as a cost. He referenced a report from the Higher Education Policy Commission and the Bureau of Business and Economic Research that stated higher education should be viewed as an investment and, instead of looking at costs, we should look at the actual financial returns education generates the state. He went on to demonstrate the very positive return on investment that higher education has yielded. This may be true, but economics realities are forcing higher education institutions to look much more closely at how they manage their institutions. It has become readily apparent that some drastic steps must be taken for many institutions to survive. These steps must not only result in cost cutting, but in creative solutions that address unique problems created by the times we live in.

   Higher Education has traditionally generated it funding through the resources shown in Figure 1. (TCS, 2007)

   To demonstrate the relative importance of the major sources of income and expenses for most higher education institutions, we will use funding and expense rankings from two relatively distinct higher education entity organizations, those of the East Division of the Conference USA group and the East Division SEC Conference group. All figures in the table come from the various universities' web sites.

   Table 1 shows sample ranking of where the East Division of Conference USA obtained its funding in 2009. The rankings in this group follow a relatively stable pattern. This group is very dependent on state funding and student tuition.

   In Table 1, the total revenue percentage ranks appear to follow a more predictable pattern than do the rankings in the East Division for the SEC Conference schools presented in Table 2. This may be due to the fact that SEC conference schools are state landmark universities with much more diverse and complex funding and spending categories. Also, many of the SEC conference schools have medical schools with complex revenue and expenditure processes.

   Table 2 shows rankings of where public institutions from the East Division of the SEC Conference obtained there funding in 2009. The funding percentages do not follow a pattern, due to the unique nature of its fundraising activities.

   Table 3 shows ranking of the Operating Expenses of the public institutions from the East Division of Conference USA obtained there funding in 2009. The rankings in this group follow a relatively stable pattern. This group follows a spending pattern similar to their revenue generation depending mostly on state funding and student tuition.

   The rankings for the Operating Expenses of the public institutions from the East Division of the SEC Conference in 2009 follow a pattern similar to the East Division of Conference USA.

   Six metrics used by the Delta Cost Project, that track trends in college spending, are useful in discussing what is happening in higher education inflows and outflows of funds (Desrochers et. al., 2007). These metrics include:

   * Revenue: Where does the money come from?

   * Expenditures: Where does the money go?

   * Cost/Price/Subsidy: What's the student's share of costs?

   * Performance: Outcomes and spending

   * Spending Comparisons: Prices and enrollments vs. spending

   * Enrollment: Where do students go?

   It is interesting to note that during the 1998 through 2008 period (2008 figures were projected), tuition, auxiliary enterprises, hospitals, independent operations and other sources, sources of funding all trended upward. State and local appropriations, private gifts, investment returns, and endowment income, fluctuated in amount (Desrochers et. all, 2007). Total revenues trended upward except in 2003.

2. LITERATURE REVIEW

   2.1 Recent History

   As illustrated in the preceding section, funding and spending has remained relatively stable, at least in the recent past. State legislatures have recently begun scaling back their support for higher education and federal support (Field, 2010) is also waning. Funds generated from contracts and grants, which come from non-appropriated state funding, cannot be touched, due to contract and grant restrictions. On the other hand, the pool where the funds used to generate contracts and grants are derived from are also decreasing. Stimulus money has temporarily halted huge budget cuts in many states, but states cannot count on the stimulus money for long term viability of their institutions. In addition, recent market collapses have greatly reduced some endowments that many institutions depend on. Recent events have caused many potential higher education students to ask the question "Should I even attend college?" These questions were not common until the recent surge in the cost to attend college.

   A mission statement "... should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decision-making." (wikipedia.com). The vision statement "... outlines what the organization wants to be." (wikipedia.com) Most higher education institutions will analyze their mission statements and reevaluate the accompanying vision statement in the very near future. Academic institutions have avoided quickly accepting the fact that funding resources are not going to be supplying their needs as readily as they have in the past. It is unlikely that most institutions will want to change their mission statements, but they will probably have to adjust their vision statements. The concept of having to reinvent the vision statement for many higher education institutions is becoming a given, instead of, as in past times, something to be avoided (Blumenstyk, 2010). The causes for this "change of heart" include such occurrences as, current demands on dwindling resources, declining donations, and stimulus money no longer being readily available. It is apparent that institutions of higher education must watch the money they have more closely. In one case, a hedge-fund manager was even convicted of swindling four universities out of millions of dollars (Fain, 2010). Support for higher education from the state had increased for several years, but that trend was broken in 2009. Total state support for higher education in 2009 fell 1.5 percent, even when you include ARRA Funds from the federal government. When ARRA are excluded from calculations state funding decreased by 3.4 percent (NCSL, 2010) Not surprisingly, many states have cut higher education programs or services (Goral, 2008). It is unlikely the academic economic environment regarding resources will return to the level it was in the past, anytime in the near future. To deal with the decrease in available funding, Florida tightened residency requirements to make it harder to qualify for in-state tuition. State actions to close budget shortfalls have included layoffs, furloughs and salary freezes, affecting higher education institutions. In addition, many states have authorized tuition and fee increases (Gorski, 2010).

   Other events that have affected funding at many higher education institutions include the decline in the value of endowments for many schools. In 2010, donations to...