University Finances Face a Long Road to Recovery

In the summer of 2020, in the midst of the developing pandemic, I wrote an article for The Chronicle on “How University Finances Work in a Crisis.” In it, I laid out the financial playbook institutions were using to adapt to the pandemic, including pessimistic actions like reducing travel and other discretionary expenditures; drawing down unrestricted reserve accounts, including unrestricted endowment funds; borrowing money; and, ultimately, reducing the numbers of personnel. These were unpleasant options. On a more optimistic note, I invoked some conventional wisdom: Enrollment levels generally increase as economic conditions decrease, which helps stabilize tuition revenue.

While the Omicron variant is a real threat to normalcy, universities have been slowly but surely emerging from the acute stage of the pandemic. Progressively more students, faculty, and staff members have been vaccinated against the virus. In-person classes and other campus activities are generally resuming (may this month be only a brief interruption of that trend). Various levers are being pulled to restore university finances to something resembling normalcy.

The early days of the pandemic saw an infusion of federal support for higher ed. The March 2020 Cares Act helped provide nearly $12.6 billion to institutions: half directly for students and half for universities. The student component helped primarily lower-income students pay their university expenses. The university component directly helped institutions recover costs incurred adapting to the pandemic: personal protective equipment, online-course preparation costs, lost revenue from auxiliary campus services due to fewer students (dorms, dining services, bookstores, parking, child-care centers, etc.). The Cares Act required each institution that accepted funds to continue paying employees and contractors to the “greatest extent practicable based on the unique financial circumstances of each institution.” In short, it bolstered university finances, but for only a limited period.

Despite this relief, my pessimistic projections proved true for most institutions. Travel expenditures were reduced, hiring was frozen, retirement-plan contributions were suspended, and personnel were furloughed across the academy.

My more-optimistic projection (increased enrollment) proved wrong. According to the National Student Clearinghouse Research Center, undergraduate enrollments nationwide dropped 7.8 percent during the two-year pandemic period from fall 2019 to fall 2021. Many institutions recorded precipitous drops in undergraduate enrollment.

Community colleges were particularly hard hit, losing 15 percent of their students in the past two years. When, for instance, Maricopa County Community College District enrollment dropped 15 percent from fall 2019 to fall 2020, and its operative budget decreased by 3 percent.

For other institutions, the pandemic amplified existing enrollment declines. Beloit College, a private liberal-arts college in Wisconsin, has had financial difficulties due to declining enrollment for several years, but the pandemic made a bad situation worse — their enrollments fell at an even faster rate. For a few, the financial woes brought on by the pandemic were insurmountable, forcing closure or merger with a more-viable institution. Mills College, for example, ceased independent operations and merged with Northeastern University.

Another sign of the tough times: Financially driven mergers occurred often enough to warrant an instructive “how to do it” webinar on the topic from the Association of Governing Boards of Universities and Colleges.

The pandemic’s negative impact on enrollment was not ubiquitous, however. Enrollments at elite universities, such as Harvard and Stanford, held steady during the height of the pandemic. Several of the more-prestigious state flagship campuses, such as the University of Michigan at Ann Arbor and the University of Wisconsin at Madison, recorded record freshman-class enrollments. Amid the adversity caused by the pandemic, in that sense, the rich simply got richer.

The Covid crisis is not yet over, of course, and new variants continue to appear. Omicron has tempered hopes for a quick end to the pandemic as we stretch into the new year. Likewise, the financial impact of the crisis is not yet over — and indeed, there has been little relief for many universities. As we enter 2022, they aim to re-establish pre-pandemic enrollment levels to boost tuition and auxiliary-services revenues. They seek to restart suspended operations, reinstate furloughed employees, and return to on-campus instruction in a changed reality.

For many — perhaps most — colleges, re-establishing pre-pandemic enrollment levels is the primary challenge. Working with commercial enrollment marketing firms, several have launched aggressive campaigns to recruit entering students as well as to retain those already enrolled. Community colleges, such as Palm Beach State College, have stepped up conventional strategies by reaching out more quickly to prospective students. Others, such as Wallace State Community College, in Alabama, have opened new satellite campuses or learning centers, hoping to attract students from new markets. Nationwide, more than 300 universities extended admissions deadlines in 2020, hoping to give students more time to decide about their enrollment plans.

Universities must also restore suspended contributions to employee retirement accounts. As economic conditions improve, some universities are providing partial restoration of the suspended contributions. Duke University, for example, suspended its contributions for one year but then, after the one year, resumed contributions with six months of retroactive payments, thus reducing the suspension to six months. Nonetheless, the momentum is building at Duke and other universities for full restoration.

And then, there’s the endowment. Projections were totally cockeyed during the last year and a half. Tracking the overall stock market, university endowment market values dropped steeply at the onset of the pandemic, portending catastrophic losses, then roared back, resulting in sizable gains in market value by the end of the 2021 fiscal year. The national median return was 27 percent in fiscal year 2021, up from median returns of 6 and 2.6 percent in fiscal years 2019 and 2020, respectively. These uniquely large returns this year triggered predictable calls for increased university spending on activities impacted by pandemic-driven budget cuts.

Unfortunately, the large increase in 2021 doesn’t translate into equally large increases in unrestricted operating income for most universities because they base their endowment payout on three- to five-year rolling averages of endowment market value. So, using the national data, the three-year average in fiscal year 2021 would be 11.9 percent; the three-year rolling average value over the past 10 years is 8.1 percent. Thus, fiscal year 2021 was, indeed, a good year, and the expected payout (which hasn’t been set yet by many universities) may be larger than most years. Still, it won’t be as large as many onlookers hope for.

As the pandemic evolves, university finances will gradually return to normal. The definition of “normal,” however, remains elusive. As variants come and go, the economy swings up and down. Government programs such as the recent trillion-dollar infrastructure package add additional opportunities in the job market, potentially further decreasing enrollments, especially at the hardest hit community colleges.

On a positive note, international-student enrollment, which dropped sharply during the 2000 and 2021 academic years, shows signs of rebounding. In a nationwide survey, universities reported a 68-percent increase in new international student enrollments in fall 2021 compared with fall 2020.

Based on the ups and downs of this past year, any projections for this next year are iffy. As we get further and further away from the pandemic’s arrival, such variability is increasingly a part of what we consider normal. While that is often difficult to accept, universities are learning to live with it.