Higher Ed Finance in UK & US

Revenue Diversification and Sustainability:A Comparison of Trends in Public HigherEducation in the UK and US

Standard & Poor’s Performance Evaluation Services

Commissioned by The Council for Industry and Higher Education (CIHE)

December 2008

SSttaannddaarrdd && PPoooorr’’ss PPeerrffoorrmmaannccee EEvvaalluuaattiioonn SSeerrvviicceess55 Water StreetNew York, NY 10041United Stateswww.sandp.comTelephone 212-438-2093

Michael StewartDirector of Research & Analytics

This study was prepared by Standard & Poor’s Performance Evaluation Services, which is separate anddistinct from Standard & Poor’s credit ratings services. Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence andobjectivity of each analytic process. Standard & Poor’s has established policies and procedures tomaintain the confidentiality of non-public information received during each analytic process.

This study was commissioned by TThhee CCoouunncciill ffoorr IInndduussttrryy aanndd HHiigghheerr EEdduuccaattiioonnStudio 11, Tiger House, Burton StreetLondon, WC1H 9BYUnited Kingdomwww.cihe-uk.com

Copyright © 2008 Standard & Poor’s, a Division of the McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York,NY 10020. Editorial offices: 55 Water Street, New York, NY 10041. Reproduction in whole or in part prohibited except by permission. All rightsreserved. Information has been obtained by Standard & Poor’s from sources believed to be reliable. However, because of the possibility of humanor mechanical error by our sources, Standard & Poor’s or others, Standard & Poor’s does not guarantee the accuracy, adequacy, or complete-ness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information.

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December 2008CIHE Foreword

Revenue Diversification and Sustainability: A Comparison of Trends in Public Higher Education in the UK and US

We are most grateful to the Performance Evaluation Services Division of Standard & Poor’s in NewYork for undertaking this study for us. It seeks to illuminate the revenue diversification strategies ofthe US publicly funded four year university sector and the UK publicly funded university sector.

The work was led by Michael Stewart and I congratulate him and his team. They received severalinputs from the UK and we are particularly grateful to Derek Pretty, the Director of Finance at BristolUniversity, and Philip Harding at the University of Westminster for supplying a range of dataand personal insights. We also much appreciate the guidance from Steve Egan, Deputy CEO ofHEFCE, Jim Port, Director of JM Consulting, Jocelyn Prudence and Damian Dochety at UCEA andJanice Leung at Universities UK who offered their advice. We also appreciate the informationprovided by colleagues at Pennsylvania State University.

A draft summary of the report was discussed at a CIHE Council meeting in November 2008. We were delighted that Terry McGraw III, the President and CEO of the McGraw Hill Companies,the parent of Standard & Poor’s, was able to lead that discussion. Professor Alison Richard, the Vice-Chancellor of Cambridge University, offered her perspectives in closing that debate.

I take responsibility for the policy discussion in the Introduction as we did not invite S&P to offersuch views or to make any recommendations.

We hope the report will add insights and inform the debate on the future of higher education in theUK and also in the US. Both sectors face similar issues and both can be better informed as a result of the S&P report.

Richard A BrownChief Executive

Studio 11, Tiger House, Burton Street, London, WC1H 9BY

Telephone: +44(0)207 383 7667 Facsimile: +44(0)207 383 3433Email: [email protected] Web: www.cihe-uk.com

The Council: Professor Sir Roy Anderson • William Archer • Simon Bradley • Mike Carr • Dominic Casserley • Professor Antony J Chapman • Tracy Clarke •Dr Andrew Cubie Martin Davidson CMG • Sir Howard Davies • Dr Annette Doherty • Peter Duffy • Carolyn Eadie • Professor David Eastwood •

Rona Fairhead • Gordon Frazer • Professor Dame Janet Finch CBE • Professor Alan Gilbert • Professor Carolyn Gipps • Professor Brenda Gourley • Olivia Grant • Sir Anthony Greener • John Griffith-Jones • Charles Hall • Professor Deian Hopkin • Dr Geraldine Kenney-Wallace • Professor Bernard King CBE

• Russell King • Sam Laidlaw • Sir Peter Lampl OBE • Sir Michael Latham DL • Sir Rob Margetts CBE FEng • Peter Mather • Terry McGraw III • Sir Tom McKillop • Tim Melville-Ross • Charles Miller Smith • Richard Olver • Professor Shirley Pearce • Andy Powell • Ian Powell • Dr Martin Read •

Sir Michael Rake • Professor Alison Richard • James Ross • Sir Muir Russell • Professor Sir Peter Scott • Dame Ruth Silver CBE • Paul Skinner • Ian Smith •Professor Christopher Snowden • Sir Martin Sorrell • Professor Elaine Thomas • Professor Eric Thomas • David Thomlinson • Professor Rick Trainor •

Professor Paul Wellings • John Widdowson • Professor Dianne Willcocks CBE • Professor Tim Wilson • Nick Winser

Chairman: Richard Greenhalgh • Chief Executive: Richard Brown • Deputy Chief Executive: Keith Herrmann

The Council for Industry and Higher Education is a company limited by guarantee registered in England and Wales No: 3465914 Registered Charity No: 1066956

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CIHE Introduction

The following report from the Performance Evaluation Services Division Standard & Poor’s (S&P) in New York confirms thatthe costs of all publicly funded higher education institutions (HEIs) tend to rise faster than the ability of governments to fullypay for them. The study compares key circumstances and trends of HEIs in the UK and US and how far they have diversifiedtheir sources of revenue. It does not offer ready made solutions to the impending divergent trends of fairly static incomebut rising costs. Neither does it suggest cost reduction opportunities, policy and practice options or offer judgements onthe relative risks of revenue diversification strategies. It was designed to illuminate the two sectors and their different revenuediversification achievements.

But some policy and practice conclusions can be drawn from the analysis and it is appropriate that the Council for Industry andHigher Education (CIHE) as a policy influencing partnership as well as research “think tank” should draw some conclusionsbased on the analysis and offer some policy suggestions.

At our November 2008 Council meeting, members from both academia and business considered that the higher educationsector in the UK is entering a period of severe financial strain.

IInnccoommee wwiillll bbee uunnddeerr pprreessssuurree……..

■ The Government in England has committed to maintain the unit of teaching resource in real terms till 2010/11 but thesector will have to compete against other competing demands thereafter in the next very tight comprehensivespending review.

■ In Scotland, public funding exceeds that in England (while falling short of what was being sought) and no student feesare charged. The funding for Welsh institutions is considerably lower.

■ The demographic dip of school leavers will especially affect those institutions that serve local markets; the dip will besevere in Scotland and in some regions in England.

■ The cap on the fee income from full-time students in England is unlikely to increase in real terms for a number of yearsgiven the up-front costs for the exchequer, while in Scotland the Government remains firmly of the view that highereducation should remain publicly funded.

■ The fees paid by international students that have helped support the finances of institutions across the UK may beunder threat as a world economic downturn takes its toll. Equally the decline in the pound has seen an increase inapplications from overseas and may help counter the attractiveness of the US under Barack Obama.

■ The income from businesses for consultancy, research, support for students on MBA and other programmes is alreadyslowing as businesses curtail their budgets. The belief that they will co-fund new workforce development programmeslooks increasingly unlikely – with implications for the diversification strategies of those institutions that are attemptingto break into this market.

■ The market for part-time study may come under pressure as those in work focus on keeping their jobs, as discretionaryincome reduces and as employers reduce their support for staff development. However, past recessions have seensome increased demand including for teachers, some other public sector jobs and postgraduates as learners continuein learning or focus on public sector jobs in the face of declining job opportunities in the private sector.

■ Now is not the best time to be seeking new donations from alumni – especially if they are (or were) in the financialservices sectors.

BBuutt pprreessssuurreess oonn ccoossttss wwiillll ccoonnttiinnuuee

■ Higher education is a people business – even though for some it is also a capital intensive business. Salary levels havetended to increase faster than RPI and indeed over recent years and at certain points have increased by some 8% perannum as a result of built-in increments as well as centrally negotiated wage settlements. But such increases are notinevitable and the economic downturn could produce a downward pressure on wages especially if the alternativewere job cuts.

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■ Final salary pensions still exist across the sector. They are regarded as an important part of the remuneration packageby both staff and employers, but their cost to employers and sustainability without reform is becoming an increasingconcern. There may now be a multi-billion liability that could go onto the balance sheets of the participating institutions.Proposals for an increase in employers contributions with possibly more to follow (or a reduction in benefits) mayreduce the gap to a limited extent, but pension liabilities remain a cost overhang.

■ The costs of replacing the teaching and research infrastructure have been hidden by historic cost accountingconventions and are only now being revealed under the TRAC methodologies. For one institution this would implyreversing a £7 million “profit” into a £10 million “loss” – such are the changes TRAC is suggesting.

■ HEFCE Board papers reveal that under TRAC the sector is losing money on research for the public, charity andprivate sectors.

■ Other costs such as fuel have also risen and while the recession will stall that trend, it will reappear once worldeconomic growth returns.

NNoott jjuusstt aa UUKK iissssuuee

The S&P report confirms that all State funded systems face similar pressures. But some have diversified further and hence haveestablished a more balanced set of income opportunities. US institutions, for example, have diversified further than those in theUK and the publicly funded sector has only some 44% of its funding from public sources against on average some 60% in thecase of UK institutions. Equally it could be argued that the efficiency opportunities are greater in the US than in the UK asfunding per student is much higher with average income per student at four year public institutions some $30K as against some$11K in the UK (S&P data). OECD comparisons of expenditure on HE confirm the low level of core funding for UK institutions.

EEnnddoowwmmeennttss nnoott aa qquuiicckk ffiixx ssoolluuttiioonn……

Whereas the Government in its 2003 report on The Future of Higher Education1 saw endowments and charitable giving as “the wayforward”, the S&P report notes that income from endowments only account on average for some 4.3% of US publicly fundedinstitutional income in 2007. Earlier this year (even before the financial crash eroded the endowment base) only some 26 publiclyfunded institutions reported an endowment fund that exceeded $1 billion (there are 667 such four year institutions). In total some 76private and public institutions had endowments greater than $1 billion out of a total of 2,649 four year institutions in the US.

Equally, it took these publicly funded institutions some 20-30 years to develop the endowment funds they now have. That longjourney has to commence in the UK, and while our institutions may be where US public institutions were some 25 years ago,they can look at the progress that their US counterparts have made. The old adage that “if you don’t ask, you don’t get” appliesin spades to this area and the British reluctance to ask has to be overcome. The Government’s matched endowment fundingscheme should help kick-start the process for many institutions (or prove that the British are less inclined to donate). As CIHEVice-Chancellors have commented, it need not matter if endowments are earmarked for specific projects or investmentsprovided these are projects that the institution would have wanted to undertake in any event, as they release funds for otheropportunities. Tracking alumni giving rates should be a KPI for all institutions as fund raising experts say that on average it isonly the 13th gift that reaches a substantial ($1 million or £1 million) sum.

But we have to be realistic and recognise that the benefits will not appear for many years and even then will make only amodest impact on total institutional income.

……NNoorr IIPP iinnccoommee

Neither will income from IP fill the gap. Only 28 US institutions earn more than $10 million per year from their IP. MIT andStanford are the exception not the rule.

1 DFES 2003

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Most institutional leaders and Governing Boards probably appreciate these realities and the recent report for John Denham MPby Professor Paul Wellings reinforces this message2. But not all policy makers have fully appreciated what they have seenwhen they look across the Atlantic – especially if they focus on MIT.

BBuussiinneessss IInnccoommee iimmppoorrttaanntt

UK institutions have raised their rate of climb in securing research and consultancy income from businesses at a faster ratethan US institutions over the recent past. The share of Gross Domestic Expenditure for R&D (GERD) financed by industry hasrisen from 1.6% in 1985 to 2.8% in 2005 in the UK according to S&P (though it has plateaued) against a static 1% in the US. Butsince the US spend on GERD financed by industry has climbed at a substantially faster rate, US institutions have done very wellto maintain their market share. The UK is a relatively small player in the world league and UK HEIs will want to partner morewith US Universities and global businesses to capture a still higher percentage of global (rather than UK based) R&D. Ourresearch councils could also develop closer and even joint programmes with such funding agencies as the NSF and NIH.Our report on Universities, Business and Knowledge Exchange 3 charts how value is most likely to be added through closecollaboration, through the co-creation of knowledge and through metrics that drive long-term relationships rather than short-term revenue maximization.

Equally not all institutions have the same ability to earn significant amounts of business income. Those with strong science,technology, engineering and maths (STEM) programmes have the greatest opportunities.

However, there are considerable opportunities for all Business Schools to accelerate the scale and reach of their activity withthe business community. They can be more aggressive and market driven on management and leadership development in fast-growth markets, with key strategic sectors in regional economies and through closer-to-market research on business issues.This work should in turn count under the new Research Excellence Framework (REF).

Business schools and UK institutions in general have shown that they can increase their income from CPD and work-basedlearning and this market offers further potential especially if institutions can work in a more system-wide approach withcolleges, private sector providers and professional bodies. Our report Influence through Collaboration4 shows the importanceof developing long-term in-depth relationships and trust and of businesses appreciating the strengths of universities rather thanviewing them merely as training providers. Blended learning using e-learning where appropriate offers opportunities fordelivering the learning at times and places that suit learners. Our report on Workforce Development: what works and why andthe joint CBI/UUK report Stepping Higher offer learning lessons and case studies5 .

OOtthheerr IInnccoommee OOppppoorrttuunniittiieess

International students, part-time learners and post-graduates are all excluded from the fee cap imposed by theGovernment in England. Institutions are already increasing this form of “unregulated income”. Income generation will want tobe consistent with offering good value for money and enhancing the quality of the overall student experience – as a rich mix oncampus should do. These unregulated income opportunities have their own different risk profiles and each will need to beevaluated accordingly.

Institutions have also been creative in their other commercial activities such as the use of their estates through conferences,evening and weekend learning (including for the community and business), summer schools and the use of their sports andother facilities.

NNoo eeaassyy ssoolluuttiioonn

The first conclusion we can draw from the S&P analysis is that there is no easy panacea to the income/cost divergence thatthe HE sector faces. But it is instructive to note that overall the US state university sector has reduced its dependence on

2 Follow the links to the reports under HE Debate on www.dius.gov.uk3 Ternouth and CBR Cambridge; 20084 Connor, Hirsh,; CIHE 20085 CIHE Connor July 2007; Stepping Higher CBI/UUK October 2008

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Government (Federal and State) funding and now has some 44% from the Government and 56% from other sources. The UK hassome way to go to diversify its income sources to the same extent. The CIHE considers that while neither endowments, IPincome, business income, unregulated fee income nor other commercial opportunities will of themselves relieve the financialpressures on institutions, each can play their part in diversifying and raising overall income sources.

The Council also considers that the sector will need to act with courage and speed to increase the pace of change. CIHE mem-bers are concerned that the sector could have reached a temporary peak in securing income from Government sources andthat unless early action is taken a funding crisis could re-emerge.

RReellaattiivvee rriisskkss

Equally, the Council appreciates that revenue diversification does not necessarily imply risk reduction. It is debatable, forexample, whether revenue diversification away from reliance on HEFCE (or any other HE funding council) represents a reduction inrisk. Certainly reliance on any Government (whether US State or UK country) can lead to unpredictable changes in policies.These range from cuts in their grants (as US State budgets continue to come under pressure), new initiatives (such as two yeardegrees), policies on mergers (Wales), reversal of student fee incomes not balanced by corresponding increases in teachinggrants (Scotland) or perturbations such as ELQs (a policy in England that might be reversed by any incoming ConservativeGovernment). Those that have seen the sudden shifts in NHS funding for nurses and training will have a somewhat jaundicedview of the reliability of central Government funding. But institutions will want to recognize that funding council funding is lowrisk, relatively predictable and comes with few strings attached in the form of block grants. No other income source has all ofthese qualities.

IInneevviittaabbllee ddiivveerrggeennccee ooff iinnccoommee aanndd ccoossttss??

It may be that there is an inevitable divergence between income and costs; that to maintain world class teaching, which ispeople intensive, then there are limits to how far institutions can increase lecture and class sizes and reduce contact hourswith their students without destroying the very quality that makes UK higher education world class.

