Beyond the Noise: The Case for Capitol Capital Budgeting

Dear Colleagues –

This newsletter comes on the heels of the Biden Administration’s $109 billion proposal for free community college, which includes $62 billion in direct institutional aid to improve student outcomes at colleges serving large numbers of Pell eligible students. The amount of recent and contemplated federal spending is truly unprecedented, but may also prove to be an unreliable antidote to the market forces that have been weighing on post-secondary institutions for far longer. As the short-term crisis of the pandemic subsides and institutional focus returns to long-term strategic challenges, we believe the current moment is one for careful reflection. One-time financial windfalls paired with thoughtful strategic decisions could create meaningful inflection points for institutional growth.

The Case for Capitol Capital Budgeting

Over the past 12 months, the federal government has directed an unprecedented amount of money — nearly $75 billion — to U.S. higher education institutions and their students. More than 50% of this amount was distributed directly to students based on need. The data on this distribution is incomplete, but if 6.7 million Pell grant recipients is a fair proxy, these students have or will receive more than $5,500 each.

Coronavirus Relief for Higher Education

Source: American Council on Education

The most recent tranche of payments (more than half of the total amount) is headed to schools as the result of the American Rescue Plan passed last month. The funds, 50% of which are again directed to students, are intended to defray the cost of the pandemic, including coronavirus testing, specialized infrastructure such as tents and plexiglass and various technologies that have facilitated remote instruction. Even more than the prior two plans, the new funds are directed very specifically toward high-Pell and minority-serving institutions.

As the table below suggests, based on estimates made by the American Council on Education (ACE), the import of the funds varies dramatically by institution for both the schools and the students. For well-resourced institutions, the funds, while surely welcome, do not represent a meaningful part of their total budgets and the student benefits represent a relatively smaller percent of student fees (though reduced fees for high need students could balance this picture somewhat). But for high-Pell and minority-serving institutions, the dollars represent a much more meaningful intervention that should be well considered by leaders of these schools.

American Rescue Plan Impact on Selected Higher Education Institutions

Source: IPEDS, American Council on Education (ACE)

Yet reporting suggests that schools’ intentions for the funds vary widely, with some planning to inject the relief funds into general operating budgets, while others expect to distribute all of the extra money directly to students. Seen another way, most schools have already absorbed the bulk of the costs associated with adjusting to the pandemic and the new round of extraordinary funding truly is extraordinary.

But while the temptation to use the funds for any manner of deferred maintenance or other long-postponed operational projects is high, we believe this would be a strategic error. For many institutions these funds represent a once-in-a-lifetime opportunity to undertake fundamental and transformative actions that can, at the risk of seeming over-dramatic, guarantee their long-term survival.

For some, this very likely represents a bigger investment in serving adult students, including an overhaul of their online delivery capabilities, including course design, infrastructure, or marketing to new online-only students. For others, it could be the implementation of new technologies, practices, and capacities to improve enrollment and persistence. Other institutions could choose to use the funds to create programs that better integrate academic offerings with relevant employers, creating new talent pipelines, and employer partnerships such as internships and apprenticeships. Other schools might use the funds to launch alternative financing models such as ISA programs that offer the promise to improve student access and end reliance on student and parent borrowing. And for some schools, the most strategically prudent action could be to use the funds to restructure their programmatic offerings more fundamentally up to and including combining with another complementary institution.

If the first two tranches of funds were lifelines through a difficult pandemic year, the third and largest tranche represents a real opportunity to enact fundamental and transformative change that should not be missed among the noise of short-term operating pressures and priorities.