News & Insights

Higher education in North America – all higher education, not only theological education – is in trouble. Moody’s credit rating agency has downgraded the entire industry from stable to negative, and everyone seems to know at least one educational institution that has closed or is about to close. A recent Gallup poll found that 71 percent of chief business officers at colleges and universities say that higher education is in the midst of a financial crisis.

Rick Beyer’s article “Mergers and Affiliations,” in the May/June 2019 issue of Trusteeship, lists the major factors behind these realities: “The business model for higher education is under severe stress. There is more capacity than student demand. Consumer behaviors have changed, technology demands are increasing, and deflationary forces are diminishing tuition revenues.”

Beyer notes that higher education is not the only sector undergoing rapid and stressful change: in health care, more than half of all physicians no longer own their own practice, but instead are employees of hospitals and health systems. In the retail sector, more than 10,000 brick-and-mortar stores have closed in the last two years. However, he notes, it is possible to see benefits as well as downsides to these changes, successes as well as failures. How can education learn from the experiences of other sectors?

First, trustees need to have a clear and detailed picture of their institution’s financial picture. To start, boards need to know if the school is at risk. “At risk” is not a hazy term; its meaning has been defined by the U.S. Department of Education: “Institutions with financial composite scores (an annual assessment of financial health calculated on three ratios: primary reserve, equity, and net income) below the department’s standard for fiscally responsible (1.5 on a scale of -1 to +3), are at risk, and those with 2.0 scores may also be vulnerable.”

Beyer warns boards against relying on balanced budgets: “Trustees should look beyond a balanced budget, which can engender a false sense of security because it does not necessarily signify that an institution is prosperous.”

Beyer recommends that boards initiate a “quality of earnings” analysis on the current operating budget – a financial modeling exercise that can be completed in 30 days – which will help draw into focus the gap between the current situation and a prosperous future.

Armed with this information, boards can ask themselves which of three basic options they want to pursue: 1) maintain independence, 2) merge with other institutions, or 3) develop affiliations that consolidate strengths.

Each option involves enormous and well-known challenges, though the option of developing affiliations may be both the one trustees know least about and at the same time the one that offers the greatest reward. When formal affiliations occur, each entity retains its board, president, senior cabinet, faculty, accreditation, and degree-granting authority. “An essential feature of an affiliation is reducing redundancy by establishing centralized resources for noneducational administrative functions (finance, purchasing, human resources, technology). Sometimes central resources can also include digital marketing, instructional designers, compliance, and academic support.”

Schools will continue to close throughout the foreseeable future, some in more difficult and painful circumstances than others. Trustees and leaders of theological institutions face challenges “unprecedented in their scope and complexity” as they strive to maintain both mission and viability. It would be wise to look at all options carefully and deliberately now, to avoid being forced into more sudden and unhappy decisions later.

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