But before that case can be proven the sector may have to show that it has tried all the means at its disposal to reduce costs,raise efficiencies and increase income. It may have to diversify itself even more than currently through offering a wider rangeof learning options each of which will have different cost but also perhaps quality implications. Equally, some options may notjeopardize quality even though they require quite radical change. The sector and those who work in it will have to decidewhether they are up for these changes. Where change involves hard political decisions then politicians will also have to decidewhether they are willing to argue the case – as the Blair Government did on tuition fees – for the greater good of the sector and(we would argue) the UK economy and society.

EEffffiicciieennccyy

It could be argued that the UK has one of the most efficient and high quality HE systems in the world. The US has a vastnumber of universities and colleges but still gets too few to HE and then only graduates some 53% within 5 years from allpublic and private four year institutions6. By comparison our completion rates are amongst the highest in the world. It costsaround $30K to educate a US student at a four year public institution against around $11K at a UK HEI.

But that does not imply that efficiency improvements are not possible in the UK and that radical solutions to what some ofour Council members consider to be an impending funding crisis should not be seriously considered and where appropriateimplemented.

6 The US graduation rates (not in the report) are: 36% after 4 years, 52.6% after 5 years and 57.5% after 6 years. The subset of four year public institutions is:29% after 4 years, 49% after 5 years and 54.8% after 6 years. Source: National Centre for Education Statistics at the US Dept of Education.

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Some uncomfortable issues

NNaattiioonnaall PPaayy BBaarrggaaiinniinngg

In the US the HE sector does not have national wage bargaining. Neither is this common at State level. The HE system is lessunionized than in the UK.

In the UK national pay bargaining remains in relation to a common pay spine, to which the individual institutions attach locallynegotiated grades and on top of which they can apply their own adjustments to reflect specific market issues and their ownarrangements for performance pay. National pay bargaining has been dismantled in many parts of the public sector. But it doesremain in places for most of the education sector, health and some other sectors. Government Departments negotiate their ownsettlements but within a centrally determined envelope and there are regional variations that reflect differential costs and thereis performance related pay. Across HE, increments as well as annual wage increases have led to substantial increases inrecent years.

The increase in pay will help the UK to continue to attract and keep quality lecturers. But the sector cannot afford for costs todiverge from income in the way it has. The sector as a whole, the families of institutions that make up the sector and individualinstitutions will want to decide how to address this divergence and whether, for example, national pay bargaining enables orhampers what they wish to achieve in terms of flexibility, enterprise, productivity and the pursuit of individual missions.

NNaattiioonnaall,, RReeggiioonnaall aanndd LLooccaall PPaarrttnneerrsshhiippss

The funding councils have encouraged a range of partnerships between institutions covering research (Scotland being themost notable), local learning (Lifelong Learning Networks for example), shared services (a range of initiatives are being pursued)and individual restructuring and refocusing (from Manchester through recent support under the workforce development strandof the Strategic Development Fund).

But more radical solutions might be tried. The CIHE has previously suggested that business models and especially the conceptof a holding company might enable individual institutions to maintain their individual brands (the Unilever model comes to mind)while pooling their administrative functions. We have suggested that not every institutions (be they HEI or FEC) necessarilyneeds its own payroll, personnel, IT, estates or purchasing staff. A holding company drawing together these functions from alocal cluster of institutions could attract a higher caliber of staff, save costs and free resources so institutions can focus ontheir core teaching, research and community missions. Joint marketing and labour market gathering could help institutionsdevelop new markets that it might not be economic for a single institution to develop (this happened with Middlesex Universityand a cluster of Colleges that the CIHE helped fund some years ago). Hence the market could be grown for the benefit of all theparticipants including the learner.

While the inability of institutions to reclaim the VAT costs incurred currently deter the wide adoption of shared services, moreradical approaches especially in cities where there are often more than two HEIs and a wide range of colleges, could yieldworthwhile quality and learner benefits as well as raise efficiencies7.

An extension of the partnership approach might see learners accessing excellence wherever it exists across the range of localinstitutions. A learner from a Russell Group institution might go to an inspiring lecturer in a post-92 institution; a learner in thelatter might go to the former to raise their research capabilities; learners in either might encourage new courses to bedeveloped where excellence is pooled and new combinations of coherent opportunities created (the example of the FiveColleges network in Mass. USA comes to mind). There might even be joint degrees. We should not assume that the system asit is has to remain as it is and that excellence cannot be tapped and be created through new combinations and approaches. Ifthat opens new markets and income streams then institutions and their funding councils should be supportive.

7 See also the results of a recent discussion at Loughborough University in University Business December 2008

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FFlleexxiibbllee AAccaaddeemmiicc PPrrooggrraammmmeess

Universities are in the business of developing reflective practitioners. This takes time. The value of the UK degree brand mustnot be undermined. But some learners might be willing and even prefer to focus their higher education within two yearsespecially where this might save them some fees or maintenance costs or both. Others might prefer to take longer. Some mightlike to start in January or at other times of year that better suit them as learners. Greater flexibility could expand the market aswell as meet a wider range of client needs.

Even if two year degrees were not preferred by many institutions, some might consider how they could teach in four semestersper year rather than three, using the long vacation for teaching. To ensure research and scholarship can still be undertaken,institutions would have to increase their staff numbers and spread the research and scholarship effort over the year. Theadditional costs would need to be balanced against the better use of the estate and the relevant Government and fundingcouncil may want to incentivise institutions with more than pro-rata funding for the compressed course. There could besavings for the public purse if graduates started repaying earlier and if maintenance grants and loans were not so protracted.A comprehensive analysis might usefully be undertaken to evaluate the financial effects and opportunities. We will all want tolearn from the experiences of the existing pilots on compressed degrees.

There may well be other opportunities for offering greater flexibility. For example, the greater use of e-learning can freeresources, enable learning to be delivered at times that suit learners and can enable wider teaching, virtual laboratory andother experiences to be offered. But e-learning costs money and is not necessarily cheaper. Students appear to prefer blendedlearning not just e-learning – the e-univerity experience comes to mind. HEIs could place more emphasis on accrediting existingemployer led work place learning and refocus/top up some of this towards a Foundation, Bachelors or Masters award. Thiswould benefit both HEI revenue streams and the wider government agenda on both up-skilling the existing workforce andwidening participation. Such learning could be delivered through a variety of work place learning/e-learning/block weekendson campus etc.

Universities have to be as business-like as possible and in times of economic downturn, restructuring and re-engineering theirproducts and the way they are delivered could widen their appeal and grow their income streams.

SSttuuddeenntt LLooaannss

The Government in England must also be willing to consider radical options.

We appreciate the pressures on public expenditure and the difficulty in raising the cap on student fees in the short-term. But amajor constraint on raising the cap is the up-front fiscal costs of the current loan arrangements. The CIHE has argued that theblanket subsidy on all student loans should be reduced over time. All blanket subsidies are inefficient. This one is socially andeconomically regressive. It enables students from richer backgrounds to borrow money and make a turn at the taxpayer’sexpense. We and Professor Nicholas Barr at the LSE have long argued that the Government should on-lend at its own cost ofborrowing. This would still involve an interest subsidy over the rate available to students in the market. But it would eliminatethe fiscal costs to the exchequer and as such would make it less costly for the Government to offer loans for part-time as wellas full-time students.

The saving depends on the differential rates of interest but has in the past been estimated by Professor Nick Barr as around£5-700 million. It will be much less today but could be more in the future depending on the movement in interest rates. The fundsreleased could form the backbone of a national bursary scheme available from the Exchequer at the same rate to all students(both full-time and part-time). Such funding could enable institutions to reinvest their current bursaries into raising the qualityof the student experience8.

8 Our proposal for a simple national bursary scheme would not prevent individual institutions offering their own supplementary bursaries. Neither would itinvolve a cross-subsidy from some institutions to others as suggested by HEPI. It would though simplify the funding offer to students and by being availableto part-time students help reduce the current inequalities between so-called full-time and part-time students.

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SSuupppplleemmeennttaarryy FFeeeess

While raising the cap on fees would have difficult public expenditure implications, if the up-front Exchequer costs could beremoved then such a route becomes more feasible. Removing the blanket subsidy on student loans would have that effect.Another option might be for institutions to impose a fee supplement of varying amounts provided they both collected the feesup-front (thus not calling on State funding and collection via the tax system) and recycled half towards institutional bursariesfor UK or international students. Some of our Council members have long noted that parents are willing to spend considerablesums to send their children to private schools and that the university fees are a substantial reduction on what they have beenused to paying. In the USA, private universities charge high fees but through a mixture of endowments and recycling of feeincome can offset the costs to admit bright students from poor backgrounds.

The details of this idea would need to be developed. But if it substituted for a raised cap and enabled institutions to bothincrease their fee income while preserving and even enhancing admission for students from poorer backgrounds, then the ideashould be further investigated. A mixed public/institution approach should be considered.

AA FFooccuuss oonn EExxcceelllleennccee

If UK higher education is to remain world class, then available Government funds will have to be focused on achieving thisoverriding objective. Lord Giddens said in November 2008 that “Quality cannot be sacrificed on the altar of equality “andthe Government should reinforce quality. It may have to delay or even forego initiatives such as developing new HE centresin some towns that currently do not have HEIs. Greater use may need to be made of local colleges many of which are wellable to meet the needs of their communities for high level learning. During times of severe financial constraints, the nationmay not be able to afford to spread a limited amount of jam thinly. Businesses can recruit from anywhere and if the UK doesnot develop excellent graduates with the skills and capabilities required, then businesses will go elsewhere. The sameapplies to research. In an increasingly knowledge driven age, we have no option but to focus our efforts and develop excellentgraduates and excellent research.

CCoonncclluussiioonn

The HE sector in the UK is high quality and offers exceptional value for money. There are limits as to how much further it canincrease its income or cut its costs. But it must continue to pursue all income diversification opportunities and be willing toconsider options that can raise efficiency while still preserving the quality of the student experience and the scholarship andresearch that underpins the sector and the UK economy and society.

We invite the sector, the Governments across the UK and others to join in a discussion on the facts that are establishedin the S&P report and the ideas presented in this cover paper.

RRiicchhaarrdd AA BBrroowwnnCouncil for Industry and Higher EducationDecember 2008

Contents

Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

I. A Question of Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10A. The Nature of Higher Education Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10B. Government Funding, Cost-Cutting Measures, and Efficiency Gains . . . . . . . . . . . . . . . . . . . . . . . .12C. The Rise of Tuition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14D. Revenue Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16E. Spending Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

II. Revenue Diversification through Philanthropic Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18A. A Matter of “Principal” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18B. Alumni Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21C. “The Way Forward” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23D. Managing Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

III. Revenue Diversification through Industry Linkages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29A. Industry Sponsored Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29B. Commercialization of Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34C. Cautions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

IV. Measures of Financial Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39A. UK Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39B. US Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

AppendixComparative Indicators of the UK and US Education Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

Revenue Diversification and Sustainability: A Comparison of Trends in Public Higher

Education in the UK and US

Publicly funded higher education institutions (HEIs) are key to the development of knowledgeeconomies, but their costs tend to rise faster than the ability of governments to fully pay for them.This study compares financial circumstances and trends of public HEIs in the UK and US, as theyhave diversified their revenue base with non-government income to enhance their financial sustainability. The study begins with a review of the literature on the contribution and limitationsof government support in the face of rising costs and global competition. It addresses the inabilityof “efficiency gains,” by themselves, to make higher education financially sustainable, and examinesefforts by HEIs to diversify their revenues through philanthropic support and industry linkages.National trends are supplemented by examples from Pennsylvania State University in the US andthe University of Bristol in the UK. The study’s national trends include the latest data available foranalysis, which vary by topic. The most recent data in the study are from the 2007-08 academic/fiscal year, and do not reflect the major global economic events unfolding at the time of the study’spublication in the fall of 2008. The study concludes with a review of the literature on differentmethods for analyzing the financial health of HEIs in both the UK and the US.

At the undergraduate level and above, the UK's higher education sector consists of 169 publiclyfunded HEIs (including separately counted component schools and institutes). By contrast, at thebachelor's level or above, the US sector consists of 667 public HEIs, 1,530 private not-for-profitHEIs, and 452 private for-profit HEIs. The US higher education sector also consists of 1,680 publicand private two-year institutions where students can earn an associates degree, which can oftenbe used as a transferable credential towards partial completion of a four-year bachelor's degree.Despite the large number of private institutions in the US, public HEIs serve the majority of students. This study is primarily concerned with comparing data from the subset of America's 667public four-year HEIs to data from the UK's 169 publicly funded HEIs.

Summary of Key Points1. On average, approximately 44% of the revenues at public HEIs in the US came from government

appropriations, grants and contracts in 2006-07, though the percentage at individual institutions variedsignificantly within and among the 50 states. In 2005-06, approximately 40% of the revenue base of UKuniversities was comprised of non-government funds across the sector as a whole, but the actual percentage at individual institutions varied across England, Scotland, Wales, and Northern Ireland.

2. On average, the UK’s expenditures for tertiary education (not including further education) were$11,484 per full-time equivalent student in 2004, whereas US public four-year institutions spent $30,166per student.

Revenue Diversification and Sustainability: A Comparison of Trends in Public HigherEducation in the UK and US

11

3. To some extent, America’s public HEIs have long had the advantage of off-setting limited governmentfunds with increases in student tuition. Meanwhile, HEIs in the UK only began charging tuition of their full-time undergraduates in the 1990s. As of 2008, tuition fees in England, Wales, and Northern Ireland werecapped by the government at £3,000 per student (Scottish universities do not charge tuition for full-timeundergraduates from Scotland and the EU). Given the currency exchange rates1 at the time of this writ-ing, this figure is comparable to the US average tuition of approximately $6,000 (not including deductionsfor student aid) for full-time undergraduates attending public four-year institutions in their own state ofresidence. (Out-of-state tuition averaged $16,640 in 2007-08, not including deductions for student aid.)

4. A number of American public HEIs have alsoenjoyed the advantage of endowments andcurrent-year philanthropic support. The num-ber and size of endowments have grown from39 HEIs reporting endowed funds of $1.5 bil-lion in 1977, to 269 (out of 667) HEIs reportingcombined endowments valued at $115.3 bil-lion in 2007 (an average of $19,600 per full-time equivalent student). During this 30 yearperiod, the number of institutions reportingendowments increased by 589%, and thevalue of endowments increased by 7,680%.

The distribution of US HEI endowments in 2007 was as follows:

■ 26 HEIs had endowments greater than $1 billion

■ 27 HEIs had endowments greater than $500 million but less than $1 billion

■ 66 HEIs had endowments greater than $100 million but less than $500 million



■ 68 HEIs had endowments less than $25 million


22

Reporting of Endowments by US Public 4-Year HEIs, 2007

269 HEIs reporting

endow ments over $1 million

40%

398 HEIs not reporting

endow ments over $1 million

60%

1 Throughout this report, UK pounds have been converted into approximate US dollar equivalents using the annualized average currencyexchange rate for the year being analyzed (with the exception of 2008, which is based on the currency exchange rate in effect at mid-year).

Education Spending Per Full-Time Equivalent Student, 2004 (US$)

$30,166

$11,484

$0 $10,000 $20,000 $30,000 $40,000

US Public 4-YearInstitutions

UK TertiaryEducation

5. While a number of US endowments are quite large, their contribution to annual operating budgets isoften relatively small at many of the institutions that have endowments. This is because only a small por-tion of endowed funds is spent per annum. In 2007, the preceding 269 HEIs reported an average annualspending rate from their endowments of 4.5%. Moreover, an average of 79% of endowed funds wereearmarked for purposes restricted by donors, while just 21% was available for unrestricted purposes.Thus, the amount of available discretionary funds represented, on average, less than 1% of the endow-ment’s value per year (i.e., 21% of 4.5% = 0.9%). This helps to explain why many US HEIs haveexpressed the need for more unrestricted gifts (a point for UK HEIs to keep in mind as they cultivatetheir own donor traditions).

Investment income, including that from endowments, comprised 4.3% of revenues at US public four-yearinstitutions. Thus, endowments are no panacea where the financial sustainability of many institutions isconcerned. Yet, working at the margins, endowments have helped some public HEIs achieve world classexcellence, by supplementing (not supplanting) government support.


