2. Institutional Revenues
p. 13-37
Texte intégral
2.1 How big is the university budget?
1University budgets range from a few million dollars at small colleges to several billion dollars at the largest universities (Figure 2.1). Dealing with millions of dollars is unfamiliar to most people, let alone dealing with billions. Once we examine the details throughout the book you will be far better acquainted with what makes up these numbers and hopefully find them easier to grasp. Note that these revenue numbers are not the same as university endowments, which are more commonly reported in the media; we’ll cover those in Chapter 13.
2These budget numbers are simply the total of what it takes to run the business of the university in a given year. Technically, the amounts in Figure 2.1 are revenues (money coming in) and not expenditures (what was spent to cover costs), but because we are dealing with nonprofits where we allocate essentially all income to expenditures, the two amounts are similar in practice unless the institution is in dire financial straits or receives windfall income. We’ll cover expenditures in Chapter 3.
3For comparative consistency, Figure 2.1 excludes hospital revenues because some universities formally include a hospital in their reported budgets. Many universities with medical schools have affiliated hospitals run as independent corporations, even if the hospital name is university-related, and those hospital finances are reported independently. Either way, academic medical school finance and administration are distinct from those of a hospital, although they are often highly dependent thereon. We’ll examine hospitals, medical schools and health sciences in Chapter 11.
4It’s clear from Figure 2.1 that the nation’s major research institutions can have truly large budgets that reflect their comprehensive scope as well as their sheer size. This holds true as we look across the categories to medium universities and to baccalaureate colleges, where the latter are focused on providing an educational environment that is purposely small, undergraduate-only, and liberal arts oriented. At this level of aggregation, the distinctions between public and private institutions are not especially remarkable, but as we get into more detail in later sections we’ll see some significant differences emerge.
5Institutional size and budget are closely correlated, as plotted in Figure 2.2. Across types of institution, average budgets scale in an almost perfect linear relationship with the number of employees and scale almost as well in terms of student enrollment (especially if one considers public and private institutions separately). As a quick guide, if you don’t know the size of the budget for your own institution, you can approximate it by simple comparison to similarly sized institutions in these data. All institutions publish an annual financial statement or report, and you can always find the definitive number for your school in that document. Although the size of the institutional budget enables coarse comparisons such as those above, alone it doesn’t tell us much more than size itself. The interesting parts are what accounts for those revenues and the matching expenditures. The rest of the book covers all of that and more.
Box 2.1. Universities in the Fortune 500?
How do the larger university enterprises compare to the size of companies, just for interest’s sake, given that they are different creatures? Fortune magazine publishes an annual listing of companies by revenue. The current threshold for number 500 is -$5.4B and for number 1000 it is -$1.8B (Fortune 2018). As a guide, recognizable names close to number 500 are Harley Davidson and Western Union, and close to number 1000 are Tribune Media and Vail Resorts. For FY2016 data, eight of the biggest public and private US R1 universities have total revenues (including hospitals) that would put them in the Fortune 500 (Figure B2). A further 41 R1 universities would be in the Fortune 1000. Using the chart-topper, Penn, its FY2016 total revenues were $9.5B, of which $5.3B were from its hospital. Just two of these eight, NYU and Johns Hopkins, do not include hospitals in their budgets, and if we exclude hospital revenues from the others, only these would squeak into the Fortune 500 at $5.6B and $5.5B respectively, with Stanford just missing the cut at $5.1B. Taking the comparison beyond revenues, the median number of employees for companies in positions 490–500 is 10,550 people, which is somewhat smaller than the median of 17,548 for these eight schools, likely because higher education and healthcare are relatively labor-intensive sectors.
