Keeping a University Financially Sustainable During the Coronavirus Crisis

This episode of Future youe is brought to you by Deloitte's center for Higher Education Excellence, producing groundbreaking research to help colleges and universities navigate the challenges they face and reimagine how they achieve excellence. This is Future youe with Jeff Salingo and Michael Horn.

Welcome to Future youe. I'm Jeff Salingo in Washington, D.C. joined by my co host Michael Horn, who's in Boston via Zoom. The news, as it has been for the past several weeks, has been dominated by the COVID 19 pandemic as campuses have shuttered their physical doors over the past couple weeks and moved to remote learning and the American economy has plunged into the beginning of what looks like to be a major recession. With jobless claims of nearly 3.3 million last week, there are major questions about the fiscal challenges facing colleges and universities today. With us we have Scott Friedman and Tim Hurley, both principals at Deloitte, joining us to talk about what this current crisis means for higher education finances. Scott has worked with about 150 institutions over the last 14 years. Meanwhile, Tim has worked as an advisor from both an audit and management consulting perspective, and his primary focus is on bankruptcy and restructuring services. Scott and Tim, thanks for joining us. And first of all, I hope you and yours are doing as well as can be expected in this crisis. Scott, I'm going to start with you. This is probably the biggest global and national challenge or crisis that many of us have faced in our lifetimes. And for college leaders, it's probably their biggest challenge right now. What's the one piece of advice you would give to college leaders right now as they try to manage through this crisis?

I guess the most critical piece of advice that I would give is the necessity of communicating and doing so with honesty and empathy. As you indicated, these are uncertain times and all signs point to that uncertainty. Frankly, continuing students, faculty, staff are all concerned not only about the institution, but also their individual health, safety and financial security. Difficult decisions have already been made by institutions and it's quite likely that even more difficult decisions will have to be made going forward. Being open and honest about what is known, what is unknown, the decisions that you're making to give effect to and preserve your institution's mission and the rationale for those decisions is the only way to preserve integrity and give stakeholders a sense that you're being thoughtful and responsive to the evolving situation.

So that makes a lot of sense from the leader's perspective, communicating to stakeholders, turning to the institutional health of colleges and universities, and they're obviously facing cash flow Constraints right now. It might be the first financial hardship that comes up and emerges from your, from both of your perspectives. And Tim, let's start with you. What should institutions be doing now to respond proactively to the challenges that they're facing?

Yeah, thanks for the question. I think given the rapid decline in revenue and a spike in one time costs, it's putting a huge pressure on their cash flow. So what we would recommend is that schools consider creating a cash flow tool that would allow them to really understand the drivers, both positive and negative, on their actual cash flow position. This tool would come from the CFO or the chief business office, but the resulting numbers from that will require management to create a plan to respond to the situation and pulling the right people together to build that plan. There really should be involved the administration, the board and the faculty because you need to put the plan. But then all those key stakeholders need to be vested in carrying out and executing a successful plan.

Sorry Scott, do you have anything to add on to that? Or else we'll just move on to the next question.

I think I would agree with everything that Tim said. I would also suggest that sort of thinking about various scenarios is also going to be important. As I said before, we don't know exactly how the situation is going to unfold. And so having different sort of, different assumptions built into sort of forward looking cash flow models will be important as you sort of evaluate the situation.

So Tim, how would you advise an institution then on the financial indicators that they need to monitor right at this time to kind of understand what their short term cash positions are? Right. Can you help us understand what are the inputs to forming some visibility into their cash flow?

So keeping it very simple, this is not an accounting exercise per se. This is all about cash. And in a crisis, cash is king. So you're starting with your initial cash balance and then you're going to create a weekly forecast of expenses and receipts. And each week you're just going to do a rolling cash forecast where you've got your whatever cash you have for the beginning of the week, you're subtracting out your expenses, adding back in any revenues and then you're going to determine whether you have any shortfalls that need to be addressed. Now that tool needs to be updated on an ongoing basis. Forecasting is never perfect. Right. So you're developing a plan and the next week you go through and some expenses came through that you didn't expect or revenue did not come through that you, that you were expecting. So you're always kind of adjusting and learning more about the vital lifeblood of the organization in terms of cash. And then you're going to adjust your cash flow from there. I would also recommend as part of this that you have built in various scenarios and that's really in the outer part, know what the future is going to be like. We've already talked about different amount, you know, the amount of uncertainty out there. So you've got to build a flexible plan that can respond to those things. The cash flow itself should really go out, at least initially, 13 weeks. So, you know, if you've got a problem from the get go and then from there stretching it out to September or so, because that's the next time you're, you're going to have a large influx, hopefully of cash coming into the schools.

