Are economic pressures beginning to hit highly selective colleges?
Are economic pressures beginning to hit highly selective colleges?
Maybe. A revealing article covers a presentation to University of Chicago staff.
News of budget and revenue pressures at US colleges and universities regularly appear in media reports today, with smaller private institutions and some regional public universities generally experiencing the pain. A detailed recent article by Elena Eisenstadt in the University of Chicago’s Chicago Maroon newspaper covers the financial constraints confronting an elite, endowment-rich institution. Eisenstadt’s full article is worth reading, but let’s summarize a few of her points:
The U of C generated revenues of $2.9 billion in 2023 (as forecasted), but spent $3.1 billion, for a deficit of just over $0.2 billion. Expenses have been growing faster than revenues for a number of years, so this year isn’t just a one off.
The U of C has seen strong enrollment growth across its undergraduate and graduate programs, with student numbers climbing 25% since 2013. A common complaint about elite colleges is that they should expand to reflect a growing US population and international interest in US graduate studies. In fact, many universities see this same opportunity and the U of C has been taking advantage of the situation to grow fairly quickly. But these program expansions haven’t led to a balanced budget. Which isn’t surprising, right? Student education is, as is widely understood, often not self-funding and requires cross-subsidies from direct government outlays and other institutional programs.
The fact that the U of C has been successful in expanding its size without resolving budget problems presents a real world example of how the “grow your way out of trouble” plan adopted implicitly by many struggling colleges doesn’t work without rigid cost control.
Headcount growth is not presented exactly analogously to student growth in the university’s slides: instructional staff rose by 8% between 2019 and 2023 while administrative staff grew at a higher tick of 10%. Extrapolating those numbers, their growth looks to be roughly equivalent to the rise in enrollment. So the U of C has not been undisciplined about hiring. Nevertheless, the increase in the cost base has resulted in budget pressures.
Eisenstadt’s article helpfully presents pie charts showing a breakdown of U of C revenues. Net tuition (after discounts) runs third in terms of revenue contributions, behind gifts & contributions and then research grants. At many institutions – Temple University jumps to mind – the revenue generated by hospitals and health care operations dwarfs academic revenues. The U of C remains principally an educational organization, though, with educational revenues outpacing health care ones.
The Hechinger Report made a prediction that the U of C would be the first university to charge over $100,000 in cost of attendance. (At elite schools, the majority of students are wealthy enough to pay this undiscounted amount, so the cost of attendance is a meaningful number. In 2019, 62% of the U of C incoming class received by our calculations no grant aid of any kind, implying a family income above $350k annually.) The prediction, made by Pete D’Amato, seems prescient. D’Amato also comments on the U of C’s aggressive spending in the 2010s, a highlight of the staff presentation covered in the Maroon. This article has aged well.
2023’s deficit represents a continuation of prior trends. The U of C has been operating at a deficit for years. What forced this recent public reveal? The university had been funding this deficit by borrowing. In a 2023 note, Fitch, the ratings agency, while emphasizing the institution’s stability and resources, implied that any further borrowing would lead to a credit rating downgrade, which would constrain future financing and raise interest costs paid by the U of C. The administration likely felt the external pressure from those financing the deficits and was forced to begin taking action.
While the article points to the rise in interest rates as feeding into this issue by increasing the costs of variable rate debt and hence its overall expenses, such a rise can also be very beneficial for Chicago’s endowment. The offsetting size of increased investment income offset by higher interest expenses would depend on the relative size of the endowment and debt. Because the endowment is much larger than the total debt load — and especially the variable-rate debt load — interest rate increases shouldn’t play a role unless institutional giving is so rigidly siloed that even the university’s administration cannot cross-subsidize programs effectively. A lengthy study would be needed to resolve the matter -- but we are skeptical it is true. The U of C’s problems are likely more caused by internal cost growth than by external events.
How is the university responding to this problem? Besides “judicious” expense cuts, the university adopts the same game plan as many other colleges: more Master’s programs, professional certification programs, increased focus on research grants and, ultimately, more endowment giving. The playbook isn’t original – the university has been doing this – and doing it successfully – for years. In fact, this response may strike you as tautological: after years of successful program growth leading to larger deficits, the solution is… successful program growth. Statements about expanding programs, enrollment and giving are almost boilerplate responses to budget problems from school administrations in the current climate. That the U of C, one of the nation’s preeminent institutions, has been successfully following the playbook without resolving its budget constraints puts these solutions in doubt. The playbook isn’t working.
The University of Chicago’s pressures are just one data point and may or may not turn out to be part of a trend, so no broader conclusions can be drawn. And the level of financial distress the U of C is presenting is mild. But the fact that an institution with a global reputation, a surplus of applicants, and an endowment worth over $10 billion faces such pressures is the news.
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