Examining Financial Issue at ICO

Introduction/Background Information

One of the greatest challenges facing private and public universities in the US today is inadequate funding. This problem has made it difficult for these institutions to run their programs smoothly. A number of factors are to blame for the problem. They include reductions in funding provided by the government and a decline in the amounts received from donors and sponsors. It is true that the universities are unable to address all the sources of the funding problems that they face. However, there are some steps that they can take to ensure that their operations do not stall as a result of limited funding. The case of the Illinois College of Optometry (ICO) exemplifies the damage that financial troubles can cause to an institution’s performance and operations. This institution is witnessing the adverse effects of the failures made in the past. ICO has a long history of misappropriation of funds and this problem has inspired distrust among the institution’s alumni. The embezzlement of funds that rocked the institution in the past left the alumni feeling alienated and unable to trust the institution’s leadership. Today, ICO is still facing this problem as it continues to rely on the financial and moral support of a small group of alumni. Instead of reaching out to freshly graduated students, ICO sources much of its funding from old alumni who are believed to be wealthy and therefore in a position to generously contribute to the institution. Whereas the institution has a solid basis for working closely with its old alumni, it needs to expand its funding network and give special attention to other stakeholders such as recently graduated students who could serve as a source of funding and an effective marketing device.

Problem Statement

The purpose of this paper is to review the financial problem at ICO and to issue recommendations whose implementation will allow the institution to solve the problem. Failure to embrace its troubled past is the main problem that ICO faces. As noted above, this institution’s leadership has a history of embezzling funds. Consequently, the institution has lost the confidence and support of a large number of its alumni. Essentially, these former students worry that the college will misuse their donations. Another problem that hampers the college’s progress lies in the fact that its leaders refuse to reach out to freshly graduated students. To defend its approach, the leaders contend that the recent graduates are burdened with such problems as student debt and it would be unfair to require them to donate to the school. In essence, ICO is facing a problem concerned with establishing a close and healthy relationship with its entire alumni. Many feel disdain at the institution’s chequered past and do not trust the leadership to spend finances prudently. Left unaddressed, the problem that ICO faces could set the stage for the institution’s collapse. Therefore, the institution needs to move with speed to repair its relationship with its alumni and to expand its donor base by reaching out to freshly graduated students.

Literature Review

The question of funding for higher education has been explored extensively in literature. In the following section, an overview of the perspectives and thoughts of different scholars on various issues concerning higher education financing is provided.

Budget Process

The budgeting process is among the critical components of the finances of higher educational institutions. Whereas public and private institutions have varying budgeting processes, there are some similarities that the processes share. Placing a budget request is among these similarities. It is common practice for the departments and other units in an institution to submit request for funding for different programs (Parmley et al., 2009). In the case of public universities, these requests are forwarded to government authorities who serve as key sources of funding. Budget negotiations are another element that constitutes the budgeting process in both public and private universities (Parmley et al., 2009). The various parties involved in the budgeting process hold discussions with the goal of ensuring that the amount allocated is sufficient to fund the institution’s programs and operations. Another critical component of the budgeting process is the actual allocation of funding (Parmley et al., 2009). Here, the legal guidelines that govern the allocation process are considered to ensure that the budgeting process is in full compliance with the law. It is worth noting that the budgeting process varies from institution to institution. For example, as part of its budgeting process, a private university may seek the input of private donors. On the other hand, a public university would work closely with the state government. Overall, the budget process is important as it allows institutions to identify their needs and to seek funding that enables them to satisfy these needs.

