Paying for college

Rising costs, shrinking public appropriations and booming demand are spurring three university CFOs to find creative pathways to growth.

Everyone wants high-quality education, but far fewer want to pay the price.

- Kevin Hegarty

Last winter, the University of Texas at Austin athletic department and ESPN announced a deal that grabbed sports headlines. In exchange for broadcast rights to the Texas Longhorns’ football season (along with other university-related events), ESPN agreed to pay UT Austin $300 million over 20 years—an unprecedented influx of cash and publicity for a college football team. Bloomberg BusinessWeek called the deal a “$300 million promise…that would transform college sports.”

But amid the sports-fan hubbub, scant attention was paid to another outcome of the ESPN deal: a new revenue stream for UT Austin’s academic programs. Roughly 30% of the Longhorn Network’s programming is made up of non-sports-related content, including lectures, performances and other academic events, and UT Austin will use half of the contract’s annual proceeds to support nonathletic initiatives. Specifically, in the immediate future, the funds will go to hire and retain talented academic faculty—a high-priority need that many university systems are struggling, and competing, to fulfill.

The ESPN deal is hardly a game-changer for an institution whose annual budget hovers around $2.3 billion. But it’s indicative of the creative zeal that today’s universities are bringing to the challenge of sustaining and growing their complex operations in an environment of rising costs, shrinking public appropriations and booming enrollment demand. “Everyone wants high-quality education, but far fewer want to pay the price,” says University of Texas at Austin CFO Kevin Hegarty, an architect of the ESPN deal and one of three university CFOs—all PwC alums—who spoke with Keyword about the strategies they’re pursuing to keep their universities in the black.

To achieve their schools’ ambitious mandates—comprising everything from educating the future workforce to making groundbreaking scientific discoveries—these leaders are aggressively controlling costs, wisely managing assets, assiduously cultivating new revenue sources and continuously adapting to changing public expectations.

Fighting for public dollars

When Hegarty was earning his master’s in public accounting from UT Austin in the late 1970s, the state paid 85 cents out of every dollar of the cost to educate him. By the time he returned to his alma mater in 2001—to assume the post of vice president and CFO—Texas’ investment had paid off handsomely. Hegarty had leapt from a post-college stint at Price Waterhouse’s Dallas office (1979–84) to C-level financial positions with Trammell Crow Company, Associates First Capital and Dell, Inc. At UT Austin, Hegarty’s task was to apply his top-flight experience in corporate management to rethink the university’s financial model in light of precipitously falling public appropriations. UT Austin’s president at the time warned Hegarty of an impending financial “wall,” a boundary point where the state’s longterm disinvestment would halt the university’s ability to function.

Frances Dyke recalls a similar greeting when she joined the University of Oregon a decade earlier. Dyke had been an educational researcher in Rochester, New York, when her husband, a physical chemist, accepted a faculty position at the University of Oregon in Eugene. Dyke took the opportunity to earn her MBA there, and then worked as a staff accountant with Coopers & Lybrand’s Eugene branch before joining the university’s budget office in 1991. Her first day on the job, the university president called an emergency meeting. Voters had just passed Ballot Measure 5, a constitutional amendment that put a permanent cap on property taxes, the state’s major source of education funding. Dyke says she’s been immersed in the challenge of adapting to the new funding environment ever since. By 2005, when she was appointed vice president for finance and administration and CFO of the university, successful recruitment of out-of-state students along with an upswing in federal grants had helped the university gain some financial ground, but there was still much work to be done.

It’s widely known that public universities have sustained deep funding cuts as a consequence of the current recession—The Chronicle of Higher Education reports 13 states have cut their higher education budgets by 10% or more in the past two years. However, less attention has been paid to the fact that for many university systems, public support has been falling for decades. Today, the 85 cents on the dollar that Texas paid for Hegarty’s education has dropped to 13 cents. Over the past 40 years in Oregon, the ratio of state support to tuition revenue has dropped from a dominant two-to-one to less than one-to-three. Today, state support accounts for only 9% of the University of Oregon’s budget.

Hegarty doesn’t envy the tough choices legislators and taxpayers face when it comes to allocating limited dollars to critical public needs. “Politicians have to ask themselves, ‘Do I want to put this dollar toward higher education, or do I want to use this dollar to feed indigent children, or provide medical insurance for Texans who can’t afford coverage?’ That’s a hard tradeoff,” he says.

