Financially Strapped Colleges Grow More Vulnerable as Economic Recovery Lags

In more than 25 years in higher education, Stephen R. Storck doesn’t remember things ever being this hard.

Mr. Storck, who became vice president for business operations at Ashland University in August 2013, is trying to stabilize the future of the 5,979-student private institution in northern Ohio, which faces struggling enrollment, rising debt, limited financial liquidity, and turnover in its enrollment and fund-raising personnel.

“The downturn in the financial market, that hurt our endowment income,” Mr. Storck said. The downturn in the housing market after the recession “hurt the families,” who no longer viewed higher education as an affordable option, he said.

Strapped for cash and without a clear path out of its financial instability, Ashland is among a flock of private institutions that survived the recession but are being hit with a new round of woes as the economic recovery drags on.

Many institutions have suffered a “double whammy,” said Matthew W. Hamill, a senior vice president at the National Association of College and University Business Officers. Now, some colleges whose finances were precarious six years ago are struggling to hold on.

In order to survive, Mr. Hamill said, these institutions must be willing to adopt alternative strategies and “respond to these challenging times.” But many are being forced into short-term fixes to bring in revenue and cut expenses.

At Ashland, a tuition reset—a reduction of both tuition and student aid, announced last August—and new academic programs are being used to entice new students. Other colleges are laying off employees, forming partnerships with other institutions, and even selling off campus buildings in their efforts to bounce back, but with little insight into these strategies’ long-term effects.

“Institutions that are in trouble are usually in trouble for good reason, and they didn’t get there overnight, they got there over bad operations,” said Rebecca DiLiddo, an administrator who has worked at several struggling universities in the past three decades and is director for instructional design and pedagogy at a teaching and learning center at the University of Mount Union, in Alliance, Ohio. Such colleges “might have been doing fine in the glory days,” when they had “more students coming in than you knew what to do with,” she said, “but that doesn’t work now.”

Small private colleges that rely heavily on tuition face the greatest hardship, said Susan I. Fitzgerald, a senior vice president at Moody’s Investors Service, a credit-rating agency.

“Either they haven’t been paying attention to the market as it’s changing around them, or they have strategic goals that are inconsistent with who they are,” Ms. Fitzgerald said.

A History of Struggle

Financial troubles aren’t new to Ashland. After the Brethren Church founded Ashland College, the university’s predecessor, in 1878, the institution struggled financially for years. It filed for bankruptcy in 1888, and its doors closed in 1896 and 1897.

After reopening in 1898, the institution eventually established a sizable endowment and saw substantial growth, with a brief decline in enrollment the 1970s, which was overcome by the addition of business and nursing degrees.

Deep in the recent recession, as student demographics shifted away from the Rust Belt, enrollment declined, and Ashland faced administrative turnover, financial problems returned.

In 2004 the university took out a bond to pay for the construction of a 105,000-square-foot recreation center and a 52,000-square-foot education building, and to renovate and build an addition to the Kettering Science Center. In 2010, it refinanced the bond for $42.7-million.

Despite the university’s recent investments in its recreational facilities, Athletic Director Bill Goldring announced in May 2013 that Ashland had cut its men’s soccer program, citing “financial and equity realities that are being faced by athletic departments across the country.”

As part of a universitywide “repositioning,” Ashland also laid off 27 employees and did not fill other vacant positions, according to the Ashland Times-Gazette. The university had cut 48 nonfaculty positions in 2008 to reduce a $3-million operating deficit.

This past November, Moody’s announced it had downgraded the rating on Ashland’s 2010 bond, driven by weak liquidity and three years of enrollment declines expected to stress the university’s operations for the 2014 fiscal year.

With a small amount of cash on hand compared with its debt, the university could default, Moody’s warned.

“At this point does everything look great? No,” said Scott D. Van Loo, vice president for enrollment management at Ashland. “We have our challenges in front of us that we’re facing head-on each day.”

Industrywide Problems

Though David Jacobson, a spokesman for Moody’s, said Ashland is hurting more than most, the university is certainly not alone. While the credit-rating agency has a negative outlook for the higher-education sector as a whole, some institutions face a heavier burden.

Mismanagement is the factor driving current financial challenges at Yeshiva University, a 7,000-student Jewish institution in New York City with a rich history and hefty endowment, said Karen L. Kedem, vice president and senior analyst at Moody’s.

In 2008 the university’s endowment lost about $110-million to Bernard L. Madoff’s Ponzi scheme, followed by three years of operating deficits. Matt Yaniv, a spokesman for the university, said the losses from the Madoff investment contributed to the university’s financial problems but did not bring on the current operating deficit, adding that Yeshiva is “addressing difficult financial realities brought on from various directions, including the changing higher-education landscape.”