33

Combined Endowment Values of US Public HEIs, 1977, 1987 - 2007

$0$20$40$60$80

$100$120

1977 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Billi

ons

(USD

)

Purposes of US Endowed Funds

Restricted Purposes

79%

Unrestricted Purposes

21%

Annual Spending Rates of US Endowments

Not Spent (Retained)

95.5%

Restricted Spending Rate

3.6%

Unrestricted Spending Rate

0.9%

6. The level of philanthropic support of public HEIs in the US has been made possible by:

■ large, professionally staffed development offices, which can spend an average of $0.30 for every$1.00 raised

■ extensive involvement of executive staff, governing boards, and volunteers in institutional advancement

■ sophisticated annual fundraising campaigns for current needs in addition to endowments

■ periodic capital campaigns

■ support from numerous grant-making foundations, which gave over $2.1 billion to higher education,graduate education, and professional education in 2006

■ favorable tax treatment of individual monetary donations (donors can deduct the full charitable valueof monetary gifts from their pre-tax earnings)

■ alumni-giving programs that capitalize on a sense of loyalty cultivated through alumni associationsand, at many institutions, through Intercollegiate Athletics

7. Public HEIs participating in a recent US survey reported average alumni contributions of $7.9 million perinstitution, and an average alumni giving rate of 8.5%. Another survey found that when all individualcontributions, bequests, and gifts are counted (not just those from alumni), annual giving averaged $13.0million per institution.


44

Average Alumni Contributions Per Public HEIAmong US Survey Respondents, 1998 - 2007

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Revenue of US Public Four-Year HEIs, 2007

Investment income (including income from endowments)

4.3%

Other95.7%

8. Similar types and levels of philanthropy have played little part in the finances of most UK universities(with the exceptions of Oxford and Cambridge, which held endowments of more than £6 billion, or theequivalent of approximately $10.9 billion, in 2005). This may be influenced, in part, by differences inthe tax treatment of individual donations in the UK and US. Limited individual support has also beendue, in part, to small or non-existent alumni associations at many institutions. Moreover, decades oftuition-free undergraduate education have reinforced the notion that “the state will provide” for theUK’s universities.

9. This is beginning to change, however, as more UK HEIs establish development offices, form or expandtheir own alumni associations, and work to create a culture of charitable giving (as well as professionalasking). UK universities other than Oxford and Cambridge held endowments totaling £1.9 billion (≈ $3.5billion) in 2005, raised an average of £1.6 million (≈ $2.9 million) per institution that year, and had alumnigiving rates of approximately 1%.

10. The experience in both the UK and US is that a significant portion of total giving by individuals dependson the gifts made by a small number of wealthier donors. This increases risk where sustainable levels ofsupport are concerned. Moreover, an alumnus’s first gift is usually not very large. In one study ofAmerican HEIs, researchers found that nearly half of the donors who gave $10,000 or more originallygave less than $50 as their initial gift. Additionally, 85% of those making gifts at or above $10,000 madesmaller gifts during a period of six or more years leading up to their larger gift. Another rule of thumbheard is that it may not be until the 13th donation that a wealthy alumnus is likely to give one milliondollars or pounds. Thus, the cultivation of a sustainable donor base takes time.

11. In some respects, UK HEIs are today where US public HEIs were some 20 or 30 years ago, so the USexperience may be instructive in certain respects. However, there are significant cultural differencesbetween the US and UK that will complicate philanthropic benchmarking between the two nations’ high-er education sectors. UK HEIs have a long journey ahead of them if the goal is to develop endowmentsof the size found in some US institutions. Given the length of time required, the impact of charitable giv-ing on the sustainability of most UK HEIs will be modest in the foreseeable future (just as it was when USpublic institutions initially set out on this course in previous decades). But even the longest journeysbegin with the first few steps, and now may be the time for UK institutions to launch or expand their ownendowments, particularly in England where the government has established an endowment matchingfund. However, given the potential for some HEI leaders to focus primarily on short-term needs (as wellas short-term successes), directives may be needed from their governing boards to also attend to longer-term sustainability strategies.

12. Few scholars have laid out the challenges, advantages, limitations, and prerequisites of successfulphilanthropy in higher education as thoroughly as Dr. Bruce Johnstone. In an address made at the 2004International Conference on Higher Education in Luxembourg, he made the following points for those inthe audience interested in building institutional endowments in their own countries:

■ Philanthropic support of higher education will be limited, uneven, and slow to develop.

■ At the same time, given the great and increasing divergence of higher educational costs from the like-ly trajectory of governmental revenues some philanthropic support for higher education is increasinglynecessary, feasible and capable of making a difference.

■ Universities and other institutions of higher education need to cultivate alumni and friends—ratherthan simply relying on the occasional philanthropic windfall of an enormously wealthy donor or a gen-erous foundation.


55

■ Universities need to be—and need also to be widely perceived to be—cost-effective and accountableif they are to present credible claims both for more tax revenue, for tuition fees from parents and stu-dents, and also for philanthropic contributions.

■ Governments may need to pursue revenue supplementation at all levels, including moderate tuitionfees, in addition to hoping for increasing philanthropic support to bring some taxpayer relief to somestate owned universities and colleges.

■ Governments must push for increasing revenue supplementation without in fact using the revenuesupplementation to supplant governmental revenue. In short, the revenue supplementation includingtuition fees and philanthropy must be, and be widely perceived to be, in addition to the bedrock of pub-lic and governmental support.

■ Governments must expect that philanthropic support will be unevenly distributed among institutionsand lead institutions, and allow much of the consequent widening of financial fortunes—while at thesame time committing themselves to maintain some reasonable parity among the institutions and fac-ulties that are unerringly unequal with philanthropic potential.

Dr. Johnstone’s observations are as timely now as they were when he first made them, and they mayoffer a framework for managing expectations as the UK higher education sector further diversifies itsrevenue streams with philanthropic funds.

13. An area in which US and UK revenue diversification strategies are more comparable is in the field ofindustry-sponsored research and development, which is reported by the OECD as “Higher EducationExpenditures on R&D (HERD) Financed by Industry.” In the UK, it increased by 870% from 1981 to 2006,rising from 45.8 million to 444.5 million Purchasing Power Parity dollars (PPP $). In the US, this measureof spending increased by 664% during the same period, rising from 314.0 million to 2.4 billion PPP $ (USdata includes both public and private HEIs).


66

Higher Education Expenditures on R&D Financed by Industry, 1981 - 2006

0

500

1,000

1,500

2,000

2,500

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Mill

ion

Curr

ent P

PP $

UKUS

Up 870%

Up 664%

14. The UK higher education sector’s market share of all Gross Domestic Expenditures on R&D (GERD)Financed by Industry fluctuated between 1981 and 2006, but experienced a net increase from 0.9% to2.8%. The US higher education sector’s market share also fluctuated during that time, and experienceda net increase from 0.9% to 1.1%. However, the more recent period from 2000 to 2006 saw a slight declinein the market share captured by UK HEIs, and a leveling off in the market share held by US HEIs. Differentexplanations for this more recent trend may exist, but keeping in mind that these data reflect domesticspending, one possibility may be that industry has been off-shoring more of its R&D in recent years. AsR&D becomes more mobile in the global marketplace, HEIs in both the US and UK will have to competemore aggressively with other nations to hold on to (or regain) market share.

15. Commercialization of intellectual property (IP) is another source of revenue available to higher education(albeit a limited one in most instances). HEIs in both the US and the UK have expanded their funding baseby receiving royalties for patents, deriving proceeds from technology transfers, taking equity positions inbusiness start-ups, and earning proceeds from commercial spin-offs. According to national surveys ofHEIs, license/IP income among US respondents rose from $675.5 million in 1999 to $1.2 billion in 2006 – anincrease of 85%. During the same period, license/IP income among UK survey respondents rose from£19.2 million to £57.9 million (≈ $107.2 million) – an increase of 201%.

16. The $1.2 billion in US license/option income was earned by 159 public and private HEIs (in a sector with2,649 four-year institutions). Only 28 of these institutions earned license income of more than $10 million.Another 52 institutions earned between $1 million and $10 million, and approximately half of the group ofHEIs earned less than $1 million. Out of 27,322 active licenses and options, 11,414 yielded income in 2004,and only 167 of these (0.6% of the total) yielded more than $1 million. These “mega-licenses” were heldby 66 institutions, three of which held ten or more of them. Thus, even though the total amount of USlicense income was significant in the aggregate, it provided little or no financial benefit for mostAmerican HEIs, and is not a major contributor to the sustainability of the US higher education sector asa whole. This is consistent with findings from the UK’s Lambert Review of 2003.


77

Higher Education's Market Share of Gross Domestic Expenditures for R&D Financed by Industry, 1981 - 2006

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

UK

US

17. This does not mean that universities should not bother pursuing IP related income. Rather, it points to theneed for realistic expectations about the potential revenues that can be generated, and to perhaps pur-suing these revenues more selectively, while considering the wider range of commercialization activi-ties that are available, such as collaborative research.

18. Other cautions to keep in mind concerning linkages with industry include the following:

■ All institutions do not have the same ability to earn significant amounts of nongovernment income.Those with the greatest advantage tend to have strong science, technology, engineering, and mathe-matics programs.

■ Much of the research sponsored by industry is applied rather than basic, and is performed with theintent of making a commercial profit, sooner rather than later. Thus, business and industry are not aslikely to fund long-term, exploratory research. (That being said, there is evidence that the line betweenbasic and applied research is blurring.)

■ Research sponsored by industry has the potential to introduce vested interests, as well as conflicts ofinterest, into the academy. Among the most frequently cited is the possibility of restrictions beingplaced on the dissemination of research findings in order to maximize private proprietary interests.

■ Entrepreneurial initiatives undertaken by HEIs have the potential to divert the faculty’s focus awayfrom the institution’s core activities, to those they might not otherwise pursue. In his book on sus-tainable change in higher education, Burton Clark (2004) observed that diversified income is essen-tial, but a holistic approach is needed in which academic criteria take precedence over financialconsiderations.


88

Active Licenses/Options Held by US Survey Respondents, 2004

27,322

11,414

1670

5,000

10,000

15,000

20,000

25,000

30,000

Number of ActiveLicenses/Options

Number ofLicenses/OptionsProducing Income

Number ofLicenses/OptionsProducing More

Than $1 Million in2004

19. The holistic approach described by Clark includes the five institutional characteristics listed below.Although they may not necessarily be prerequisites for financial sustainability at every institution, theyare likely to be antecedents of adaptive capacity, and their absence from certain kinds of HEIs may poseobstacles to their long-term financial security.

■ A diversified funding base (funding from government sources, other than core support; revenue fromthe business and philanthropic sectors; and university-generated income).

■ A strengthened steering core (in European universities this is evidenced by central managementgroups or centralized coordination, which can be adapted to traditional hierarchies as well as flatterorganizational structures).

■ An expanded outreach/developmental periphery (e.g., project-focused or problem-oriented, multi-dis-ciplinary centers linked to the “outside world”; also, diverse administrative offices tailored to supportan ever-evolving array of entrepreneurial activities).

■ A stimulated academic heartland (i.e., entrepreneurial activities are not limited to the fields of science,but also the humanities and social sciences, for example).

■ An integrated entrepreneurial culture (a system of beliefs, values, and deliberate activity that embod-ies the preceding four elements).

20. As noted by the UK’s Committee of University Chairs (CUC), sustainability is not the same as survival; noris it only a financial issue. It is also about investment in staff, innovation, and relationships. It concerns‘adaptive capacity’ – a combination of leadership, quality of management, and acceptance of change.That being said, the lack of financial sustainability puts all other forms of sustainability at risk. Therefore,it is incumbent upon an institution’s governing board and executives to carefully monitor the financialhealth of their institution.

A variety of programs to monitor HEI finances are undertaken by both government and non-governmentorganizations in the UK, such as the various funding councils, the CUC, and the Research Base Funders’Forum. For comparative purposes, HEI governing boards and executive staff might wish to refer to vari-ous approaches taken in the US to measure the financial health of HEIs. An example of a conciseapproach is described in Strategic Financial Analysis for Higher Education, a guide jointly published byPrager, Sealy & Co.; KPMG; and Bearing Point. It includes a “ratio map” of four high-level financial meas-ures, each of which is supplemented by several supporting ratios. In certain respects it resembles theapproach taken in the CUC’s Report on the Monitoring of Institutional Performance and the Use of KeyPerformance Indicators, but it is narrower in scope, addresses just four self-assessment questions, andprovides a mechanism for combining the four high-level ratios into an optional composite financial index.The ratio map is described more fully in the report that follows, and it is cited along with other resourcesas part of the study's review of the literature."


99

xxxx

1100

A. The Nature of Higher Education CostsHigher education has become increasingly important to the social, cultural, and economic advancement ofindividuals and societies alike. A tremendous amount of financial, human, and physical resources are devotedto it. Yet, rapidly rising costs and financial demands are threatening the sector’s ability to sustain or increase itscurrent levels of teaching, research, and public service without creating disproportionate liabilities for futuregenerations. The challenge of the sector’s sustainability has become a global concern. Despite the diversepolitical, economic, and cultural characteristics of different countries around the world, their public highereducation systems all face a common dilemma: costs are rising faster than the ability of governments tofully pay for them (Johnstone, 2004).

The US and UK are a case in point. Despite the two nations’ shared heritage, their higher education systems aredifferent in important respects. Although both nations have world-class teaching and research universities, theUK’s higher education institutions are essentially public, and are supported by each constituent country’s highereducation funding authority and the various research councils2. On the other hand, the US has a large numberof both public and private institutions. The former are funded, in large part, by the governments of the 50 statesin which they are located, and for that reason are often referred to as “state” institutions.3 In the aggregate,they offer a useful parallel set of experiences to publicly funded HEIs in the UK.

Another difference between the two nations is the extent to which students are responsible for funding their owneducation. Although a number of HEIs in the UK began charging significant tuition and fees of full-time under-graduates in the 1990s, most American states have a long history of charging tuition. Since an undergraduateeducation and even a portion of living expenses were free to so many UK students for much of the 20th century,the funding of higher education has traditionally been viewed as the government’s responsibility. Partly as aresult, most UK HEIs do not have strong traditions of alumni giving, and have relatively modest endowments (withthe exceptions of Oxford and Cambridge). In contrast, many public universities in the US have built up largeendowments in recent years that are strongly supported by alumni donations and other private contributions.

Despite their differences, UK and US HEIs face growing financial pressures of a similar kind. Writing in theWelsh Journal of Education, American professor and former university chancellor Bruce Johnstone (2002)observed that the basic financial challenge faced by higher education systems all over the world is that theircosts tend to rise faster than the average rate of inflation. This can be traced to a variety of causes that areoften interrelated, such as the following:

■ Most of the sector’s financial pressures are driven by employee wages and benefits, as well as largeinvestments in technology and infrastructure. Unlike other sectors of the economy where technology

I. A Question of Sustainability

2 The four primary UK funding authorities include the Higher Education Funding Council for England, the Higher Education Funding Councilfor Wales, the Scottish Higher Education Funding Council, and the Department for Employment and Learning in Northern Ireland. SevenResearch Councils also provide funding in the fields of Arts & Humanities, Biotechnology and Biological Sciences, Economic and SocialResearch, Engineering and Physical Sciences, Medical Research, Natural Environment, and Science & Technology Facilities. Together, thefunding councils and research councils comprise the “dual support” system of funding for higher education in the UK.

3 As noted by the State Higher Education Executive Officers association, “each state’s unique combination of policy choices and fiscal andenvironmental conditions provides the context within which higher education funding occurs,” and the condition and trends across thestates vary widely.


1111

lowers costs by serving as a substitute for labor, higher education’s investment in technology such asteaching and research laboratories tends to increase costs on a net basis, rather than lower them,especially in the fields of science, technology, engineering, and mathematics (the STEM fields). Pensioncosts at many institutions also rise faster than either inflation or increases in government support.

