Looking Beyond Personnel Reductions for Cost-Cutting Solutions

Without a crystal ball most higher education leaders (and the world at large) could not have predicted what 2020 would bring. Every aspect of higher education has been challenged over the past year. Institutions with on-campus residents have been forced to make changes to every facility to enforce social distancing regulations amid enrollment challenges. Online institutions also may be facing a decline in registration as many Americans are facing economic challenges and may have had to postpone college plans. Data from the National Student Clearing House, indicates that, as of October, total undergraduate enrollment is down 4.4%, including a 18.9% drop in community college enrollment.

While all industries have been affected by the COVID-19 crisis, higher education has faced challenges that are unique and sometimes seem to be insurmountable. At the start of the pandemic, many institutions implemented cost-cutting measures in response to the lost revenue relating, in part, to room and board refunds. Some of the cost reductions were a natural result of the pandemic, as travel relating to athletics, recruiting, and conferences was halted. Other cost reductions came with a significant amount of pain. The unfortunate reality is that personnel costs are often the easiest and most effective reduction to make. As a result, most institutions implemented a variety of employee expense reductions including furloughs, salary reduction arrangements, and decreases in employer contributions to employee benefit plans. As the pandemic has continued, with no end in sight, some institutions have been forced to permanently lay off employees.

With surging cases, many institutions are preparing for the long haul. Though vaccine distribution has begun, it is likely students will be among the last to receive it as they are generally considered to be at lower risk for serious illness. Therefore, it is probable that for the foreseeable future institutions will be facing the reality of declining enrollment, more students living off campus, possible campus closures, and mounting pressure to increase the discount rate to attract students. It will be critical for institutions to look at new ways to generate revenue and reduce expenses that are sustainable and effective. There are several initiatives that institutions can consider or implement in response to the crisis, including:

Diversification of revenue streams.

Many institutions are looking at other opportunities to help offset the anticipated decline in traditional undergraduate enrollment. Although traditional undergraduate enrollment is expected to continue to decline, particularly in the Northeast, some institutions are finding success in expanding into the adult education market, both by creating new undergraduate programs that are designed to appeal to adults and by increasing graduate program offerings.

Increasing the endowment draw.

This is a very controversial strategy that often pits the business affairs department against the President and/or Board of Trustees. Those of us with a financial acumen know the long-term effect of “raiding the endowment” and are aware that increasing the endowment draw may have a negative impact on the long-term financial health of an institution. Investment return and new giving may not keep up with these higher draws. Some institutions have had success with special draws, however, that are targeted specifically for advertising campaigns, program expansion, and other enrollment initiatives. If a special draw results in improving the overall fiscal health of an institution, then it is clearly a worthwhile undertaking. Institutions that simply increase their overall percentage draw, however, run the risk of not using these additional dollars in an effective manner.

Increasing retention and graduation rates, particularly for minority and/or low-income students.

It is an unfortunate reality that many minority and/or low-income students do not graduate. While the focus has traditionally been on getting students to initially enroll, keeping these students enrolled (and succeeding academically) is just as important. A focus on providing the proper amount of support for minority and/or low-income students not only makes a positive difference in the lives of these students, but also helps increase the bottom line by improving retention.

Review of current program offerings.

It is likely that adding new programs and diversifying revenue is not enough. Most institutions have programs that do not have sufficient enrollment to remain financially viable. This is a difficult conversation and the institutions that have the most success with program reviews rely on collaboration between administration and the faculty. It may well be that certain majors are so critical to mission that it is acceptable to consider them as a “loss leader”. Until an institution performs a detailed program review, however, it is impossible to truly know which programs require increased scrutiny (although it is likely that most have a pretty good idea already).

Collaboration with local employers.

There may be opportunity to collaborate with local employers to establish a pipeline of graduates that mutually benefits both the institution and employer. One of the industries that has been most successful in such workforce development programs is healthcare.

These are just a few of the innovative ideas that higher education institutions have started to implement over the past several months. While they may not be applicable or practical across the board, every institution’s leaders should think outside the box to find the solutions that work for their current situation. Certainly, no institution that is facing flat or declining enrollment, cuts in state funding, reduced giving, increased discount rates, etc. wants to remain with this status quo, so instead of embracing the “new normal” work toward creating something better.

About the Author

Joe is a Partner in The Bonadio Group’s Higher Education practice, specializing in the business and accounting needs of colleges and universities. His experience includes financial statement audits, tax reporting, compliance and consulting for a wide variety of institutions. ([email protected]; (585) 249-2835)