Higher Education Policy and Practice

Dealing with the Shrinking Economy

During the past month, the country has elected a new president and the economy continues to founder. For colleges the question is how will the state of the economy shape their financial condition? The state of the economy is no mystery to anyone living through its consequences. Financial markets are severely depressed, Common Fund froze short-term withdrawals at the worst possible time for colleges, debt is almost impossible to sell, and families are squeezed by disappearance of home equity.

We know that times are tough when the President of Harvard with their $36 billion endowment sends a letter telling administrators, faculty, and staff to expect belt tightening. If Harvard has to tighten its belt, the rest of us better pay note. The good thing for colleges with small endowments today is the hit on their income will not be as immediate as those with larger endowments where about 25% of their operating income is based on those endowment earnings. But if the recent rapid stock market decline is a predictor of the future of our economy, next fall should be the time when tuition dependent private colleges–most all but the top 100 private colleges–will feel a deep hit. They need to prepare now.

We can expect to see the following over the next year:

  1. The stock market drop – now about 40% – will depress endowment values.
  2. Depressed endowment values lead to smaller endowment draws.
  3. Significant declines among supposedly safe financial stocks have depleted the fortunes of many wealthy donors; so expect fewer and smaller gifts.
  4. More than likely large capital campaigns will stall.
  5. Colleges with variable rate debt will find that their bondholders concerned about the college’s ability to cover the debt.
  6. Colleges trying to convert variable rates to fixed rates will find a very small market for refinancing their bonds.
  7. Debt holders will impose harsher terms in bond covenants.
  8. Colleges will find that banks are reluctant to make short-term cash flow loans.
  9. Downward pressure on demand for a private college education, lower enrollment and lower income.
  10. Cash flow issues, perhaps serious enough to force closure, for unprepared institutions.

So what should colleges do to survive this recession whose duration and depth is still not known? Following the following five key rules could help the college survive:

  1. Build up cash reserves now.
  2. Expand markets – offer new programs, go into new geographic areas, and form instructional partnerships.
  3. Expand low cost distance and technology based instructional delivery.
  4. Form administrative partnerships to cut costs.
  5. Get out your strategic plan and rework it for current circumstances.

It is likely that this downturn in the economy is different from anything that we have experienced recently. Colleges will need to become even more strategic, flexible to changing markets, responsive to aggressive competition for students, and concerned about cost and cash flows. Strategy is not limited to the internal workings of the college. Strategy is looking outward and figuring out how partnerships, joint ventures, new avenues of instructional delivery, and new ways of projecting the instructional services of the college can serve the mission of the college. The mantra for the next several months is “be prepared.”

We can help. Now is the time.

Originally posted November 23, 2008

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