■ The burgeoning costs of higher education are also due in part to large enrollments and increaseddemand. Higher education enrollment in the UK grew by 34.5 percent from 1996-97 to 2006-07, whileenrollment in US public and private four-year institutions grew by 28.1 percent. Capital costs havealso risen as additional facilities have been built to accommodate this demand. Moreover, addition-al costs have been borne as students remain enrolled in higher education for longer periods of timeto earn advanced degrees beyond the bachelor’s level. Even when government funding hasincreased to help offset such costs, it has frequently risen at a rate below full cost recovery, whichcan result in an increase in government funding on an absolute basis, but a decrease in funding ona per-student basis.

■ Competitive excellence is highly valued in education, and its pursuit tends to increase costs as univer-sities work to attract the best faculty and brightest students. This competition can result in highersalaries for faculty and staff, and the high cost of constructing state-of-the-art facilities or upgradingolder buildings. Moreover, the pursuit of programmatic excellence really has no definitive limits. Nomatter how good a particular department is, there is always something that could make it better. Asexplained by former University of Iowa President Howard Bowen, “in quest of excellence, prestige,and influence… each institution raises all the money it can… [and] spends all it raises” (cited inGeiger, 2004, p. 10).

Competition in US higher education is not limited to the classroom or research laboratory;Intercollegiate Athletics is “big business” on many campuses, and is enormously popular among thegeneral public. Sports teams help to create the institutional identity at many HEIs, and alumni enthu-siasm for those teams is strongly linked with philanthropic giving. Yet, the cost of sports facilities,coaching staff, and generous athletic scholarships requires considerable outlay, and operating expen-ditures exceed revenues in many athletic programs. According to Fulks (2008), median operatingexpenses of $37.9 million in 2006 exceeded median revenues of $32.0 million among the 109 public insti-tutions belonging to the prominent Division I Football Bowl Subdivision of the National CollegiateAthletic Association. Still, the sports image of many institutions creates a competitive edge that helpsto attract students and build a favorable image.

■ Due to the rapid pace of the knowledge explosion, HEIs continuously add new teaching andresearch initiatives that can result in a net growth of programs and entire fields of study. DonaldKennedy, former president of Stanford University, likened it to the continuous addition of new ele-ments to the Periodic Table. Universities have to research and teach all the previously known ele-ments, as well as the new element itself. This increase in knowledge makes universities increasing-ly complex and expensive (Zemsky, Wegner, and Massy, 2006). Even when new programs are ableto take the place of older ones, they are typically added faster than the older ones can be phasedout, resulting in overlapping costs.

■ HEIs in both the UK and US frequently do not recover the full cost of sponsored research from themajor sponsoring entity; the difference must then be made up through the commitment of institutionalfunds or supplemental sources. Within the UK, this situation is related to the concern that many HEIs


1122

have undertaken research programs without knowing the full costs associated with them, resulting inprograms operating at a loss or having to be cross-subsidized by other activities. This has led to thedevelopment of an activity-based costing method known as TRAC (Transparent Approach to Costing),which is used to calculate the full economic cost of research projects.

One of the other concerns over sustainability in both the US and UK is the physical infrastructure, but the con-cern differs between the two countries in important respects. In the US, many HEIs have taken on consider-able debt to fund capital projects that will have to be paid by future revenues. As one analyst at Standard &Poor’s has noted:

A lot of schools got into this arms race, or facilities race. They needed a rec center becausethe school they compete with has a new one. Or they had to have a new dorm because thecollege they compete with had one. Now those buildings are done, and they have to pay forthem. There are a lot of colleges out there that before they can spend a dime, they havealready committed 10 or 15 percent of their budget to debt service (Van Der Werf, 2002, ascited in Kirp, 2003, p. 24).

Concern over HEI estates also exists in the UK, but at many institutions the concern is with under-investment,not aggressive investment of the sort described in the US. Universities UK (2008) reports that long-term borrow-ing across the sector increased from £3.1 billion in 2002/03 to £4.2 billion (≈ $8.4 billion) in 2006/07 (a 24%increase when adjusted for inflation). Nonetheless, many UK institutions have deferred capital and mainte-nance investments and are experiencing a backlog of infrastructure improvement projects. Tellingly, 56 out of106 English HEIs reported that less than 70% of their gross internal area (GIA) was in good condition in 2004-05.Of this number, 23 institutions reported that less than 50% of their GIA was in good condition (HEFCE, 2007).

Such levels of quality may threaten an institution’s sustainability in several ways. One is that an institution maybe unable to achieve its programmatic missions. Another is that it may not be able to attract a sufficient num-ber of students to generate adequate revenue. A third potential threat to sustainability is that the bill for need-ed improvements capital improvements will continue to grow. As it eventually comes due, it may consumeresources that would have otherwise supported operating and programmatic needs, especially in light of thetraditionally modest operating surpluses generated across the UK sector as a whole, which totaled 1.1% ofincome in 2006-07 – a year in which 27 institutions across the UK higher education sector reported deficits(HESA, 2008a).

Universities UK has noted that the increasingly diverse income portfolio of universities, combined with improve-ments in risk management, and greater attractiveness of universities in the eyes of financial institutions, mayprovide more opportunities for HEIs to borrow funds to support significant infrastructure projects. Strategic useof debt is capable of enabling institutions to better pursue their missions and compete for students and faculty,as well as certain grants and contracts. However, no route is without its risks and trade-offs. Each institutionmust determine its own course toward sustainability, while the government simultaneously considers policyoptions for the sector as a whole.

B. Government Funding, Cost-Cutting Measures, and Efficiency GainsThe financial pressures borne by public HEIs are not only caused by rising costs, but the necessity of compet-ing with other legitimate demands for finite government resources. These can include pre-college education,health and human services, public safety, physical infrastructure, and looming pension costs, to name a few. In


1133

the UK, to understand the pressures that HEIs face today requires an understanding of the dramatic change infunding that began in 1981, when overall research funding and the unit of government funding for teaching wassignificantly cut. This was done, in part, because of the competing demands for limited public resources, butalso because of a shift in political ideologies. These cuts were not temporary in nature; indeed, as the decadeof the 1980s progressed, the Thatcher government insisted on additional “efficiency gains,” and universitieswere required to make do with less.

When faced with financial constraints, HEIs tended to respond with a variety of cost-cutting measures, such as:

■ increasing class sizes by raising student-faculty ratios

■ using fixed-term instead of permanent employment of faculty

■ substituting full-time, senior faculty with part-time or adjunct faculty and graduate students

■ increasing teaching loads and reducing research activities of faculty

■ placing a freeze on new hires

■ limiting faculty travel and professional development

■ contracting out selected services

■ deferring maintenance

Observers may argue over whether such cost-reduction strategies increase efficiency, or merely reducespending to the point of adversely impacting effectiveness and even distorting institutional missions (or somecombination of these). Johnstone and Marcucci (2007) contend that the research missions of HEIs can fall inpriority as a result of reductions in government support, but this may not always be the case. Indeed, concerncurrently exists in the UK that research has been funded at the expense of teaching, perhaps because interna-tional league tables focus on research standing rather than instructional quality.

Johnstone and Marcucci also contend that reductions in spending, motivated by a sometimes justifiable desireto increase efficiency, have their limitations:

Solutions to higher education’s financial austerity that feature expenditure reductions appealto… [those] who are more likely to believe that public universities are wasteful. And theremay be, or more likely may once have been, elements of truth—at least in certain more afflu-ent universities in more affluent countries, and however much exaggerated—to views ofwaste, bad management, and self-serving and unproductive faculty. At the same time, in mostcountries, several decades of budget cuts and of absorbing more students and institutingnew academic programs with little or no additional public funding has arguably taken most ifnot all of the “low hanging fruit” of obvious waste and budget cuts. Cheaper is not the sameas more efficient or more productive, and it is at least an arguable proposition that most ofthe easy expenditure reductions have been already forced upon most universities in mostcountries (p. 14).

Guskin and Marcy (2005) go a step further, and contend that cost reduction strategies such as those previous-ly cited are not well equipped to deal with long-term budget problems since they often consist of one-time sav-ings, or cannot be sustained without damaging the teaching and research missions of institutions. Similar con-cerns were raised in the 1980s as austerity took hold in the UK higher education sector and continued into thenext decade. Between 1989 and 1997, public funding for HEIs fell by approximately 36% on a per-student basis,a void that eventually led to the introduction of tuition.


1144

C. The Rise of TuitionWhile the UK struggled with government funding cuts in the 1980s and 1990s, so, too, did the US. As noted byGeiger (2004), the worst fiscal squeeze for public universities occurred around 1980, concurrent with theReagan administration. It was then that political options gradually shifted away from government-funded solu-tions, toward less government as the solution. However, the fiscal impact was not as pronounced in the US asit was in the UK.4 As explained by Palfreyman (2004), the higher education sectors in both nations faced gov-ernment cut-backs, but while UK HEIs “muddled through by accordingly reducing funding per student,” someUS HEIs substituted lost revenue by increasing tuition fees paid by students and their families (p. 5). However,this probably occurred to a greater extent among private universities, whereas the ability of some public HEIsto raise tuition is regulated by state statutes, legislatures or oversight bodies.

Tuition did not become an option for UK universities until the late 1990s, when it was introduced for full-time stu-dents at many universities. Concerned about the potential decline in the overall quality of higher education, andfollowing the publication of the Dearing Report, the Labour Government announced a major policy change withthe introduction of means-tested tuition fees of up to £1,000 for full-time UK and European Union (EU) undergrad-uate students (an amount permitted to rise with the rate of inflation, not the actual cost of service delivery). Alsoannounced were a system of student loans, and the elimination of maintnance grants for student living expens-es, though these were subsequently reintroduced for students from lower socioeconomic backgrounds. In 2006,the government’s cap on full-time undergraduate tuition at HEIs in England, Wales, and Northern Ireland wasraised to £3,000 (≈ $6,000), with another review scheduled for 2009. However, HEIs in Scotland do not chargetuition for full-time Scottish and EU students, so their revenues are not as diversified as those of other UK uni-versities. Also, tuition fees for part-time students throughout the UK are determined by each university, andthere is no government cap on the amount that can be charged.

Another important source of non-government revenue in the UK comes from the higher tuition paid by non-EUforeign students, whose fees are not capped (overseas fees can range from £4,000 to £18,000 per year, depend-ing on the institution, the level of course and the type of course). Between 2002-03 and 2006-07, the UK’s non-EU enrollment grew by 29.5% to 239,210 students, and the tuition revenue they generated grew by 58%.Interestingly, revenue from international students has become a more significant source of income for manyHEIs than research grants from funding councils. It should also be noted that a substantial proportion of stu-dents enrolled at UK universities are actually on collaboration programmes delivered overseas. However,reliance on the revenue produced by non-EU students must be balanced by a recognition that developingnations are expanding and improving their own higher education systems. Indeed, Hvistendahl (2008) notes thatChina now takes in more higher education students than it sends abroad. Moreover, advanced nations likeFrance, Australia, Japan and New Zealand are increasing their share in the market of international students.

Unlike the UK, America’s public HEIs have a long history of charging tuition. Most public institutions chargedifferent amounts for in-state versus out-of-state students. According to the College Board, although tuition andfees vary greatly from one state to another, the national average for full-time, in-state students rose to $6,185 in2007-08 (not including deductions for student aid, or the cost of room and board). However, this figure maskssignificant variations around the average. Exhibit 1 shows the distribution of tuition rates (in-state and out-of-state combined) by the percentage of students enrolled in public four-year institutions.

4 As noted by the State Higher Education Executive Officers association, “looking back over the past 25 years, state and local support forhigher education has twice ‘recovered,’ following major economic recessions, to levels that exceeded previous support. The pattern ofrecovery following recession has begun a third time over the past two years, but constant dollar, per student state support has not yetreturned to the level reached in 2000 and 2001.”


1155

It's important to note that the published tuition rate is not paid by many US students, since many of them receivefinancial aid in the form of grants that do not have to be repaid. On average, full-time students at public four-year institutions in the US receive approximately $3,600 in grants from all sources and in tax benefits. This aidreduces the average tuition and fees paid from $6,185 to approximately $2,600 (~ £1,300). Note that this does notinclude room and board that averages approximately $7,100. Thus, net tuition, fees, room and board averagenearly $10,000 per full-time student at US public four-year institutions. However, it should be noted that pricingpatterns are becoming increasingly complex as more institutions are establishing different prices for studentsin different years of study and/or different programs.

EExxhhiibbiitt 11

Out-of-state students comprise approximately 14% of the enrollment at public four-year institutions. According toThe College Board, out-of-state tuition for full-time students averaged $16,640 in 2007-08 (not including deductionsfor student aid, or the cost of room and board). However, out-of-state tuition rates vary among the 50 states, andthere are several regional cooperatives among reciprocating states that allow out-of-state students to pay in-state rates or reduced out-of-state rates. For example, the Academic Common Market (ACM) is a program for col-lege students in 16 member states who wish to pursue degrees that are not offered by their home state’s institu-tions. Students can enroll in out-of-state institutions that offer the desired degree program, and pay only the in-state tuition rate. The ACM is not competitive or merit-based, and eliminates unnecessary duplication of academ-ic programs among participating states, which contributes to sustainability through efficiency.

Out-of-state tuition rates also apply to many foreign students. However, their tuition can vary depending on theirvisa status and the availability of financial aid, tuition waivers or exemptions.

The long-term trend of tuition increases across the US higher education sector (public and private combined)recently became a focal point of the Commission on the Future of Higher Education, which was appointed by

Percentage of Enrollment at US Public Four-Year HEIs by Range of Tuition (In-State and Out-of-State Rates Combined), 2007-08

(Does Not Reflect Student Aid, or Room & Board Costs)

2%

42%

33%

10%

5%8%

0%

10%

20%

30%

40%

50%

Under $3,000 $3,000 -$5,999

$6,000 -$8,999

$9,000 -$11,999

$12,000 -$14,999

$15,000 andover

Tuition & Fees

Prop

ortio

n of

Enr

ollm

ent

Data source: The College Board


1166

US Secretary of Education Margaret Spellings. In its final report published in 2006, the Commission expressedconcern over “the seemingly inexorable increase in college costs, which have outpaced inflation for the pasttwo decades and have made affordability an ever-growing worry for students, families, and policymakers” (p. 2).Notwithstanding the burden on students and families, these fee increases need to be kept in perspective:America’s public four-year institutions still received only 16.7% of their total revenues from tuition and fees (netof tuition discounts awarded by the institution) in 2006-07. A key issue in the present study is the extent to whichUS institutions have increased their revenues while diversifying their sources, and the how this might be donein the UK.

D. Revenue ComparisonsThe need for diversified funding is certainly not new. As noted by Michael (2005), “starting with the ReaganAdministration and Thatcher’s Administration, an aggressive policy to force higher education to explore alter-native sources of funding was developed in the United States and the United Kingdom” (p. 15). Today, US pub-lic four-year institutions receive just 44.1% of their total revenues in the form of “Government Appropriations”and “Government Grants and Contracts” (this includes federal, state, and local governments). When tuition isadded to government support, the combination still only represents 60.8% of the total. As shown in the follow-ing exhibit, the other 39.2% comes from a variety of sources, including hospitals, auxiliary services (such as stu-dent housing, food services, bookstores), investment income, gifts and grants, additions to permanent endow-ment, and other sources.

EExxhhiibbiitt 22

Although the UK categorizes higher education revenues differently than the US, the next exhibit shows that UKHEIs are also funded by diverse revenue streams.

US Public Four-Year HEI Revenue Sources, 2006-07(For Institutions using Government Accounting Standards)

Other12.3%

2.1%

Auxiliary enterprises

8.4%Additions to endowments

0.5%

Gifts

Hospitals10.5%

Government appropriations

24.1%

Gov't grants & contracts

20.0%

Investment income (including from endowments)

4.3%

Tuition & fees16.7%

Capital grants & gifts1.2%

Data source: National Center for Education Statistics


1177

EExxhhiibbiitt 33

E. Spending ComparisonsIn 2004, the US spent an average of $30,166 per full-time equivalent (FTE) student at public four-year institutions,while the UK spent an average of $11,484 per FTE student in tertiary education.5 America’s higher spending isdue, in part, to the sector's non-government revenue streams. The remainder of this report focuses on twosources of non-government revenue: philanthropic support, and linkages with industry.

