Economics of non-profit versus for-profit schools

To follow-up with a recent conversation with Rich Douglas and all - let's look at some financials from one well-known non-profit, DL focused instituions:

Income (in millions)
Tuition, Fees 205.8
Govt Grants 19.1
Gifts 13.5
Endowment 11.4
Aux Ops 12.4
Other 7.4
Total 269.6

Expenses (in millions)
Instruction 159.6
Research 2.3
Public Service 6.4
Academic Support 20.2
Student Service 7.3
Institution Support 36.6
Aux Ops 11.5
Scholarships 1.5
Total 254.4

Excess 15.2

Note several things:

1. The "Excess" may sound like a profit. However, educational institutions don't figure depreciation as an expense as for profit firms do. Some of the 15.2 may go for reserves - but then some goes to capital uses.
2. Note that the "gifts", "endowment",
"government grants", "public service",
"research" and, likely, "scholarship" categories are unique to non-profits. For profits don't have these - or at most they have nominal amounts here.

Now what if this same school were for profit? First, assume that they charged the same tuition and had the same expenses in operation (excluding the items noted above). Their income statement would look like:

Income (in millions)
Tuition, Fees 205.8
Govt Grants 0
Gifts 0
Endowment 0
Aux Ops 12.4
Other 7.4
Total 225.6

Expenses (in millions)
Instruction 159.6
Research 0
Public Service 0
Academic Support 20.2
Student Service 7.3
Institution Support 36.6
Aux Ops 11.5
Scholarships 0
Total 235.2

Profit - or (loss) (10)

Hum! Looks like the school is now a loser. To make a reasonable profit (say 10% on sales), the for-profit school would have to turn a profit of $23 million.

How could this happen? Well assuming they can't raise prices in a competitive education market, they'd have to lower expenses. So, our for-profit version would have to "cheapen" their educational offering by $33 million.

How can they do this? Well, they could employ a large adjunct corp that gives the appearance of a faculty - but that only show up when classes are being taught. Such an adjunct corp doesn't provide the continuity in an academic program that full-timers do. Who advises students and provides guidance? Perhaps the for profit can hire some sales staff to do this.

Will the school still grant degrees? Perhaps. But what about the quality of education delivered? What about society's loss of $6.4 million in "public service" or $2.3 million in "research"?

My Bottom line - profit motivated firms don't provide the same value to society as non-profit organizations.

I am suspicious of for profit academic institutions, and as a practical matter I refuse to teach for one. My experiences to date have confirmed my suspicions - for profits are in busines to make a profit first and meet student and society needs second. Non-profits aren't perfect - but there is a difference.

Regards - Andy



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Andy Borchers, DBA
NSU (1996)

 

Non-Profit: Mission is to educate... finances serve this mission.

Profit: Mission is to increase shareholder value... education will serve this mission. If shareholder value can be increased by weakening standards, so be it.

Unfortunately (IMO) Some non-profits are setting up separate orgs under the profit model to help fund there non-profit mission... the orgs are separate to keep distance between the real school and the whore.

 

Andy,
It would be interesting to know if the non-profit DL schools have more full-time faculty than the for-profit DL schools? If were are comparing apples to apples this is an integral part of the equation!

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Howard Rodgers

 

The only data point I have is NSU's school of business. They list some 25-30 faculty as being campus based, full-time faculty. As for the for profits - I'm not clear which of the faculty they list are adjuncts and which are full-time employees.

The point is that full-time faculty bring an important dimension to education. Full timers are the one that create the academic programs, advise students and otherwise serve to provide continuity. Adjuncts are great to have - but they tend to teach, and go home. A balance of the two can provide the continuity and energy a program needs.

Thanks - Andy

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Andy Borchers, DBA
NSU (1996)

 

From my understanding, a profit-making organization can distribute profit to its shareholders. A non-profit-making organization (e.g. school or charitable organization) cannot distribute its profit (but put it into a 'fund' for development of certain specific mission).

However, some tricks can be made by paying out substantial part of profit (or surplus) through the means of salaries (to president, charirman and senior staff).