2.2 How big is the university by enrollment size and growth?
6We acknowledged the obvious importance of student enrollments in the previous section on budget size, so let’s take a closer look. Enrollment is the most commonly cited measure of university size. As a metric, it is an excellent example of how variable definitions are critically important (and infuriating to the uninitiated) because the truth is that there isn’t one correct answer to the question, “how many students are at your university?” The simplest metric would appear to be total headcount— all individuals registered as students—but even that’s complicated. Consider the following non-exhaustive list that can influence the answer, in which I’ve included the IPEDS Fall enrollment definition in parentheses for context (US Department of Education 2019b):
- What if some students are doing two degrees at the same time, do we count them twice? (no);
- What about students just taking the odd class who are non-degree seeking? (yes);
- And those who are only auditing classes? (no);
- There are many part-time students, should we use full-time equivalent (FTE) numbers instead? (no);
- Do we include online students? (yes);
- Include students at the main campus only or include those at branch campuses and off-campus locations? (domestic = yes, international = no);
- What about those taking remedial courses or English as a Second Language before they take regular college courses? (yes);
- Undergraduates only or are graduate students included too? (yes, count all);
- Do we count professionals registered for continuing professional education classes? (no).
7As you can see, there are dozens of permutations that each lead to a different number for the “how many students” question. Thus, the right answer is that it depends on how the number will be used. For example, in Figure 2.2 in the previous section, I used FTE enrollment because it arguably aligns better with resource-related amounts like revenue. If we were interested in student-faculty ratios then some version of headcount would be better. There are still further details (e.g., which day of the semester to use as the census day) but at this point you get the idea as to why official enrollment numbers can be simultaneously accurate and yet different for one institution at any given time.1
8The IPEDS enrollment headcount definition is designed for consistency and comparison across many institutions, and it is the basic metric of institutional size, so let’s take a closer look. Figure 2.3 shows total Fall enrollment broken out for undergraduate and graduate students for two individual years that are three decades apart, FY1987 and FY2017. The Carnegie classification is closely tied to size, and indeed we see a steady scaling by institution type from the large R1 schools to the small baccalaureates. Public institutions have higher average enrollments than private ones, category for category, and as it happens private schools have enrollments that are roughly the size of the next smaller category of public school (i.e., R1 privates are similar in size to R2 publics, and so on down).
9Figure 2.3 also shows that the average number and proportion of graduate students differs between public and private universities, especially at R1 and R2 institutions, which the bulk of them attend. The majority of them are master’s and doctoral (PhD) students but this group also includes what are known as first professional doctor’s degrees such as those in law (JD), medicine (MD), pharmacy (PharmD), veterinary medicine (DVM) and a number of other fields. The percentage of graduate students is about 25 % and 20 % at R1 and R2 publics respectively, while it is over 50 % and about 35 % at R1 and R2 privates respectively. There are several dimensions to those differences related to revenue and funding for graduate students that we will explore in parts of Chapters 5, 6 and 7.
10Enrollments have grown at virtually every type of institution over the last three decades, as illustrated by absolute numbers in Figure 2.3 and by relative growth over time in Figure 2.4. Most types of school grew their total enrollment by 30–40 % over that period (a little over 1 % annual growth on average). Enrollment growth was alternately faster and slower by decade: fast in the late 1980s, slow in the 1990s, faster again in the 2000s, and then slower in the 2010s. Enrollment growth is counter-cyclical with economic and unemployment conditions, although not across the board at all kinds of institution or across all demographic groups (Dellas and Sakellaris 2003; Schmidt 2018; Li et al. 2019); while it is widely observed and assumed, this general tendency for people to enroll in or return to university studies during tougher economic times or vice-versa when the economy and employment are strong is just that: a tendency, and not a hard and fast rule.
11There are three types of institution whose enrollment growth trends stand out from the others. R3-M3 private schools grew in enrollment at double the typical rate (80 % over the same period, about 2 % annually), disproportionately in graduate students. This sector is dominated by a handful of schools with massive growth in online enrollments (see Section 6.11). The baccalaureate colleges make up the other two atypical trends. Private baccalaureate institutions have seen flat growth rates for fifteen or so years, while the small number of public baccalaureate schools have had declining growth over that period and have actually shrunk in absolute size by about 10 % since the Great Recession.
12As with basic budget sizes, basic enrollment numbers don’t tell us much more than size itself. Again, the interesting parts are what accounts for these enrollment patterns and what they mean for the business of the university. There’s plenty of that to come in the rest of the book, but for now we return to budgets.
2.3 Are budgets growing or shrinking over time?
13Budgets at four-year colleges and universities have grown steadily over time. Figure 2.5 illustrates how revenues have generally increased with occasional brief periods of decline during economic downturns. The effects of the Great Recession on revenues are especially noticeable in FY2009. Notice also that revenues tend to fluctuate more than expenditures although the trend is essentially the same for both—we’ll cover more detail on expenditures in Chapter 3. Even with economic fluctuations the broad increasing trend has been present for many decades (see Chapter 4).
