Stakeholders Are Shaping a New M&A Model for Higher Education at PASSHE

Changing Higher Ed Podcast 100 with host Dr. Drumm McNaughton and Guest Dr. Dan Greenstein

Table of Contents

Stakeholders Are Shaping a New M&A Model for Higher Education

A new M&A model for Higher Education has taken shape with Pennsylvania’s State System of Higher Education (PASSHE) merger. PASSHE has 14 public universities, and most of its institutions teach to the undergrad and master’s level and are regional institutions. The system has one research institution.

These institutions primarily serve rural areas, which is an area that is changing, especially due to the growing inequality in the United States. As a result, the system has seen a 27% decline in enrollment over the past 11-12 years. It currently enrolls 89,000 degree-seeking students, which is a large drop from its previous high of 120,000 students.

Because of declining enrollment, the system is “merging” six universities into two institutions, one in eastern Pennsylvania and one in western Pennsylvania.

Background of Institutional Integration

This type of public higher education merger is not unique; structural changes are happening in colleges and universities across the nation. These changes are due to a variety of factors, such as demographics resulting in declining high school graduation rates; these require higher education to look elsewhere for student enrollment. Lower state funding allocations also are putting pressure on higher education institutions to raise tuition, which, in turn, creates barriers to education among many students and their families.

These issues are particularly acute in Pennsylvania, which is 48th in the nation in state investment in public higher education. Additionally, the State has a higher number of rural schools, which are experiencing significant demographic changes. This impacts the ability of families that PASSHE has historically served to pay the price for higher education.

As colleges and universities get smaller, they are not able to offer the same breadth of programs, unless they charge more tuition. PASSHE leaders realized that they cannot continue to raise tuition on low- and middle-income students that the system has historically served and will continue to educate.

At the same time, more jobs are requiring some form of higher education. In Pennsylvania, 60% of jobs require some form of higher education; in comparison, only 50% of adults in the state have some higher education. The only way to close this gap, which is growing, is through educating more historically underserved students, including low- and middle-income students, rural students, underrepresented minority students, and adults. It would be impossible to meet the needs of the state by focusing only on students from affluent white families.

Changing the Higher Ed M&A Model

Pennsylvania also is home to several high-end private institutions that serve part of the state’s higher education market. Additionally, there is a number of quasi-public institutions in the state, as well as 100 private institutions and 15 community colleges.

This combination makes for a crowded landscape in higher education, to the point that some institutions in PASSHE were struggling with enrollment and not doing well financially. Adding to the issues, the system didn’t move quickly enough to tighten its belt as both student enrollment and revenues declined.

Leaders’ decision to do institutional integration was based on the need to balance the budget. Institutions that have lost a significant amount of enrollment (and as a result, revenue) must cut programs, which then leads to smaller enrollments because students want a wide choice of programs. Additionally, rural America relies on higher education – especially regional institutions – to produce community leaders as well as the range of professionals that provide services to that community.

Integration is a way of recognizing that the institutions are getting smaller and would have to downsize their programs if they were to continue to work alone. However, by working together through institutional integration, the number of programs that can be offered remains numerous, diverse, and strong. This allows the system’s institutions to offer a significant breadth of opportunities for students and the communities they serve in a way that is financially sustainable.

A Slow Methodical Process to Redesign the Integration System

Because the Board did not have the legal authority to change the structure of the system, the system had to go to the Legislature to gain that authority before they could move forward on the integration. This legislative change took a year and was approved in June 2020.

After approval was given, the system went through a planning process for integration. These plans were presented to the board and then had a 60-day public review and comment period. The board voted in July 2021 to approve the plans, and now system officials are moving forward with plan implementation.

The responsibility for the implementation of the integration falls primarily to the regional presidents, their leadership team, and the consultative processes that are being used. The system officials check in periodically and testify before the Legislature.

Integration also is part of a fundamental redesign of the entire PAASHE system, which is being driven by the view that public higher education should be a partnership between the state and higher education. The system’s leaders believe that its institutions need to be run effectively, efficiently and with leading-edge knowledge, so they provide the best possible outcomes for students.

This redesign was brought about because PAASHE had fallen down on its part of the job in several ways. The redesign process provides avenues for feedback from elected individuals as well as multiple constituencies. Now the system leaders are even more committed to transparency and accountability, including providing a vast amount of data online to the public, reining in costs, and addressing the challenges faced by the system’s smaller schools.

