Private research universities face a new financial model

By Kimber Williams | Emory Report | Oct. 29, 2012

With growing external pressures, increased competition and mounting financial challenges, is the "golden age" over for private research universities?  

It may well be, said Cornell University labor economist Ronald Ehrenberg, whose Oct. 23 lecture opened a series of talks sponsored by the University Senate around issues concerning the funding of America's private research universities.  

Speaking to the Emory audience through a high-definition video link, Ehrenberg, the Irving M. Ives Professor of Industrial and Labor Relations and Economics at Cornell University and director of the Cornell Higher Education Research, outlined a complex and vastly changing landscape for America's institutions of higher education that has led to a breakdown of longstanding financial models.  

When Ehrenberg received his PhD in 1970, he was "graduating into one of the best job markets ever known to an academic," with a choice of positions at a dozen major research universities.  

What followed was a career that coincided with "the golden age" for America's top research universities — undergraduate admissions grew increasingly selective and attracted top students, research funding soared, endowments grew, and faculty salaries outdistanced other institutions.  

But over the last 40 years, a variety of factors have slowed that momentum, said Ehrenberg, who served as vice president of academic programs, planning and budgeting at Cornell University from 1995 to 1998.  

Today, while private research universities are still viewed as critical players in shaping a highly educated workforce and producing research that will lead to job creation and scientific advancements, they're also the target of growing criticism, he said, with public outcry over issues that include:  

  • Undergraduate tuition rates that have increased 3 to 3.5 percent (for the last 30 years); beyond the rate of inflation;

  • Rising student debt burdens;

  • Classes that represent fewer students of modest means;

  • Perceptions of low endowment spending.

  The dynamic is further stressed by ever-expanding research budgets, federal cutbacks in research funding, and growing financial aid demands — research universities now typically give back more than 40 percent of new tuition dollars in grant aid. "That limits the ability to fund operating budgets adequately," he noted.  

Meanwhile, pressure to attract the best, brightest faculty and students — and to grow technologies that attract students — has continued to build. And competition to place well within U.S. News & World Report academic rankings feeds the institutional spending race.  

"Students and parents perceive that where they go to college matters almost as much as if they go to college," Ehrenberg said. "We raised tuition beyond the rate of inflation because it didn't affect the flow of applicants."  

Growing financial constraints further cloud the picture: The 2008 financial collapse wreaked havoc with endowment income, while financial aid needs exploded. Even now, financial analysts forecast continued lower returns on endowments at a time when academic and administrative expenses are swelling.  

The result? "The financial model that premier research universities operate under is under great stress and may be close to breaking down," Ehrenberg cautioned.  

In the near future, political and economic forces may likely limit tuition hikes. In some cases, he speculated, "we may well be subsidizing research out of undergraduate tuition dollars."  

In response, universities must increasingly turn to new sources of external and internal funding while making tough choices about where to cut spending.  His recommendations include:  

  • Reduce layers of administration; increase number of direct reports;

  • Reorganize administrative services, support services to achieve efficiencies, reduce costs;

  • Centralize procurement, pursue electronic purchasing;

  • Consider technology to improve educational outcomes, reduce instructional costs;

  • Pursue partnerships, share academic resources across institutions;

  • Grow annual giving and full-tuition paying programs;

  • Seek commercialization opportunities for research, real estate;

  • Generate more revenue from professional degree programs, including new hybrid programs.

Though Ehrenberg acknowledged the outlook may seem grim, such targeted savings can make a difference. For example, Cornell University is "on track, on our Ithaca campus, to achieve savings of $75 to $85 million a year" by the end of FY 2015 from these efforts. "This represents more than 5 percent of our operating budget, once we take away external research funding, which the university has no control over."  

However, he noted that those were one-time cuts in the university's base operating budget, adding that "continual efforts to reduce both administrative and other costs will be necessary if Cornell and other private research universities are to have any hope of reducing their rates of budget increases and tuition increases."  

The University Senate lecture series "Shaping Emory's' Future: Challenges and Opportunities in the 21st Century" will continue with:  

  • "A Faculty Encamped Just North of Armageddon" by Robert Zemsky, University of Pennsylvania professor and Learning Alliance for Higher Education chair, on  Dec. 4, 4 p.m., Jones Room, Woodruff Library

  • "The Law of More: Unmanaged Cost Growth in Universities" by Jeff Deneen, Bain & Company, on Feb. 11, 2013, 4 p.m. (location TBA)

  • "Financial Aid: Moral Imperative, Competitive Tool, or Unsustainable Burden?" by Sandy Baum, Skidmore College professor emerita and senior associate at the Institute for Higher Education, on March 5, 2013, 4 p.m., Jones Room, Woodruff Library.