EExxhhiibbiitt 44

UK HEI Revenue Sources, 2006 - 07

Other income - other services rendered

6.2%

Other income - other13.0%

Endowment & investment income1.8%

Tuition fees & education grants & contracts

25.4%

Contracts - UK industry, commerce, public

corporations, EU sources, other overseas sources,

other sources, UK charities, UK central

government/local authorities, health & hospital authorities

10.5%

Funding Council Grants (Research)

7.9%

Funding Council - other4.7%

Grants & Contracts - DIUS Research Councils

5.4%

Funding Council Grants (Teaching)

25.2%

Data source: Higher Education Statistics Agency

Education Spending Per Full-Time Equivalent Student, 2004 (US$)

$30,166

$11,484

$0 $10,000 $20,000 $30,000 $40,000

US Public 4-YearInstitutions

UK TertiaryEducation

5 US data is from the National Center for Education Statistics. UK data is from the Organization for Economic Cooperation and Development.

1188

A. A Matter of “Principal”Universities are increasingly turning to charitable sources of income by cultivating alumni support, obtainingphilanthropic grants from private foundations, and building endowments in which the principal is permanentlyinvested, and a portion of the proceeds are spent to meet current needs.

As noted by Clark (2004), “the most promising income providers are those the university itself can develop anddirectly control. Foremost is income from endowment. A strategic decision of the first order is to squirrel awaysome ‘surplus’ income as endowment, rather than to spend it all next year on immediate need” (p. 79). He alsonotes that gifts and contributions from alumni, earmarked to spend contemporaneously, can provide a valuablestream of revenue.

Although America’s private HEIs have a long history of charitable support, many of its public institutions haveonly built up significant endowments during the past two to three decades. According to annual voluntaryendowment surveys conducted by the National Association of College and University Business Officers(NACUBO):

■ A total of 39 public HEIs reported endowment funds totaling $1.5 billion in 1977.

■ Ten years later, 76 public HEIs reported endowment funds of $10.3 billion in 1987.

■ Another ten years later, 160 public HEIs reported endowments totaling $40.9 billion in 1997.

■ A decade later, 269 public HEIs reported endowment funds totaling $115.3 billion in 2007 (an average of$19,600 per full-time equivalent student).

Working at the margins, these funds have helped some public institutions to achieve world-class excellence.

II. Revenue Diversification through Philanthropic Support


1199

Exhibit 5

America’s independent (private) HEIs still raise more in the aggregate than its public institutions; as shownfrom the NACUBO survey responses6 in the exhibit that follows, there are nearly twice as many private insti-tutions as public institutions with endowments larger than $1 billion. But the key message from this chart isthe considerable number and size of public university endowments, many of which have experienced mostof their growth in the past two to three decades. In some cases endowments are held by the public univer-sity itself, and in other cases by institutionally related foundations that operate as legally separate fundrais-ing arms of the university.

Combined Endowment Values of Public HEI Respondents to NACUBO Endowment Surveys, 1977, 1987 - 2007

$1.5

$10.

3

$10.

7

$5.4 $1

0.3

$13.

8

$16.

1

$17.

7 $23.

0

$19.

1

$32.

4 $40.

9 $48.

6

$53.

1

$66.

3

$65.

2

$61.

2

$64.

4 $75.

2 $84.

6 $95.

1

$115

.3

$0

$20

$40

$60

$80

$100

$120

1977:39

HEIs

1987:76

HEIs

1988:85

HEIs

1989:83

HEIs

1990:96

HEIs

1991:109HEIs

1992:121HEIs

1993:131HEIs

1994:138HEIs

1995:138HEIs

1996:140HEIs

1997:160HEIs

1998:162HEIs

1999:157HEIs

2000:192HEIs

2001:198HEIs

2002:207HEIs

2003:230HEIs

2004:227HEIs

2005:231HEIs

2006:248HEIs

2007:269HEIs

Billi

ons

in E

ndow

men

t ($U

SD)

Note: $1 ≈ £0.5 in mid-2008.

6 It is important to note that the manner in which endowment funds are reported varies among America’s 50 states. Each state operatesmultiple public universities and campuses. Although most states report endowment data for each individual campus, other state universi-ty systems report their endowment data on an aggregated basis (i.e., as a single dollar amount for all campuses combined). For example,the University of Texas System operates nine campuses and six health institutions that are dispersed across thousands of square miles.Yet, separate endowment amounts are not reported for each campus; instead, a single endowment value of $15.6 billion was reported forthe system as a whole in 2007. Therefore, the system counts as only one institution among the 26 public institutions with endowments over$1 billion. Hypothetically, if endowment values could be attributed to individual campuses within the system, it is possible that the total num-ber of institutions in the US with endowments over $1 billion could increase. However, in other states that report smaller system-wideendowments (e.g., valued at just over $1 billion), the pro-rating of endowment values among individual campuses could potentially reducethe number of institutions with endowments over $1 billion.

Exhibit 6

Unlike the philanthropic trends witnessed in America’s public universities, individuals such as Vice-ChancellorAllison Richard of the University of Cambridge note that philanthropy has played little part in the finances ofmost UK universities during the same period, discouraged until recently by the tax laws in place and the notionthat ‘the state will provide’ (Acharaya and Dimson, 2007). The UK’s Task Force on Voluntary Giving to HigherEducation (2004) attributes differences in the amounts raised on opposite sides of the Atlantic to different cul-tures of giving, as well as a strong culture of asking in the US. As noted in the Task Force’s report, “Many pub-lic US universities came to professional fundraising in the 1970s and 1980s and have made significant gains inthe amounts raised. Leading UK institutions have adopted a professional approach more recently and there ismuch we can learn from the successes in the USA” (p. 6).

The Ross Group and the Council for the Advancement and Support of Education (2008) have noted that devel-opment offices are being established in many UK HEIs (although Universities UK has observed that there is con-siderable disparity in the capacity and structure of development offices among English universities). They alsoreported in 2005, along with the Sutton Trust in 2006, that fundraising among UK HEIs has grown in recent years,as evidenced by the raising of £350 million (≈ $636 million) reported by 75 institutions responding to the Ross-CASE 2004-05 survey, and another estimated £100 million (≈ $182 million) raised by other HEIs not participatingin the survey. On the other hand, the Sutton Trust noted that major fundraising activity is still the preserve of theacademic ‘philanthropic elite,’ as only 13 universities raised more than £5 million (≈ $9.1 million) that same year.The Trust observed that only Oxford and Cambridge compare with the more philanthropically successfulAmerican universities, raising £185 million (≈ $336 million) in 2004-05, holding endowments worth £6 billion(≈ $10.9 billion), and achieving alumni giving rates of 10%. The remaining HEIs in the UK control combinedendowments of £1.9 billion (≈ $3.5 billion), raised an average of £1.6 million (≈ $2.9 million) each, and have


2200

Endowments Assets of Public and Independent Respondents to NACUBO 2008 Survey

Endowment Assets

Greater than $1 Billion

> $500 Million to $1 Billion

> $100 Million to $500 Million



Less Than or Equal to $25 Million

Total

Public Independent Total

N

%

N

%

N

%

N

%

N

%

N

%

N

%

26 50 76

3.3 6.4

27 38

3.4 4.8

66 166

8.4 21.1

44 112

5.6 14.3

38 88

4.8 11.2

68 62

8.7 7.9

269 516

34.3 65.7

9.7

65

8.3

232

29.6

156

19.9

126

16.1

130

16.6

785

100


2211

annual alumni giving rates of approximately 1%. Hence, the report observes that the “UK’s higher educationsector lags significantly behind the US in terms of funds raised, alumni giving rates, and endowment levels”(p. 2). Yet, the report also concludes that additional progress is possible in the UK.

B. Alumni SupportThe Sutton Trust’s optimism is shared by Clark (2004), especially where alumni fundraising is concerned, whenhe states that

universities, nationally and internationally, can teach each other how to do it. Once alerted,a university can figure out (a) how to reach graduates at different levels of personal wealthby different means, (b) how to ask for backing of specific projects versus contributing to gen-eral funds, and (c) how to boost sustained results to new levels by occasional, well-timedfund-raising drives (p. 79-80).

US institutions, both public and private, have strong alumni giving programs. Some contributions are madetoward endowments where they are invested in perpetuity, while other gifts are made to support current oper-ating expenses and capital campaigns. In 2007, public four-year HEIs participating in an annual survey by theUS Council for Aid to Education (CAE) reported an average total alumni contribution of $7.9 million per institu-tion, and an alumni giving rate of 8.5% (CAE DataMiner, 2008). As might be expected, institutionsthat participated in an earlier CAE survey con-ducted in 1998 reported a lower average totalalumni contribution of just $0.5 million.Surprisingly, however, they reported a higheraverage giving rate of 12.3% in the earlier survey.This may indicate that the percentage of alumniwho are making contributions has decreased;alternatively, given the increase in total giving,the data might also be explained by the addition ofsurvey participants with newer, less establishedalumni fundraising programs, whose lower givingrates have lowered the survey’s average. Butregardless of the explanation, it should be notedthat many fundraising campaigns in the US get ahigh percentage of the total amount contributedeach year from a small percentage of verywealthy donors (The Chronicle of HigherEducation, July 18, 2008).7

Although the CAE survey is voluntary and doesnot include all public institutions, the response

7 A report on the Ross-CASE UK HE Sector Survey of Gift Revenue for 2004-05 found that “there is a higher degree of dependency on largegifts and especially the largest gift, which can make up a significant proportion of results.” Although the report noted that this is indicativeof underdeveloped fundraising activity and a weakness that increases risk, it is not altogether different from the experience in the US,though it may be different in degree.

The role of Intercollegiate Athletics,and the favorable tax treatment of gifts

Much of the individual giving to American collegesand universities comes from alumni loyalty that isoften sustained over time through highly visible col-lege athletic programs. It would be hard to over-state the amount of public enthusiasm forIntercollegiate Athletics in American culture.Although it is not a prerequisite for generatingalumni support, it is a major contributing factor atmany institutions.

Another factor is the favorable tax treatment ofcharitable donations in the US. Donors are permit-ted to deduct the full amount of charitable gifts fromtheir taxable income, before taxes are calculatedand paid.

Any benchmarking of US and UK alumni givingtrends need to take these factors into consideration.


2222

data is useful for analysis. The next two exhibits show the trend in the average total amount of alumni giftsreported by the CAE 2007 survey’s respondents, as well as their alumni giving rates.

Exhibit 7

Exhibit 8

According to the previously cited NACUBO survey, the total combination of contributions, bequests, and othergifts from individuals averaged $13.0 million per survey respondent in 2007. The survey also found that publicrespondents had an average rate of additions to their endowment investment pools of 24.3%.8 Of this amount,

Average Alumni Giving to Public 4-Year HEIs Responding to CAE Surveys, 1998 - 2007

$0$1,000,000$2,000,000$3,000,000$4,000,000$5,000,000$6,000,000$7,000,000$8,000,000$9,000,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Average Alumni Giving Rates to Public 4-Year HEIs Responding to CAE Surveys, 1998 - 2007

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


2233

individual gifts, bequests, and other types of support accounted for 6.4 percentage points (pp), while apprecia-tion and investment income accounted for 17.9 pp. Similarly, in the 2008 benchmarks study of educationalendowments published by the Commonfund Institute in the US, 62 participants from public systems of highereducation reported that an average of 82.9% of their endowment growth came from investment returns, and 126State Institution-Related Foundations (i.e., fundraising arms of public universities) reported that 68.3% of theirgrowth came from this source. Thus, most of the annual growth among mature endowments was not the resultof charitable contributions, but successful investment practices and favorable market trends.

Overall, public institutions responding to the NACUBO survey reported compounded nominal rates of return thataveraged 16.8% over one year, 11.9% over three years, 10.8% over five years, and 8.2% over 10 years (for enti-ties with fiscal years ending June 30, 2007). Their average annual spending rates averaged 4.5% for the preced-ing four consecutive years. Thus, while the total sum of endowed funds is often quite large, the percentage offunds spent each year is a small fraction of the total amount invested.

Moreover, an average of 79% of endowed funds among survey respondents was for “restricted” purposes,while only 21% was for unrestricted purposes. Thus, the amount of purely discretionary (unrestricted) fundsavailable to spend on an annualized basis might represent less than 1% of the endowment in some institutions.This helps to explain why an American vice president for institutional advancement recently observed that USuniversities need more unrestricted donations, but have not done a very good job in dealing with the impulse ofdonors to make restricted contributions, or the tendency of some development officers to take the easier pathof cultivating such gifts rather than making the more challenging case for flexible contributions. UK institutionscould benefit by learning from this facet of the American experience as they establish their own philanthropictraditions going forward.

C. “The Way Forward”England’s Department of Education and Skill’s 2003 White Paper on the Future of Higher Education made thefollowing observation:

The way forward is through endowment. This will ensure the sector is less dependent on anysingle source of funding, as well as enabling it to take advantage of new opportunities that theycould not otherwise afford. Endowment funds can be used, for example, to make financialinvestments; invest in new facilities, enabling universities to bid for research funds where theinfrastructure costs are not covered; pay for specific chairs or general academic posts; under-take research, and pay researchers competitively and create scholarship funds (p. 80).

That being said, it should also be acknowledged that endowments are no panacea. Their potential benefit toinstitutional finances can provide a strong incentive to begin the long journey of building them up – but a jour-ney it will be. Where alumni support of endowments, annual fund drives, and capital campaigns are concerned,it can take decades for a public institution to cultivate relationships9 with a large enough base of alumni sup-porters and other individuals who have acquired enough personal wealth to make major gifts (Johnstone,Arora, and Experton, 1998). Moreover, an alumnus’s first gift is usually not particularly large. As noted by theUK’s Task Force on Voluntary Giving to Higher Education (2004), research conducted by Target Analysis Group

8 Rates are based on a percentage of the average of the fiscal year beginning and ending market values, and are dollar-weighted.

9 Relationship-building, ongoing communications, alumni relations, and donor stewardship are some of the key elements that distinguishinstitutional “advancement” and “development” from other types of fundraising.


2244

at ten American HEIs found that nearly half of the donors who had given $10,000 or more originally gave lessthan $50 as their first gift. At the same universities, 85% of those making gifts of $10,000 or more for the first timehad made smaller gifts in six or more years since their first gift. Another rule of thumb heard in the industry isthat it is not until the 13th donation that a wealthy alumnus is likely to give £1 or $1 million.

As noted by the UK’s Task Force on Increasing Voluntary Giving to Higher Education (2004), “the investment inthe short-term can be significant for institutions and the returns can often only be realised in the medium andlong-term” (p. 51). Still, if the proverbial journey of a thousand miles begins with the first step, now may be thetime for those institutions that have not already done so to take it. The Government in England has recentlyintroduced a matching fund to encourage HEIs to increase their endowment income. Depending on the bandchosen, the Government (through the Higher Education Funding Council for England) will partly match theamounts raised by universities up to a maximum figure. This should encourage all institutions to expand theirdevelopment efforts.

The Sutton Trust’s 2003 report on University Endowments – A UK/US Comparison, outlines a roadmap of stepsthat can be taken. Suggested steps were also made by the Task Force on Increasing Voluntary Giving to HigherEducation in 2004. Suggestions have included:

■ Making charitable giving less complex, and looking to the US system where donations are deductiblefrom pre-tax income.

■ Developing a cultural shift in attitudes to charitable giving, which is 0.6% of GDP in the UK, comparedwith 2% in the US.

■ Being clear about who is being targeted by fundraising requests, and for what purpose (not justendowment, but current operating funds, scholarships, and capital needs).

■ Giving a higher priority to higher education fundraising through focused leadership of vice-chancel-lors and the recruitment and training of professional development officers.

This last point – the hiring of professional fundraisers – cannot be overstated in terms of the approaches takenby some American HEIs. According to a July 18, 2008 article in The Chronicle of Higher Education, the Universityof Washington (a public institution) had hired 64 new fundraisers since 2002, nearly doubling its staff, to raisegifts for a $2 billion campaign. During the past three years, the University of Chicago had increased its devel-opment staff approximately 50%, to more than 400 employees, as it completed a campaign of more than $2 bil-lion. Similarly, The Johns Hopkins University had hired 43 fundraisers in the past five years, increasing its staffby nearly 50%, and reportedly planned to add another 50 staff by 2012. Although these may be among the larg-er development staffs in American higher education, the point is that “talent is everything in this business”(Flessner, as cited in Masterson and Wolverton, July 18, 2008). There is no doubt that it takes money to raisemoney, and much of the money it takes is spent on professional development officers. However, it should benoted that they often work with dedicated volunteers who help with solicitations and special events. As notedby the Task Force on Increasing Voluntary Giving to Higher Education (2004), “well regarded and influential laypeople can make a significant difference in the effectiveness of alumni relations and fundraising” (p. 6).

