Higher Education in a Troubled Economy

Assessing the Damage and Forecasting for the Future

December 5, 2008

Sue Menditto

NACUBO

Business Office Issues

Long term investments• Changes to asset allocation mix• The largest institutions have not (yet)

reduced spending rates– Several have increased– Smaller institutions

• Newer endowments• Under water• UPMIFA

Business Office Issues

Long term debt• Reassessing structure of debt portfolio• Revisiting debt policies• Examining derivatives and counter-party

risk• No new construction• New debt covenants

Business Office Issues

Balance sheet analysis• Liquidity• Rating agencies• Financial responsibility ratios – ED• Ratios as a tool• Financial reporting issues

Business Office Issues

Financial Reporting

• Asset reclassifications

• Disclosures

• Fair market value

Business Office Issues

Public Institutions• 3 – 17% cut-backs • Majority 3-5%

– Immediate– Double the percentage next fiscal year

Independent Institutions• Endowment declines• Enrollment declines

Responses to Economic Conditions

• Decentralized environments become more centralized

• Business process review – goal is lean office practices

• Greater centralization of IT endeavors• Assess revenue contributions and related costs

of institutes, schools, departments, centers– Examine against mission critical / core programs– Examine contracts, even for tenured positions– Reexamine endowed chairs

Responses to Economic Conditions

• Renegotiate contracts with vendors– Know benchmarks and standards– Consider outside help for above

• Construction contraction• Explore healthcare coalitions with other

institutions– Greater buying power– Cost reductions

• Conduct a vacancy review process

Responses to Economic Conditions

• Workforce exploration– Staff salary freezes– Faculty salary freezes– Review faculty teaching loads– One time salary contributions– Centralize all hiring

• Open positions• FT / PT, lecturers, adjuncts

– Analyze workforce demographics• Explore pre/early retirement programs• Explore above first, especially if reductions seem

imminent

Responses to Economic Conditions

Create a “war-chest” for increased financial aid needs– Carve out savings from departments, schools,

etc… a portion (if not all) gets remitted to central administration

– Central administration also finds cost reduction opportunities and earmarks for financial aid needs

– Reexamine funding / fund carryovers– Examine quasi-endowments

Responses to Economic Conditions

Review “all things endowment”– Form “endowment liberation team”– Differential endowment payouts– Review endowment terms – determine how

restrictive they really are – Examine endowed chairs– Legal analysis of donor agreements – past

and going forward for flexibility– Quasi-endowments

Responses to Economic Conditions

• Examine classroom size– Cut back on non critical courses– Distance learning– Examine “outliers” – from average classroom size

• Public institutions should ask state / Governor for help– Support salary freeze– Support fee increases

Responses to Economic Conditions

Union Issues • Ask for renegotiation• Point out trade offs

– Current economic times– Positives– Negatives– A compromise is better than a shut down

• Seek legal advice, look for precedents

Immediate Matters to Consider

• Has a current determination been made of whether there are any immediate liquidity needs that require action while longer-term analysis is undertaken?

• Are any of the three “warning signs” of financial stress turning critical? – Declining enrollment – Declining net tuition per student or declining net tuition – Declining liquidity due to investment losses or operating

deficit

Immediate Matters to Consider

• Financial projections• Develop several scenarios

– Changes in revenues and expenses– Changing endowment yields– Enrollment changes– Debt fluctuations

Immediate Matters to Consider

Estimate the following over 15 – 18 months– Current operating budget – State funding for operating and capital budgets – Student financial aid – Tuition and fees for academic year 2009-10 – Enrollment for spring term and next fall – Current hiring – Institutional debt/financing – Retirements of staff and/or faculty – Fund-raising and any anticipated comprehensive capital

campaign – Endowment and endowment spending – Underway or planned capital projects – Matching or in-kind obligations for grants or gifts

Immediate Matters to Consider

• Is it appropriate to consider changing the annual endowment spending rate?– Near or mid-term – Assess consequences of above

• What communications about the current crisis have taken place?– Between the president and the board– Between the president and institutional stakeholders

(e.g., parents of students, alumni, and staff)? – Between the president and cabinet– Faculty senate

Immediate Matters to Consider

• Has anyone either within the administration or on the board had significant experience working with an organization or a business undergoing severe financial hardship? – Seek advice – Gather information

• Has it been determined whether financial aid is sufficiently available for currently enrolled as well as incoming students (examine alternatives)– Short-term loans– Quasi endowment spending

Resources

www.nacubo.org

• Financial downturn toolkit

• Financial reporting and accounting