Higher Education in a Troubled Economy

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

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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

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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

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Business Office Issues

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

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Business Office Issues

• Financial Reporting
• Asset reclassifications
• Disclosures
• Fair market value

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Immediate Matters to Consider

• Financial projections
• Develop several scenarios
• Changes in revenues and expenses
• Changing endowment yields
• Enrollment changes
• Debt fluctuations

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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

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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

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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

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Resources

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