Higher Education in a Troubled Economy Assessing the Damage and Forecasting for the Future

1. Higher Education in a Troubled Economy Assessing the Damage and Forecasting for the Future December 5, 2008 Sue Menditto NACUBO

2. 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

3. 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

4. Business Office Issues Balance sheet analysis • Liquidity • Rating agencies • Financial responsibility ratios – ED • Ratios as a tool • Financial reporting issues

5. Business Office Issues Financial Reporting • Asset reclassifications • Disclosures • Fair market value

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Immediate Matters to Consider • Financial projections • Develop several scenarios • Changes in revenues and expenses • Changing endowment yields • Enrollment changes • Debt fluctuations

16. 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

17. 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

18. 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

19. Resources www.nacubo.org • Financial downturn toolkit • Financial reporting and accounting