The Fallacy of Revenue Diversification

Enrollment is only presented here because it functions as a "pipeline" that people understand, in much the same way research and endowment also function as pipelines in ways that most people do not understand.

What happens in one year in terms of enrollment could have long term implications if the circumstances behind the year's outcome repeat. A plan to increase enrollment could take as many as four years to mature if the plan is simply to increase the size of the incoming class for a while. And the impact of a decline in the number of incoming students in one year would compound in the years ahead if the number of incoming students stays down. 

Endowment functions as a pipeline as well. By law, donor stipulations, and institutional policy, the amount of endowment funds that can be used in a year is limited. And this, in turn, significantly limits the extent to which endowment growth will provide immediate operating budget and, thereby, cash flow relief in the near term:

In this example it is assumed that an institution, by policy,  permits a 4% draw on the trailing 3-year average value of the investments held in the endowment. Leaving appreciation in value aside, a $50 million increase in the endowment in one year with no further growth for the next three years and with no restriction on its use except in accordance with this institutional policy would provide no budget relief in Year 1, $600,000+ in Year 2, $1.2 million+ in Year 3 and $2 million in Year 4. And in the illustration above, a steady $50 million in endowment value per year for 10 years running would see a $350 million endowment at the beginning growing to $900 million over time – almost a threefold increase – while endowment draws at 4% will do just a little more than double from $16 million to $34 million over a decade.

Research can be a very costly undertaking, particularly lab-based research, which requires facilities that are at the highest end of construction costs. Just pursuing grants in itself is a costly business, with success rates on submitted applications often in the low single or double digits. And while, in theory, the expense goes away when a grant ends, investigators often turn to the institution to continue funding until new grants are secured, which, often enough, does not happen. And even when investigators are fully funded, study after study makes the claim that indirect cost recovery falls short of covering the real overhead costs of being in the research business.

But grants, too, function as a pipeline, with new grants spread out over a period of years. In this illustration, a year’s worth of grant awards are spent out over 4 years. Grant awards grow from $7 million to $11 million. But growth in actual grant spending lags. And leaving aside the fact that grants often pick up salary costs that would otherwise have to be paid using school funds, the increase in budget-relieving indirect cost recovery in the illustration below on an increase in annual grant awards from $7 million to $11 million is only $1.7 million over a decade.