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5. Is Higher Education a Bubble? > Abdication of Risk Management

Abdication of Risk Management

Although I am sure few, if any, college boards would agree, looking objectively at the financial model for most colleges today, it is hard not to see an abdication of risk management. From my perspective, there is an enormous mismatch today between colleges’ social mood/confidence-dependent revenue sources and their fixed expense bases. On the expense side of the ledger, there are large fixed costs arising from both tenured faculty and extensive physical facilities and on the other side there are significant social mood-driven revenues—particularly donor giving, endowment revenue, tuition and for public universities, as discussed below, state funding.

Admittedly, many universities got a short-term taste of this mismatch during 2008 when their endowment values fell sharply, but there was no material decline in enrollment, and, for most schools, donor giving has quickly rebounded along with the stock market. As a result, the mismatch was quickly “contained” and few institutions from my perspective have seriously considered the potential for a sustained concurrent drop in enrollment, giving, and endowment values.


  

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