Overview of the Financial Landscape

What is a U.S. Public University?

"is an institution of higher education that is funded primarily by state or local governments and operates under the control of a publicly appointed board or governing body" (in-text citation)

What is a U.S. Private University?

"is an institution of higher education that is privately owned and funded and is not operated by the government. Private universities are typically founded and run by religious organizations, corporations, or have private entities, and often have a specific educational mission of philosophy" (in-text citation)

Whether a research university is public or private, revenue for both can be divided into unrestricted and restricted resources. Unrestricted resources are financial contributions that can be used at the discretion of the institution for primary general expenses, such as teaching, research, public service, or any other basic activity advancing its mission. Restricted resources are funds restricted to a particular use or time and thereby earmarked for specific projects and purposes. The primary unrestricted resource for both types of research universities is tuition, wherein the revenue source difference is state appropriations for public universities. However, in recent years, amid economic downturns and constant political changes, U.S. government funding has steadily declined as a share of institutional revenue. Thereby, most U.S. research universities (public or private) have limited opportunities for cost-cutting and face the same ongoing challenge of maintaining a high quality and competitive standing in the face of depleting resource constraints. Accordingly, tuition and fees have risen rapidly to replace this lost funding with much pushback, and institutions are increasingly aiming to leverage alternative revenue sources and schemes other than the traditional types.

The following is an overview of the financial landscapes of public and private research universities to exhibit their financial similarities and differences.

Operational Revenue Streams

State Appropriations
Net Tuition and Fees
Federal, State, Local Grants and Contracts
Private Gifts, Grants and Contracts
Auxiliary Enterprises and Other Revenues

Expense Categories

Instruction, Research, and Public Service
Academic Support
Institution Support
Auxiliary Enterprise
Scholarships and Fellowships
Depreciation, Interest, and Operations and Maintenance

Assets and Liabilities

Property, plant, and equipment include buildings, infrastructure, equipment, and computer systems (hardware and software).
Endowment- the most prestigious research universities in America record their endowments the largest asset group.

U.S. Public Institution: Government appropriations, grants, and contracts make up most of the school's funding resources.

U.S. Private Institution: Grants and endowments make up most of the school's funding resource

Vietnam National University: Main revenue streams for all VNUs

Research Funding and Its Financial Implications

Public research universities face constant revenue challenges due to a variety of factors and must rely on grants, cooperative agreements, or contracts to fund their research programs. However, government funding for research is competitive and subject to fluctuations. Thereby, research expenses and the mechanics of the sponsor reimbursement process significantly impact the finances of research universities.

In the states, sponsorships arise from federal, state, and local government, nonprofits, and private industry through a competitive awards process that includes direct and indirect costs of research.

Direct and Indirect Costs: Direct costs support research underway and includes expenses for laboratory supplies, salary for researchers, and research equipment. Indirect costs (also known as Facilities and Administrative costs) are expenses on behalf of federally-sponsored research for specific shared costs that institutions do not incur when performing research projects outside a federal government-university research partnership. For example, sophisticated labs designed with cutting-edge technology.

Revenue Challenges for Public Research Universities

Limited government funding: While public universities receive government funding, this funding is often limited and subject to fluctuations based on changes in government priorities and economic conditions.
Increasing costs: Public universities face increasing costs associated with maintaining and upgrading facilities, providing competitive salaries and benefits to faculty and staff, and sustaining pace with advances in technology.
Reduced enrollment: Public universities must compete to attract and retain students, leading to decreased revenue from tuition and fees.
Competition from private universities: Private universities may offer more attractive financial aid packages and amenities, making it harder for public universities to compete for students.

To address these revenue challenges, public universities are exploring alternative revenue sources, such as increasing fundraising efforts, expanding online and continuing education programs, partnering with industry and government entities to pursue research opportunities, and implementing cost-saving measures. It may also be necessary for public universities to advocate for increased government funding and support to help address these challenges.

Planning for the Future: The Yale Endowment Model

Can a university mainly run off of attribution of revenue? Sure it can! However, this type of revenue structure/source (?) takes decades to establish and requires specific institutional elements. The Yale Endowment Model is an example of such an innovative revenue source!

How does the model work?

It's the university's largest revenue source, with 75% of the endowment's total funds under restricted use where the university is legally required to use these donated funds for only stated purposes. The remaining 25% of the endowment is unrestricted.

Since the endowment servers to ensure intergenerational equity, only a portion of ANY fund is available for spending a year. This disciplined endowment spending tactic allows the university only to spend 5.25 after adjustment for inflation.

It's sustained over decades to generate returns for the university through the independent management of The Yale Investment Office from its finance department with long-term investment strategy thinking of incorporating the modern portfolio theory of building a diversified set of investments.

What's the model's impact?

The video discusses a new higher education financing model, Income Share Agreements (ISAs), which offer funding to students in exchange for a percentage of their future income. The ISA model has enabled the university to attract a more diverse student body and allowed students to graduate without high levels of debt. It has also encouraged a focus on career-oriented education and led to increased interest from investors.

References

National Center for Education Statistics. (2021). Revenues and Expenditures for Public and Private Institutions: 2019-2020. https://nces.ed.gov/programs/coe/indicator_cfa.asp
VNU's 2021 annual report (2022). https://www.vnu.edu.vn/ttsk/?C1654/N30161/Bao-cao-thuong-nien-2021.htm
AsapSCIENCE. (2018, April 12). The science of productivity [Video]. YouTube. https://www.youtube.com/watch?v=w2Psaz8vtwk

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