For more than two years, Moody’s, Bloomberg, Bain and others have been warning about the sustainability of the higher education model. The renowned Sweet Briar College’s announcement highlights the issues that colleges and universities are facing – especially smaller institutions.
Their endowment was enviable to many peers, and their campus was regarded for its beauty. In fact, according to their website, Sweet Briar College was “consistently recognized as one of the most beautiful campuses in the country, and the fourth largest campus in the United States with 3,250 acres in the foothills of the Virginia Blue Ridge Mountains, 30 buildings, six nature sanctuaries and two lakes.”
On the other side, according to Inside Higher Ed,
“Sweet Briar was already spending an unusually high amount of its endowment each year to fund operations, according to Standard & Poor’s, which rates the college’s bond debt. Most colleges aim to spend about 5 percent of their endowment each year. Last year, Sweet Briar spent about 9 percent of its endowment. The college projected an annual operating deficit this year of about $2 million.”
“I’ve heard a lot of fear among smaller institutions lately,” said Nate Webb, an Associate Director at Sightlines. “There are declining enrollments, programs that are losing money as well as rising costs of faculty and administrative salaries and healthcare.”
However, Webb also sees that facilities’ issues continue to be a concern at many small institutions. In fact, in an article in this week’s Chronicle, the president of one small institution identified deferred maintenance as a primary concern, equally as important as faculty and administrative salaries. These worries are well founded as Sightlines’ data shows that for all but the wealthiest institutions, the replacement value of their facilities is three to five times the value of their endowment. With project backlogs on the rise, the level of accumulated facilities need actually exceeds financial wealth at many of these institutions.
So, what can colleges in this situation do? Webb states that the traditional methods of allocating capital will not work. Understanding critical facilities risks and managing this small subset of repairs will be the key for the foreseeable future. This approach will need to become the norm for a decade or more until funding is available to conduct repairs and improve space as fast as many campus constituents demand.
“Strategic project selection that balances the competing priorities of safety, reliability and key program enhancement is essential,” said Webb. “Unfortunately, tough trade-off decisions between program and asset preservation will be needed. With facilities costs at such a high percentage of total institutional fixed costs, the risk of facilities failures is greater at small campuses. The problem is compounded as the mix of repair investment is out of balance with the level of space investment. Small campuses with high operating leverage are very sensitive to fluctuations in enrollment. With facilities costs such a large part of that operating leverage, facilities risks truly threaten overall financial stability. Uniting the concepts of space management, capital allocation, and operating efficiency into a single conversation around facilities will be critical.”
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