14The trend is sufficiently steep (4.4 % per year for publics and 4.2 % per year for privates in Figure 2.5) that it is twice the 2 % general rate of inflation for this period (US Bureau of Labor Statistics 2018a), with the result that institutional budgets have essentially doubled over these fifteen years.2 For those of us that have worked on campuses since the early 2000s, it certainly doesn’t feel like our institutions now have twice as much money as we did back then—but despite the cognitive dissonance of this trend against the lived experience of multiple budget cuts, the data don’t lie! The brief and absolutely crucial explanation is that these trends are not adjusted for inflation or for increasing enrollments that together account for almost all of the trend (skip ahead to Section 2.10 to see how the adjusted revenue trends are essentially flat). Also, underlying costs have also been rising inexorably (we’ll see much more on these topics when we cover expenditures in Chapter 3 and public funding in Chapter 4).
15You may be wondering why the revenue fluctuations are relatively large for the privates compared to the publics. That’s because a key source of revenue for each is driven by different fundamentals: the publics receive allocations from state revenue, which is based on taxes and thus responds to broad economic conditions, in contrast to the privates, which do not receive state allocations and instead rely on endowment and investment revenues that are closely tied to the comparatively higher volatility of the stock market. We’ll look at all the major sources of revenue in the next few sections, and endowments in Chapter 13.
2.4 Where does the revenue come from?
16Universities and colleges generate revenues from many sources. The average revenue picture across all types of four-year colleges and universities is shown in Figure 2.6. The revenue mix changes depending on the type of institution, public or private and large or small (see Section 2.5 coming up next). However, looking at the broad public and private averages first is a straightforward way to get a feel for the basics before we delve into crucial differences between types of schools. Two data notes: (i) here and in other similar figures I’ve used the average across types of schools to better show the central tendency, instead of the simple overall average that would be skewed towards the more numerous smaller schools in the set; (ii) for comparability across institutions, I have omitted hospital revenues where applicable, per the discussion in previous sections.
17The most important take-home point in this section is that tuition and fees are the dominant source of revenue. While certain types of institutions have always relied heavily on tuition, as an across-the-board pattern in all sizes of public and private universities, this is a relatively recent development involving several factors (see the rest of this chapter). Note that Figure 2.6 shows net tuition and fee revenue after subtracting discounts (e.g., scholarships and fellowships paid with institutional funds). Gross tuition and fee revenue can sometimes include a third to half as much again beyond net revenue (see Section 2.8). Tuition revenue is important not only because of its size, but also because it can be spent broadly and used to pay salaries and operating expenses (see Section 2.11).
18People new to university budgeting are often surprised to learn that state appropriations are nowadays a relatively small part of institutional revenues, because they imagine (reasonably enough) that a state would be the signature funding source for a state university. For medium and large publics in particular, that has not been the case for many decades, and as a result those institutions have diversified their revenue sources over time. State allocations are still a critical revenue source in most public institutions, however, because of their role as a primary funding source that enables the institution to leverage additional funds such as grants and philanthropy (see Chapters 8 and 13).
19Investment income can be thought of as the private university counterpart to state income, serving as the signature revenue source for private colleges (as state revenue is for publics). While it is not typically the major source of revenue on a private campus, investment income is nonetheless a critical revenue source. One difference, as we’ve already seen in Section 2.3, is that investment income is relatively more volatile and private colleges must allow for that in their financial planning. For example, Figure 2.6 uses FY2017 data, a good year for investment income, but in FY2016 many private institutions experienced low or negative investment income. There is a popular impression that private colleges in general are awash in investment income proceeds from their substantial endowments. This is not the typical situation and the misconception likely stems from conditions found only at the wealthiest (and hence highly visible and influential) private institutions (see Chapter 13 for more on this topic).
20Grants and contracts can form a sizable portion of overall revenues, especially at larger research-oriented institutions. The Federal Government is the dominant source of these funds, although state and local governments and private industry are also significant sources. An important distinction is that these sponsored projects almost always involve restricted funds, because the funds are obtained and can only be expended for the purposes of the project. By definition, then, they are not to be used for the everyday running of the institution, and instead they augment the activities of the university. See Chapter 8 for more detail on research funding including direct costs and indirect cost recovery (the much maligned and misunderstood “overhead”).