Sources/Streams of Funding

To fully understand the financial affairs of higher education institutions, an examination of the sources and streams of funding is needed. Colleges and universities in the United States receive funding from a variety of sources. Tuition is among these sources. Thomson Walanin (2015) authored an enlightening article in which he identifies tuition as among the key sources of funding for colleges and universities. According to Walanin, tuition accounts for as much as 19% of the revenue that public universities rely on to fund their operations. On the other hand, for private universities, the proportion of tuition revenue stands at a whopping 42% (Walanin, 2015). This statistic shows that tuition is the lifeline of private universities. Local, state and federal governments also serve as revenue streams for both public and private universities. Walanin notes that state governments contribute 36% and 2% of the revenues received by public and private universities respectively (Walanin, 2015). The federal and state governments also make substantial contributions. Private individuals and organizations are another source of revenue. Alumni are among the private entities who offer financial support to the educational institutions. Many colleges and universities also generate revenue through the sale of products and the provision of services (Walanin, 2015). For example, an institution may charge its students rent for accommodation. Endowment income is another form of revenue that enables institutions to ensure that their programs are adequately funded. Essentially, this income refers to the generous donations from such stakeholders as foundations and individual donors. In his text, Walanin notes that 5% of the funding for private universities and colleges is endowment income while this income accounts for 1% of the revenue that public universities receive. It is clear that both public and private universities have various streams of funding. Worth noting is that tuition appears to be the primary source of funding for private institutions whereas public universities and colleges rely mostly on the generosity of their partners.

Resource Allocation to Balance Budgets

A balanced budget is a goal that has proven elusive for many colleges and universities. Essentially, a balanced budget means that an institution’s expenditure can be adequately met using the available resources. Resource allocation is a process that the institutions leverage in their quest for balanced budgets. One of the principles that govern the resource allocation process is strategic planning (Jones, 2011). In order to achieve balanced budgets, colleges and institutions ensure that their financial decisions are in line with their long-term goals and the mission that they have set out to fulfill. Furthermore, the institutions focus on their main priorities (Jones, 2011). While many institutions strive to ensure responsible stewardship of their financial resources, there are many that grapple with serious challenges. According to Dennis Jones (2011), a worryingly high number of institutions allocate resources in a manner that allows them to maintain the status quo. Basically, this means that the institutions invest heavily in routine operations instead of identifying new avenues and opportunities. While it is true that the pursuit of new opportunities could upset the budget balance, as they exploit the opportunities, colleges and universities poise themselves for growth and impressive performance. Another critical issue that defines the resource allocation process is accounting for social and internal factors that have an effect on the cost of education (Uspuriene, Sakalauskas & Dumskis, 2017). As they allocate resources, it is important for colleges and institutions to have in mind both external and internal forces that could influence their financial bottom line and how they operate.

Funding Resources

In an earlier discussion, some of the sources of revenue for colleges and universities were identified. They include tuition, government funding, support from alumni, and the revenue from services and the sale of products. For many institutions, these sources are also their main funding resources. In addition to these sources, the institutions also receive funding in the form of vouchers, and sponsorships (Maria & Bleotu, 2014). Loans that are issued to students to finance their studies are also emerging as a critical funding resource for hundreds of public and private higher education institutions.

Strategies to Increase Revenue and Reduce Expenditures

It was observed in a previous section that achieving balanced budgets is a challenge that many colleges and universities grapple with. The solution to this challenge lies in increasing revenue and reducing expenditures. There are a number of strategies that have been shown to allow universities and colleges to achieve these outcomes. Increasing tuition is among the measures that raise the revenue. Today, more and more institutions in the US are charging their students higher amounts as they seek to fulfill their obligations and ensure that their operations run without hitches (Lapovsky, 2016). While the tuition increases have sparked controversy and strong opposition, it should be noted that cuts in government funding have pushed the institutions to charge their students higher amounts. Another measure for increasing revenue is expanding sources. For example, an institution that has traditionally relied on a few donors could seek the support of other parties. Offering a wider range of programs so as to boost enrolment is another strategy that the institutions could adopt in their quest for increased revenue (Lapovsky, 2018). Higher revenue can also be achieved through business ventures. For instance, an institution could establish an enterprise through which it generates additional revenue. Other avenues for increasing revenue is establishing partnerships with the business community, taking steps to improve student retention, and creating a culture of openness and transparency so as to win the trust and confidence of partners (“5 Ways Colleges”, 2017). There is no doubt that there are multiple platforms that colleges and universities can explore as they attempt to increase revenue.

