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  • 1.  Continuing the capital analysis - Economic capital impact

    Posted 07-22-2020 01:46:00 PM

    In previous essays, Rick, Munir and I addressed three types of capital - human, social, and natural, impacted by the Covid-19 pandemic. This essay describes the fourth (of six), which is economic capital, characterized as, "financial, physical, and manufactured resources." 

    On the positive side, our institution's financial resources include endowments, the income from those endowments, student tuition and fees, gate receipts and television royalties from sporting events, monies acquired through bond issuances, revenues from on campus services, facility rentals, apparel sales, and so on. For public institutions we add in ever more modest appropriations from the state. Physical capital includes instructional and administrative structures, labs, student centers, climbing walls, lazy rivers, libraries, museums, concert halls, dorms, athletic fields and facilities, transportation systems, facilities & grounds equipment and so on.  

    But the University also faces significant costs, many of which are fixed or close to fixed. Interest payments on bonds used to pay for parking structures, dorms, stadiums, or classroom buildings do not go away. Multi-year, multi-million dollar contracts for football and basketball coaches too are inescapable as might be multi-year commitments to air carriers and hotel chains for transport and accommodation of our teams.  While faculty costs are more flexible, both tenure constraints and research reputation make universities reluctant, but, to eliminate research faculty while, less expensive, and less contractually inflexible, adjunct faculty are key to necessary to garner tuition dollars from students, particularly the large undergraduate pool found in most universities.

    Our leaders find themselves facing massive budget shortfalls, as well as required unanticipated expenditures for pandemic mandated PPE and classroom modifications. They also have been required to return dormitory and fee money from last semester, while facing student and parent expectations for lower tuition bills should on-campus classes be unworkable. There is also the risk students will choose less expensive alternatives, should those reductions not be forthcoming.

    These financial pains are most apparent for private institutions with modest endowments, many of which, at least in the U.S., were already facing budget shortfalls from a decline in college-age undergraduates and the need to make more scholarship money available to attract students. Moreover, as the institution's revenue sources shrink and become less diverse, capital will become more expensive to borrow, thus likely leading to further budget cuts.

    Larger institutions, particularly those significantly dependent on sports revenues, are also at risk. A university's long-standing investment in athletics is a common sore point with many members of faculty who view the money, which today is only draining out, to be an unbearable, even unconscionable, burden.  For the senior administration, however, that investment in sports, particularly men's football and basketball, has in the past paid, and hopefully will again pay, huge dividends. These are not just the gate and TV royalties, but the pride, and donations, of alumni. These teams and sporting events also help build the school's brand, which translates into more applicants as well as enhancing the school's attractiveness to prospective faculty and campus recruiters. Therefore, despite faculty push back, university presidents, for sound financial reasons, will continue to pursue entry into more respected, and more remunerative, leagues. Only now, and facing massive shortfalls, are some presidents seriously considering eliminating some, low revenue-producing, sports programs.  Many are being forced to cancel or push forward their fall football seasons while temporarily shelving other programs.

    State supported institutions may appear to be in a more advantageous position as the state is assumed to be backing up their bonds and supplementing tuition. Unfortunately, many states face major budget shortfalls with some potentially facing bankruptcy. Texas, for instance just reported a very tentative $4.6B budget deficit for the year, driven not only by the pandemic, but also by falling tax revenues from oil and gas. Some states, perhaps in the hopes of obtaining greater support from the U.S. federal government, reopened too early, while simultaneously putting pressure on university presidents to reopen their classrooms. Opening the state too early, has proved to be both a health and economic disaster, which could very well be repeated in a few weeks with the start of classes in the U.S.

    The economic pain extends to the hundreds of staff who work at our universities in services including food, security, maintenance, transportation, administrative support, and so on.  In addition many communities are dependent on their resident colleges and universities for the livelihood of many of their citizens.  If a small liberal arts school or regional university goes under, the town will suffer.

    Students too are facing financial hardships, with some choosing to take a gap year, settling on a less expensive educational alternative, or foregoing higher education.

    As an educational institution's physical assets - its classrooms, parking structures, and athletic facilities - are transformed by the pandemic from assets to liabilities, the future of that institution becomes more doubtful. Those physical assets have been, along with the associated human and social capital that leveraged them, a defensive moat protecting colleges and universities from far less expensive online educational alternatives. Moreover, as higher educational institutions continue to seek out lower cost alternatives for educating students (e.g., Coursera, EdX), we are endorsing the digitally delivered and enhanced pedagogical offerings of still other new entrants. Turning towards certificates, badges, and skill-based education further erodes another defensive moat - the diploma!

    We do have assets that are inimitable, immutable and therefore sustaining. Among these are our intellectual property, our brands, our world-class scholars, and our alumni. For many institutions, this latter group, the alumni and other external stakeholders, are seen primarily as a source for endowments. But in a virtual world, they are assets we can quickly and almost effortlessly summon from throughout the world into virtual classrooms, advisory boards, and mentoring opportunities. Today, with our economic capital at risk, this might be a ripe opportunity to harness this rich inventory of human and social capital to the construction of a new competitive moat. Let's build a bigger tent!  (Or, maybe, as an innovative Rice University is doing, five of them.)



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    Blake Ives
    bives@mac.com
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  • 2.  RE: Continuing the capital analysis - Economic capital impact

    Posted 07-23-2020 12:13:00 PM
    I recall arguing in the past that many institutions of higher education were making two Faustian Bargains: NCAA Sports and Sponsored and Funded Research. Both are ancillary to the central mission of educating students. Both require "eternal vigilance" on the part of presidents and administrators. They can consume large amounts of an institution's budget and demand constant attention on the part of administrators. Yet, both if managed well yield substantial benefits for the institution.  How effectively they are conducted affects an institution's reputation. The pandemic is upsetting the way athletics and sponsored research are being managed, mostly negatively at this time.

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    Richard Mason
    PROFESSOR EMERTIUS
    Southern Methodist University
    Durango TX
    970 2470252
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