PASSHE leaders are now going back to the state to reestablish the funding relationship. They have asked for significant additional funding for the system as well as for direct student financial aid that would address financial imbalances.

Embracing Transparency for a New M&A Model

While embracing transparency in this integration process (which was required in ACT 50), PASSHE leaders tried to go above and beyond the minimum requirements because the system considers itself “the people’s university” since it is the only public higher education system in the state. Leaders feel it is important for the public to know where tax dollars are being spent and the resulting outcomes. This approach is part of the system’s culture and values.

The system ensured transparency throughout the integration efforts, which had several phases in its planning process. This transparency included:

  • A financial analysis.
  • An inclusive process to develop a blueprint of an integrated entity that involved 1,000 people from across the six universities in working groups.
  • Public discussion of the plans during regular board meetings.
  • Regular legislative testimony and briefings.
  • Regular engagement of community members and students.
  • A public comment period, which received eight hours of testimony.

 

As a result, substantive changes were made that were beneficial to the final plan. These changes included:

  • prolonging the process of curriculum blending, which improved the systems environment;
  • conducting additional market research that gathered the views of students and parents about online delivery;
  • changing governance structures and the legislative process used to move forward; and
  • completing an economic impact study.

 

The demand analysis evaluated the fundamental characteristics of the institution being designed. This is very tricky in a competitive environment and has a lot to do with price. For institutions like PASSHE that are focused on middle- to lower-income students, if the price is not differentiated significantly from other institutions, then the value proposition is very difficult to sustain. However, the students that typically plan to attend PASSHE institutions do not go to other higher education institutions; instead, they don’t pursue higher education at all. This means that the state will not have the workforce it needs to stay strong.

Pennsylvania is suffering consequently, dropping from 24th to 42nd in the nation in the unemployment rate. Additionally, this value proposition is also a societal issue where lower- and middle-income families are denied the affordances that individuals who go to college receive.

Change is hard and very personal and it’s important to support the change journey for everyone because PASSHE cares about and needs those individuals. For example, the legal and advocacy team has been involved in the change process for over 2 years while the campus staff has been involved for over a year. Burn-out is a very real threat in building a whole new structure while also dealing with the pandemic. PAASHE leaders are trying to pace the work and be sensitive to people’s needs.

A Guiding Role of Accreditors and Stakeholders in Shaping a Better Model

Most accreditors are getting used to mergers and acquisitions. Middle States has been a great partner to PASSHE throughout the integration system. PASSHE made sure the accreditors were involved early to help ensure that everything was done correctly. The accreditors had seen this type of effort before and had developed processes to help guide this effort. The system’s leaders believed that Middle States’ responses helped make the integration process less daunting for PASSHE’s leaders, faculty, and stakeholders.

Additionally, the U.S. Department of Education, NCAA, FSA, the Pennsylvania Department of Education, and other oversight organizations also have been supportive of this transition. PASSHE leaders are committed to remaining on top of the integration process and informing these oversight organizations about what is happening to ensure that they are following the appropriate rules and processes.

PASSHE’s leaders are looking forward to the regular and middle-stage regulatory reviews, which will provide helpful feedback. This third-party perspective helps ease the system’s tunnel vision.

What’s Next for PASSHE

The system plans to enroll its first cohort of students into the integrated entity in Fall 2022. The system is looking at various issues such as financial packages, system status, and technology capacity in preparation for the opening day. These points will provide a good indication of PASSHE’s ability to communicate with various stakeholders, as well as its capacity to create these two institutions through developing a new admissions process, etc.

Longer-term results will focus on enrollments, student outcomes, and affordability. PASSHE officials regularly review these specific indicators very closely for the integrated entities as well as for the system’s other institutions.

Three Recommendations for Higher Education Leaders and Boards

  • Boards need courage because these decisions are not easy. Everything is political and very public in higher education systems that are beloved. There will be significant resistance, but don’t turn away from doing the right thing.
  • Everything needs to be analytically driven because of the emotion tied to this effort. Opinions will arise, especially those based on what has previously been done. Therefore, it’s important to ground every single hypothesis about where the institution(s) may go in data to inform the discussion. Consider where the institution is currently and what the data suggests the path will be in moving forward in a specific direction.
  • Resilience is critical because there will be many critics. It’s important to become resilient without becoming cynical. It’s important to maintain an individual North Star, such as a commitment to fairness and a passion for equity for everyone.

Resources

Dr. Drumm McNaughton provides M&A consulting services to higher education institutions

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