And what are the indicators then that you should be looking for? I mean, what are those indicators over 13 weeks or September that should be, you know, that could raise red flags, for example, what are, what are some of the things that you're looking for in that moment?

Well, you're really looking for cash shortfall walls, right? Because you've gotten your auxiliary revenue that's gotten dramatically declined. You're not collecting on parking lots and cafeterias and other auxiliary revenues. So when you're looking at the 13 weeks, if you're seeing where you're running low on cash, then you've got to put together a plan to go forward and address that. If you have capital projects that you can push off, you want to push those off. I would like to say this is not all the downside. I want to put a little bit of a positive spin on this. This is an opportunity here for schools to actually add revenue to their budget. If you look at what's happening in SUNY and they are offering their dorms to be utilized as temporary hospitals, SUNY would be reimbursed for that. I also know of schools looking to house healthcare professionals who are, you know, in there fighting on the front line, but yet they don't want to go home to potentially infect family members. So schools are opening their doors and also creating a revenue opportunity for themselves to utilize those assets that are now really not being used.

Yeah, that's extremely helpful. And it starts to go actually, I think where we want to go next on this, which is to say you started talking about ways you can actually bring in revenue during this crisis and start to change maybe the inputs right into that forecast and how it will roll out over the next many weeks and so forth. One of the Factors that colleges can obviously potentially manipulate is changing what is owed. From a debt obligation perspective, from your perspective and advice to leaders, how should colleges be engaging their lenders in this current situation?

So prepare, prepare, prepare. So obviously people know the sector is under extreme stress, but proactively reach out to the bank. And when you do that with an ask for an extension of credit, come with a plan. It doesn't have to be a detailed plan at this point in time, but show that you're thinking your way through it. Make them sure, make sure that they're aware that there's an ask that is coming. In fact, I spoke to a lender last night and they are extending credit, but for anything that is out of the normal request, they're certainly looking to make sure that there's a plan. The other option, in addition to just reaching out to your lender is keep an eye on the legislation that's coming out from D.C. one of the pieces that has been approved is the sba, so the Small Business Administration. So in there they're allowing for where it appears to be allowing for higher ed. So smaller schools may qualify for loans where before this they may not. So that's an avenue for someone to consider as well.

Tim, for those institutions that have endowments that haven't been adversely affected or where they have some liquidity, should institutions think about drawing down their endowment or should they think about adding to their debt given current interest rates? Or is it a combination of both? It seems like the situation is so fast moving that these decisions could change by the day. But what's the overall strategy between debt and endowment?

I think it's really case specific, but I would say on the endowment side, for schools that are already stressed, have already maxed out what they could take for the year, I am, you know, the other way to go at that is looking at the restricted portion, reaching out to potentially donors who made those donations and see if, given the nature of the crisis that we're going through, if they would unrestrict their gift and allow it to be moved over into the operational budget, that getting the permission to do so and helping out the school in an urgent time of need is certainly an avenue. The other unique idea that I've heard floating around is a collection of universities have actually gone to the attorney General and have requested a one time waiver for the school to take a loan virtually against themselves with a promise to pay back in X years. So it would be an interest free loan. The terms can change, but interest free loan borrow from their endowment paying it back over the next years. It's similar to the way if someone were to be laid off that they could loan again and take a loan against their 401, if you will. That's something that I have also heard that is being considered at various states.

I'd add one thing here and that is that the market has obviously gone down significantly over the past several weeks. The corpus of these endowments in many cases may have fallen pretty significantly. So I think being thoughtful about drawing down endowment not in the loan situation that Tim just described, but actually drawing down the corpus may have slightly more outsized impact than were you to do that when the endowment is greater. So I just think that should be part of the calculus.

That's a good point, Scott.

Sorry, go ahead.

