How U.S. Colleges Are Screwing Up Their Books, in Three Charts

You might think that years of galloping tuition used to build new facilities, bigger stadiums, state-of-the-art gyms, and health-conscious dining halls is evidence that U.S. higher education is doing quite well, thank you.

In fact, U.S. colleges and universities are just living beyond their means, new data show.

Two years ago, Jeff Denneen of Bain & Co. and Tom Dretler of Sterling Capital Partners used government data to evaluate the balance sheets of U.S. colleges and universities. They found that one-third “were on an unsustainable financial path.”

This month, Denneen updated the report with the numbers from 2012, the most recent available. The bottom line: Some of the colleges in the deepest trouble in 2010, the year the first study looked at, have edged back from the brink, but at more schools, less money is coming in and more is being spent. “While the growth in costs has slowed in the most recent couple of years, it’s not enough to offset the declines in revenue at most institutions,” according to Denneen.

Three slides from Bain help illustrate how U.S. higher education got into its current state.

Fewer schools were “financially unsound” (defined as schools where equity and expense ratios “were significantly weaker than they were several years ago”), as the first slide shows, but a much larger chunk are now in the “at risk” category, meaning they could become financially unsound soon. Elite liberal arts colleges are in the most trouble. Not one is categorized as being financially sound, and 70 percent are at risk.
 

Chart two shows what’s helping keep colleges afloat despite these worrying trends: a robust stock market. College endowments were in much better shape by 2012, thanks to an equities market that was well into a rebound. The Standard & Poor’s 500-stock index grew 8.56 percent from 2010 to 2012. That bolstered the assets of U.S. schools, improving their equity ratios. On the other side of the balance sheet, however, more than 80 percent of U.S. schools have ramped up their spending and increased expense ratios. Without the endowment boost, more schools would be in bad shape.
 

The third chart goes deeper into what schools are spending, and how fast. Any student of Accounting 101 can tell you that a business doesn’t want its spending to head north as revenue flows south. From 2010 to 2012, expenditures at public schools grew 1.9 percent; at private institutions, 5.3 percent. That growth has slowed a bit: In 2010 costs grew 7 percent overall. Trouble is, revenue is still falling: Public schools are down 0.2 percent, while private schools dropped 3.2 percent.
 

The recession has tapped out parents, so it’s harder for schools to pass along tuition hikes, as they did in the past. State and federal sources are just as stressed and no longer able (or willing) to make up the shortfall.

“Schools outside the elite 100 have not been able to fill their seats or raise tuitions,” Denneen wrote in a LinkedIn post.

One point raised two years ago is still valid: “In no other industry would overhead costs be allowed to grow at this rate—executives would lose their jobs.”

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