21Auxiliaries are units within the university that are largely or wholly self-funded through a direct cost-recovery mechanism. Examples of auxiliaries include residence halls, dining services, bookstores, parking, and sometimes the athletics department. This slice of the pie in Figure 2.6 is largely committed because the revenues are used directly to pay for the activity that generates them. Well-run auxiliaries can generate a modest margin for investment in other priorities.
22Gifts have always been a critical component of the budget for the privates, and increasingly they are a vital source of revenue at the publics too. Gift revenues come from new gifts each year made to the institution or its foundation (s). Gift revenue is distinct from investment income earned on the endowment (that is built on gifts from prior years). Fundraising, gifts and endowments are covered in Chapter 13.
23Finally, there are countless other activities that generate smaller portions of revenue that vary by institution. For simplicity, these are all lumped together in the “Other” category in Figure 2.6.
2.5 How does the revenue mix differ by type of institution?
24A useful way to appreciate the differences in institutional revenue mix is to compare portfolios by type and control of the school. Figure 2.7 shows pie charts that break out the same FY2017 data used in the previous section, illustrating several significant distinctions between the categories of institutions. For the publics, both tuition and state funding comprise a progressively larger portion of overall revenue as one shifts from large to medium and smaller schools. Conversely, the portion of revenue from grants and contracts diminishes across the span from large to small campuses, especially at the privates. For smaller publics, almost two-thirds of their revenue comes from tuition and state appropriations in roughly equal proportions.
25For the privates, there are several notable differences. Needless to say, there is no state funding. For R1 privates, if one substitutes investment income for state appropriation as a functional parallel, then the rest of the budget mix is not unlike the R1 publics. The relative role of investment income declines with type for the other privates, although it rises in importance at the baccalaureate colleges. Another distinction across all private institutions is that, as expected, gift revenues are clearly a bigger part of the budget than at the publics. For medium and small privates, grants and contracts (essentially research revenues) are a relatively smaller portion of the budget, even compared to their similarly-sized public counterparts.
26The dominance of tuition as a revenue source for the medium and small privates is clear, where it can form half or more of the institution’s revenue. Many articles have been written in the popular and higher education press about small privates being overly tuition-dependent in an unforgiving market, leading to a precarious financial standing and the risk of closure in some cases (Seltzer 2018). In contrast, at elite private baccalaureate colleges the relative role of tuition can diminish to about one third of revenues and investment income can instead make up a sizable portion of revenue, averaging about 25 %.
27Presidents and chancellors, and their senior leadership teams, are usually acutely aware of their institutional revenue profile. They typically pay a lot of attention to developing strategies that can sustain current sources of revenue and grow additional income streams to support the academic mission. This awareness and attention to the revenue portfolio holds across all types of institution, even though some must deal with the reality of a more narrowly constrained business model than others.
2.6 How much is tuition?
28Before looking at the details of tuition and fee revenue, it is useful to start with published tuition rates (the “sticker price” using the car sales analogy) and explore the details from there. In Figure 2.8 I’ve shown these data for entering undergraduates in FY2018 including the out-of-state portion for the publics. Naturally, the overall totals as well as the breakout details all vary by institution. Fees in these data are those that all students are required to pay, which are also different from place to place and variously include fees for information technology, student health service, library, new students, activities, athletics, and so on. These fees exclude those that vary by degree program or individual course fees—the annual total for them will differ individually by student and term. Program fees can sometimes add substantially to the overall amount in professional programs (e.g., engineering) and can be significantly more than regular tuition for special graduate programs such as an executive MBA.
29Still, most students pay less than the full published rate, so one cannot simply multiply a university’s enrollment by the posted tuition to obtain its realized tuition revenue. Financial aid, in the form of both need-based and non-need-based aid (sometimes called merit aid), is available to every student and is contingent on family income as well as individual academic preparation (see Sections 7.5, 7.10 and 7.11 for more about price, affordability and debt). In addition to discounting with aid, further factors in the tuition revenue mix include international students and, at the publics, the proportion of in-state and out-of-state students, as well as online students, those attending summer sessions, and the mix of part-time to full-time students (see Sections 3.6 and 6.11). It takes a lot of important and detailed accounting, almost constantly throughout the year, to figure all these details and arrive at the institutional tuition and fee revenue.