Those hard tradeoffs are one reason that, like many of their peers, Hegarty and Dyke don’t expect the outgoing tide of public support to turn any time soon. Still, neither of their institutions has given up the fight to win back public dollars. Both universities work on sending strong and consistent messages to lawmakers and citizens about the value they provide to the public—not just in terms of educating citizens, creating a stronger workforce and developing advanced knowledge and technologies, but also, Dyke points out, in terms of the university’s direct economic impact on the state via the turnover on dollars it spends on salaries and local purchases.

Budget management 101

In recent years, college tuition has been rising far faster than people’s incomes, such that in 2010, Americans owed more than $800 billion in college debt, according to the public-service organization FinAid. Public funding cuts aren’t the only factor driving that increase, which has affected private as well as public universities; rising costs also play a role. Colleges compete for students by offering distinctive experiences: Star professors, gleaming research facilities and beautiful grounds are often part of the package. But these things come with a cost, as do more pedestrian expenses ranging from food service to garbage collection. Thus, university financial officers are looking for new ways to do more with less.

PwC alum Tom Nedell was an economics major at Boston College before joining Coopers & Lybrand’s Boston office in 1988. When one of his colleagues took a position as controller at St. John’s University in New York, a private Catholic school, Nedell followed. Working for the university for 18 years, rising from assistant controller to CFO, he guided St. John’s through a complex merger and other challenges, which helped prepare him for his current post as CFO of the private, Bostonbased Northeastern University, where he’s been since 2009.

When he arrived at Northeastern, Nedell found an institution engaged in a period of ambitious and strategically sound growth. But on an administrative level, he saw an opportunity to make cost-efficiency improvements that would empower the university to do more with its resources.

Nedell and his staff attacked costs by making common- sense investments in technology—replacing paper expense reports with electronic ones, for instance—and refining the school’s procurement process. “We buy a very, very wide variety of things, whether it’s beakers and chemicals or hotel lodging and airline flights,” Nedell says. The school’s new procurement system will do away with triplicate paper order forms, enabling staff to order goods and services more efficiently online. More important, Nedell says, “It will allow us to combine our spending and negotiate more favorable contracts.” Working with the Provost and the rest of senior leadership, he’s also implemented what the university calls a “hybrid budget model,” which increases the control that individual colleges within the university have over their budgets, while providing financial incentives for saving money and generating new revenue sources.

Now he’s tackling one of the fastest-growing expenses colleges face: healthcare. “One of the nice things we have here in Boston is the Boston Consortium. It’s 16 schools, Northeastern being among the largest, that come together to improve the way we do things,” Nedell says. Reducing healthcare costs is the group’s current focus. A program some consortium members have already adopted, Healthy You, trims expenses by providing employees incentives to monitor their own health risk factors. The next matter on the table, Nedell says, is “how we can negotiate with providers and bundle our healthcare contracts in a more effective way.”

We will be financially solvent and will move into the future into a very different world than existed in the last century.

- Frances Dyke

Hegarty and Dyke faced a different sort of task when they began their tenures as university CFOs. Each recalls the heavy lifting they did early on to bring their respective institutions up to date with essential budget management systems. “I stepped into the university and found what I learned to be a common problem of higher education,” Hegarty says. “There was no forecasting beyond the current year. There was no cash forecasting. There was no capital forecasting.” In the for-profit environment where he came from, solid forecasting is “the Bible by which you live,” he says. “I want to know where cash is, and I want to know where we think we are going.” Hegarty spent his first couple years on the job “installing basic blocking and tackling tools that are common to the for-profit world, but weren’t so common to the higher education world.”

When she assumed her present role back in 2005, Dyke recalls renovating a system that, in the wake of a decade of state disinvestment, lacked the essential administrative and financial management structures befitting a major research university. From creating the school’s first purchasing and contract office to ensuring financial managers of large campus units were properly trained, she and her colleagues focused on improving the ability of the university to manage its finances and “making sure that information was available so that leaders could make the right decisions.” Their hard work has given both Hegarty and Dyke the tools to build out larger strategies for financial sustainability—including maximizing existing revenue sources and tapping new ones.