The amount of money that US institutions spend on their development programs varies widely. Public systemparticipants in the 2008 Commonfund Benchmarks Study reported spending an average of just over $6 millioneach, in part because of their large alumni bases. Their related foundations (i.e., separately incorporatedfundraising arms) averaged approximately $2.5 million in fundraising expenditures. On a combined basis, pub-lic institutions and their foundations spent approximately $0.30 for every $1.00 raised from contributions.


2255

D. Managing ExpectationsFew scholars have laid out the challenges, advantages, limitations, and prerequisites of successful philanthropyin higher education as thoroughly as Bruce Johnstone, former chancellor of the State University of New York (apublic HE system), and also a former vice president of the University of Pennsylvania (a private HEI), as well asprofessor of higher and comparative education at the State College of Buffalo, where he also served as presi-dent. In an address he made at the 2004 International Conference on Higher Education in Luxembourg, Dr.Johnstone explained that there are limitations on endowments, even in the US:

For example, the great endowments and the high-yield annual giving are heavily concentratedin elite institutions, both public and private. For most institutions of higher education, philanthro-py is a struggle. Furthermore, even in those public and private institutions fortunate to havegreat success in philanthropy, both the annual endowment returns and the annual philanthrop-ic giving tend to be very small relative to the total budgets. (These sources are, of course, sig-nificant on the margins of growth; but the percentages of total recurrent budgets, even for suc-cessful philanthropic institutions remain quite small.) Additionally, both endowments and theannual giving are frequently restricted—and frequently not to operations that the institutionwould be vigorously pursuing in the absence of these restricted contributions. Finally, success-ful philanthropy is costly to begin with and cannot be “ramped up,” or increased, quickly (p. 3).

To quote him at further length, Johnstone concluded his address with the following seven advisory points forthose in the audience interested in building higher education endowments in their own countries:

1. Philanthropic support of higher education will be limited, uneven, and slow to develop.

2. At the same time, given the great and increasing divergence of higher educational costs from the likelytrajectory of governmental revenues some philanthropic support for higher education is increasinglynecessary, feasible and capable of making a difference.

3. Universities and other institutions of higher education need to cultivate alumni and friends—rather thansimply relying on the occasional philanthropic windfall of an enormously wealthy donor or a generousfoundation.

4. Universities need to be—and need also to be widely perceived to be—cost-effective and accountable ifthey are to present credible claims both for more tax revenue, for tuition fees from parents and students,and also for philanthropic contributions.

5. Governments may need to pursue revenue supplementation at all levels, including moderate tuition fees,in addition to hoping for increasing philanthropic support to bring some taxpayer relief to some stateowned universities and colleges.

6. Governments must push for increasing revenue supplementation without in fact using the revenue sup-plementation to supplant governmental revenue. In short, the revenue supplementation including tuitionfees and philanthropy must be, and be widely perceived to be, in addition to the bedrock of public andgovernmental support.

7. Governments must expect that philanthropic support will be unevenly distributed among institutions andlead institutions, and allow much of the consequent widening of financial fortunes—while at the sametime committing themselves to maintain some reasonable parity among the institutions and faculties thatare unerringly unequal with philanthropic potential (p. 5 – 6).

Johnstone’s observations are as timely now as they were when he first made them, and they may offer a sen-sible framework for managing expectations as the UK higher education sector further diversifies its revenuestreams with philanthropic funds.


2266

PPeennnnssyyllvvaanniiaa SSttaattee UUnniivveerrssiittyy ((UUSS))Pennsylvania State University (commonly known as “Penn State”) is a public research university com-prised of 24 campuses throughout the state (or commonwealth) of Pennsylvania. Total enrollment isapproximately 93,000 students, half of whom attend the main campus at University Park. As a “state-related” institution, Pennsylvania State University receives funding from the commonwealth, but alsorelies on the generosity of alumni, friends, foundations, corporations, and other donors to provide sup-port for current and future needs. In the 2006-07 fiscal year, the University received $190.3 million in phil-anthropic gifts, as follows:

■ $87.1 million from 134,761 individuals

■ $59.9 million from 5,579 corporations

■ $22.3 million from 445 foundations

■ $21.0 million from 2,732 other organizations

Gifts to Penn State have been made to a variety of funds and campaigns, such as the following examples:

■ EEnnddoowwmmeenntt ffuunnddss—both unrestricted and restricted gifts can be made in perpetual support ofprograms, lectureships, research, libraries, faculty, student aid, service and outreach.

■ TThhee AAnnnnuuaall FFuunndd—donors can designate gifts of immediate support for a particular campus,college, department or program.

■ FFoorr tthhee FFuuttuurree:: TThhee CCaammppaaiiggnn ffoorr PPeennnn SSttaattee SSttuuddeennttss—scholarships are the highest priority ofthis fund. The campaign began at the start of 2007 and raised $364 million in gifts and pledges inits first 12 months, including 65 gifts of $1 million or more, 11 of which exceeded $5 million.

■ TThhee RReennaaiissssaannccee FFuunndd—donors can support scholarships for students who are academicallytalented with the greatest financial need. In 2006-07, nearly $568,000 was awarded to 472 stu-dents, more than half of whom were the first in their family to attend university.

■ FFuuttuurree FFuunnddss aanndd TThhee PPrreessiiddeenntt’’ss CClluubb—donors can make unrestricted gifts that provide flexi-ble financial support.

■ The Investing in People Initiative (concluded in 2007)—donors contributed funds for scholar-ships, faculty endowments, college excellence, intercollegiate athletics, and a medial center.

■ The Grand Destiny capital campaign fund—donors contributed $1.37 billion to this fund between1996 and 2003.

■ The Faculty and Staff Campaign—this fund provides employees with an opportunity to enhancethe quality of the University’s programs.

Penn State’s endowment was initially established in the 1960s, but has grown dramatically in the past 15years, from $259.7 million in 1993 to $1.49 billion in 2008.

The following examples of philanthropic activities and related income illustrate some of the revenue diversifi-cation strategies used by Pennsylvania State University in the US, and the University of Bristol in the UK.


2277

UUnniivveerrssiittyy ooff BBrriissttooll ((UUKK))The University of Bristol’s academic affairs span 45 departments and 15 research centers arranged in sixfaculties. In 2007-08 the University enrolled 17,660 students (12,516 undergraduates and 5,144 postgradu-ates). Bristol conducts high-level research across a wide range of disciplines, and 78% of its depart-ments were judged as world class or internationally excellent in the UK’s 2001 Research AssessmentExercise (the most recent data available at the time of this writing).

The University of Bristol has approximately 350 endowment funds which had a combined value of nearly£47 million (≈ $94 million) on June 30, 2008. This reflects a 49% increase above the endowment funds’combined value of £31.4 million in 1998. Approximately 98% of the university’s endowment funds are des-ignated for specific purposes, and are tied to strategic initiatives, scholarships, professorships, and pro-grams. The university attributes the combined size of the endowments to two major considerations: (1)most of the university’s annual philanthropic income does not go to the endowment; instead, it goesdirectly to support recurrent and capital expenditures; (2) the university has used very conservativeinvestment strategies in order to preserve capital. Investment performance is reviewed by theUniversity’s Finance Committee, which oversees the selection of investment managers.

To help attract both designated and undesignated gifts, the University launched the Centenary Campaignin 2007 in anticipation of the University’s hundredth anniversary in 2009. The campaign’s goal is to raise

A significant portion of Penn State’s philanthropic support comes from its alumni. The University’s AlumniAssociation was established in 1870, and today it has 160,742 members, making it the largest dues-pay-ing alumni association in the US. Its mission is to connect alumni to the University and to each other, toprovide valued services to members, and to support the university’s mission of teaching, research, andservice. With its own professional staff, the Association resides within the University’s Division ofDevelopment and Alumni Relations; however, it is governed by an 86-member Alumni Council and elect-ed Executive Board. The Association is also tightly intertwined with Intercollegiate Athletics, whose pro-grams provide a strong element of social cohesion for the University’s alumni, who are dispersedthroughout the world.

Notably, Association members contribute 72% of all individual financial giving to the University (in 2006-07, the University received a total of $87.1 million in contributions from a total of 134,761 individuals).Moreover, grassroots efforts led by alumni help garner state support through legislative education andadvocacy. However, it is important to note that the Association is not simply a fundraising organization.It provides a broad range of services and benefits to its members that go well beyond homecomings andreunions, including educational and cultural events, free lecture series, travel opportunities includingmore than 30 tours, cruises and adventure excursions, special interest groups, volunteer opportunities,awards and recognition programs, career services and employment networks, retail discounts, andfinancial services.


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SSttuuddeennttss (goal of £35 million)

■ Annual Fund ■ Law library

■ Arts and Social Sciences Library ■ Sports: coaching, scholarships, community, facilities

■ Bristol ChemLabS ■ Students’ Union

■ Drama: Theatre Collection ■ Undergraduate and postgraduate support

■ Endowment

■ Equine/large animal surgical facility

RReesseeaarrcchh (goal of £51.2 million)

■ Academic excellence ■ Enterprise and innovation – inspiring and investing

■ Animal welfare in enterprising people

■ Bristol Institute for Public Affairs ■ Global change and sustainability

■ Bristol Heart Institute Cardiovascular ■ Bristol Institute of Greece, Rome and the Classical

Research Tradition

■ Endowment ■ Neuroscience

■ Energy ■ Quantum information

■ Stem cell research

CCoommmmuunniittyy (goal of £13.8 million)

■ Building Bristol ■ The engage university

■ Education ■ Endowment

CCaammppaaiiggnnss aanndd AAlluummnnii SSuuppppoorrtt

The University’s office of Campaigns and Alumni Relations is professionally staffed by a significant numberof employees with designated responsibilities in such areas as alumni relations, special events, publica-tions, reunions and convocations, annual giving, direct marketing, stewardship, annual giving, major gifts,research, trusts and foundations, website development, media relations, and database management. Theoffice’s Alumni and Friends programs includes Bristol Alumni Online, a membership website dedicated toalumni news, services, interests, reunions and special events.

£100 million by 2012. Campaign donors can provide undesignated support, or can designate their contribu-tion for one or more of the following giving opportunities:

xxxx

2299

A. Industry Sponsored Research & Development One of the ways in which entrepreneurial universities have diversified their funding is by engaging in contractedresearch sponsored by the commercial sector. The following chart shows that Higher Education Expenditures onR&D (HERD) funded by industry increased in both the UK and US from 1981 to 2006.

■ In the UK, it increased by 870%, from 45.8 to 444.5 million current Purchasing Power Parity dollars (PPP $).

■ In the US, it increased by 664%, from 314.0 to 2,400.1 million current PPP $.

Exhibit 9

Interestingly, the percentage of HERD financed by industry, as a subset of total HERD financed by all sources,has fluctuated over time. As shown in the next exhibit, it has decreased since about 2000, even though themonetary amount (shown in the previous exhibit) has shown a net increase since that time. So, while HERDfinancing streams from industry have increased in monetary terms, other HERD financing sources haveincreased even more in recent years.

III. Revenue Diversification throughIndustry Linkages

HERD Financed by Industry, 1981 - 2006 (US Higher Education Includes Public and Private Institutions)

Source: OECD Main Science & Technology Indicators

0

500

1,000

1,500

2,000

2,500

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Mill

ion

Curr

ent P

PP $

UK

US

Up 870%

Up 664%


3300

Exhibit 10

The proportional decrease in HERD financed by industry since about 2000 (shown in the preceding exhibit),appears to be roughly consistent with declines in the percentage of overall Gross Domestic Expenditure onR&D (GERD) financed by industry after 2000, as shown in the following exhibit (note: HERD is a subset of GERD).

Exhibit 11

Finally, as shown in the next exhibit, HERD financed by industry, as a percentage of total GERD financed by

industry, shows different patterns in the UK and US between 1981 and 2006.

■ In the UK, it fluctuated, but experienced a net increase from 0.9% to 2.8%.

■ In the US, it also fluctuated, and showed a slight net increase from 0.9% to 1.1%.

Percentage of Higher Education R&D Financed by Industry, 1981 - 2006Higher Education in the US includes public and private institutions.


0

1

2

3

4

5

6

7

8

9

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Perc

enta

ge

UKUS

Percentage of GERD Financed by Industry, 1981 - 2006


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Perc

enta

ge

UKUS


3311

Exhibit 12

Despite the net gains made from 1981 to 2006, the preceding exhibit also reveals that the more recent periodfrom 2000 to 2006 saw a slight decline in the UK higher education sector’s market share of GERD Financed byIndustry, and a leveling off in the market share held by the US sector. Different explanations for this more recenttrend may exist, but keeping in mind that these data reflect domestic spending, one possibility may be thatindustry has been off-shoring more of its R&D in recent years. As R&D becomes more mobile in the global mar-ketplace, HEIs in both nations will have to compete more aggressively with other nations to hold on to (orregain) market share.

While cost is always a factor when industry contracts out R&D, excellence is also a major consideration. Asnoted in the UK’s Lambert Review (2003), “although there is much good collaborative work underway already,there is more to be done. Universities will have to get better at identifying their areas of competitive strength inresearch. Government will have to do more to support business-university collaboration. Business will have tolearn how to exploit the innovative ideas that are being developed in the university sector” (p. 2). Universitiesand governments will also want to appreciate that industry will increasingly undertake applied research in themajor markets of the world and with the rising importance of Asia, the accessible research will reduce (Brown& Ternouth, 2006).

HERD Financed by Industry as a Percentage of GERD Financed by Industry, 1981 - 2006

(HERD is a subset of GERD)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Percentages calculated using million current PPP $

UK

US


3322

PPeennnnssyyllvvaanniiaa SSttaattee UUnniivveerrssiittyy ((UUSS))The University is ranked by the National Science Foundation as 13th overall among US universities inR&D expenditures. During 2006-07, the University’s research expenditures totaled $665 million, funded bythe following sources:

■ $375 million came from federal agencies, including the Department of Defense, EducationDepartment, and Department of Transportation, among others

■ $101 million was funded by the University itself

■ $100 million was funded by industry and other sources

■ $89 million came from the state

According to the Strategic Plan published by the Office of the Senior Vice President for Research, PennState has seen an increase in industry-sponsored research, ranking it third nationwide. Over the past fiveyears, Penn State has had an average of 849 unique industrial sponsors. The University’s IndustrialResearch Office is responsible for promoting industry-sponsored research, and in particular for helpingfaculty interface with corporations which have strong research interests. The Office markets theUniversity’s research capabilities to corporations, and facilitates long-term relationships and masteragreements. As of 2008, the Office has 22 active master industrial research agreements. The most exten-sive of these are considered Alliance Relationships, a recent example being the $17.5 million, five-yearagreement with the Chevron Corporation to conduct research on clean coal technology. Annually, theOffice of the Senior Vice President for Research manages the development and submission of approxi-mately $20 million of research proposals to state and federal agencies in partnership with industry. TheOffice of Sponsored Programs is responsible for negotiating many of the grants and contracts awarded.

To further encourage and support industry-sponsored research, Penn State launched Innovation Park, a118-acre parcel being developed to create an environment where University and business partners cancollaborate to take the research and technology resources developed at Penn State to market. To date,46 acres and 750,000 square feet of buildings have been developed, with another 150,000 square feetunder development. The Park has 60 tenants with approximately 1,200 employees in residence.Innovation Capital Partners, a private developer, has been retained to develop the rest of the Park.

The following examples of industry linkages and related income illustrate some of the revenue diversificationstrategies used by Pennsylvania State University and the University of Bristol.