2.7 How fast has tuition increased, and why?
30Annual increases in published tuition and fees routinely garner media attention, shaping public opinion on the perceived costs of higher education. Even after adjusting for inflation, tuition and fees at all types of institutions have been trending upward for many years, consistently so since the early 1980s (Figure 2.9). Over the last three decades, published tuition and fees have approximately tripled in real terms, with average annual rates of 3.9 % for in-state and 3.5 % for out-of-state students at the publics, and 2.9 % at the privates.
31What is driving these increases? It is easy to jump to convenient conclusions and blame various supposed causes, such as administrative bloat, high faculty salaries, students demanding resort-like amenities, or reduced government support. In reality, it is not all these things, but instead a combination of fundamental economic forces that include some of these factors and some others—the core explanation on the causes of rising costs is in Section 3.7, with additional material in Chapter 4 on state funding, and in Section 7.5 on discounting.
2.8 What is included in tuition and fee revenue?
32Net tuition and fees are those that remain after subtracting discounts and allowances (essentially financial aid) from the gross tuition and fee budget, as illustrated in Figure 2.10. A sizable portion of aid comes from unrestricted university revenues, which one can think of as tuition revenue that is simultaneously “recycled” back to students as aid, with the remainder from restricted funds (gifts), Pell grants and other federal, state and local grants administered by the university. On average, for all degree levels and students, the overall aid-related revenue discount is about 39 %, made up of the overall institutional revenue discount at about 26 % and an overall government revenue discount of about 13 %. These discounts to revenue are closely related to, but not the same as, the undergraduate tuition discount rate that is often simply called the discount rate. Given the vital role of tuition revenue, both discount calculations are key metrics for institutions to monitor and manage in tandem with recruiting as part of enrollment management (see Section 7.5 for more on tuition discount rates).
33Figure 2.11 shows how aid discounts to revenue differ across types of institution. As one might expect, institutional aid is by far the dominant form of aid at the privates, averaging 44 % at the small baccalaureate colleges and over 30 % at other privates. At the publics the combined institutional aid is about 17 %, but combined government aid plays a far larger role at public institutions. At the large publics, government aid is just under half of all aid, and at the smaller regional publics and public baccalaureate colleges it is over half of all financial aid, highlighting the critical role the smaller publics fulfil in affordability and access (see also Chapter 7). Unsurprisingly, institutions with higher tuition tend to discount at a higher rate and vice-versa, with correlations of 0.73 and 0.65 respectively for in-state and out-of-state, which leads one to how much revenue an institution spends per student (see Section 3.3). Nationwide, aid discounts have been trending higher in recent decades—see more on tuition discount rates in Section 7.5.
2.9 How much revenue do institutions receive per student?
34As we saw earlier in Section 2.3, gross revenues to higher education have risen over time. Increasing enrollments at new and existing institutions (plus inflation) make up most of the trend in increasing revenues and expenditures and so, to gain a comparable understanding of budgets across institutions, we often express data in terms of amounts per student, combining full-time and pro-rated part-time enrollments into FTE enrollment, including undergraduates as well as graduate and professional students.
35Figure 2.12 illustrates FY2017 revenues per FTE student enrolled across types of institutions, now in dollars rather than in relative percentage terms as we introduced in the preceding sections. Note that these are core revenues that exclude auxiliaries, hospitals, and independent operations. The most obvious feature is that average revenues per FTE at private R1 universities dwarf all others. Revenues per FTE at private R2 universities and private baccalaureate colleges exceed revenues at all types of public institution on average (R3-M3 private institutions receive about the same as the smaller publics). At all types of institution, revenue components generally scale by size, even after the per-FTE adjustment, although there is a notable difference at the baccalaureate colleges that have relatively higher state appropriations at the publics and relatively higher investment returns at the privates.
