Bankrupt!

In Where’s the money….? I described for you the Department of Education’s assessment of the financial health of the nation’s private universities:

The U.S. Department of Education issues a regular report on the financial health of  degree-granting colleges and universities.  It is a sort of test of financial strength.  When I started tracking the course of these institutions for my book, there were about a hundred non-profit colleges  that failed the test.  By 2008, that number had risen to 127.  The Chronicle of Higher Education has just reported that 150 non-profits now fail the Education Department’s test.

Now we have picture of the toll that the financial meltdown and runaway expenses are exacting on America’s public institutions as well. Moody’s Investor Services has just issued its report on the liquidity of public universities: “U.S. Public University Medians for Fiscal Year 2009 Show Tuition Pricing Power Amidst Rising Challenges.”  The report is available only to Moody subscribers, but Goldie Blumenstyk, writing in today’s Chronicle of Higher Education, summarizes the key findings as follows:

The median level of debt for 200-plus public institutions rated by Moody’s—$176.9-million as of the end of the 2009 fiscal year—has grown by 31 percent over four years. That’s notably greater than the rate of revenue growth (25 percent), total financial resource growth (15 percent), and enrollment growth (13 percent) during that same period…For the first time, colleges’ debt per student ($13,665) exceeded their financial resources per student ($12,893).

As a consequence, operating margins are at or near all-time lows for public institutions and are negative for many.

Tuition is rising at many public universities, but the cost to students is not being converted to increased educational value.  In many cases, tuition increases simply service expanding debt obligations. While the liquidity of top-ranked public research universities is worse than their private top-ranked counterparts, the public medians have the ability to convert a larger share of their assets to cash in the near term.  What Moody’s doesn’t say is where the liquid cash comes from.

The lack of transparency in public funding of higher education matters.  A public university has a public budget, and we all know that in most states funds slosh back and forth between spending categories without regard to the rules of arithmetic that most of us have to live under.

One large eastern state delayed paying university employees until the start of the next fiscal year.  Another one routinely delays most raises until the start of the next calendar year.  Still another allows cash to flow freely between major athletic programs and major academic obligations in the hope that a great athletic season might generate enough private donation to repay internal mortgages. Cost-sharing contributions are shifted, research cost recovery is murky, and personnel obligations are sometimes backloaded for months and years.

Even in good times, generating cash for operations in a public university is an exercise in juggling future payments.  With zero operating margins, administrators are the unlucky Monopoly™ player who has just landed on Park Place and realizes that the only way to pay the rent on the three hotels is to mortgage all of his properties. He spends the rest of the game hoping that he can keep his meager wages. Hope is not a strategy.

That is why the ability to raise tuition is so powerful.  But, as Moody’s new report makes clear, tuition increases are like passing GO.  New tuition dollars fill budget gaps. They do not change a university’s finances. It is only a matter of time before students figure that out and go for the e-pill.