Rallying the base

Over the past five years, the recession has caused a general drop-off in philanthropic giving. Yet private donations to Northeastern University have doubled, rising from roughly $25 million to over $50 million per year. What’s driven this swell of generosity? According to Nedell, it’s excitement. “In general, donors don’t give to fill gaps; they don’t necessarily give to places that have funding shortages,” Nedell says. “They give to successful schools that have a vision.”

Academic quality is the main driver of financial health.

- Thomas Nedell

Northeastern’s period of rapid fundraising corresponds with the implementation of a strategic vision that included expanding the global reach of Northeastern’s signature “experiential learning” program (aka the co-op system, in which students integrate their academic study with full-time employment in positions related to their academic or career interests); hiring 261 new faculty members, so as to reduce class sizes and beef up the school’s academic talent pool; doubling the value of the university’s research awards; and raising debt capital to invest in significant infrastructure improvements. Word of these plans, and their gradual realization, produced a snowball effect: Applicants’ SAT scores rose, Northeastern’s US News & World Report rankings jumped from 98 to 62 and demand for enrollment grew. Last year, Northeastern received 43,255 applications, the most of any private university in the country.

The simultaneous uptick in donor contributions is no coincidence, Nedell says. “That $50 million we’ve received is a result of people being excited about experiential learning, or about our innovative academic programs or the new security research facility on campus. There are some really exciting things that underpin those donations.”

Dyke and Hegarty concur that the revenue-generating power of a strong vision, combined with effective public messaging, can’t be underestimated even in hard times. In 2008, the University of Oregon closed a capital campaign called Campaign Oregon: Transforming Lives, which raised more than $853 million and funded the creation of more than a million square feet of new space on campus. Hegarty points out that last year, UT Austin raised $360 million in private contributions—or about $1 million a day— largely from its alumni base. “We’ve got a compelling story that we tell publicly, and I think we tell it well,” he says. “As a result, even in the midst of the recession, this institution has been able to raise very meaningful amounts of money.”

Monetizing the brand

Still, Hegarty says, “Alumni fundraising drives only get you so far.” Today, schools are looking at new types of revenue streams, including for-profit initiatives and corporate partnerships. “We have tried—I think successfully—to be more entrepreneurial in our thinking,” Hegarty says.

This type of thinking is still gaining acceptance in a traditionally nonprofit industry, and Hegarty voices sympathy with students who worry partnerships such as the Longhorn Network will commercialize their alma maters. Similar concerns emerged when the school outsourced its food service to for-profit entities such as Wendy’s and Taco Bell. But in the hunt for scarce dollars to fund education, the UT Austin brand is, in Hegarty’s mind, too valuable a trading card to leave off the table. “What you are going to see us do is monetize the brand and the University of Texas cachet more and more, and in different ways,” he says.

At Northeastern, similar efforts are under way. But rather than corporate partnerships, Northeastern has focused on growing its own profit centers and expanding the Northeastern brand into new markets. “At the graduate level, there has been significant growth in the number of students and also the types of students we serve,” Nedell says. The school’s online executive MBA program is one of the largest in the country without the burden of the fixed costs of brick-and-mortar facilities. In November, Northeastern announced it would open a new campus in Charlotte, North Carolina.

“We’ve done a lot of market research and have found that there are certain metropolitan areas, Charlotte being one of them, that are underserved for certain graduate programs,” Nedell says. “We’re building on all that is unique and distinctive about Northeastern and taking it on the road—not in the traditional undergraduate model where you’d have to build out a whole infrastructure of student services and bricks and mortar, but having it be fairly nimble financially, with leased space in an urban environment, delivering programs that involve a combination of in-person and online instruction.”

Managing the tuition-cost equation

Despite strong cost-control measures and ambitious revenue-producing initiatives, universities have still found it necessary to raise tuition at rates that outpace inflation. Rising demand has helped drive those price increases. According to the National Center for Education Statistics, in the past decade, the number of college-age Americans grew by 3.7 million, and the proportion of 18- to 24-year-olds enrolled in college rose from 35% to 41%. But it’s widely believed that current rates of tuition increase are not sustainable. In short, as Nedell says, “Tuition can only go up so much.”

The issue isn’t simply economic. Even if the market value of a college degree continues to rise in tandem with its cost, Nedell, Hegarty and Dyke concur that colleges are impelled to keep tuition hikes under control for the purpose of keeping college accessible to those on the lower end of the income scale. Social conscience isn’t the only motivator; affordable tuition boosts academic rankings (the broader the pool of potential applicants, the more academic talent admissions officers have to choose from) and, for many public institutions, it’s mandated by the state.