Moody’s downgraded Yeshiva’s bond status to “junk” in January, and again on March 5, citing the institution’s lack of cash on hand from continuing operating deficits. Although the university has also seen enrollment declines, it is not as dependent as Ashland is on tuition. In 2013, Yeshiva’s endowment stood at $1.83-billion.

In its review, Moody’s called for Yeshiva to make “swift plans to reduce deficits and grow liquidity in order to continue operations.”

Between 1997 and 2012, Calvin College, a 4,000-student private liberal-arts institution in Grand Rapids, Mich., took out loans for construction projects, including an athletics complex. But a strategy to borrow to build while investing pledged gifts did not work out as expected.

“Many of the pledged gifts were received over time according to agreement schedules, rather than immediately, resulting in a smaller investment pool and lower returns,” said Matt Kucinski, a Calvin College spokesman. In 2012, when the college commissioned an independent group to review its governance and finances, it identified a long-term debt of $115-million without an appropriate debt-service payment built into the college’s operating budget.

The construction projects, and other investments that were meant to pay down the debt, had lower-than-expected returns. With the construction costs exceeding fund raising and the college’s use of long-term debt to acquire real estate close to campus, the institution built a $4.5-million annual operating deficit that is projected to grow to $7.7-million by 2017. Last year the college’s board of trustees approved a 2013-14 budget that prompted five employee layoffs and eliminated 17 open positions. In January, Calvin’s board of trustees announced a five-year strategic plan that includes phasing out or redesigning programs with low enrollment and adding a differential tuition rate for more expensive programs. The plan would cut additional staff members.

In an effort to bounce back, Mr. Kucinski said the university set a goal to raise $25-million by 2017 to pay off long-term debt. Since October 2013, the institution received $24.5-million in pledges.

Such forces took their toll last year on Saint Paul’s College. The small, historically black private college in Lawrenceville, Va., announced in June that it would shut its doors after a proposed merger with another institution fell through. A year earlier, the institution lost its accreditation after a two-year probation prompted largely by its financial problems.

After Saint Paul’s announced it would close, Moody’s cautioned in a weekly credit outlook that more closures could follow.

Susan I. Fitzgerald, the Moody’s vice president, said she expects more institutions to be shuttered in the next few years, but she does not believe the numbers will be drastic.

“Colleges have historically been very long-lived,” Ms. Fitzgerald said. “They’ve got donors who support them, they’ve got a number of constituents who are interested in making sure that they are successful, so they are very different from corporations in that respect.”

Digging Out of Debt

Officials at Ashland said their strategy to develop a more sustainable financial future has been successful so far.

The tuition and student-aid cut, which will apply to all full-time undergraduates beginning in the 2014-15 academic year, will lower tuition from $30,064 to $18,908. Mr. Van Loo said freshmen enrollment for Fall 2013 had already grown to 621 from 565 the year before. While this was the highest first-year enrollment in two years, overall enrollment fell by 2 percent.

“This is one of those things that has created positive momentum in the right area for us, that we believe will help us change our debt ratios,” Mr. Van Loo said.

In order to reach a new market, Mr. Van Loo said the university also recently started an online criminal-justice program. Another online program, a master’s degree in teaching American history and government, was announced in February.

Despite Mr. Van Loo’s optimism, Ashland’s strategies to retain financial viability carry an uncertain long-term effect.

Yeshiva University recently announced it was selling campus buildings to generate extra money.

Ms. Kedem, of Moody’s, said the university’s location in Upper Manhattan and ability to sell noncore real estate are among Yeshiva’s strengths. “Over the shorter term, this strategy could be helpful in providing wiggle room,” Ms. Kedem said, adding that the plan’s long-term financial impact is still unknown.

Meanwhile, many other institutions have announced layoffs in recent months, even those that have historically enjoyed financial stability.

While Moody’s continues to downgrade institutions, Mr. Jacobson, the service’s spokesman, noted that Moody’s typically rates only stronger institutions; some colleges are probably even worse off, but their financial insecurity is not publicly known.

For more challenged institutions to survive, said Andrew L. Laws, managing director of Huron Consulting Group, they must make some hard decisions, but a strong administration will need to lead the way.

“The management team is the element of the university that has the greatest impact on the ability to get through these challenges,” Mr. Laws said.

In the meantime, colleges will very likely continue to initiate short-term solutions in order to “buy time to restructure themselves for success over the long term,” Ms. Fitzgerald said.

Corrections (4/2/2014, 1:53 p.m.): This article originally misstated some enrollment data at Ashland University. Its overall enrollment is 5,979, not 2,250, which is its undergraduate enrollment. And while the latter dropped this year, overall enrollment did not. The article has been updated to reflect those corrections.