3333

UUnniivveerrssiittyy ooff BBrriissttooll ((UUKK))The University’s Division of Research and Enterprise Development works with business and industry tohelp make Bristol a key player in the knowledge-driven economy. The University’s ResearchDevelopment Team works with academics to support research in a variety of ways:

■ TThhee RReesseeaarrcchh DDeevveellooppmmeenntt TTeeaamm provides expert advice and assistance for obtaining externalfunding for research. The team also acts as a contact point for funding agencies and partners,and has detailed knowledge of a wide range of funding issues. The team provides assistance tothe University community by:

● searching for specific opportunities

● pro-actively disseminating funding opportunities as they arise

● providing expert assistance on approaching industry

● co-ordinating interdisciplinary bids between departments/faculties

● delivering tailored workshops and training courses.

■ TThhee CCoonnttrraaccttss aanndd EEuurrooppeeaann TTeeaamm works with the academic community to obtain the best con-tractual and commercial basis for undertaking high quality research and consultancy. It isresponsible for reviewing the terms and conditions of research proposals and contracts, andproviding expert advice and assistance in the negotiation process.

■ TThhee PPrroojjeecctt MMaannaaggeemmeenntt TTeeaamm provides a flexible and responsive business development andproject management resource for the University and its research community, with the aim ofenhancing the University’s sustainability and its position as a leading research university. ItsProject Managers are engaged in a wide variety of tasks, including University-wide initiativesand secondment to specific faculties. Project Managers interact with senior management with-in both the University and externally. The team provides the following services:

● Supports academic departments in deriving business from their research base

● Provides the lead on project and program management elements of major academ-ic research projects

● Helps in the development and implementation of business plans and help academ-ics to implement best business practice

● Facilitates beneficial interactions with public and private partners

● Takes responsibility for aspects relating to commercial negotiation, contract man-agement, setting up and management of subcontracts, monitoring and control ofbudgets and securing of intellectual property

● Advises on University research strategy and policy


3344

B. Commercialization of Intellectual PropertyResearch contracted by industry is not the only source of revenue available to higher education from the “mar-ketplace.” Commercialization of intellectual property (IP) is another source (though in most cases a limitedone). In the U.S., such commercialization was the goal of the Bayh-Dole Act passed by Congress in 1980, whichmade it easier for HEIs to own and license patents on discoveries made through publicly-funded research. IPrelated income has also been generated through UK institutions of higher education. Indeed, HEIs in both coun-tries have expanded their funding base by:

■ receiving royalties for patents;

■ deriving proceeds from technology transfers;

■ taking equity positions in business start-ups; and

■ earning proceeds from commercial spin-offs.

This type of activity is monitored in the US by the Association of University Technology Managers (AUTM)through an annual Licensing Survey of research-intensive institutions10. In the UK it is monitored through theannual Higher Education-Business Community Interaction (HE-BCI) surveys managed by the Higher EducationFunding Council. It is also monitored in the UK through the University Commercialisation Surveys administeredby the University Companies Association (UNICO). Portions of these three surveys are relatively well aligned,so that certain comparisons can be made between the UK and US. For example, the next exhibit shows trendsin aggregate license/IP income11 received by US and UK university survey respondents from 1999 to 2006, asmeasured by the AUTM and HE-BCI surveys. In 2006, more than $1.2 billion in license/IP income was earned by159 US public and private universities that responded to the AUTM survey. However, only 28 of these institu-tions earned license income of more than $10 million. Another 52 universities earned between $1 million and $10million. Approximately half of the HEIs responding to the survey earned less than $1 million in license income in2006. So, even though the total amount of license income was significant across the nation as a whole, it pro-vided little or no financial benefit for most American HEIs.

10 The AUTM survey data in this study should be read in light of the following points:

■ AUTM survey respondents include not just universities, but also hospitals and research institutions. However, the AUTM data shownin Exhibits 13-14 - 10 is for the subset of university respondents only (both public and private).

■ AUTM survey respondents include fewer than 200 HEIs, or less than 10% of all US public and private universities. However, theseinstitutions have prominent research programs, and reflect a large share of HEI licensing activity in the US.

■ The AUTM survey data shown in Exhibits 13 - 14 have been extracted from AUTM’s Statistics Access for Tech Transfer database,known as STATT, which provides data at the institutional level. Total figures for this report have been calculated by adding each par-ticipating HEI respondent’s data, which are identifiable by institutional name. The totals presented in these exhibits may vary fromthe totals published in the printed AUTM Licensing Survey Full Report, since those are calculated by combining data from publiclyidentifiable survey respondents, with data from respondents that wish to remain anonymous.

11 AUTM’s measure of “licensed income received” includes running royalties, cashed-in equity, and all other types combined. HE-BCI’smeasure of “IP income” includes software licenses, non-software licenses, other income, and sales of shares in spin-offs.


3355

Exhibit 13

The next exhibit compares the number of licenses and options yielding income among US and UK surveyrespondents.

Exhibit 14

License/IP Income of US and UK University Survey Respondents, 1999-2006

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

$1,400,000,000

$1,600,000,000

$1,800,000,000

1999 2000 2001 2002 2003 2004 2005 2006£0

£10,000,000

£20,000,000

£30,000,000

£40,000,000

£50,000,000

£60,000,000

£70,000,000

US in Dollars (AUTM) UK in Pounds (HE-BCI)

US income increased 85%; UK income increased 201%.

Note: the number of institutions responding to they survey varies over time.

Number of Licenses & Options Yielding Income amongUK and US University Survey Respondents, 2001 - 2004

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2001 2002 2003 2004

US: AUTM

UK: UNICO

Note: the number of institutions responding to they survey varies over time.


3366

In a September 7, 2008 New York Times article entitled “When Academia Puts Profit Ahead of Wonder,” JanetRae-Dupree discusses the Bayh-Dole Act, and quotes Jennifer Washburn on the belief that universities couldsolve their financial problems through the commercialization of blockbuster inventions:

Ms. Washburn says that was “extremely wrong-headed.” Initially reacting to the law by slap-ping patents on every possible innovation, universities quickly discovered that patents werean expensive proposition. The fees and legal costs involved in obtaining a single patent canrun upward of $15,000 and that doesn’t count the salaries of administrative staff members.Instead of bringing home the bacon, university tech transfer offices were throwing moneyinto the void with little hope of returns. (p. 4)

These observations are consistent with those made five years earlier in the UK’s Lambert Review of 2003:

The experience of US universities demonstrates that technology transfer is not usually alarge revenue generator. A number of US universities started with that aim, but found itimpossible to make significant amounts of money and so changed their objectives. MIT,

According to the 2004 AUTM survey responses that included not just universities but also hospitals andresearch institutes (which are excluded from the preceding exhibit), 191 institutions reported a total of 27,322active licenses/options, but fewer than half of these (11,414) yielded income in fiscal year 2004, which totaled$1.385 billion nationwide. Only 167 licenses/options (just 0.6% of the total) generated more than $1 million eachin license income that year. These “mega-licenses” were held by 66 institutions, three of which held ten or moreof them. Such significant income-producing licenses accounted for 1.5% of all licenses/options yielding incomethat year.

Exhibit 15

Number of Licenses/Options Held by 191 AUTM Survey Respondents 2004

27,322

11,414

1670

5,000

10,000

15,000

20,000

25,000

30,000

Number of ActiveLicenses/Options

Number of Licenses/OptionsProducing Income

Number of Licenses/OptionsProducing More Than

$1 Million in 2004


3377

Stanford and Yale all now state that their main reason for engaging in technology transfer isto improve the public good – that is, to create the greatest possible economic and social ben-efits from their research, whether they accrue to the university or not.

Many UK universities are still seeking large financial returns, which is unrealistic and is like-ly to reduce the broader benefits of their research. Public funding for technology transferoffices in universities is not intended to generate large new revenue streams and the USexperience shows that it will rarely do so. Its main purpose is to enable universities to max-imise the wider impact of their research (p. 49).

While the above concerns certainly need to be taken into consideration, their existence does not mean that uni-versities should not bother pursuing IP-related income. Rather, it points to the need for realistic expectationsabout the potential revenues that can be generated, and to perhaps pursuing these revenues more selectively,while considering the wider range of commercialization activities that are available, such as collaborativeresearch."

C. CautionsIn addition to the preceding cautions concerning realistic expectations over patent and royalty income,additional considerations about industry linkages, including sponsored research, should also be kept in mind:

■ All institutions do not have the same ability to earn significant amounts of non-government income.Those with the greatest advantage tend to have strong math, science, technology, and engineeringprograms that can perform sponsored research (Thomas, 2001).

■ Much of the research sponsored by industry is applied rather than basic, and is performed with theintent of making a commercial profit, sooner rather than later. Thus, business and industry are not aslikely to fund long-term, exploratory, fundamental research.

■ Research sponsored by industry has the potential to introduce vested interests, as well as conflicts ofinterest, into the academy. Among the most frequently cited is the possibility of restrictions beingplaced on the dissemination of research findings in order to maximize private proprietary interests.

■ Entrepreneurial initiatives undertaken by HEIs have the potential to divert the faculty’s focus awayfrom the institution’s core activities, to those they might not otherwise pursue. Clark (2004) offers thiscaution: “Diversified income is absolutely essential… [but] a holistic approach is needed in whichacademic criteria dominate financial matters: finance should follow academic efforts, not viceversa” (p. 173).

The holistic approach mentioned by Clark includes the five institutional characteristics listed below. Althoughthey may not necessarily be prerequisites for financial sustainability at every institution, they are likely to beantecedents of adaptive capacity, and their absence from certain kinds of institutions may post obstacles tosustainability.

1. A diversified funding base (funding from government sources, other than core support; revenue from thebusiness and philanthropic sectors; and university-generated income).

2. A strengthened steering core (in European universities this is evidenced by central management groupsor centralized coordination, which can be adapted to traditional hierarchies as well as flatter organiza-tional structures).

3. An expanded outreach/developmental periphery (e.g., project-focused or problem-oriented, multi-disci-plinary centers linked to the “outside world”; also, diverse administrative offices tailored to support anever-evolving array of entrepreneurial activities).

4. A stimulated academic heartland (i.e., entrepreneurial activities are not limited to the STEM fields, butalso the humanities and social sciences, for example).

5. An integrated entrepreneurial culture (a system of beliefs, values, and deliberate activity that embodiesthe preceding four elements).


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A. UK MetricsAs noted by the UK’s Committee of University Chairs (2006), sustainability is not the same as survival; nor isit just a financial issue. It is also about investment in staff, innovation, and relationships. It also concerns‘adaptive capacity’ – a combination of leadership, quality of management, and acceptance of change. Thatbeing said, the lack of financial sustainability puts all other forms of sustainability at risk. Therefore, it is incum-bent upon each institution’s governing board and executive staff to carefully monitor the financial health andposition of their institution. A number of programs to help them do so are undertaken by both government andnon-government organizations in the UK, as described below.

1. Funding CouncilsThe UK’s higher education funding authorities have employed a variety of approaches to monitor the finan-cial health and sustainability of the institutions they support. Activities include institutional reviews, dataaudit reviews, annual accountability assessments, financial monitoring, risk assessments, and risk notifica-tions. HEIs submit financial statements, external audit management letters, internal audits, audit committeeannual reports, designated officer’s annual assurance returns, annual monitoring statements, andTransparency Review data returns that address the full economic costs of activities. They also preparestrategic plans and financial forecasts that include a discussion of planning assumptions and commentaryabout the steps taken to ensure that expenditures do not exceed income (taking one year with another). Awide range of financial indicators are used that pertain to income, surplus/(deficit), non-pay and pay expen-ditures, balance sheet data, cash flow statements, comparisons of prior year audited accounts with mostrecent estimates for the following year, capital financing, and variable fees. A cost benchmarking model hasalso been used, along with 18 indicators divided among four categories, including I&E performance, keyareas of balance sheet strength, income, expenditures, and unit costs. In 2007 a “single conversation” wasapproved as a new accountability process, with full implementation scheduled for 2008.

2. Research Base Funders’ Forum Trigger MetricsThe UK’s higher education institutions were notified in 2005 of arrangements established by the Funders’ Forumto monitor and evaluate the sustainability of the UK research base, using an ‘institutional framework towardsachieving long-term sustainability’ and a related set of ‘trigger metrics’ for research-intensive universities. Asexplained by the funding councils, the framework is essentially a narrative statement endorsed by each institu-tion’s governing body to describe how and why the leadership considers the institution to be on a sustainabletrajectory over the next decade. It requires institutions to consider four categories of key resources – money,people, equipment and buildings – and how these are planned and applied in a changing environment. Fourteentrigger metrics for monitoring these four resource areas are designed to help highlight any inconsistenciesbetween the direction and intended outcomes outlined in the framework and actual results. Although this ini-tiative is research-oriented, many of the metrics deal with the institution as a whole. It is expected that HEIs will

IV. Measures of Financial Sustainability


4400

be given comparative, anonymised sector averages to assist with inter-institutional benchmarking, and willhave the option of directly sharing and comparing their data with groups of comparator institutions.

3. CUC Performance IndicatorsAs part of a Governance Questionnaire conducted by the Committee of University Chairs (CUC) in 2006, institu-tions were asked if their governing bodies had adopted key performance indicators (KPIs). Only about half (51)of the respondents indicated that they had done so. The CUC subsequently published a Report on the Monitoringof Institutional Performance and the Use of Key Performance Indicators. It offers a set of KPIs organized acrossten categories (as shown in Exhibit 16), that are accompanied by a series of many different self-assessmentquestions and supporting performance indicators. Note that although category #6 pertains specifically to finan-cial heath, a number of financial indicators are included in several of the other categories as well.

Exhibit 16

Examples of some of the CUC model’s self-assessment questions and accompanying indicators are shown inthe tables that follow (take from the three categories of Institutional Sustainability, Financial Health, and Estatesand Infrastructure). It should be noted that unlike the "official" accountability measures used by funding agen-cies, the CUC's performance indicators reflect "good practice," and are not prescriptive or required.

CCUUCC HHiigghh LLeevveell IInnddiiccaattoorrss

TToopp--lleevveell ssuummmmaarryy iinnddiiccaattoorrss ((““ssuuppeerr KKPPIIss””))

1. Institutional sustainability

2. Academic profile and market position

TToopp--lleevveell iinnddiiccaattoorrss ooff iinnssttiittuuttiioonnaall hheeaalltthh

3. The student experience and teaching and learning

4. Research

5. Knowledge transfer and relationships

6. Financial health

7. Estates and infrastructure

8. Staff and human resource development

9. Governance, leadership and management

10. Institutional projects


4411

IInnssttiittuuttiioonnaall SSuussttaaiinnaabbiilliittyy

EExxaammpplleess ooff SSeellff--AAsssseessssmmeenntt QQuueessttiioonnss

■ Are we generating enough cash to allowstrategic investments and to manage risk anduncertainty?

■ Is our infrastructure fit for purpose and gener-ating a realistic return on past investment?

■ Are there threats to our viability (e.g. from ris-ing staff costs, buildings or utilities inflation,pensions liabilities, competitive pressures),and do we have convincing strategies for managing these?

EExxaammpplleess ooff PPeerrffoorrmmaannccee IInnddiiccaattoorrss

■ Return on assets – (CE/CP ratio: cost ofequity over cost of production)

■ Annual spend on infrastructure com-pared to agreed annual requirement

■ Income growth, diversity and security

■ Student demand, achievement and satisfaction

FFiinnaanncciiaall HHeeaalltthhEExxaammpplleess ooff SSeellff--AAsssseessssmmeenntt QQuueessttiioonnss

■ How financially strong is our institution and what arewe doing to maintain and enhance this?

■ What level of surplus do we need to generate on aconsistent basis to provide cash for investment andfinancial headroom to cope with contingencies?

■ How does our financial performance compare withthis? What are we doing to improve it if necessary?

■ How dependent are we on funding council grants?What, if anything, should we do to diversify oursources of income?

■ Do we have significant areas of loss-making activityin our portfolio? Are these justified? What, if anything,should we do about this?

■ How do we compare with the other institutions in ourpeer group in terms of high-level ratios such as CE/CPratio, income per academic, surplus/deficit, TRACestates and indirect cost rates for research, and theSubject FACTS (unit costs of teaching in each disci-pline by TRAC)?

■ Do we have an effective process for reviewing andmanaging financial risks? What are the (five) mostimportant financial risks facing the institution and how are we managing each of these?


