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Higher Education Policy and Practice

Delta Cost Project Summary

The Delta Cost Project (sponsored by the Lumina Foundation) analyzes and reports on the implications of major spending trends in public and private institutions of higher education.  Because the report is lengthy and time is valuable for presidents and chief administrators, Stevens Strategy is sharing our review of the latest Delta report for the period 1999 to 2009.

There are five areas in the report that we believe are most valuable to our readership: revenue, market share, expenses, the cost of personnel, and degree production.  Our summary focuses on these areas because they deal with trends that have had a powerful effect on the financial conditions in higher education over the last decade.  (The discussion follows the general practice of categorizing private institutions as bachelors, masters, or research. Even though if an institution is categorized as a bachelor’s college, it may offer
graduate programs as will be seen in market share discussions.)

Revenue

  1. Private four-year institutions responded to the recession by increasing sticker prices roughly 4.5% in 2009.  Most of the increase was discounted with financial aid.  As a result little of the new tuition revenue made it into net income.
  2. Net price at some private colleges may be competitive with tuition rates at public institutions as they increase tuition to offset reductions in state funding.
  3. Tuition revenue in private institutions covers almost 90% of the costs in the master’s sector, and 70% to 75% of the costs in the research and bachelor’s sectors. 

Market Share

  1. Private bachelors, masters and research institutions reported market share losses in their undergraduate programs between 0.5% and 0.7%.  Graduate programs for private institutions showed that private bachelor colleges gained 0.7% in market share, and private master colleges increased their market share 1.6%.  Private research institutions, on the other hand, reported a 2.3% decline in market share.  The report notes that  private bachelors and masters institutions may find more graduate level opportunities to add growth and to reduce enrollment pressure on their bachelors programs.
  2. Enrollment growth was greatest for public community colleges and for-profit institutions.  Nevertheless, enrollment grew for all institutional categories between 1% and 2%.  Private colleges and universities in some geographic regions will find it more difficult to offset market share losses as demographic trends for high school students continue their decline during this decade.

Expenses

  1. There were no dramatic spending cuts at private nonprofit institutions.  Reports indicate that their spending increases continued “unabated” by the recession.
  2. The following is a summary of the changes in spending over the last ten years and for the one year period 2008-09.
    1. Greatest increases over the ten and one year period for private institutions were usually found in student services and academic support.  Data from other studies support the Delta Study findings that private institutions have made substantial increased funding allocations for student services and academic support.
    2. It is not clear why operations and maintenance expenses have required increased spending levels in all three sectors.  It could be due to the age of buildings, addition of new buildings, or increased costs to reduce liabilities.
    3. Except for bachelor’s institutions, public services funding declined suggesting that these funds were redeployed elsewhere.  Also cutbacks in grants probably accounts for the reduction in funds for research in the master’s and bachelor’s sector.
    4. Spending on instruction, though not a high priority, improved for all sectors except for the bachelor’s sector during the one year period.

Employee Compensation

  1. The proportion of expenses spent on faculty has remained steady or fallen slightly.  Compensation for full-time faculty at private institutions increased
    modestly.  At four-year institutions, full-time professors represent between 40% and 60% of faculty.  Reliance on part-time faculty has kept faculty costs down.
  2. The addition of a large number of new staff positions at private institutions has more than offset cost reduction per FTE for faculty.  Staffing costs increased 11% at private research universities and 4% at other private institutions.  The higher costs of staffing can be directly seen in the pace of expense increases over ten years for student services and academic support.
  3. As the Delta Study points out, neither public nor private institutions “have controlled compensations costs (due tothe hiring of more staff) on a per student basis”.  Higher staffing costs absorb scarce tuition dollars and push expense allocations away from the primary responsibilities of colleges and universities to educate students and conduct research. 

Degree Production

  1. Private research and master’s institutions have the highest degree productivity (measured by degrees to enrollments).
  2. Private bachelor’s institutions credit hour productivity per degree remained flat, while credit hours credit productivity per degree improved at master’s and research institutions improved as the number of credit hours per degree declined.

The Delta Study suggests that private institutions need to continue to monitor the relationship between revenue and expenses closely if they intend to reduce pressure to increase tuition rates.  This could mean that enrolling students will become more competitive as colleges seek more students in new geographic and demographic markets.
Private colleges and universities will also need to manage expenses more closely.  They will need to develop new ways to assess the costs of hiring and compensating new and existing staff and faculty and assessing the costs of non-personnel expenses.  Productivity metrics will need to become commonplace as institutions in the private sector respond to tougher price competition and new governmental regulations.  Of necessity, this will mean the development of productivity measures, budget funding rules, and management tools to manage tuition rates and to control costs.

Stevens Strategy has the proven experience and skills to help colleges and universities develop mechanisms to measure productivity and to formulate budgets that effectively allocate and manage resources.  Brendan Leonard, who has developed our highly respected financial models, and Michael Townsley, an acknowledged national expert on financial management in higher education, can work with you to develop powerful financial strategies and financial management assessment systems.

Michael Townsley, PhD

Senior Consultant, Stevens Strategy

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