36Returning to the large revenues at R1 private universities, although they are prominent in name and reputation, these institutions have only half the enrollment of R1 publics on average (-17,000 versus -32,000), which has the effect of increasing the per-FTE revenue amounts. Also, as we’ll see in the next section, investment returns are volatile from year to year and, particularly at R1 privates, they can range from the largest to the smallest (and even negative) component of the budget depending on the year. For example, the $63,000 in investment return per FTE at R1 privates in FY2017 was just $3,600 in FY2016.
2.10 What are the trends in per-student revenues?
37We covered overall higher education trends in both revenues and expenditures earlier in Section 2.3 and in short, before adjusting for enrollment and inflation, they are upward. Now that we have discussed revenues on a per-student basis, we move on to revenue trends per student FTE adjusted for inflation (per Section 1.4). To aid clarity, I’ve shown the per-FTE core revenue trends in separate panels for public and private institutions (Figure 2.13), and just at that aggregated level because the patterns by Carnegie type across the years are generally consistent with the proportions in Figure 2.12 above.
38Starting with the publics, over the last dozen years, tuition revenue has climbed from $6,628 to $8,797 per FTE, averaging 2.9 % per year. State revenues dropped from almost $9,300 per FTE right before the recession to about $7,000 per FTE four to five years later with a $700 rebound since then. Grants and contracts are shown for completeness but obviously they are not directly related to student enrollment. Private gifts and investment income are both relatively small components at the publics; gifts increased from about $1,600 to $2,100 per FTE, while investment returns per FTE averaged under $1,000 but varied by hundreds of dollars from year to year. Significantly, total core revenues per FTE at public institutions (Figure 2.14) have decreased over the twelve years, from $35,893 to $33,436, an average reduction of -0.84 % annually.
39At the privates, the volatility in investment returns is the most notable feature (Figure 2.13). Over the last twelve years it has been nominally centered around $15,000 per FTE but has frequently been double or half that amount. The massive losses of FY2009 are clear, and even in “normal” years these revenues can be close to zero or as high as $30,000 per FTE. Managing institutional finances with this kind of volatility can be challenging, particularly at the private R1 universities where investment returns can approach half the overall budget. Financial officers must budget these revenues conservatively, estimating the level that produces a reasonably constant funding stream from year to year by keeping funds in reserve from the good years to cover the bad years. We’ll examine cash on hand and related financial issues in Chapter 10. Average tuition revenue increased from $18,760 to $21,503 per FTE, about 1.3 % annually over the twelve years. Gifts rose from about $11,000 to about $12,000 over the period, averaging a 1.2 % annual increase. It is crucial to note that total core revenues per FTE at private institutions (Figure 2.14) have been essentially flat (with high volatility) over the twelve years, as well as the post-recession years.
40I want to reiterate just how important the trends are in Figure 2.14: in contrast to claims of rampant increases that use unadjusted numbers, on a per-student basis and adjusted for inflation, FY2006–2017 total core institutional revenues decreased at the publics and were flat at the privates.
2.11 Why isn’t all revenue treated the same way?
41All money is green, as the saying goes, although at universities and other nonprofits the source of funds and their intended use lead to various shades of green with different associated allowable expenditures (Figure 2.15). This is what is meant by different “colors of money” in accounting slang on some campuses. We’ll leave the technicalities of fund accounting to the experts, but there are some relevant peculiarities that attentive campus citizens should be aware of. I’ve briefly mentioned the big ones already when introducing revenues: restricted and unrestricted funds.
42Restricted funds, as the name implies, carry external stipulations limiting their use to specific types of expenditure. The largest sources of university restricted funds are expendable gifts and endowment income from gifts, as well as the direct cost portion of sponsored grants and contracts. Most donors designate their gifts for a specified purpose, such as a scholarship for women engineers or construction of a new biotech building. When the university accepts the donation, it obligates itself to spend the funds in accordance with the donor’s desires. Likewise, when the university is awarded a contract, such as a federal research grant from the National Institutes of Health, it is contractually obligated to spend the award only on the directly budgeted costs of that project (laboratory equipment, specialized labor, etc.).
43Unrestricted funds, in contrast, can be used for most of the general expenses of running an institution, and their local names can vary, including general funds, institutional funds, state funds, and more. The largest sources of unrestricted funds are tuition and fees, interest earned on investments, state appropriations, the indirect cost recovery portion of grants that covers institutional facilities and administration costs (see Chapter 8), and income from auxiliary units.
