The Pietist Schoolman

“Higher education in the United States is at a tipping point.” So conclude Jeff Denneen and Tom Dretler in their 2012 paper, “The financially sustainable university” — one in a series of “Bain Briefs,” as it was produced by Bain & Co., with Sterling Partners (management consulting and private equity firms, respectively). Noting some of the financial challenges facing higher education — in short: “Institutions have more liabilities, higher, debt service and increasing expense without the revenue or the cash reserves to back them up” — Denneen and Dretler argue that colleges and universities can no longer simply pass on the costs through higher tuition, rely on government support, or grow their way out of problems. Based on their analysis of changes in expense ratio (“income as a percentage of revenue”) and equity ratio (“equity as a percentage of assets”) over the period 2005-2010, they conclude that one-third of American colleges and universities are “financially unsustainable.”

The report is accompanied by a website that places nearly 1700 colleges and universities on a matrix: financially sustainable, financially unsustainable, or at risk of slipping into the “unsustainable” category.

Their analysis has not gone uncriticized. In the Chronicle of Higher Education, Denneen himself acknowledged that he and Dretler focused on a five-year period that ended with many institutions’ endowments suffering major losses that have since rebounded somewhat as the stock market has recovered. I have my own reservations, which I’ll get into as this post goes on. But I’m trying to let it challenge my instinctive response to the financial crisis that Bethel, like so many tuition-driven schools, is facing: namely, that we just need to ride it out.

Thanks a 6% increase in expense ratio and a 19% decrease in equity ratio (and that with a small endowment to start with — more to come), Bethel falls in the least sustainable of the unsustainable boxes on the Bain matrix.

But misery loves company, so I thought I might take a look at one of my favorite data sets — the evangelical colleges and universities that make up the Council for Christian Colleges and Universities (CCCU) — to see how they’re doing financially. Here’s where they fell on the Bain matrix (111 of the CCCU’s 115 American members are included):

Sustainable: Anderson (SC), Biola, California Baptist, Cedarville, College of the Ozarks, Concordia-Irvine, Corban, Cornerstone, Crown, Dordt, Eastern, Emmanuel, Geneva, George Fox, Grace, Greenville, Hannibal-LaGrange, Hope International, John Brown, Kentucky Christian, Lee, LeTourneau, Louisiana College, Messiah, Missouri Baptist, Mount Vernon Nazarene, North Central, North Greenville, Nyack, Oklahoma Wesleyan, Oral Roberts, Simpson, Southwest Baptist, Spring Arbor, Toccoa Falls, Trinity Christian, Trinity International, Union, Williams Baptist, York.

At risk: Abilene Christian, Asbury, Belhaven, Bluffton, Carson-Newman, Charleston Southern, Colorado Christian, Covenant, Dallas Baptist, East Texas Baptist, Eastern Nazarene, Fresno Pacific, Goshen, Houghton, Houston Baptist, Howard Payne, Indiana Wesleyan, Judson (IL), King, Milligan, Mississippi College, Northwest Nazarene, Northwestern (IA), Oklahoma Baptist, Olivet Nazarene, Point Loma Nazarene, Roberts Wesleyan, Seattle Pacific, Shorter, Southeastern, Southern Wesleyan, Taylor, Univ. of the Southwest, Vanguard, Waynesburg, Wheaton.

Unsustainable: Anderson (IN), Azusa Pacific, Bethel (IN), Bethel (MN), Bluefield, Calvin, Campbellsville, Eastern Mennonite, Erskine, Evangel, Hardin-Simmons, Huntington, Judson (AL), Lipscomb, Malone, MidAmerica Nazarene, Montreat, North Park, Northwest, Northwest Christian, Northwestern (MN), Oklahoma Christian, Palm Beach Atlantic, Regent, San Diego Christian, Southern Nazarene, Sterling, Tabor, Trevecca Nazarene, Univ. of Mary Hardin-Baylor, Univ. of Mobile, Univ. of Sioux Falls, Warner, Warner Pacific, Whitworth.

Overall, that makes evangelical colleges slightly more at risk than other schools, though not dramatically so:

(*Rounding accounts for “All” adding up to 101%.)

Gordon College outside Boston is one of the four CCCU members that doesn’t show up on the Bain website, but in a recent interview with Todd Ream for Books and Culture, its president, D. Michael Lindsay, acknowledged that financial sustainability was the greatest challenge facing higher education:

The financial model for higher education, in general, is not sustainable. And institutions that have thrived over the last few years have done so is by growing themselves out of the problems. Enrollment growth. That is not a sustainable model because demographically the pool of the college-bound population is declining in the United States. So, there has to be a real attention to the financial model that sustains, that drives, the engine of higher education. I think that is challenge number one.

However, I do think there are weaknesses with the way that the Bain Brief defines who is and isn’t financially sustainable. To illustrate, here’s a set of median figures for the CCCU schools in each of the three sustainability categories — changes in expense and equity ratios and endowment per full-time student, from the Bain website; plus, net cost and graduation rate, both from the Department of Education “score card” about which I blogged earlier this year (those data from 2010-2011, just after the 2005-2010 period Bain analyzed).

It’s not surprising that “unsustainable” schools have a net cost 8% higher than those in the “sustainable” category, but they also tend to have higher graduation rates. (I’m sure there are far too many variables to disentangle there, but I do wonder how many schools have controlled costs by shrinking academic support services and cutting faculty, which could also reduce course options and grow student:teacher ratios.) More strikingly, supposedly sustainable Christian colleges don’t have the sizable endowments that, to the Bain authors, “serve as ‘shock absorbers.'”