This is the second of a three-part series on changes at St. Thomas, with stories in this edition examining the university’s finances. In the fall, we will write about access and affordability. Last winter, we wrote about major issues facing the university and profiled 12 people on why they chose St. Thomas as a place to learn, teach, work and volunteer.
The headlines are not encouraging these days when it comes to higher-education finances.
“A year of treading water?” asked a headline atop a four-page special report in a January issue of the Chronicle of Higher Education. Secondary headlines were bleaker: “Health-care costs: The pain continues,” “Debt: More borrowing expected” and “Facilities: Construction prices will get higher yet.” The most-positive headline? “Tuition: Some increases slow down, but concerns linger.”
The stories talked about inexorable increases, many in double digits, in just about everything a college or university pays for these days. Those translate into tuition increases twice the Consumer Price Index, efforts to raise more funds and identify new revenue-generating ideas, and requests to hold the line on spending.
“Colleges have the bricks-and-mortar costs of a retail chain, the labor expenses of an airline, the high-skilled employee costs of a law firm, and the rebate costs of American car manufacturers,” says “How Much is Too Much?” a story in the Oct. 21 issue of the Chronicle of Higher Education. “Underlying all that are demanding customers who want expensive nonacademic amenities: apartment-like dormitories, top-of-the-line fitness facilities, and palatial student centers.”
Depressing? It all depends on your perspective. Dr. Charles Keffer has been involved in setting and overseeing budgets at St. Thomas for more than three decades, and he finds every year to be a challenge in some respect.
“We always are balancing requests with resources, and one never can have enough resources!” said Keffer, who retired as provost in 1998 and has served as assistant to Dr. Mark Dienhart, executive vice president and chief administrative officer, since 2003. “One difference is that expectations of people – students, parents, faculty and staff – are at a higher level.”
Dienhart agrees. The 1975 alumnus, who never paid more than $2,250 a year in tuition, finds that many prospective students who face tuition bills 10 times higher end up viewing the choice of a college “as a commodities purchase.”
“It’s different from back in the 1950s, when a lot of kids went to a certain college because Dad or Uncle Louie went there,” Dienhart said. “Colleges and universities like St. Thomas are enrollment-driven. There is an escalation in competition for students, and financial aid is an important marketing tool. Some students may look at everything and say, ‘Well, St. Thomas is a good place, but if I get a better financial aid package from another school of comparable reputation, I’ll just go there.’ ”
Most schools, except those with large endowments and small student populations, are tuition-driven. St. Thomas clearly is in that camp, deriving 63 percent of its operating revenue from tuition. While the university’s endowment of $271 million ranks No. 4 in Minnesota and No. 9 among Catholic institutions in the United States, the per-student endowment of $33,620 is in the middle of the pack.
Keffer has seen other changes since he arrived on campus in 1973, when St. Thomas was a mostly all-male liberal arts college with only one graduate program (in education). Decisions to admit women as undergraduate students, develop more graduate programs and add a campus in downtown Minneapolis helped St. Thomas evolve into a comprehensive regional university.
“The nature of the institution has changed,” he said. “We are still a teaching university, but we emphasize research more, and we’re getting more students involved in that research. That’s positive, but it brings a greater need for space, equipment and workload adjustments for faculty.”
Enrollment growth – the number of students nearly tripled in just 15 years, from 3,650 in 1976 to 10,156 in 1991 – led to pressure on facilities. Murray Hall and O’Shaughnessy Library underwent expansions in 1989 and 1991, and the Frey Science and Engineering Center opened in 1997. It replaced Albertus Magnus Hall as home for the sciences, with 2.5 times as much space. The development of the Minneapolis campus (four buildings in 13 years, including a law school) and two apartment-style residence halls in St. Paul also changed St. Thomas.
All of those buildings cost money – to build and to operate. While most of the capital costs have been covered by gifts or, in the case of residence halls, new revenue, St. Thomas still has increased its debt in the last decade from $73 million to $163 million. Principle and interest expenses will have doubled from $6.8 million in 1998 to a projected $13.6 million in 2006-2007.
As significant as those expenses are, the biggest budget change over the last 25 years has been increases in financial aid for undergraduate students.
In 1980-81, for example, St. Thomas’ tuition “discount” was 12 percent, meaning that for every $100 in tuition, $12 was awarded to students eligible for financial aid. The discount rate steadily increased and last year eclipsed 30 percent – or $29 million of $96.3 million in undergraduate tuition revenue. The discount rate is expected to climb to 36 percent by 2010.