44Even unrestricted funds have some notable fine-print exceptions. For example, in many states public universities cannot use them to purchase alcohol, such as for special events and receptions (a common work-around is to use unrestricted gift income instead, especially as such events often involve donor development). Another kind of exception is income from specially targeted fees, such as course fees to cover expendable supply and equipment costs (e.g., laboratory courses in chemistry)—such fees are often approved for a narrow purpose only, and the related expenditures are usually vetted on a regular basis. These fees, as well as various special funds such as parking surcharges for the “free” campus shuttle, are often known as designated funds. Designated funds originate as unrestricted funds, but the Board or President/ Chancellor will designate them such that in practice they become restricted for most campus accounting purposes.
45One further clarification on restricted endowment income versus unrestricted investment interest: the investments that produce unrestricted interest income originate from unrestricted institutional funds (e.g., money in the university’s bank accounts) and quasi-endowments (Board-designated institutional funds for investment) as well as undesignated gifts. At institutions with exceptionally large endowments, the unrestricted investment interest can be a major source of operating revenue. For example, unrestricted funds account for about 30 % of Harvard’s total endowment (Harvard University 2018).
Box 2.2. Complicated Fund Sources and Pitfalls
Restricted, unrestricted, and designated funds complement each other within the overall university budget. It can get complicated, though. Professor Overachiever might be paid a base nine-month academic year salary from unrestricted funds (tuition and state allocation), a stipend as the prestigious Eminent Alumnus Chair from restricted funds (endowment proceeds from a gift), plus a summer salary from both restricted funds (a research grant) and unrestricted funds (administrative stipend as department chair). Often these are just technical details that the department business manager can handle easily. But academic work is often more complex and intertwined than this tidy accounting world, which can trip up unsuspecting academics.
One example is spending on research grants where early results change the approach so that the project needs equipment that wasn’t listed or the population under study is changed to a more logical one that wasn’t anticipated in the grant. These shifts make perfect academic sense, but they are an accounting no-no unless formally approved by the granting agency. Another example might be a student awards committee that expands eligibility for a donor-endowed award because the rules have become outdated, but the chair forgets to first get the OK from the development office and donor.
2.12 Why worry about state appropriations and investment income if tuition dominates?
46Despite the leading role of tuition revenue at essentially all US institutions nowadays, the two signature revenue sources of publics and privates—state appropriations and investment income respectively—are nonetheless each critical because of what we can spend them on. As unrestricted funds they are sizable sources of primary operating income. In many institutions, together with tuition, these revenues associated with the primary educational mission are the main way that we cover payroll and operations outside of the auxiliaries.
47There are further implications: these two sources are linked to the psychology and culture of the institution. At the publics, decades ago (in the 1970s and 1980s), state appropriations averaged around 45 % of institutional revenues and in some cases over 75 % (National Center for Education Statistics 1991; IPEDS 2020). Even at their present diminished levels, however, state appropriations represent (through taxes) the investment of society at large in public higher education. At the privates, funds from the founder and other major donors literally made the origin and ongoing independence of the college possible. Faculty, staff, students, alumni and the community are often closely connected to the institutional philosophy that is exercised through these funds and changes to them are invariably newsworthy.
48Another implication is leverage—as part of the primary activity revenue, these funds are necessary for the institution to obtain additional funding from other key revenue sources, such as gifts, or funding the research mission through grants and contracts (Figure 2.16). It is exceedingly difficult to succeed in sustaining a research enterprise on grant funds (so-called “soft” money) alone, and thus the primary funding for faculty and administrative staff furnished by tuition and signature revenues is key in enabling sustained external research support (and the associated quality and prestige). This primary activity revenue is a critical part of the research university’s business model (see Section 14.2) and a fundamental element in the unparalleled success of the US in research and graduate education since the mid-twentieth century (see Section 8.2).
2.13 What is the revenue significance of out-of-state and international students?
49At private institutions the distinction between in-state and out-of-state students doesn’t apply, at least in the revenue sense, and there is a uniform sticker price for all students. At public institutions, which are supported in part by tax proceeds, substantially lower pricing for in-state students is built into the pricing structure, often by statute or charter. These are known as resident students for tuition purposes, while out-of-state and international students are known as non-resident students. International students are typically billed at the non-resident rate although they pay slightly more at a few institutions (for more on international students, see Section 6.12).
