For most higher education institutions, the end of summer did not bring a return to campus, or for that matter any semblance of normalcy, that most had envisioned. In this flash update, we discuss the challenges higher education institutions face in the midst of a global pandemic, a renewed push for social reform, and other events that are changing how colleges and universities are dealing with this new and more difficult normal. We also offer some best practices for how to address these challenges successfully.
Challenges to Revenue
Lower Revenue from Operations
- Tuition and enrollment rates are significant issues for educational institutions on two fronts. First, many domestic students may be less likely to pay (or be financially able to pay) full price for a virtual education. Second, foreign students, who traditionally pay closer to full price for tuition relative to domestic students, face new challenges in attending (in person or otherwise). The result is that many institutions are likely to face lower enrollment rates and higher discount rates than they have in the past.
- For many institutions, campus activities, including sports, are a crucial source of revenue. With campuses shutting down and many sports on indefinite hold or operating in a bubble environment with lower revenue potential, schools must now plan for budgets that do not include campus activities as a significant revenue source.
Potential for Lower Revenue from Fundraising and Investment Sources
- There is a close relationship between the state of the economy and the level of charitable giving in any particular year or time period. Given the troubled state of the economy and the logistical challenges of fundraising during a global pandemic (namely, the reduced capacity to meet donors or hold large-scale fundraising events in person), the remainder of the year could remain challenging, leaving many full-year fundraising forecasts less than optimistic.
- After a long period of stability, the global pandemic and subsequent global shutdown and reopening have created historically high levels of volatility. Some of this is a function of a structural shift in the underlying fundamentals in combination with an acceleration of preexisting trends. That said, the ultimate path of COVID-19 is largely going to determine the timeline for an economic recovery, in our view. As a result, it could be more difficult in the near term to determine the level of distributions that investment pools will be able to contribute to fiscal budgets.
Best Practice Options for Higher Education Institutions
- There is no one-size-fits-all solution to mitigate the damages to operational revenue as a result of the global pandemic. Moving toward the end of 2020, we expect higher education institutions will have to focus on conveying their value proposition to students, alumni, and stakeholders. One best practice we have observed is increasing the quality of touch points (e.g., email, phone calls, virtual events) with students, such as faculty and board members engaging directly with prospective students (as opposed to traditional recruiting offices doing the heavy lifting).
- As the stock market continues to recover from the depths of the coronavirus pandemic, donors might be willing to initiate philanthropic gifts using appreciated (or reappreciated) securities. Being mindful of how donors might find it most advantageous to give (i.e., cash vs. stock gifts), and especially how that might be different than in prior years, can help fundraisers to be successful. Cash isn’t the only way to fund a gift, and there can be material advantages to donors using appreciated assets. (For more information, please see our white paper Fundraising Through Adverse Scenarios.)
- There is much pressure on institutions with large, long-term asset pools to make special distributions to help support operations. For institutions considering taking a special distribution from a long-term asset pool, or explaining to stakeholders why it might not always be a prudent idea, we recommend reading our white paper Understanding Special Distributions from Long-Term Asset Pools. In our opinion, the decision hinges on balancing the need to maintain solvency in the present with being financially viable in the future, especially given a special distribution could permanently impair future distributions.
- Decision makers should consider implementing an investment strategy designed to balance investment goals and objectives with considerations for both short-term volatility and long-term shortfall risk. We are seeing more institutions shift to a holistic, enterprise-focused investment management model. Specifically, we see this occurring in two ways: first, analyzing the role of balance sheet investment assets in contributing to their financial wellbeing; second, using the relationship between investment assets and financial results to help determine the best asset allocation for addressing liquidity and cash flow concerns. (For more on information on how an enterprise investment risk management approach works, please see our report Goals-Based Investment Framework.)