Some observers decry tuition discounting, but admissions officers say it is absolutely necessary to attract students. Those who balance the books point out that discounting can be a good investment – spend $1 in financial aid to put $2 in the till, as long as that $2 helps pay the bills.
“Sure, I wish the percentage of financial aid related to tuition could be lower,” Dienhart said, “but it’s a fact of life for now.” He wants St. Thomas to raise more endowment for financial aid, with proceeds funding a larger share of financial aid. That would reduce the reliance on institutional funds and could lead to a leveling off – if not a decrease – in discounting.
Financial aid concerns aside, budget managers still struggle with red ink because of the impact of the so-called “Higher Education CPI.” A university is heavily labor intensive, with low ratios on quality measures such as small class sizes and higher-than-normal cost structures for buildings, technology and public safety. Running a campus has been compared to governing a small town because students are present 24 hours a day and need housing, food, security, a computer network and many other services.
Here are six other budget-sensitive areas:
Compensation – St. Thomas strives to match the CPI with annual salary and wage increases, although most employees received only a 2 percent increase this year after a $500 across-the-board increase in 2004-2005. The compensation pool will increase 3 percent in September. If budget projections are met, the goal is for subsequent increases of 3.5, 4 and 4.5 percent.
Health care costs – Double-digit annual increases have battered higher education. St. Thomas is self-insured, meaning it covers its share of an employee’s bills up to $100,000, after which Blue Cross & Blue Shield takes over. Health care benefit costs have nearly quadrupled since 1998 – from $1.6 million to $6.2 million – and 8 percent average annual increases are projected through 2010.
Technology – Everybody expects a university to have the best technology, including up-to-date laboratories, extensive customer services and inexhaustible bandwidth. Wireless capability is the latest trend, and St. Thomas made sure its residence halls were wireless “friendly” last fall. The university began to charge a modest technology fee in 1999, but at $134 a semester for undergraduate students next year, it will cover only a portion of the costs. Technology-related expenses have increased 58 percent, from $7.6 million to $12 million, in the last five years.
Utilities – Utility costs also have skyrocketed. A 40 percent increase in rates last fall led to an anticipated $1.4 million in extra expenses to heat buildings. Conservation measures are in place, but for the most part the university still is held hostage by Mother Nature and how cold it gets.
School of Law – Everyone knew the school, which opened in 2001, would need an infusion of startup funds until enrollment and fund raising hit their targets. St. Thomas will have loaned the law school $20 million by 2008, after which the school will turn profitable, become a significant contributor to the university’s bottom line and repay those startup loans.
Government funding – Federal and state support for need-based financial aid programs has been flat for years and has not kept pace with inflation. That puts pressure on schools to devote more resources to institutional financial aid.
St. Thomas tries to keep noncompensation spending increases for ongoing operations under inflation, and achieved that in 2003 (1 percent) and 2005 (0.5 percent). More drastic measures were taken in 2001, when 51 staff positions were eliminated with layoffs and 40 by attrition. The moves saved $9 million (5.2 percent) in the 2001-2002 budget but left a bad aftertaste, and Dienhart vows he will do everything possible to avoid anything remotely similar in the future.
The most obvious source of additional revenue is tuition increases, which have averaged 6 percent a year over the last decade and will be 6.5 percent for most programs next year. The comprehensive fee (tuition, room, board and fees) for undergraduate students exceeded $30,000 for the first time this year, and will increase 5.1 percent, to $32,218, next year.
Those kinds of year-after-year increases lead to hand-wringing questions such as, “Are we pricing ourselves out of the market?” and “Just how high can we go?” Nobody knows the answer, of course, but some find solace in how most other private schools face the same – if not greater – challenges as St. Thomas.
Dienhart and Keffer believe that fund-raising success, especially in generating endowed funds for scholarships, will relieve pressure on future budgets by reducing both the need for financial aid discounts and the size of annual tuition increases.
At least one neutral observer agrees. Moody’s Investors Services issued an opinion in January when it affirmed an A2 rating on the university’s debt. The agency praised St. Thomas’ “substantial market position” in the Twin Cities, “diversified enrollment base,” “consistently strong fund-raising performance” and “strong financial management.”
“You can be sure we’ll give this our best shot,” Dienhart said. “St. Thomas always has been successful in adapting and in solving difficult problems. It seems to be in our DNA. I have no doubt we will prevail again.”