In 2002, the big issues facing independent colleges and universities were the stock market crashes of 2000 and 2001, tuition pricing, demographics, market competition, and institutional size. Guess what? These problems have not gone away, and now there are new problems facing private institutions: energy costs, new federal regulations, credit crunch, and endowment spending. Of course, this is not the first time that murmurs of dismal consequences confronting independent institutions have passed through the media, professional journals, association meetings, faculty senates, and board meetings.
Do these dismal consequences mean that economic and financial problems have reached a critical mass and that the pace of mergers and closings for independent colleges and universities will speed up? There is no surefire way of making that prediction now because at this moment most private institutions seem to be financially stable.
Financial markets deteriorated so quickly during the last half of 2008 and early 2009 that many private institutions were blindsided by calls to repay debt balances, frozen debt markets, sharp declines in interest rates on cash investments, loss of major gifts from reliable donors, and severe strains on liquidity as private investments lost significant value. During the tech bubble burst and the effects of 9/11/2001, markets also experienced sudden losses, but the direct impact on cash was not as dramatic as the financial market debacle of 2008-2009. Private institutions scrambled for money when they suddenly discovered that they could not draw down cash from Commonfund, or they were unable to sell into the market to provide cash for operations.
Independent colleges took two years to recover from the crash of 2001. It will take at least two years for most private institutions to recover from the latest crash; the recovery could take longer because the earlier crash was not nearly as intense nor as long. Colleges and universities may struggle for three or four years as they try to recover their footing.
Moody’s Investors Service provides support for the conclusion that private institutions will face considerable pressure on their financial stability over the next five years. According to Moody’s Higher Education Outlook, issued in January 2009, pressure will come from:
- Threats to tuition and financial aid because parents and students will select less expensive public institutions, which will force private institutions to increase financial aid awards to attract the same number of students that enrolled the prior year. Less selective private colleges (these colleges tend to accept most applicants) are most vulnerable as students switch to public four-year colleges or community colleges.
- Loss of value in endowment funds have forced private colleges to postpone or cancel large capital projects planned to attract more students or new research funds. Investment losses have a direct impact on financial ratios (example debt to equity) that are required in debt covenants. Failure to maintain those ratios may mean that the college has to increase its reserves for debt thereby reducing funds for
operations or they could be required to speed up their debt payback.
- Loss of liquidity because endowments and gifts will generate less cash which will force colleges to cut expense budgets.
- Debt at many major colleges was protected or insured by credit swaps which will require colleges to increase collateral to remain in compliance with credit agreements. Injecting new cash to support credit conditions is another factor that suctions cash from operations.
- Volatility in credit markets will make it more difficult for colleges to refinance debt if they have to respond to a call provision, the debt has a balloon payment, or they have to rollover a debt package.
Despite these five issues, Moody’s believes that most colleges have the resources to withstand the threats that the chaotic debt market may pose to a private institution’s financial stability.
They do expect that the keys to maintaining stability will depend on “operational management and governance.” Operational management will call for increased financial controls, difficult choices on debt versus program requirements, and slowing down the capital boom of the prior decade. The current financial crisis calls for rapid decision making by colleges and universities, which they find to be difficult in the best of circumstances because they are consensus driven and decentralized. Those institutions that can rapidly respond to change have the best chance of rebuilding their strength, according to Moody’s.
So, have private institutions reached a state where they are strong enough to withstand the gales of misfortune that might have sunk them several decades ago? There is no ready answer to this question. What this book does address is how to determine whether your institution has the financial and strategic resources to withstand major changes in the economics that drive institutional finances. The chapters, appendices, and CD-ROM tools provide a broad range of resources for estimating financial condition, reshaping strategy, designing turnarounds, and identifying the characteristics needed for presidents and chief management officers.
Independent colleges and universities do not have huge state bureaucracies or friends in the state legislature who will rescue them when times are tough. Survival of private institutions depends on strong leadership, mission- and market-driven strategies, and relentless assessment of a college’s performance and position in themarketplace.
The Small College Guide to Financial Health: Weathering Turbulent Times provides the reader with insights on how to deal with the uncertainties that can strengthen or severely weaken the financial and strategic stability of an independent institution. The book is organized to provide answers to questions about developing a strong and flexible independent college or university:
- The current state of finances for private colleges and universities (Chapter 2);
- The economics of markets, prices, and constraints that drive private institutions (Chapter 3);
- The financial structures found in most independent institutions (Chapter 4);
- The practices employed in a well-run business office (Chapter 5);
- Typical business models that are the framework for strategy, operations, and finance among private institutions (Chapter 6);
- The policies and procedures that presidents and chief administrative officers need to consider in managing their institution (Chapter 7);
- How to conduct strategic planning that will improve the performance of the institution (Chapter 8);
- The characteristics needed by a president to manage an independent institution successfully (Chapter 9);
- Warning signs of financial distress (Chapter 10);
- Case histories of several independent colleges that have failed (Chapter 11);
- Case histories of several independent colleges that conducted successful turnarounds and are now flourishing (Chapter 12);
- Major lessons from colleges that closed versus lessons from colleges that successfully rose above major threats to their existence (Chapter 13); and
- The set of principles that college presidents can apply to build and sustain strategic momentum (Chapter 14).
Dr. Townley’s book comes with customizable tools, forms, and templates on a CD. These items will improve your understanding of financial analysis and guide the leadership of the college as you analyze your financial and strategic condition and formulate your strategic plans.
Originally posted July 27, 2009