The other piece of this is we didn't address debt. Certainly the rates are excellent right now. For those that are strong credits and that should be evaluated. This could be an opportunity for someone to take advantage of their financial health.

So you both have talked now about some creative ways to both impact a variety cash out as well as cash in for these organizations. Obviously one of the big things is given no one knows how this crisis will unfold in the coming weeks and months, a significant question is what will students and families actually be able to pay and will they even show up in the fall? Already we're seeing surveys that suggest a significant minority of students are actually rethinking their college plans for the fall. From your perspective, how should institutions start to plan from a tuition revenue perspective and financial aid budgets for the fall of next year? Even before the crisis, obviously some colleges were missing their enrollment goals or having to discounts of their tuition even to make a class full. It seems this crisis will exacerbate that. How would you plan in that situation?

We have to assume that students estimated family contributions are going to differ markedly from where they were even a month ago, and that's presumably going to be downward. On top of that, the traditional models that forecast melt for admitted students and retention for returning students are frankly not going to be terribly predictive in this cycle and frankly probably in the next few cycles as well. As a result, schools are going to need to repackage financial aid for incoming and returning students and will have to very, very carefully watch their deposits and registrations for fall of 2020 and frankly be able to alter their aid strategies on the fly. Schools might want to start to think about analyzing the impact of offering incoming students more flexible scheduling, staggered starts, or even reduced course load requirements to ease the transition to university for those who either want to spend more time with their families or who frankly need to work because of the economic conditions. To answer the last part of your question, I mean, the honest answer is yes, this will probably exacerbate the situation for schools that were already missing their enrollment targets. And those schools should really be thinking critically about what they can do to reduce costs in scenarios that assume various reductions in enrollments and can combinate increases in discount rates.

Quick question.

From a scenario planning perspective on this, does modeling out from what happened during the Great Recession, is that a helpful analog? Like, what are your points as you're thinking about the sensitivity analysis and new models that schools ought to be going to? What's their reference point, or is there none?

I mean, I think that's a, that's probably one of the most reasonable reference points I was actually talking about with a colleague earlier this morning about what is the appropriate analog? What is the appropriate proxy? I think just the suddenness of this and the sort of the precipitous decline over a, you know, short but, you know, multi day or multi week period of time sort of created this sort of emergent and exigent circumstance. So I think, yes, using the 2008 recession as an analog, as a proxy to analyze what various scenarios are is reasonable. But I would maybe even take that and go beyond that too, and say maybe there's even a more aggressive, if you will, scenario that you want to model out, just so you have a sort of a reasonable sense of the range of possibilities.

Scott and Tim, I want to end on a somewhat more positive note as we kind of look forward in the next couple of months and in the next couple of years, it's clear we're probably going to enter a recession if we're not already in one and maybe even a pretty deep one. Now. Higher ed tends to see a rise in enrollment actually during economic downtimes. It's the interesting thing about higher ed. It's always been countercyclical in that way. Do you see this downturn kind of playing out like the last ones when it comes to enrollment, where we've seen these upticks in enrollment, which schools might benefit in this situation, which schools might actually lose out in this situation? And for those that might see an uptick in their enrollment, what can they do to potentially prepare for that increase in demand? Because we were just talking about cash flow here. We were talking about risk. We weren't talking about in some places it might actually be growth that they have to prepare for and what do they have to do to get ready for that?

Yeah, great question. I don't have any reason to counter that conventional wisdom that higher ed enrollment is inversely correlated with the economy. But growing enrollments during a recession, especially one that came about so suddenly, is potentially a double edged sword. Enrollments might rise, but simultaneously net tuition revenue may stagnate or even drop because of estimated family contributions and student and parents ability to pay. That's going to put increased pressure on institutions that experience a rise in enrollment to effectively serve their students with the same or potentially fewer resources. I haven't completely digested the CARES act that was passed this morning, but it does appear to allocate money directly to institutions, I think to the tune of between 12.5 and $13 billion in total. There is a skew towards institutions with larger Pell eligible face to face populations and that money sort of covers both costs incurred as a result of COVID 19 and also provides direct or has institution provide direct financial aid to students. My hope is that this will bolster institutions. With that in mind, the institutions who are most likely going to be challenged in this circumstance is those that are a heavily tuition dependent, b have smaller endowments based on the rationale that we talked about previously, and c have lower percentages of Pell eligible students because they're going to be the ones most sort of crunched and then also not have the same level of access to funds provided by the CARES Act. The schools that are going to benefit really need to be thinking now about how they can ultimately scale up their student services. That's going to be a critical need. If you have more students in an environment with, you know, not significantly more revenue, you've got to be able to effectively serve those students to maintain retention, graduation and ultimately student outcomes.