Apart from increasing their revenues, colleges and universities should also dedicate their effort to reducing their expenditures. In an article featured on the Washington Post, Steven Pearlstein (2015) outlines a number of strategies that hold the key to reducing expenditure. He recommends that higher educational institutions should divest away from research that adds little value and instead focus on delivering quality education. Pearlstein adds that the institutions need to place limits on administrative costs and ensure that all their facilities are utilized fully by operating for as many days as possible. By implementing the strategies that Pearlstein proposes, higher educational institutions can minimize costs and dedicate their limited resources to initiatives that enhance their bottom line and enable them to operate optimally.

Bases for Financial Dilemmas

The Illinois College of Optometry is facing a dilemma that is must solve if it is to remain a premium provider of training for optometrists. This institution is not isolated as various other colleges and universities grapple with financial dilemmas. Among the primary bases of the dilemmas concerns tuition increases. An increasing number of universities and colleges have been compelled to raise their tuition (Thelin, 2017). As a result, higher education has become unaffordable for many. To finance their studies, thousands of students have to resort to loans. The tuition increases place colleges and universities in a difficult situation where they need to balance their mandate of providing high quality and affordable education while ensuring that they have enough funding to finance their operations. Declines in government funding are another issue that underlies the financial dilemmas that higher educational institutions face. In the recent past, local, state, and the federal government have slashed the amount that they allocate for higher education (Mitchell et al., 2018). This has forces the institutions to turn to non-traditional funding sources and to resort to such measures as increasing tuition. The financial dilemmas that the institutions face are compounded by the fact that despite the financial hardships they are grappling with, these institutions are still expected to ensure that their services are equitably availed and accessible, especially to minorities and disadvantaged students. There is no doubt that the dilemmas that the institutions are confronted with must be addressed.

Trends

A complete understanding of financing in higher education can only be said to have been gained if one considers the trends that are defining the financial affairs of colleges and universities. One of these trends is the drop in government funding. As noted above, the various levels of government are lowering the amounts that they set aside for higher education. This trend has real implications for higher educational institutions as it means that the institutions need to identify alternative sources of financing. The emergence of tuition as the primary source of revenue for the institutions is another trend that is defining higher education financing. In the US and other countries across the globe, colleges and universities are increasingly turning to their students to fund their operations (Brownstein, 2018). This trend is the result of the drop in government funding. A key insight from the trend is that students are bearing the brunt of the challenges that the institutions are grappling with. There is no question that the financial model that higher education providers are adopting is unsustainable. Students cannot continue to be required to contribute the bulk of the funding for higher education. There is a need for the institutions to challenge other stakeholders to make a greater contribution. It should be noted that there are a number of trends that are providing institutions with platforms to increase revenue and lower expenditure. Competency-based education is among these trends (Dusst & Winthrop, 2019). More and more institutions are focusing on equipping their learners with competencies that enable the institutions to lower the cost of operating. Income share agreements are another trend that are lessening the burden that students shoulder (Dusst & Winthrop, 2019). Through these agreements, students are able to minimize their reliance on loans.

Conclusions/Recommendations

From the literature review above, it is evident that higher educational institutions are operating in complex environments and difficult times. Face with dwindling government funding, these institutions have been forced to innovate and venture into non-traditional pursuits. Fortunately for the institutions, government funding is just one of various funding sources. Other sources include tuition, donations and grants. In order to secure their future, the institutions need to adopt budgeting procedures that enable them to achieve balance. Using these procedures, the colleges and universities should ensure that their expenditures match their revenues. It is also important for these institutions to allocate resources in a fashion that is prudent and sustainable. Additionally, colleges and universities should adopt measures that have been proven to be effective in expanding the revenue base while minimizing the expenditures incurred. The institutions also need to be mindful of the trends that are currently shaping the higher education funding landscape. In particular, they should understand that government authorities seem to have lost their commitment to higher education given the steady declines in government funding.