Schools have two basic ways to control tuition even as operating costs rise. One is to supplement tuition with other revenue sources, including those discussed above. The other is to create a staggered pricing schedule, based on students’ ability and willingness to pay.

At private universities, the staggered-price model is relatively simple. At Northeastern, full-price tuition runs $38,600 per year including mandatory fees, or $51,362 including room and board. Students pay full price if they can afford to, covering something approximating the actual cost of their education.

Less well-off students pay less—with financial aid, to the extent it’s available and merited by their academic credentials, making up the difference. Over the past five years, Northeastern has increased its financial aid budget at twice the rate it has increased tuition charges. “That’s a very intentional investment of university resources,” Nedell explains, “which helps us shape our class and attract diverse and highly talented students.”

At public universities, the equation is more complicated. At the University of Texas, tuition was regulated by the state until 2003 and is now set by a board of regents; presently it’s about $10,000 per year for in-state students. As is the case at many public schools, out-of-state students are charged differently— 250% more. But only about half of students, in-state and out-of-state, pay what Hegarty calls “full sticker price.” The other half receive some amount of non-loan financial aid, and a full 25% pay next to nothing.

Under this system, tuition prices bear little relation to the cost to UT Austin of producing a credit hour, which Hegarty views as a problem. He’d like to see the university consider adopting the “Yale model” (which is also the Northeastern model): Ask students at the top of the income scale to pay something closer to the real cost of their education, freeing up subsidies to help those truly in need.

At the University of Oregon, in addition to strong commitments of financial aid, active recruitment of higher-paying out-of-state and international students has been a key strategy for keeping in-state tuition rates in check. “There is no way,” Dyke says, “given the amount of state support and the amount of tuition that’s charged to in-state residents, that we could provide them an education of this quality without those out-of-state students.” Fees included, nonresidents pay $20,916, about three times the instate rate of $6,804.

The benefits of this strategy go beyond financial returns, Dyke emphasizes. “Oregon has a small population, and it’s not terribly diverse,” she says. Providing in-state students opportunities to meet people from other geographic locations and broader racial and ethnic backgrounds gives them “a lens on the world that they would not normally get.”

Balancing priorities

Of course, there may be no simpler or more ingenious system of paying for college than the one Northeastern established 100 years ago. Today it may be called “experiential learning”—lauded by researchers as a powerful pedagogical model and touted by college officials as a distinguishing mark of the Northeastern brand. But, as Nedell explains, the co-op system “was actually started as a way to help kids pay for school, because they don’t pay tuition while they’re off on their work assignments.”

Informally, that’s a college-funding model that students and their families have followed for as long as memory holds—working, saving and, when necessary, borrowing to pay their tuition bills. And as long as the value of a college education is considered worth its price, they’ll likely continue to do so. At present, from the standpoint of both intellectual enrichment and financial gains, there’s little question that it is: On average, within 11 years, higher earnings and lower unemployment rates more than make up the cost of a four-year education, according to a comprehensive 2010 study by the nonprofit organization College Board.

Leaders like Hegarty, Nedell and Dyke are working hard to ensure that equation continues to hold true.

Dyke is confident that creative partnerships with private donors and the state will produce a stable funding model for the University of Oregon, enabling it to “achieve the greatness that the state deserves from this type of university.” She foresees better risk management solutions will bring an end to continuous handwringing over unpredictable public funding cycles: “We will be financially solvent and will move into the future into a very different world than existed in the last century.”

Nedell emphasizes that to the extent that the highereducation industry provides a product that people value, financial stability will follow. “Academic quality is the main driver of financial health,” he says, and Northeastern’s steady commitment to enhancing academic excellence, combined with its distinctive job-preparedness program, will prove a winning formula in years to come. “We have a significant value proposition,” he asserts. “Our students get jobs.”

Hegarty concurs that even if his axiom holds true — that everyone wants high-quality education, but far fewer want to pay the price — top-tier universities like UT Austin will continue to survive and thrive in response to strong and rising demand, which last year amounted to 34,000 applications for 6,000 freshman spots. “There is a high-level delegation on this campus at least once a month, with people coming from both developed and developing nations. They come here wanting to do one thing—study the great Western public research university.” Hegarty plans to keep it that way.