So, don't forget to review the annual report of the (charitable or other) organization that you make donations.

 

The numbers Andy posted are unconvincing to me, since they seem to be dependent on the assumptions that went into them.

Why should we accept these assertions? For example, what is preventing for-profit institutions from doing research and attracting funding for that research?

Good sarcasm. But one could say, with equal sarcasm, that adjuncts bring real world experience to their teaching because they are usually employed in the fields that they are teaching. That certainly beats some tenured professor who got his Ph.D. in 1971 and has been teaching full time ever since.

And more broadly, isn't the use of adjuncts a matter of flexibility? It allows the school to meet changing student demand without retaining a large body of highly paid tenured staff on the payroll when they aren't needed. Well, aren't those issues of cost-efficiency also relevant to many struggling non-profits?

Does this really break down as a profit/non-profit issue? Don't many non-profits use adjuncts extensively and isn't it entirely possible for a for-profit to attract a prestigious full time faculty and then use that as a selling point? It would raise their costs, but gourmet restaurants have higher costs than McDonalds and still somehow manage to survive.

And for that matter, why can't a for-profit position itself as a corporate research institute, hire a full time research staff, and then put in some degree programs on the side and bring in graduate students? That seems like a viable for-profit model that runs counter to Andy's argument.

Now I'll go beyond what Andy said and make a broader observation of my own:

This is really a labor issue, isn't it? In my opinion, that's a big reason why so many university faculty oppose distance education. While they cite educational concerns, they really fear what might happen to their jobs if courses go on line en-masse.

If you could reassure them about tenure, intellectual property, control of course content and so on, most of the 'educational concerns' about both DL and the for-profits would probably dissappear. It's the 'David Noble nexus' of politics, education and self-interest.

I'm not putting that on Andy, but I think that many people say similar things for the reasons I cited.

What about it? I'm still not clear why we should ignore research conducted in the for-profit sector. For-profit firms conduct research all the time. They win Nobel prizes. (Bell labs, IBM...) Non-profit universities sell research services and set up for-profit R&D arms.

And if a school is teaching a helping profession, it is still going to be operating clinics of some sort in order to give their students practical experience. That's part of their instructional program.

If most for-profit schools don't position themselves as research institutes or as medical centers, it's because they are filling a different educational niche, serving up night-school MBAs or something. Just as most non-profit colleges are not conducting research or running clinics either.

 

I think you need to put the education paradigm aside for a moment and address the question:

Is there any difference between a non-profit and for profit organization?
(hint, the answer is yes)

 

Bill - Yes, assumptions can make or break the case. But let me put this simply. The non-profit I picture here has over 10% of their income in the form of gifts, endowment and government grants that the for-profit won't get. The for profit organization gets none of this - and needs to make some sort of profit to justify their existance.

Bottom line - for profits will have to skimp on education to make a profit. Non profits aren't immune to financial concerns - but they have more financial flexibility and can consider a broader set of interests than the for-profit.

As for research in the for-profit sector - sure it can be done. I'd love to see the for profit schools we talk about here do this - it would show their committment to expanding knowledge. However, I haven't seen any evidence of research going on in these schools.

Regards - Andy

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Andy Borchers, DBA
NSU (1996)

 

This seems a bit strongly worded to me, labeling these components of non-profits as whores. After all, virtually all of us on this forum live in countries that are essentially capitalistic in their economic orientations. Are you trying to say that anyone who seeks to make a profit from their labors is a whore? As to the question of the for-profit schools cutting services in order to enhance profits...they will, of course, cut as far as they can. It falls to the Regional Accrediting organization to insure that sufficient quality of service remains. If you don't believe that they can adequately perform that job then it brings the whole RA issue to the forefront. Are you saying that for-profit schools are not performing adequately to deserve their RA status?
Jack

 

There have always been organizations that seek more than to make a buck... often churches, charities and universities. Of course you have also had such organizations whose primary motive is profit... I am not so sure whore is inappropriate.

As far as RA is concerned... one mans standard is another man's lack of innovation, however IMO RA doesn't mean very much. I beleive the existance of some "less than wonderful" RA schools substantiates this.

