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Private Higher Education: Coping with Financial Downturn

This presentation discusses the impact of the financial downturn on private higher education institutions and examines how colleges are responding to the challenges. It covers topics such as the long-term and short-term risks, the negative outlook for the higher education sector, the impact on endowments, and the coping strategies being implemented by colleges.

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Private Higher Education: Coping with Financial Downturn

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  1. Private Higher Education: Coping with Financial Downturn • NFMA Annual Conference • Presented by: • Roger Goodman- VP & Team Leader • Higher Education Team • Moody’s Public Finance Group May 7, 2009

  2. Topics • Highlights of our 2009 Outlook • How are Colleges Responding?

  3. Oct 2008: Impact of Credit Crisis • Long Term Risks: • Tipping Point for Tuition? • Philanthropy Slows • LT Investment Return Assumptions too Rosy? • Short Term Risks: • Interest rate spike • Swap mismatch • Failed remarketings • Self liquidity draws • Illiquidity of alternatives and other investments “Good Management and Governance Now Even More Important”

  4. 2009: First Time Negative Outlook for Entire Higher Education Sector • Intensified pressure on household income and net worth causes pressure on tuition and financial aid • Broad impact of investment losses on operations and philanthropy • Illiquidity of balance sheets, amplified by alternative investments • Volatile debt markets, reduced market access • Variable rate debt structures & swaps are problematic

  5. HAS DOOM FINALLY ARRIVED FOR ENDOWMENTS?Big, New Worries About Investments & Giving -3% FY 2009 YTD: -30% with spending

  6. Large Loss of Household Net Worth:Tuition/Enrollment Impact is the Big Unknown • Remained Strong in Prior Recessions; Is This Cycle Different? • Net worth losses already much larger than 2000-2002 • Financial wealth decline at same time as home equity loss • Borrowing capacity reduced; Student Lenders & Home Equity • Political & Mission constraints tighter than economic constraints? Loss is 5-6x the amount of 2001/02 Source: Moody’s Economy.com; Federal Reserve

  7. LARGEST ENDOWMENTS MOST IMMEDIATELY AFFECTED Current Year Budget Cuts, Layoffs, Lower Endowment Spending Endowment % Revenue Resources to Debt Source: Moodys 2007 Private College Median Data

  8. TUITION-DEPENDENT COLLEGES RECKONING TO COME? Current Year Impacts Slight, but more Competitive Risks Are Inevitable; Market Innovation Needed Source: Moodys 2007 Private College Median Data

  9. Comparing Challenges of Aaa/Aa and A/Baa Universities • Price takers-competition with publics • Endowment rarely major component of budget; change in value not that important • Philanthropy often helped around edges but capital came from operations too • Similar risk for investment illiquidity; less staff to oversee/react • More centralized control and ability to respond • Market access and bank credit access real concerns • Price Setters-tuition and aid driven by choice of class make-up • Endowment losses mean substantial budget changes • Philanthropy was major source of capital; concern for next few years • Large allocations to private investments impact liquidity • Budget reductions/capital spending delays have more of an impact on psychology? • Market access and bank access of only limited concern

  10. Responding to Liquidity Pressures • FINANCIAL STATEMENTS DO NOT REPORT LIQUIDITY • Endowment losses (-30%) will be disproportionately reported in unrestricted net assets (-60%) • UPMIFA might make things look worse than they are • Unrestricted cash not even required reporting • Board-designated unrestricted net assets: not “liquid” • Moody’s is developing new liquidity ratios: • Operating needs • Capex • VRDO/CP collateral • Swap collateral posting • Capital commitments to managers

  11. Responding to Liquidity Pressures • Sampling of actions taken: • Liquidation of marketable securities (equities and hedge funds) • Freeze on new alternative investment commitments • Converting daily/weekly vrdo’s to CP • Freeze on capital spending • Taxable fixed rate bond sales (mainly large endowments)

  12. Responding to Student Market Pressures • Acceptance rates will likely weaken as prepare for worse “yield” on admits • Boosting financial aid budgets • Large increase in outreach regarding costs and financial aid ability • Tuition increases likely lowest in many years for private colleges

  13. Responding to Budget Pressures • Ability to cut spending is real—untapped resource after long period of high growth • Hiring freezes/Salary freezes/Layoffs • Benefit reductions • Program rationalization • Loosening socio-economic enrollment goals • Growth of enrollment • Non-salary budget cuts • Partnering for cost savings (eg. Purchasing collectives) • Many Choose to Take Pain Early • Small endowments haven’t seen revenue declines but are cutting immediately in preparation • Large endowments won’t see endowment spending policy impact for 1-2 years; take cuts now

  14. Responding to Market Access/Credit Pressures • Market access, including investor relationships are strategic focus of top treasury teams • Better focus on covenants and bank agreement terms • Despite challenges, taking firmer stances with banks • Disclosure still lagging and weak • Moody’s developing new liquidity metrics • Some universities focused on improving • Many diversifying banking relationships • Swaps, LOC’s, lines, underwriting, etc. • Frequently reducing market access exposure (refi VR to Fixed) when possible

  15. Reasons to be Optimistic from Past Lessons:Survival Tactics of Small Private Colleges • FOCUS ON RETENTION: Cheaper than recruiting new students • OLDER STUDENTS: More students over 21 will stay in college to get a masters or return to college to complete degree; veterans on GI bill, retirees will be interested in some education content • ON-LINE CLASSES: Booming potential, especially in recession • INTERNATIONAL MARKETS: Some potential even now • PARTNERSHIPS/MARKET OUTREACH: Locating new programs in more favorable locations, sharing costs with other colleges, even community colleges and public universities • DONORS: Even Baa-rated colleges get 6% of revenue from unrestricted gifts; alumni rally, bequests, deferred gifts • COMMUNITY SUPPORT: Most college towns value their colleges highly and presidents/board members can rally support • ENDOWMENT BORROWING: Might require court approval • SUSPENSION OF TENURE: Requires declaration of financial exigency; faculty often agrees to deep cuts to prevent this

  16. Questions and Comments

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