Thanks Scott and Tim for joining us during these challenging times and shedding some real important light on what I think for many students and institutions is going to be an uncertain and highly fluid fiscal future. Michael and I will be right back on Future U.

This episode is brought to you by Deloitte center for Higher Education Excellence. Producing groundbreaking research to help colleges and universities navigate the challenges they face and reimagine how they achieve excellence. Every aspect of the Academy teaching, learning and research. Through forums and immersive lab sessions, the center engages the higher education community collaboratively on a transformative journey, exploring critical topics, overcoming constraints, and expanding the limits of the art of the possible.

Welcome back to Future You, Coming off a sobering but important conversation with Scott Friedman and Tim Hurley from Deloitte. Appreciate them being there. Jeff, just to transition a little bit, you covered higher ed during the last downturn, the Great Recession. As you reflect on the advice and tips we heard from Scott and Tim on the importance of managing cash and what's likely to come and some of the steps that schools can take to both bring in revenue, delay payments and so forth. What strikes you as being different this go round from the last recession?

So I think there's two key things that are different. First of all, what's different for all of us is how quickly this came about. Even in 2007, 8, there were signs of a slowdown in the housing market, which was particularly hard on colleges and universities because at that time, parents in particular and students in general were using the cash from their homes and the increasing values of their homes to pay for, for rising tuitions. We kind of saw the signs of that happening. And then of course, in the fall of 2008, it all came crashing down. But I think that colleges were able to slightly better prepare for that compared to now, where it just obviously for all of us, has fallen off a cliff. The second, and maybe this is more critical, is that I think the underpinnings of higher education, the financial underpinnings of higher education were just stronger back then than they are now. Right. We were, we were kind of in the middle of the millennial generation. Among traditional college age students then, enrollments were high, even among adult and master students at that time. So the enrollment and the amount of tuition discounting going on that time was just less because net tuition was high because we had so many students in the system. As we all know, and as we've been talking for the last couple of years, even here on Future you, the financial underpinning of higher education hasn't been great the last couple of years. Many schools were missing, already missing their enrollment targets. They were discounting tuition. We saw enrollments in master's programs falling and professional programs falling. Schools were closing their face to face MBA programs. I mean, all around there were issues and now this has happened on top of it. That's a big difference to me from 2008.

Well, so that actually segues, I think, Jeff, nicely into the other thing that I've been curious about because you just alluded to the fact that you've been extremely worried about college's financial viability before all this happened. And indeed, your reporting recently on gapping for the New York Times sort of revealed the start gap between what financial aid students actually need and what Colleges are in fact giving them and what that suggested about colleges, revenue position and now all of a sudden, you know, something that feels different from my perspective is where this is literally unfolding in the period when students are committing to schools, they're hearing from schools, and students would be hearing about their financial aid awards, making plans around that. But with both household finances and college finances so up in the air, how fluid are those awards from your perspective? And how will financial aid packages and filling out a class and so forth, really helping students afford the school, but also making sure that schools put together a class that results in a sustainable bottom line? How's that going to all work in the coming weeks and months?

Fantastic question. And I think it's just going to be fluid right up to the last possible moment. Because the other piece that you didn't add in there is that I think a lot of students don't know if they are going to go to a college that's going to be face to face in the fall. Right. And I think there's a lot of students that are wondering like, do I really want to go to X institution online or remotely? And so I think they're going to be making a lot of their decisions at the last possible moment. Until that's clear. I think institutions are going to probably spend more than they thought on financial aid, but they're not going to overspend. They're going to probably put their money and their dollars to the students they think are going to succeed. In other words, the students that they think they can retain and the students that they think they can graduate. I think we're going to start to kind of see them slice off a portion of the class that is either too expensive for them, which is unfortunate, because I think we've been doing a really good job with access for low income students in particular. And I think they're also going to look at the success measures of students and to see which ones that they want to enroll. So I think they're going to be more willing in the end to kind of come in under but not discount tuition so that they could maintain some sort of tuition revenue than rather discount too much and fill their beds. Yeah.

