by Robert Kelchen
Current and aspiring leaders in higher education need to understand their institution’s budget in order to put their current institution’s situation into context, or determine the financial well-being of a potential new employer. In this piece, I provide a primer on some key budget numbers, including:
- Revenues and expenditures
- Enrollment
- Institutional debt
- Deferred maintenance and pensions
Revenues and expenditures
The first figures to consider are overall revenues and expenditures. Public and private nonprofit colleges should have a positive net operating margin (revenues exceeding expenditures) so additional funds can be used for new strategic initiatives or placed into reserve for a rainy day. The general wisdom is to have a net operating margin of about 3-5 percent, but pay careful attention to whether the margin is driven solely by endowment returns or an unusual change in donations received. Colleges should aim to break even during lean years without having to resort to hiring freezes or furloughs if at all possible.
The U.S. Department of Education’s Integrated Postsecondary Education Data System (IPEDS), which contains a wealth of information on all colleges receiving federal financial aid, is a great resource for data on different types of revenues and expenditures. On the revenue side, net tuition revenue is a particularly important measure as most colleges are highly dependent on tuition dollars to balance their budgets. Expenditure measures include instruction, research, public service, student services, institutional support, and auxiliary enterprises. These measures can be useful to examine for trends over time, but I recommend approaching these numbers with caution due to the flexibility that colleges have in allocating expenses to different categories. For example, my salary as a professor is typically counted solely toward instruction, even though I also perform research and administrative duties.
Enrollment
Since most colleges rely on tuition as a key revenue source, institutional leaders must keep a close watch on enrollment numbers. IPEDS has information on new undergraduate student enrollment, total enrollment, and full-time equivalent enrollment. The latter two measures are available separately for undergraduate and graduate students. Careful attention should be paid to the flows of each cohort of students through a college, as enrollment numbers that look good on the surface may be a concern if they are driven by an unusually large class that is ready to graduate.
Leaders should also use data from their institutional research office (when available) to dig deeper into groups of students who share particular revenue and expenditure characteristics. For example, first-year undergraduate students are typically less expensive to educate than juniors or seniors, but tuition discounts also tend to be larger for incoming students to induce them to attend. The composition of students by field of study is also crucial, as increases in majors that require specialized laboratories or other facilities could place a strain on institutional resources. Out-of-state and international students are another important revenue category for colleges to monitor.
Institutional debt
A college’s audited financial statement or balance sheet will provide information about how much debt it has issued to pay for facilities or other strategic priorities. Most colleges have at least some debt, and a modest debt burden is perfectly reasonable and will not constrain future initiatives. But too much debt will affect a college’s credit rating (which effectively determines the interest rate that it has to pay for future borrowing) and also requires larger annual debt payments that limit institutional flexibility.
Institutional leaders should take a close look at the components of their college’s debt portfolio. The following questions are useful ones to ask:
- Is most of the debt long-term in nature, or will some bonds be paid off in the near future?
- What are the interest rates on bonds and is there an opportunity to reduce the interest rate through issuing new long-term bonds?
- Are the bonds tied to a particular revenue source or are they based on general revenue?
- How do the terms of the bonds compare to the facility’s expected lifespan?
All of these factors help to determine how much financial flexibility a college has going forward.
Deferred maintenance and retirement/healthcare expenses
There are two other key areas of institutional budgets that affect a college’s financial flexibility. One is deferred maintenance on facilities. IPEDS reports information on operations and maintenance expenditures, and a significant decline in this category over time can raise concerns that necessary maintenance is being postponed in an effort to save money in the short term. This can be combined with information on depreciation of assets to determine whether a college replaced old facilities with new ones, or simply postponed maintenance on old facilities. Leaders should pay close attention to projected lifespans of facilities and potential replacement costs in order to plan for the long term.
The second area of concern at many colleges is the retirement expenses of employees, including both pension payments and benefits. While most private colleges and a number of public colleges have moved away from defined benefit pension plans for new hires, a significant number of older employees have traditional pension plans instead of 401(k)-style plans. These plans require the employer to pay upon an individual’s retirement. Colleges should pay close attention to whether their pension plans are fully funded (an issue for a number of states) and the ages of their employees. In some extreme cases (such as Illinois), a large portion of state funding for higher education now goes into funding pension obligations.
Identifying comparison groups
All of these budget numbers can provide useful information to institutional leaders in isolation. But comparing these values to similar institutions can provide useful benchmarking information to college leaders. Most institutions have multiple lists of comparison institutions, with some being efforts to identify peers and others containing aspirational institutions that they want to be like when they “grow up.”
The best source for obtaining these lists is often the institutional research office, as they typically are instructed to develop multiple lists. If these lists are not available from the institutional research office, salary equity studies can provide an externally-generated list of comparable institutions. Finally, if these lists are not available, IPEDS contains both a self-reported list of peer institutions and one that is automatically generated based on institutional type, region, and Carnegie classification.
About the author
Robert Kelchen is an assistant professor of higher education in the Department of Education Leadership, Management and Policy at Seton Hall University. He has written for Educational Evaluation and Policy Analysis, The Journal of Higher Education, and Educational Researcher; and is the author of Higher Education Accountability. He is frequently quoted in the media, including The Washington Post, National Public Radio, The Wall Street Journal, The New York Times, The Chronicle of Higher Education, and Politico, and has been recognized as one of the most influential faculty members on social media by Education Week and The Chronicle of Higher Education. Professor Kelchen holds a bachelor’s degree in economics and finance from Truman State University, a master’s degree in economics from the University of Wisconsin-Madison, and a PhD in educational policy studies from the University of Wisconsin-Madison.