 

I have been paying a lot of attention to your posts. I am reading them with keen interest. But..

 

Of course there is a difference between non-profit and for-profit organizations.
The question is whether that difference is only of technical interest to accountants and tax attorneys, or whether it directly impacts the education that these schools offer.

 

I agree that this is the ONLY issue. And I contend that one (tax status) does not have much to do with the other (quality of education). The criticisms levied against for-profit schools can also be applied to many not-for-profits. And both compete in the same market, so they must attend to the same issues involving production and profitability.

Rich Douglas

 

I was not referring to taxation.

The bottom line of a profit org is profit... ideally every decision should be measured against the rule of whether it contributes to profit (i.e shareholder value). The bottom line of a non-profit org is the mission of the enterprise... ideally every decision should be measured against the rule of whether it contributes to the mission of the organization.

This difference of paradigm does make a difference in some decisions an organization makes... the most obvious in the relm of education is the non-profit school that subsidizes a non-profitable program because it contributes to the mission of the school... a profit school would eliminate the program and dedicate resources to where they are more profitable.

In reality these schools generally do not compete which each other because they segment the market very differently.

 

I would be interested in seeing your list of "less than wonderful" RA schools and knowing what criteria you have used in rating their lack of wonderfulness.
Jack

 

Rich - I guess we'll have to agree to disagree. Tax status has significant implications to the financial status of institutions. Non profits can receive donations, operate endowments, and receive grants that aren't opened to for profits. They aren't immune to financial problems - but they have flexibility that for-profits don't have. Further, non-profits have special reporting requirements (such as the IRS 990 and IPEDS) that make public what their doing (and what their administrators are paid) that privately held for profits don't have to face. Finally, many non-profits are involved in "public service" and "researcher" which benefit society as a whole. They serve a broader set of stakeholders than do for-profits.

For profits are in business to make a profit and have to pay taxes. If they are privately held, they can pay their administrators whatever they please - and keep salaries private. They aren't accounatable to anyone except themselves - and an occasion accreditation visit. As I tried to show with my financial numbers this leads (other things being equal) to for profits having to cut costs and "cheapen" the educational part of their work.

I'm not saying that non-profits are perfect. But their profit status does impact organizational culture. I'll say again what I've said before - I'll never work for a for-profit academic institution. My reputation means too much to me.

Regards - Andy

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Andy Borchers, DBA
NSU (1996)

 

The then-Dean of Students at the University of California San Francisco (the medical campus), who left to form the Mother Earth Church in Carmel, wrote a charming and revealing book called Non-Profit Can Be Profitable which called attention to the many ways that individuals have profited significantly from starting and running non-profit enterprises. Long out of print

The fact that two of the biggest diploma mills of the 1990s (LaSalle, which took in $35 million in four years; and Columbia State, which took in $75 million) had a non-profit status, suggests their "owners" may have read that book. (LaSalle's founder was indicted on tax fraud, among many other counts, but that one was 'plea bargained' away; he went to prison only on one count of mail fraud. But the IRS did sell his riverfront mansion for a 7-figure amount; it was owned by his church, since he had taken a vow of poverty.)

 

He will provide the same old list and "proof" that are based on heresay.

 

Mr. Tracey asks, I would be interested in seeing your list of "less than wonderful" RA schools and knowing what criteria you have used in rating their lack of wonderfulness.

One very helpful list of non-wonderfuls is found on the official State of Oregon list. http://www.osac.state.or.us/oda/unaccredited.html

Whether one agrees with the list or not, their criterion for non-wonderfulness is pretty clear and simple: public use of degrees from those schools subjects the user to a $5,000 fine and/or six months in prison.

 

Jack Tracey

While I appreciate the link provided by Dr. Bear I would like to point out that the posting to which I replied specified that there was a list of non-wonderful "RA" schools. The link you provided was for unaccredited schools and so seems irrelevant to this discussion. I am relatively well aware of all the non-wonderful unaccredited schools. I would, however, like to learn more about Mr. Rogers alleged list of non-wonderful RA schools. Is there a list he can provide? And what are the criteria for inclusion?
Jack