July 24, 2020

With college enrollment down, how will universities make up the budget shortfall?

This fall, colleges around the country are bracing themselves for an unprecedented crisis of declining enrollment. A report from FitchRatings suggests that annual enrollment could drop by 5 to 20 percent in the fall of 2020 due to coronavirus.1 With tuition and fees accounting for 82% of revenue for private colleges,2 and declines likely in athletic revenues and donor proceeds, universities may be faced with severe budget shortfalls in 2020. As families struggle with unemployment and the economic downturn and with many schools switching to online learning, tuition increases are not likely to be a successful measure in making up the shortfall. This may be a watershed moment for the business of college and education, between stretched budgets and rising costs; and it’s likely going to cause some difficult decisions. What can colleges do to cover the gaps until a recovery is possible?

Universities have a number of measures available that can help sustain them through this difficult period. We outline some of the options to consider below, along with a discussion of the advantages and drawbacks they may pose.

Reduce spending

When a budget is tight, the first place to look is often at spending plans to determine what expenditures can be cut or postponed. If there are large projects that can be put on hold, that may be less painful than cutting staff or benefits. Keep in mind that staff cuts, which may help in the short term, can impact long-term operations negatively.

Dip into endowment funds

If ever there was a time for universities to tap their unrestricted endowment funds, this might be it. However, colleges should consider this option carefully, as the long-term impacts can be profound. An endowment is generally intended to make it possible for the institution to operate in perpetuity, typically by using investment returns to cover operating expenses. When endowment principal is depleted, future potential investment returns will be necessarily reduced, which may force the institution to spend a larger proportion of those returns in the future, creating a compounding effect. Colleges should look closely at how any spending of an endowment now would affect the long-term growth of the endowment later.

On the other hand, failing to spend the money now to support the staff and students on whom the future of the institution lies could negatively affect the college’s future prospects. Universities need to create future alumni donors by making sure their students graduate with strong prospects, they need to be able to recruit new students, and they need to attract current wealthy donors, all of which require spending. For instance, Benjamin Bernard from Inside Higher Ed takes a look at whether there is value in using endowment funds to pay all graduate stipends for a year in “The Moral Trade-Off of Endowment Spending.” The compromises involved in spending endowment funds to cover operating expenses should be carefully examined and discussed if your organization is considering this option.

Borrow from endowment funds

An alternative to simply spending endowment funds is to borrow from the endowment. In this case, the college would take a loan from an endowment fund that includes a repayment arrangement. In this way, the endowment retains its long-term principal and ability to generate cash flow, while the university is able to make use of funds while in need. The loan can be treated as a fixed income investment in the endowment’s portfolio. In order to avoid conflicts of interest, it would be important for the endowment to charge a competitive interest rate, which is reasonable given that this should be a very low-risk loan. The terms of the loan would depend on the university’s future enrollment and cash flow projections.

We know that universities are facing challenges this coming year, some of which are severe enough to pose an existential threat. Denial of the issue is likely to only make it worse. If you’d like to speak to our advisors about how you can continue to meet your mission under these circumstances and fill in the budget gaps in your operating expenditures, please contact us at 503.239.0475.

 

1 “Declining Enrollment Revenue Risk More Acute for Private Colleges,” FitchRatings: June 8, 2020; https://www.fitchratings.com/research/us-public-finance/declining-enrollment-revenue-risk-more-acute-for-private-colleges-08-06-2020

2 Ibid.