■ Aggregate surplus/deficit forpast 3 years as % of income

■ Cash generated – last financialyear

■ Forecast surplus for next/currentfiscal year

■ Current assets to liabilities ratio(financial strength)

■ Liquidity (days expenditure avail-able as cash)

■ Borrowing as % of income(gearing)

■ Unfinanced capital investmentrequirement

■ Credit rating, quality of relationship with bankers and auditors


4422

B. US MetricsParticipation in various monitoring programs and the use of performance indicators can help UK universitiesaddress a wide range of accountability requirements, oversight functions, planning needs, and managementresponsibilities. For comparative purposes, HEI governing boards and executive staff may wish to refer to someof the approaches taken in the US to measure the financial health of HEIs. A number of publications provideinformation on the calculation and use of different financial ratios in American higher education, such as:

■ Strategic Financial Analysis for Higher Education, by Prager, Sealy & Co.; KPMG; and Bearing Point,2005 (available from the National Association of College and University Business Officers).

■ Managerial Analysis and Decision Support, published jointly by the National Association of Collegeand University Business Officers and the Association of Governing Boards, 2004.

■ The Small College Guide to Financial Health, by Michael Townsley, 2002.

■ Financial Responsibilities of Governing Boards, by William S. Reed, 2001.

■ Presentation and Analysis of Financial Management Information, by David Kenton, 2002.

EEssttaatteess aanndd IInnffrraassttrruuccttuurreeEExxaammpplleess ooff SSeellff--AAsssseessssmmeenntt QQuueessttiioonnss

■ Do we have the facilities needed to meet student expectations, attract high quality staff, and deliver ouracademic objectives?

■ Have we defined how much we need to invest annuallyfor a sustainable infrastructure, and are we doing this?

■ Do we have a ten-year capital investment strategy? Arewe satisfied with the business case for this expenditure;can we finance it; and will it deliver what we need to support our academic and student support requirements?

■ Are we utilising our assets effectively?

■ Are high-cost space and facilities intensively used forvalue-adding operations?

■ Are we duplicating facilities unnecessarily?

■ Do we collaborate where appropriate to reduce the cost of infrastructure?

■ How does our return on assets (shown by the CE/CP ratio) compare with our peer institutions?

■ Are we satisfied with the management of capital projects and the effectiveness of planned maintenanceprogrammes?

■ Is the total infrastructure bill, including utilities costs and efficiency, being managed effectively?


■ Maintenance condition and func-tional suitability of estate

■ Total cost of remedial investment

■ Utilisation – square metres perstudent

■ Return on assets: £ income persquare metre

■ Proportion of modernised teaching rooms

■ TRAC estates rates for researchcompared to peer institutions


4433

Perhaps the most comprehensive of these is Strategic Financial Analysis for Higher Education, which includesa “ratio map” of four high-level indicators, each of which is supplemented by several supporting ratios. Muchlike the approach taken by the CUC, the guidebook explains that the ratios are not the main focus; rather, theyare tools to help answer key questions of strategic financial importance. A cross-walk between the ratio mapand the CUC’s report on the use of performance indicators reveals some similarities; however, the map address-es just four self-assessment questions, and provides a way of combining the four strategic ratios into an option-al Composite Financial Index. UK institutions could conceivably explore a similar approach using relevant ratiosthat are already in use in the UK, or by “translating” US ratios using UK accounting standards and definitions.The map is shown here (without endorsement) for informational purposes:

Exhibit 17

PrimaryReserve

Ratio

ViabilityRatio

Return on Net Assets

Ratio

Net OperatingRevenues

Ratio

Composite Financial

Index

Debt Burden Ratio

Debt ServiceCove

Leverage Ratio

ShortLeve age Ratio

Secondary Reserve Ratio

CapitalizRatio

Financial Net Assets Ratio

Physical Net Assets Ratio

Physical Asset Reinvestment

Ratio

Age of Facilities Ratio

Facilities Burden Ratio

Facilities Mai tenance

Ratio

Deferred Mai tenance

Ratio

Cash Income Ratio

Contribution Ratios

Demand Ratios

age Ratio

Term

tion

Are resources, including debt,

managed strategically to

advance the mission?

Are resources sufficient and

flexible enough to support the

mission?

Does asset performance

and management support the

strategic direction?

Do operating results indicate the institution is

living with available

resources?

Source: Prager, Sealy & Co.; KPMG; and Bearing Point (2006). Strategic Financial Analysis for Higher Education.

ar

r

n

n

-

Financial Ratio Map (for US Institutions)

Each of the Ratio Map’s four self-assessment questions are reiterated below, followed by a conceptual descrip-tion or formula for each corresponding strategic ratio and supporting ratios.

11.. AArree rreessoouurrcceess ssuuffffiicciieenntt aanndd fflleexxiibbllee eennoouugghh ttoo ssuuppppoorrtt tthhee iinnssttiittuuttiioonn’’ss mmiissssiioonn??

Strategic Ratio

■ Primary reserve ratio: Measures financial strength by comparing expendable net assets to totalexpenses. Indicates how long the institution could operate using its expendable reserves without newrevenue.

Supporting Ratios

■ Secondary reserve ratio: Compares nonexpendable (permanently restricted) net assets to totalexpenses.

■ Capitalization ratio: Compares modified net assets to modified total assets.

22.. AArree rreessoouurrcceess,, iinncclluuddiinngg ddeebbtt,, mmaannaaggeedd ssttrraatteeggiiccaallllyy ttoo aaddvvaannccee tthhee iinnssttiittuuttiioonn’’ss mmiissssiioonn??

Strategic Ratio

■ Viability ratio: Compares expendable net assets to long-term project-related debt.

Supporting Ratios

■ Debt burden ratio: Compares debt service to adjusted expenses.

■ Debt service coverage ratio: Compares the excess of income over adjusted expenses to debt service.

■ Leverage ratio: Compares the combination of total net assets less nonexpendable net assets plus theavailable net assets of component organizations that support the institution, to long-term debt (totalproject-related debt).

■ Short-term leverage ratio: Compares nonproject debt and similar obligations to the combination ofcash, cash equivalents, and short-term investments.

33.. DDooeess tthhee ppeerrffoorrmmaannccee && mmaannaaggeemmeenntt ooff aasssseettss ssuuppppoorrtt tthhee iinnssttiittuuttiioonn’’ss ssttrraatteeggiicc ddiirreeccttiioonn??

Strategic Ratio

■ Return on net assets ratio: Compares the change in net assets to total net assets.

Supporting Ratios

■ Financial net assets ratio: Measures the percentage of financial net assets to total net assets.Complements the physical net assets ratio.

■ Physical net assets ratio: Measures the percentage of net assets an institution has invested in itsphysical plant. Complements the financial net assets ratio.

■ Physical asset reinvestment ratio: Calculates the extent to which capital renewal is occurring (repre-sented as capital expenditures and gifts) compared with physical asset usage (represented as depre-ciation expense).

■ Age of facilities ratio: Measures the average age of total plant facilities by measuring the relationshipof current depreciation to total depreciation (i.e., accumulated depreciation compared to depreciationexpense).


4444


4455

■ Facilities burden ratio: Compares the comprehensive cost of facilities investments on the institutionalbudget. Calculated by comparing the sum of depreciation expense plus interest expense plus plantoperations and maintenance expense to capital assets, net plus property, plant and equipment, net ofsupporting organizations.

■ Facilities maintenance ratio: Compares operations and maintenance of plant to revenues.

■ Deferred maintenance ratio: Compares outstanding maintenance requirements to expendable netassets.

44.. DDoo ooppeerraattiinngg rreessuullttss iinnddiiccaattee tthhee iinnssttiittuuttiioonn iiss lliivviinngg wwiitthh aavvaaiillaabbllee rreessoouurrcceess??

Strategic Ratio

■ Net operating revenues ratio: Measures the surplus or deficit from operations.

Supporting Ratios

■ Cash income ratio: Measures the portion of revenue represented by cash flow.

■ Contribution ratios: Compares each source of revenue to total expenses.

■ Demand ratios: Measures the extent to which each type of expense is consuming operating revenues.

CCoommppoossiittee FFiinnaanncciiaall IInnddeexx

One of the interesting features of the Ratio Map is that the four strategic ratios can be combined to calculatean overall measure of an institution’s financial health, known as the Composite Financial Index (CFI), using thefollowing four steps:

1. Compute each of the four core ratios (as previously described).

2. Convert each ratio into a strength factor along a common scale.

3. Multiply each strength factor by a weighting factor.

4. Sum the four weighted values to arrive at the CFI score.

These steps are described in more detail as follows: once the strategic ratios are calculated in step #1, thesecond step is to convert them into strength factors on a common scale. For practical purposes, the scaleranges from a low of – 1 to a high of +10. (Although strength factors above this range are possible, the authorsrecommend that they be capped at 10.) To convert each ratio into a scaled strength factor, it is divided by thecorresponding denominator indicated below:

■ The primary reserve ratio is divided by 0.133x

■ The net operating revenue ratio is divided by 1.3% or 0.7%, depending on the way the institution calculates the ratio

■ The return on net assets ratio is divided by 2.0%

■ The viability ratio is divided by 0.417x

These four converted strength factors are not given equal value when they are summed to calculate the CFI.Instead, step #3 requires that they must first be multiplied by a corresponding weighting factor. As the authorsexplain:

In a “normalized” institution, the suggested weighting would be more heavily skewed towardmeasurement of retained wealth and less toward current operations. The principal reason forthis is the belief that retained wealth and strategic use of debt are stronger indicators of long-term institutional financial health than measures depending on a single year’s performance(p. 98-99).

The authors go on to explain that the appropriate weighting of the ratios is influenced by whether or not aninstitution has long-term debt, with the respective weightings as follows:

Once the four strength factors are multiplied by their respective weightings, they are summed to arrive at theCFI score. Again, scores are designed to fall within a range of –1 to +10. A score of 3 is considered the thresh-old for a relatively stronger financial position (scores below 3 are weaker, and scores above 3 are stronger).Although CFI scores are open to interpretation depending on local context and non-financial considerations,the authors have identified actions that an institution might take in response to its score. However, it is impor-tant to note that there is no absolute precision between any given score and an associated response, and thereis a necessary degree of overlap among score ranges and associated responses, as follows:

■ Scores of –1 to +1: consider assessing the institution’s viability to survive.

■ Scores of 0 to 3: consider re-engineering the institution.

■ Scores of 2 to 5: consider directing institutional resources to allow transformation.

■ Scores of 4 to 7: consider directing resources to compete in future state.

■ Scores of 6 to 9: consider experimenting with new initiatives.

■ Scores of 7 to 10: consider deploying resources to achieve a robust mission.

The Index’s creators describe two of the CFI score’s intended benefits, as follows:

First, by blending the four key measures of financial health into a single number, a more bal-anced view of the state of the institution’s finances is possible because a weakness in onemeasure may be offset by the strength of another measure. Second, by using the same crite-ria to determine the CFI over a period of time, the board and management are given theopportunity to measure the overall financial progress that it is making (p. 94).


4466

RRaattiioo IInnssttiittuuttiioonn wwiitthh lloonngg--tteerrmm ddeebbtt IInnssttiittuuttiioonn wwiitthhoouutt lloonngg--tteerrmm ddeebbtt

Primary reserve ratio 35% 55%

Net operating revenues ratio 10% 15%

Return on net assets ratio 20% 30%

Viability ratio 35% -

Although the individual ratios used to calculate the CFI are useful for comparative benchmarking with otherinstitutions, the CFI itself is limited in this respect, because it involves a greater number and possible configu-ration of variables that would make it difficult to determine the reasons for similarities or differences when com-paring different CFIs.

As noted by the authors, financial ratio analysis, when used as one part of a broader approach to overall strate-gic analysis, can help institutions make financial decisions needed to achieve their mission. These can include:

■ Aligning operating and capital budgets with mission and strategic plan goals

■ Determining resource allocation, sufficiency, flexibility and management

■ Achieving balance between financial and physical assets

■ Integrating capital and operating budgets and facilities planning

■ Investing funds for current versus future students, faculty and other constituents

■ Evaluating return on assets deployed

■ Identifying and communicating sources and uses of funds

■ Integrating financial policies, such as investment, cash management and debt management policies (p. 2)

As universities in the US and UK work to secure their long-term sustainability, financial monitoring strategiessuch as the examples profiled here may be able to help governing boards and executives establish financialgoals, measure progress, evaluate results, and incorporate data analysis into their strategic decision-mak-ing. To go a step further, they can even benchmark their financial circumstances and trends with those ofcomparator institutions. But more than that, they can share information about “what works” in the areas pre-viously discussed in this report, such as alumni relations, philanthropic support of endowments, industry-sponsored R&D, commercialization of intellectual property, and other strategies to diversify revenues. Suchsharing of “best practices” can help to ensure the sustainability of individual institutions and the higher edu-cation sector as a whole.


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Tertiary education expenditure per student in 2004. (UK data excludes students in further

education institutions, which account for less than 10% of all students at the tertiary level.

US data includes 2-year, 4-year, public, and private institutions.)a $11,484 $22,476

Total higher education expenditure as a percentage of GDP in 2004a 1.12% 2.91%

• HE expenditures for core services as a percentage of GDP in 2004a 0.85% 2.34%

• HE expenditures for ancillary services (transport, meals, housing provided by

institutions) in as a percentage of GDP 2004a -- 0.23%

• HE expenditures for R&D in as a percentage of GDP 2004a 0.26 0.34%

Public direct expenditure on higher education as a percentage of GDP in 2003 0.8% 1.2%

Distribution of total expenditure on tertiary educational institutions from public and

private sources, 2004

• Capital expendituresa 5.0% 12.4%

• Current expendituresa 95.0% 87.5%

• Current – teacher compensationa 30.7% 26.0%

• Current – other staff compensationa 24.4% 32.3%

• Current – othera 39.9% 29.3%

Primary/secondary education expenditure per student in 2003b $6,800 $8,900

Primary/secondary education expenditure as a percentage of GDP in 2003b 4.6% 4.1%

Beginning age of universal enrollment in childhood educationb Age 4 Age 6

Typical duration of bachelor degree programsb 3-4 years 4 years

Typical duration of masters degree programsb 1+ years 2 years

Typical duration of doctoral programsb 3 years 3-4 years

Percentage of population aged 25-64 that completed higher education as of 2004b 29% 39%

Percentage of population aged 25-34 that completed higher education as of 2004b 35% 42%

Students participating in formal education ages 20 – 29 in 2005a 29.0% 23.1%

Percentage of country’s higher education students comprised of foreign students in 2004b 16.2% 3.4%

Appendix

UNITED UNITEDKINGDOM STATES

INDICATOR

Comparative Indicators of the UK and US Education Sectors


5522

Country’s global share of foreign students coming into the country, reported to the

OECD, 2005a 12% 22%

Percentage of university degrees awarded in science, math, and engineering in 2004b 27% 17%

Percentage of population aged 25-64 with higher education earning more than median

income in 2004b 77.9% 69.2%

Total enrollment in public and private higher education institutions in 2006 (US)c -- 18,205,474

Undergraduate and graduate enrollment in UK HEIs in 2006-07, or enrollment in

US public four-year and two-year HEIs combinedf, d 2,362,815 13,281,664

Enrollment in private, not-for-profit institutions in 2006 (US)c -- 3,543,455

Enrollment in private, for-profit institutions in 2006 (US)c -- 1,380,355

Number of public HEIs in 2006-07 enrolling undergraduates or highter (UK)e 169 --

Number of other higher education institutions in 2004 (UK)e 55 --

Number of public four-year degree granting institutions in 2007 (US)c -- 667

Number of private not-for-profit four-year institutions in 2007 (US)c -- 1,530

Number of private for-profit four-year degree granting institutions in 2007 (US)c -- 452

Number of public two-year degree granting institutions in 2007 (US)c -- 1,045

Number of private not-for-profit two-year degree granting institutions in 2007 (US)c -- 107

Number of private for-profit two-year degree granting institutions in 2007 (US)c -- 528

UNITED UNITEDKINGDOM STATES

Sources: a Organization for Economic Cooperation and Development, 2007b Miller, Sen & Malley, 2007c Knapp, Kelly-Reid, Ginder & Miller, 2008d National Center for Education Statisticse Higher Education Funding Council for Englandf Higher Education Statistics Agency, 2008b

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Higher Ed Finance in UK & US

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