Clarify Your Institution's Financial    Picture

The immediate impacts of COVID-19 have resulted in prompt and thoughtful actions by institutional leaders; many actions have required substantial resource shifts to promote community safety, learning outcomes, risk reduction and financial stability.

The first financial impacts that received attention were the declines in operating revenues (auxiliaries, summer programs, athletics, etc.) and, as relevant, the associated refunding of student payments. Just as pressing, however, have been the meltdown of endowment values, and the risks associated with capital calls, tripped debt covenants and short-term bond refinancing. Challenges, including the potential for significantly reduced appropriations and continuing enrollment uncertainty, make the case for enterprise wide stabilization and longer-term transformation considerations.

Huron has outlined a framework for higher education’s evolution through this pandemic and economic uncertainty. The framework focuses on stabilization but emphasizes the need to explore opportunities for fundamental transformation.

Here are examples of financial actions that leaders should consider as they navigate.

As leaders responded to urgent needs early in the pandemic’s disruption, there were multiple immediate actions required and the list is still worth reviewing. Most leaders turned to scenario models to forecast the near-term net revenue and cash flow picture to effectively size the impact of strategic and operational changes. Variables in these models have typically included the institution’s own COVID-19 responses, as well as anticipated student and third-party responses. Institutional leadership should also have conducted a careful review of debt covenants to ensure compliance with ratio maintenance and notice requirements, seeking advance waivers from creditors if ratios cannot be met or if material adverse change disclosures are needed. Additionally, these are areas in which action should likely have been taken:

• Accounts payable payment frequency, extending payment time frames if appropriate.
• Accounts and pledges receivable for potential write-downs.
• Current balances of cash and investments, including liquidity measures.
• Investment vehicles for potential private equity capital calls.
• Derivative financial instrument requirements, understanding circumstances that would trigger collateral posting.
• Business interruption insurance coverage levels and exclusions.

Institutions have also been collaborating with their contractual partners to quantify potential liabilities arising from guaranteed minimum revenues in public-private partnerships and to assess commitments required pursuant to union contracts, outsourcing contracts and other contractual arrangements. Considering all these variables, leaders should also be prepared to respond as needed to accreditors, ratings agencies and state authorities regarding their financial plans.

A focus during the stabilization phase is to create an understandable cash and investment report that leaders can use to gauge institutional liquidity and to make time-sensitive decisions. Developing more extensive cash flow monitoring and updating projections with current known data will help provide a clearer picture of the institution’s financial standing. Institutions may need to explore available borrowing options to optimize operating liquidity. Other critical stabilizing steps include:

• Prioritizing spending that provides a return on investment.
• Redirecting funding to support transformations in academic delivery models.
• Exploring fiscal policies such as hiring freezes, procurement limitations and purchasing card restrictions.
• Evaluating capital and major maintenance projects planned for summer, prioritizing those affecting health and safety.
• Assessing planned equipment purchases to identify those that may be cancelled or deferred.
• Evaluating waiver, discounting and endowment spending policies for potential changes.

Another critical function for financial leaders during this period will be to manage campus expectations with respect to upcoming fiscal years’ budgets while course-correcting the planning processes already underway.

As leaders consider their opportunities for longer-term transformation, it will be necessary to rethink the institution’s approach to resource planning, allocation and management. Institutions need comprehensive budget planning models that deeply engage stakeholders with the right set of data and incentives. Such budgeting models allow for an intentional focus on adjustments to the institution’s academic and research portfolio to ensure a sustainable program mix and appropriate matching of resources with institutional priorities.

Models should include multiyear financial plans, accurate reporting tools, transformative scenarios and contingencies so that leaders can be prepared for any future service disruptions and, most importantly, stay ahead of the macroeconomic changes sweeping across higher education.

Access other educational resources on our COVID-19 resource page. For more information, contact us.