ICO’s troubles echo the hardships that many colleges and universities are dealing with. This institution lacks the support of its alumni and has been unable to gain the support of its fresh graduates. Furthermore, leadership failures in the past have made it difficult for the organization to embark on a new path of transparency and trust. To address the various problems that ICO faces, various recommendations are issued. First, the university should reach out to its alumni who have lost faith in its leadership. To achieve this, the institution’s leadership should reiterate its commitment to responsibly managing financial resources. Secondly, ICO needs to appeal to its fresh graduates to support its mission through financial contributions. By seeking the support of these graduates, this institution will have taken the first step toward a diversified pool of revenue sources while engaging its alumni community. Another change that ICO should implement is establishing a culture of responsible stewardship. It will be difficult for the institution to sustain momentum unless it accompanies the changes that it adopts with a robust culture which emphasizes accountability and responsible resource utilization.

References

5 ways colleges find alternative revenue. (2017). EAB. Retrieved February 14, 2019 from https://www.eab.com/daily-briefing/2017/07/19/5-ways-colleges-find-alternative-revenue

Brownstein, R. (2018). American higher education hits a dangerous milestone. The Atlantic. Retrieved February 14, 2019 from https://www.theatlantic.com/politics/archive/2018/05/american-higher-education-hits-a-dangerous-milestone/559457/

Dusst, E., & Winthrop, R. (2019). Top 6 trends in higher education. Brookings Institution. Retrieved February 14, 2019 from https://www.brookings.edu/blog/education-plus-development/2019/01/10/top-6-trends-in-higher-education/

Jones, D. (2011). Board budget decisions: protecting and building your institution’s assets. Trusteeship Magazine. Retrieved February 14, 2019 from https://www.agb.org/trusteeship/2011/januaryfebruary/board-budget-decisions-protecting-and-building-your-institutions

Lapovsky, L. (2016). Why colleges continue to increase tuition when many should lower it. Forbes. Retrieved February 14, 2019 from https://www.forbes.com/sites/lucielapovsky/2016/12/29/why-colleges-continue-to-increase-tuition-when-many-should-lower-it/#12492f9b7eb3

Lapovsky, L. (2018). The changing business model for colleges and universities. Forbes. Retrieved February 14, 2019 from https://www.forbes.com/sites/lucielapovsky/2018/02/06/the-changing-business-model-for-colleges-and-universities/#313209a35ed5

Maria, T. D., & Bleotu, V. (2014). Modern trends in higher education funding. Procedia Social and Behavioral Sciences, 116, 2226-2230.

Mitchell, M., Leachman, M., Masterson, K., & Waxman, S. (2018). Unkept promises: state cuts to higher education threaten access and equity. Center on Budget and Policy Priorities. Retrieved February 14, 2019 from https://www.cbpp.org/research/state-budget-and-tax/unkept-promises-state-cuts-to-higher-education-threaten-access-and

Parmley, K., Bell, A., L’Orange, H., & Lingenfelter, P. (2009). State budgeting for higher education in the United States. State Higher Education Executive Officers Association. Retrieved February 14, 2019 from http://www.sheeo.org/sites/default/files/publications/Budgeting_For_Higher_Ed.pdf

Pearlstein, S. (2015). Four tough things universities should do to rein in costs. The Washington Post. Retrieved February 14, 2019 from https://www.washingtonpost.com/opinions/four-tough-things-universities-should-do-to-rein-in-costs/2015/11/25/64fed3de-92c0-11e5-a2d6-f57908580b1f_story.html?noredirect=on&utm_term=.4cd75ec21b49

Thelin, J. R. (2017). California’s higher education: from American dream to dilemma. Biz Journals. Retrieved February 14, 2019 from https://www.bizjournals.com/losangeles/news/2017/11/24/california-s-higher-education-from-american-dream.html

Uspuriene, A., Sakalauskas, L., & Dumskis, V. (2017). Financial resource allocation in higher education. Informatics in Education, 16 (2), 289-300.

Walanin, T. R. (2015). Financing higher education in the United States: an overview. International Higher Education. Retrieved February 14, 2019 from https://ejournals.bc.edu/ojs/index.php/ihe/article/viewFile/6875/6092