50As state funding for public higher education has diminished, non-resident students have come to play a role in tuition revenue at the publics that is far greater than their relative headcount. Detailed comparative data showing net tuition revenue from in-state and out-of-state students is not readily available, but we can easily examine enrollment data and show the revenue impact of non-resident students by inference. Figure 2.17 illustrates the relative proportions of in-state, out-of-state and international students across the types of schools in our set for first-time undergraduates. All types of private schools except the smaller regionals draw over half their incoming students from outside their home states, while at all types of public university the non-resident portion averages substantially lower with 15–27 % being non-residents. As an individual counterexample, the University of Vermont has only 21 % in-state first-timers, the lowest of all public universities (Vermont is among the public universities with the highest out-of-state tuition and fees, comparable to the University of California campuses)—clearly Vermont’s situation is atypical for the mix of tuition revenue (Despart 2015).
51With some simple assumptions, we can calculate a back-of-the-envelope estimate of the net tuition revenue impact of out-of-state students at a public university, as summarized in Table 2.1. In line A we use the average in-state and out-of-state FY2018 published tuition and fees for the public universities in our example set. In line B we assume an average 30 % tuition discount across all students (in practice, in-state students often receive a higher percentage discount relative to out-of-state students, but we’ll keep it simple here and use an equal discount, just to be conservative). In line C we list the required fees, and in line D we obtain the tuition and fee revenue per student as the total of lines B and C. We assume an overall enrollment of 14,000 in line E (this number doesn’t matter in the end, but it helps keep the example understandable) with 75 % as in-state students (this proportion does make a difference). We multiply the average revenue per student (line D) by enrollment (line E) to get the total net tuition and fee revenue for the institution in line F. Finally, in line G, we convert the two revenue totals into their percentages of the combined total.
Table 2.1. An illustrative estimate of the net tuition and fee revenue impact of in-state versus out-of-state students. See text for explanation.
Line | Item | In-State | Out-of-State |
A. | Tuition | $8,092 | $21,195 |
B. | Less 30 % discount | $5,664 | $14,837 |
C. | Fees | $1,998 | $2,329 |
D. | Revenue per student | $7,662 | $17,166 |
E. | Enrollment | 10,500 | 3,500 |
F. | Net Tuition & Fee Revenue | $80,455,200 | $60,079,250 |
G. | Percent | 57 % | 43 % |
52In this model, at 43 %, the net tuition and fee revenue from out-of-state students is approaching half the total revenue although these students only comprise 25 % of the total by headcount. If we vary the proportion of out-of-state students in the model, we can get a sense of their impact across typical public institutions: with 10 % out-of-state students they generate 20 % of the revenue, and with 30 % out-of-state students we get close to a 50: 50 revenue split. Thus, as a rough guide for a typical public institution, we can say that the net tuition and fee revenue portion from out-of-state students is 1.7 to 2 times their headcount proportion. On a per-student basis in our model, as line D shows, an out-of-state student pays more than double that of an in-state student. These numbers are clearly significant in the business model of public institutions, and like the discount rate this is also a key metric for these institutions to monitor and manage in tandem with recruiting as part of enrollment management (see Chapter 7). Note that we’ve also simply included undergraduate and graduate students together for data reasons, although the undergraduate numbers will dominate the calculation at almost every institution. See Section 3.6 for the flip-side of the in-state/out-of-state issue in expenditures.
Notes de bas de page
1 Similar challenges of multiple variable definitions apply to much of the financial data we’ll be looking at too. I’ll be sure to point out where definitions might make an important difference to how we interpret the data.
2 Although they are beyond our scope here, it is interesting to note for context that recent revenue trends have been flat at four-year for-profit institutions. Furthermore, at two-year institutions, recent revenue trends prior to the pandemic were mixed across type: flat at publics, rising at privates, and falling at for-profits.
Le texte seul est utilisable sous licence Creative Commons - Attribution 4.0 International - CC BY 4.0. Les autres éléments (illustrations, fichiers annexes importés) sont « Tous droits réservés », sauf mention contraire.