Which Philadelphia Colleges Will Survive?

Our region is awash in institutes of higher ed. How many will make it through the coming shakeout?

Last spring, a week before commencement at Saint Joseph’s University, faculty in the business school voted 27 to one in favor of a resolution rebuffing St. Joe’s president, the Reverend C. Kevin Gillespie. He was the third member of the administration to be hit with a “no confidence” vote in just four months, a gambit by faculty to reshape the financial future of the Catholic college that straddles City Avenue.

In some ways, it was hard to blame the professors. Gillespie had announced a budget shortfall of more than $8 million for the second year in a row, followed by across-the-board budget cuts and a freeze on faculty retirement contributions. It wasn’t exactly financial doomsday — a senior vice president says the school’s money troubles have been exaggerated — but if this wasn’t a monetary bottoming-out, the administration’s actions were signs of a moral bankruptcy to many on campus. “We no longer trust these administrators to lead us through the terrible circumstances they are responsible for creating,” read an editorial in The Hawk, the student newspaper.

In the wake of this, Gillespie announced that he will resign at the end of the upcoming school year. Still, compared to many private colleges in the Philly area, St. Joe’s is actually facing much less austerity. As of May, 13 other local schools still had space available for the new school year, including Widener, La Salle, Arcadia and Immaculata. And last year, to offset financial pressures, Holy Family University reduced its faculty by 19 percent, trimmed 40 staff positions, and began selling some of its real estate.

Throw in the disruption of online learning, and you’ve got a landscape of higher education today that’s generating dire forecasts from prognosticators. “The scary thing is that 15 years from now, maybe half the universities will be in bankruptcy,” predicts Clayton Christensen, an economic futurist and professor at Harvard Business School. (Christensen, who wrote the influential book The Innovator’s Dilemma, is also the author of The Innovative University.) There’s no reason to expect that the Philadelphia area, with its 37 four-year colleges and universities, will be spared.

Part of the problem is skyrocketing tuition. Nationally, tuition has risen every single year for the past half-century, to the point that everyone from parents to banks to President Obama is now questioning the value of a degree from some schools. On top of that, the number of high-school graduates has been declining for years, and won’t return to positive growth until 2019 (when a rise in minority graduation rates is expected). “The youth population in Pennsylvania is relatively flat, so the pool from which the colleges are drawing is getting smaller,” says Joni Finney, director of the Institute for Research on Higher Education at Penn. Especially for private schools like St. Joe’s — which receives no direct funding from the state and gets more than 70 percent of its revenue from tuition — the shrinking number of high-school graduates means a zero-sum competition for enrollment and viability.

In that fight for students, schools have been offering discounts — sometimes sharp ones — off their pricey tuitions. When St. Joe’s decided to enroll another 225 students this fall, the strategy required an influx of $8 million in financial aid: Freshmen will receive an average of 41 percent off the sticker price of $40,420. That’s good news for the kids and their families, but for the college, it means the marginal revenue return per pupil will decrease.

The problem, though, isn’t just a shifting market. Colleges are also victims of their own behavior. There’s been much talk of the $1 trillion in student-loan debt we’ve amassed as a nation, but private colleges have also borrowed billions of dollars to satisfy capital-improvement projects, build dormitories and fund their edifice complexes. “There’s a less-discussed bubble on institutional debt,” says Ken Hartman, former president of Drexel University Online and now a higher-ed consultant.

Unfortunately, those lines of credit will soon be drying up. Since the Great Recession, Moody’s has been downgrading individual schools at a dizzying clip, and for the second year in a row, the ratings agency forecast a negative outlook for the entire higher-education sector. Plus, interest rates are expected to rise in 2015, when the Federal Reserve’s bond-buying binge officially ends. “As soon as money isn’t free, you’re going to see some schools go into a death spiral,” says Hartman.

In the worst shape will be colleges that have hamstrung themselves with superfluous upgrades on student services and additional layers of management and support. The higher-education workforce ballooned 28 percent between 2000 and 2012, driven largely by new administrative positions, not faculty. “In no other industry would overhead costs be allowed to grow at this rate,” wrote the authors of a 2012 Bain & Co. report. “Executives would lose their jobs.” Even Harvard University’s chief financial officer has cautioned that his school’s pace of spending is “just not a sustainable model,” despite a $32 billion endowment.

According to “Learning From Closed Institutions,” a study analyzing data from American colleges that failed in the past 10 years, there is a clear danger zone for overspending: an operating budget that exceeds three times the institution’s endowment. Most of Philly’s private colleges are steps away from that precipice, but tiny schools like Chestnut Hill College — with an endowment of $8 million and a budget of $37 million, a 4.6-to-1 ratio — will be facing a steep climb back to fiscal health. Having already grown from 400 to 900 undergraduates since 2002, the school is now seeking to add another 300 over the next few years, despite the nationwide enrollment crunch. “A school like that needs to think very carefully about its future,” says Finney, before throwing in a disclaimer: “But there have been amazing examples of schools who’ve gotten by on a shoestring and survived.”

Righting the ship will require borrowing a page from the community-college playbook, by adding employment-ready programs like nursing (as Holy Family has done) and computing to entice disaffected degree-seekers. Developing online and hybrid teaching methods might also raise revenue from adult learners. Mostly, self-preservation will require both professors and administrators to accept cost-cutting, which will hardly be easy. Even though St. Joe’s ended the year with a $7 million surplus by embracing some of these measures, its administration became cannon fodder for faculty. But if more schools don’t follow suit, it could spell closures. “For those college presidents unwilling to reboot,” Hartman warns. “I’ve got one word for them: Detroit.”

Originally published in the September 2014 issue of Philadelphia magazine.

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