And frankly, I guess that would boost predictability to a certain degree because as Scott and Tim pointed out, making sure you also serve your current students and that they graduate, that they get to the finish line is going to be important. Which I guess leads me to my last question, which is, you know, we've talked about how Moody's swiftly downgraded the outlook for colleges to negative in the wake of this crisis unfolding. Robert Zemski, the author of the College Stress Test, came out in the Chronicle last week and said that his current view is that 20% of schools are in deep trouble, not just the 10% that he forecast. He and his co authors forecast in the book. You've been more optimistic, I think it's safe to say, than me about school closure rates.

But what's your own view of the landscape of closures?

And maybe not even just closures, but declarations of financial exigency, which is the higher ed's equivalency, effectively of bankruptcy. What's your sense of what we're likely to see from this?

We probably will see a slight uptick in the closures than we would have seen, or at least ones that were going to be sooner than five years from now or 10 years out. I don't think we're going to see a ton of them because I think that there will be a lot of federal money. You know, both Tim and Scott mentioned the CARES act that passed the Senate, going to the House for the president's signature. I think that's only going to be the first of one of many bills that are going to come out of Washington. Higher ed did fairly well in that. And I think, again, I think you're going to see more money. The question I have is whether the states will get more money that then they will plow into their public and in some cases private universities. You know, we've talked so many times on this show about the economic impact that colleges, universities have in many of their small towns. Given everything else kind of going out of business in some of these places or at least boarded up for quite some time. I don't think people are going to want their college to also go out of business. So I think that we're going to see a lot of propping up of the sector, both at the federal level and at the state level. So, Michael, you've been not as optimistic on this front as I am. How do you think this kind of changes the dynamic in terms of closures and particularly even more in terms of mergers now, because there may be some partners that might have worked a couple of months ago that may not work as well in this.

Yeah, I think it'll actually soften the mergers to your point, Jeff.

But I actually, I mean, I do

think that there will be an uptick in closures. We've already seen two casualties pretty quickly where they haven't said that they're closing, but that they're not going to be accepting new students for the fall. The San Francisco Institute of Art and Notre Dame Nemour, hardly rural schools in both cases, although small in both cases, and specialized, you know, with religious focus and art focus, which of course are squarely in the zone of challenged schools. But I think we will see some softness. While you're right that the federal money will backstop some of this, it's not clear to me that it will be enough or fast enough in certain cases. So I think we'll see some softness, some acceleration of closures. I thought it was interesting that Central Washington declared financial exigencies so quickly, and I would expect that we'll see a few other regional comprehensive publics to do so as well. I don't think we'll be seeing flagships or anything like that sort of that state comprehensive university level. I wouldn't be surprised if we see a few of those declare financial exigency. And then it'll really depend, obviously, if we see some consolidation in the state systems. I think that depends on what states do to shore up college finances. I think you're right. That's going to be on no one's wish list to see coming forward.

Jeff yeah, and Michael, there's just so many subjects that we're going to have to dive into in the next couple of weeks on this, or actually next couple of months probably, and even into next season of Future you. And in fact, we've said on a recent episode that we were actually going to take a little bit of a hiatus, and clearly we're not, because this crisis is unfolding the hour by the day. So we are going to be back and doing many episodes in the coming weeks on this crisis, in particular going into what might be a summer hiatus. But maybe if we're stuck in our homes, we might just keep going through the summer. We haven't decided that yet, but that's a wrap on this particular episode. Thanks so much for joining us, and particularly to Scott and Tim at Deloitte for talking about the financial challenges facing colleges and universities. We're going to be back with more episodes on this unfolding crisis and its impact on the future of higher education. And in the meantime, be safe and stay strong.

Hey, folks, Michael Horn here. Hope you enjoyed the latest episode of Future youe. And just a reminder to please subscribe to us on your favorite podcast platform. And if you like the podcast, rate us so that others can find us and find out about the good conversations that we're having here. As always. Thanks so much for listening.