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By Joel Berg

After years of hiking tuition costs faster than inflation, college and university officials aren't waiting for cries of "Uncle!"

"The big questions are what more can they cut, what other revenue sources are there, and how can they be more efficient?" said Leta Finch, national practice leader for higher education at Aon Risk Solutions in Burlington, Vt. "Many colleges and universities have been grappling with these issues for the last 20 years, just more intensely for the last five or six. What more can they do?"

Risks await administrators no matter what steps they take. And given the high cost of some colleges and universities, frustrated customers may be more likely to seek financial redress.

"It's a really, really big investment," said Elda Martocci, product manager for nonprofit directors' and officers' (D&O) liability at Travelers Bond & Financial Products, a business unit of Travelers in Morristown, N.J.

Already, alumni of several law schools have filed class-action lawsuits claiming the schools misrepresented the job-placement rates and salaries of graduates.

But the biggest risk for higher education, according to one observer, is repeating the rise and fall of tech stocks and housing prices. Tuition could be experiencing a similar bubble, said Robert B. Smith, who heads the higher education industry team at law firm LeClairRyan.

"At some point, the bubble has to burst and some of the schools are thinking about that now and planning for that disaster," said Smith, who wrote about the issue earlier this year in an article for the University Risk Management and Insurance Association Journal. "Others are blithely going about their business."

Other observers dismiss the notion of a bubble, noting the difficulty of generalizing about an industry spanning both Harvard Yard and community college parking lots. Skeptics point out that a college education still confers an advantage on job seekers and that the government continues to encourage students to earn higher degrees.

"There are still more people who are not in college and could be than there are people who are not in college," said Michael B. Goldstein, practice leader for higher education at Dow Lohnes, a law firm in Washington, D.C.

Although tuition has outpaced inflation, colleges have not budgeted on the assumption that they can name their price, Goldstein adds. "In fact, there is an affirmative sense that raising tuition is not a good thing."

Tuition prices may not be heading for a crash. But they may push students to embrace less-expensive alternatives, especially if the economy remains weak, said Allen Bova, who retired in September as risk management and insurance director at Cornell University in Ithaca, N.Y.

Students will opt for online courses or certification programs that promise better job prospects, Bova said. They may also start out in two-year colleges and wrap up their degrees at traditional four-year schools.

Schools in the top tier -- those in the Ivy League and others known for being highly selective -- will emerge relatively unscathed, observers said. Community colleges also appear poised to do well.

The biggest risks face less-selective liberal arts institutions that are in rural areas, boast smaller endowments and lack a clear niche.

"You'll just see colleges under significant pressure because the enrollment is not there, and some of them will end up having to close," Bova said.

Others might decide to merge, though the move is rare in higher education and usually driven by a crisis, said Ellen Thrower, a professor in the School of Risk Management, Insurance, and Actuarial Science at St. John's University in New York.

"It will be interesting in 10 years to look back and see how many schools are still operating independently or don't exist or are part of larger institutions," said Thrower, who has lived through the merger process. The School of Risk Management was formerly the independent College of Insurance before electing to merge with St. John's in 2001.

Every college can benefit from examining the potential fallout from a sudden drop in enrollment, said Ann Franke, president of Wise Results LLC, a consulting firm in Washington, D.C., that specializes in higher education.

"Those could be economically driven decisions; it could be that a Hurricane Katrina comes along; the origin could be some huge scandal, say a religiously affiliated institution gets crosswise with its sponsoring denomination and students elect not to attend because of its reputation," Franke said.

Less dramatic scenarios already are playing out. For instance, a growing number of students appear to be graduating in three or three and a half years rather than four, said Vincent Morris, risk management director at Wheaton College, a Christian liberal arts college in Wheaton, Ill., about 25 miles west of Chicago.

For most colleges, the revenue model is based on four years of tuition per student. If class sizes are tapering off by senior year, Morris said, "We have to account for that."

One solution is to beef up the size of the freshman class, ensuring a wider base at the bottom of the funnel that ends in graduation. Wheaton, a dry campus, has gone from 600 freshman to 625, Morris said. To accommodate them, the college converted a historically women's-only dorm into co-ed housing.

"I can only imagine what must be happening at schools if they're increasing the freshman class where there is drinking," Morris said. "That has some pretty significant ramifications for behaviors and criminal activity."

Larger classes already are generating risks for community colleges. Between fall 2008 and fall 2010, community college enrollment rose by an estimated 15 percent, according to the American Association of Community Colleges.

Campuses, for instance, may be dealing with increased security issues, particularly if they operate around the clock. Parking is another potential hot spot.

"There are risks just in the logistics of getting students sometimes across very busy streets at busy times of the day at new parking lots that were never anticipated," said John McLaughlin, managing director of the higher education practice at brokerage firm Arthur J. Gallagher in Itasca, Ill., a Chicago suburb.

Other colleges, haunted by fears of empty parking lots, are selecting spending cuts from a relatively well-established target list. The menu includes deferring planned maintenance and reviewing insurance purchases.

"You'll see some schools, perhaps, self-insure, if they have enough funding," said Maureen Waterbury, educational services segment manager for Chubb Group of Insurance Cos. in Whitehouse Station, N.J.

More controversial steps might entail program and staff cuts, either of which could spark employment-related lawsuits. "It's the same situation private businesses are confronted with when they have staff reductions," said Richard Vohden, a senior vice president and national education practice leader at Marsh Risk Consulting in Morristown, N.J.

At the same time, Vohden said, demands on remaining staff could lead to fatigue and injuries. "That extra set of hands to move a desk isn't around, leading to a back injury. Snow doesn't get removed as quickly as it may have been. It will eventually get removed but instead of taking four hours, it may take five or six hours."

In addition to cutting expenses, colleges and universities are searching for new revenue streams.

Schools have long rented out their facilities for youth sports camps, and they may seek to increase that business. The risks include injury to participants and the potential for criminal activity, such as the child molestation claims engulfing The Pennsylvania State University.

"You need good risk management programs to prevent false allegations and real occurrences," Vohden said. "They both hit the front page, whether real or not."

Commercialization of faculty research is another attractive option, given the millions of dollars that can flow from a single breakthrough.

On the downside, commercial entanglements expose higher education to the same risks as businesses. If colleges and universities lack the infrastructure to manage those risks, it will take time to build, delaying whatever financial reward may be in store.

Money, however, is usually not the chief motive for commercializing research, a process commonly known as technology transfer, said David Allen, associate vice president for technology transfer at University of Colorado. The motives more often are retaining faculty, contributing to the local economy and making an effect beyond the classroom.

The perceived financial payoff may be tempting nonetheless, especially for schools facing a financial straitjacket.

But, Allen said, "To build a soup-to-nuts tech transfer organization and put it into a context for success is a $3 million to $5 million-dollar venture on a yearly basis. That's our annual budget. That's not something you just do because you think there might be opportunities that you're missing."

JOEL BERG is a freelance journalist and college professor. He can be reached at riskletters@lrp.com.

December 1, 2011

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