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Higher education restructuring demands focus on labor considerations

RFP
classroomIn 2016, 763 higher education institutions closed, the highest number since 2012. While primarily for-profit schools closed, independent not-for-profit (NFP) schools closed as well.

Ascribing reasons for the schools’ closures risks conclusion bias, but there are some macro trends to note: enrollment is falling; net tuition rates are under pressure; for-profit schools are required to focus and report on student outcomes; and education delivery models are being disrupted.

Peeling back the layers to examine the underlying drivers of these trends indicates that this may be the new normal and that schools must adapt to survive.

Part of adapting will include reducing costs across the board. As labor costs generally are a school’s primary expense, this article discusses labor considerations in NFP school restructuring. Our focus on NFP schools includes both state and private higher education institutions. Many of the readers of this article will be familiar with restructuring issues associated with for-profit organizations. However, NFP schools have their own unique set of cultural and mission-based considerations, which are helpful to understand.

“Money can only be one of the factors in making decisions, rather than the primary one, as it is in for-profit entities.”
(Larry Ladd, director, Grant Thornton National Higher Education Practice)
To start, the overriding purpose of a NFP school is its mission, which traditionally focuses on educational outcomes. According to Larry Ladd, a director in Grant Thornton’s National Higher Education Practice, NFP schools define success as mission achievement rather than profitability. “Money can only be one of the factors in making decisions, rather than the primary one, as it is in for-profit entities,” said Ladd. “A not-for-profit university is accountable to multiple stakeholders rather than shareholders or a small set of owners, and those stakeholders define success more broadly than finances alone.”

Because NFP schools are driven by their missions, they will focus on this instead of profit or contribution—the primary focus of for-profit schools. It is also helpful to understand a school’s unique, contractually defined relationships (commonly referred to as the “Blue Book”) with its tenured and tenure-track faculty. While these contractual agreements differ, the American Association of University Professors (AAUP) provides overarching guidance on what should be in a contract. The AAUP also investigates alleged breaches and censures schools who are found to have breached their agreements.

The AAUP’s guidance stipulates that tenured faculty can be terminated only in three scenarios: (1) for cause; (2) in the event that financial exigency is declared; or (3) if the entire program is being eliminated. According to the AAUP, “exigency” references a severe financial crisis that fundamentally compromises the academic integrity of the institution as a whole and that cannot be alleviated by less drastic means other than then termination of tenured faculty appointments. A “program” is designated as a related cluster of credit-bearing courses that constitute a coherent body of study within a discipline or set of related disciplines. When feasible, the term should designate a department, per the AAUP. In addition, the AAUP guidance includes provisions for the institution to try to re-equip and re-deploy tenured faculty within the institution before terminating them.

None of these options is practical or attractive to administrators because:

  • While terminating underperforming faculty for cause is good practice, it does not allow for strategic terminations to reduce costs or to re-tool the faculty and academic programs.
  • Eliminating an entire program may be either unnecessary or undesirable for a school where, for example, enrollment in a specific program has halved (meaning there is still demand for the program, but that faculty may be underutilized and the program is perhaps loss-making). The AAUP does not see “efficiency,” “cost effectiveness” or “improved productivity” as justifiable reasons, again unlike the for-profit sector. If eliminating a program is desirable, it can still be a Herculean task for a school to guide its multiple stakeholders through the necessary practical and psychological steps to close the program. For example, enrollment at law schools has dropped; consequently, many law schools have been operating at a loss for several years, thereby consuming precious resources. However, few universities have announced closures of law schools. In addition, every program has a constituency to defend it, and everyone wonders, “If they cut that program now, will they come for my program next?”
  • Declaring financial exigency is a public admission that the school is at risk of financial failure and shutdown. This admission can impact the school’s accreditation and its attractiveness to both talented academics and students. Acknowledging financial distress may, in fact, accelerate the decline.

Given the limited options available, schools look to cut personnel costs in other ways, which often include reducing the number of adjuncts and teaching assistants, offering faculty early retirement, holding posts vacant, curtailing benefits such as pensions, or not awarding annual pay increases. An increasingly popular method is to not replace full-time faculty positions when they become vacant, replacing them, if at all, with part-timers or adjuncts.

While cutting costs is critical for the school, a piecemeal approach can have unintended consequences that can materially impact the school in the longer term—a slippery slope leading to compounding distress.

In the short term, freezing hiring and eliminating posts when faculty retire or leave delivers cost savings. However, as the school is forced to adapt to lower staffing levels, academic programming and initiatives drop off, potentially impacting accreditation and making the school less attractive to prospective students. Additionally, class sizes could increase and class content might have to be adjusted to fit the skills and capacity of the remaining faculty.

“Changes will require strong leadership by presidents and trustees, combined with a commitment to communication and collaboration without sacrificing presidential and board responsibility decision-making.”
(Larry Ladd)

All of these changes have the potential to negatively influence the ability of a school to attract and retain students, which directly impacts top-line revenue.

Ladd foresees significant changes to the traditional tenure model, which could potentially lead to conflict. “Changes…will require strong leadership by presidents and trustees, combined with a commitment to communication and collaboration without sacrificing presidential and board responsibility decision-making,” Ladd said.

So what can schools do to adapt? Consider the following;

  • To start, a school should ensure that it has a culture of accountability through robust, fair and timely performance assessments.
  • Leadership (including the provost, president, vice president of finance, board, and et.al.) should have a clear understanding of what contribution or loss each program delivers to the school’s bottom line.
  • Additionally, leadership should prepare the school to adapt to a changing environment by creating a culture of accountability to the mission across departments.

Implementing these changes can be a long and time-consuming process that requires strong leadership and clear communication. With focused leadership and early action, NFP higher education institutions can mitigate difficult labor decisions before they have to be made in a distressed situation.

(This article was originally published in the November 2017 issue of the American Bankruptcy Institute Commercial and Regulatory Law Committee Newsletter.)

Gain more insights:

Contacts:
Bradley Chadwick
Principal
T: +1 312 602 8899

Katherine R. Catanese

Senior Counsel
Foley & Lardner, LLP