Colleges Grapple With Grim Financial Realities

Start early and get to Thanksgiving. That was the goal for a range of colleges that held in-person classes in the fall despite the pandemic.

But how many got to the end of the semester in a healthy financial condition? Many colleges enrolled significantly fewer students than they would have in a typical year, cutting into tuition revenue at a time when higher education was already desperate to attract bodies. And although getting to the end of the semester prevented institutions from having to issue refunds on room-and-board fees, occupancy was down in residence halls across the country. And then there were the financial hits from canceling fall athletics, buying personal protective equipment for faculty and staff members, and retrofitting buildings for spread-out classes.

A new survey conducted by The Chronicle and two other organizations sheds some light on the financial challenges that colleges face as they approach a spring semester that might be even tougher to pull off than the fall.

Many of the surveyed institutions — particularly small private colleges — offered high discount rates and saw significant declines in net-tuition revenue. Smaller institutions and those with lower graduation rates were also more likely to lose value on their endowments.

Larger institutions, meanwhile, were more likely to lose revenue on athletic events — particularly if they had an NCAA football program. (Colleges in Republican-controlled states were also more likely to lose money on athletics.) Among doctoral institutions that have NCAA football, 61 percent experienced a decline in athletics revenue, while only 36 percent of doctoral institutions that do not have football lost revenue. The athletics-revenue losses among doctoral institutions that have NCAA football was greater than those among master’s institutions with football, at 52 percent, and baccalaureate institutions with football, at 41 percent.

Also true among larger institutions in the survey — and those with higher graduation rates — was a correlation with losses on dining and residence operations and on spending more to retrofit the campus and test for Covid-19.

The Chronicle conducted the online survey from October 20 to November 11 in collaboration with the course-scheduling firm Ad Astra and Davidson College’s College Crisis Initiative. This analysis is based on responses from financial officers at 162 colleges across the United States, both public and private, from baccalaureate to doctoral. Two-year colleges were initially part of the survey but were ultimately dropped from the final results because the number participating did not constitute a representative sample.

On the whole, says John Barnshaw, vice president for research and data science at Ad Astra, the survey confirms some assumptions about the pressures colleges are facing and indicates that institutions with size, prestige, and higher graduation rates — qualities that provided “preservative effects” in the crisis — will pull away from smaller, poorer institutions.

“There was pre-existing inequality in society before you have a disaster, and in the intermediate to long-term aftermath, it tends to expand even further,” he says. “Some institutions might be OK with weathering the storm for a year. But as this continues to go on, the more long-term to intermediate concerns are not likely to improve in the future.”

Cash-Flow Challenges

The poll revealed some stark vulnerabilities among private institutions.

Discount rates among private baccalaureate and master’s institutions stood well above those of public institutions. Half the respondents had set discount rates significantly higher than 50 percent; a quarter of respondents in each category had discount rates above 62 percent — with one institution offering a discount of 78 percent. (By way of comparison, tuition discounts for first-time, full-time freshmen at private nonprofit institutions surpassed 50 percent only in the last three years.) Private colleges were also more likely to raise the price of tuition this year.

Offering high discounts cuts into the bottom line, where private institutions were also troubled. Nearly half of the private baccalaureate colleges and a quarter of private master’s colleges responding to the survey noted net tuition revenue decreases of 5 percent or more. Colleges that saw losses of more than 5 percent also held only online classes in the fall, instituted furloughs, or announced layoffs.

“Unless they reduced their expenses concomitantly, they are going to have a real cash challenge,” says James F. Galbally Jr., a consultant who advises colleges on their finances. Galbally predicts that cash-flow problems will dog the weakest institutions and may well be the factor that separates survivors from the rest.

In the qualitative responses to the survey, one institution reported that its cash-balance reserves were “nearly depleted.” Another college noted that while the money from the $2 trillion coronavirus stimulus package was a critical help, “liquidity is always a challenge.”

Constrained cash would mean that colleges would have trouble meeting payroll and paying debts. Some colleges, Galbally says, are dipping into a line of credit early in the year, which will constrain their ability to borrow later. Colleges typically borrow in the summer to bridge the gap between the end of the spring semester and the beginning of the fall, when tuition payments bring a new infusion of cash. But Galbally has learned that some colleges borrowed money to get through the fall, and may need the borrow to get through spring.

A ‘Long and Damaging’ Crisis

At the University of Scranton, a private master’s institution that responded to the survey, financial hardships are forcing hard yet necessary decisions, says Edward J. Steinmetz Jr., senior vice president for finance and administration. He projects that reductions in the university’s tuition revenue, combined with new expenses to deal with Covid-19, will result in a loss of $12 million to $14 million this year.
“If it’s a $12-million hit, that’s huge,” he says. “We’ve had negative variances in the past, but never to that extreme.” In late March, the university got a sense that the pandemic could be long and damaging. “We started to alter our plans, because our fiscal year begins June 1. It allowed us to say, The world has changed. What can we impact right away?” The university eliminated salary increases, reduced pension contributions, and eliminated some positions.

Now the university is going through a longer and more difficult process of examining the enrollment, revenues, and costs of various academic programs, and analyzing which could be cut.

“It forced us to have conversations,” Steinmetz says, “which I think was a sea change for campuses like ours and a lot of academic leadership. They’re not used to those conversations.”

Tuition losses will represent about two-thirds of the university’s shortfall this year. Scranton set its tuition-discount rate at 54 percent. Steinmetz knows of peer institutions that set rates much higher.

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The rest of the losses came through additional expenses to deal with the pandemic. Steinmetz says testing and nursing services will probably cost the university nearly $2-million, a figure that caught the attention of some board members. But, Steinmetz says, if the university had to shut down the residence halls and issue refunds to students, it would lose nearly $1 million a week. Over all, he says, the pain may lead to lasting innovations, like investments in hybrid learning or more flexible and efficient approaches to work.

The survey revealed fewer vulnerabilities for public institutions in discounting or meeting revenue goals. But again, public colleges – perhaps because of their generally larger size — were more likely to see declining revenue for athletics, dining, and residence halls. They were also more prone to spend money on Covid-19 testing and surveillance.

Brian Fox, vice president for finance and administration at Oregon Institute of Technology, says Covid-19 arrived just weeks before the start of the spring 2020 quarter; while administrators worried that students would drop out, enrollment held steady.

Fox’s longer-term concern — like other respondents from public colleges — revolves around state budgets for years to come. Many states already have significant obligations to public retirement accounts and may have mounting bills associated with their responses to the coronavirus, even as the economic crisis surrounding Covid-19 undermines the tax base. In Oregon in particular, the state must also cope with the financial impact of the devastating summer wildfires.

“The state budget is going to be in real trouble,” Fox says. “And for our institution, which is relatively dependent on state funding, that’s a problem.”