COVID-19 had immediate and long-term financial impacts on universities. In the immediate term, it reduced revenue from programs, auxiliaries, and state allocations in FY2020. It also increased some expenditures. In the long term, it adds uncertainty to revenue projections for FY2021 from tuition, state appropriations, gifts, and endowments. Universities must prepare budgets conservatively and may need to cut expenditures, posing difficult questions about priorities and resource allocation. After the pandemic passes, universities will need to restore operations and reserve funds over several years.

1. Financial Pressures
Building in Higher
Education
June 17, 2020
Changes in Higher Education and the
Information Marketplace

2. Dean O. Smith, Ph.D.
Professor Emeritus
University of Hawaii
PresenterPresenter

3. PresenterOutline
COVID-19’s impact on
university finances
• Immediate
• Long-term
• Inevitable questions
• Looking forward

4. COVID-19 disrupted fundamental aspects
of higher education mid-FY2020
• course instruction
• on-campus social life
• staff workload
• laboratory research projects
• athletic schedules
• and on and on
All of these
impact
university
finances

5. • Study-abroad programs close
• Workshops, conferences cancelled
• Some fees reduced
Immediate impact:
Less program revenue in FY2020

6. • Close dormitories and dining halls
• No longer collect parking fees
• Cancel athletic and special events
Note: Refunds reduce net revenue
Immediate impact:
Less auxiliary revenue in FY2020

7. Anticipating budget shortfalls, some states reduced
mid-year allocations to public universities
Immediate impact:
University generates less income in FY2020
Immediate impact:
State allocations cut in FY2020
This is particularly difficult to manage because
some of the money may already have been spent

8. • Tuition
• Endowment payout
• Indirect cost reimbursement
Immediate impact:
University generates less income in FY2020
Immediate impact:
Some FY2020 revenue not affected--yet
Academic year

9. • Moving students off campus
• Increasing online availability
• Providing protective environment
• Emergency financial aid
Immediate impact:
Some expenditures increase in FY2020

10. • Cut discretionary expenditures
• Unnecessary travel
• Over-time pay
• Non-emergency repairs
• Other discretionary items
• Dip into rainy-day reserve funds
Immediate impact:
Compensation for lost income

11. The CARES Act authorized $6.3 billion in financial aid
Cash grants to students for expenses related to
unanticipated changes to their lives and education:
• Course materials
• Computers
• Food and housing
• Child care
Immediate impact:
Federal short-term relief to students
Some of this money will end up in university coffers

12. The CARES Act authorized $6.3 billion to cover costs
of significant changes to the delivery of instruction
However, a university may not use student grant funds to
reimburse itself for any costs or expenses.
Immediate impact:
Federal short-term relief to universities

13. Impact of COVID-19 on the FY2021
Budget Cycle
COVID-19
2019
2020
2021
Long-term
impact
…Immediate
impact

14. Revenue sources
• Tuition
• State appropriations
• Private gifts
• Endowment payout
• Grants and contracts
Long-term impact:
Universities must revise revenue projections
$?
Uncertainty of
projections

15. Tuition depends on enrollment
Enrollment levels generally increase as
economic conditions decrease
Community colleges and universities with masters-
level graduate programs benefit the most
BUT:
out-of-state, international, and
corporate-sponsored enrollments
may decrease

16. Students may choose less expensive
options
I’m not going to
pay that much
tuition for an
online course.
Me neither. I can
get the same
course cheaper
somewhere else.
(Reluctant students)

17. Tuition remains the big unknown
Tuition $?
Until enrollment stabilizes, operating budgets
must remain flexible and conservative.

18. I agree. Higher
education is critical
to economic
recovery.
The state will have
to find the money
to protect the
university.
(Wishful thinkers)
State appropriations will decrease in
FY2021 due to less tax revenue

19. All other
Transportation
Public assistance
Corrections
Higher education
Medicaid
K-12 education
0 10 20 30 40
% of total appropriations
Support for higher education is
discretionary in most states
Mandatory
Discretionary
Necessary but
adjustable
Higher education gets what’s left over
after other programs are funded.

20. 34.89%
25.07%
4.96%
6.74%
1.19%0.69%
26.46%
K-12 education
MedicaidHigher education
Corrections
Public assistanceTransportation
All other
FY2020
FY2021
K-12 education
MedicaidHigher education
Corrections
Public assistanceTransportation
All other
Higher education’s share of the budget
Public universities may get a
disproportionately large appropriation cut
Proportionate Disproportionate

21. State appropriations remain a big
unknown
State
appropriations $?
Until tax revenues stabilize, operating budgets
must remain flexible and conservative.

22. Private gifts may (or may not)
decrease
Sorry, but I can’t
give money until
the economy
recovers.
(Pinched donor)
Here, I’ll give a
little extra in
this time of
need.
(Fortunate donor)

23. Endowment income may decrease
Endowment market values have decreased since the
COVID-19 pandemic
www.macrotrends.net
0
5000
10000
15000
20000
25000
30000
35000
DowJonesIndustrialAverage(DJIA)

24. But: endowment payout is calculated
using a rolling 5-year average
2010 2012 2014 2016 2018 2020
10000
15000
20000
25000
DJIA5-yearaverage($)
Year
2010 2012 2014 2016 2018 2020
500
600
700
800
900
1000
1100
Payout($)
Year
The depressing effect of this year’s market decline
will be spread out over 5 years.
Rolling 5-year average data
Market value Payout

25. Grant and contract income generally
unaffected as campuses closed
Many researchers continued work at home
BUT:
Some direct costs may be deferred, resulting
in deferred indirect cost reimbursement

26. The long-term financial impact of
COVID-19 is uncertain
• Unstable revenue
• COVID-19-related expenditures
• Unpredictable duration of pandemic

27. Revenue projections for 2021 must be
conservative
Most chief financial officers will develop
several alternative revenue projections
Realistically, budgets will probably be
based on the most conservative estimates

28. First:
Operational cuts
• Impose a hiring freeze
• Defer nonessential
repairs and maintenance
• Reduce library costs
• Discontinue retirement
account contributions
Expenditures must decrease to
compensate for lost income
Last:
Personnel cuts
• Contracts are not renewed
• Appointment effort is reduced
• Tenured faculty and academic
programs are terminated
Financial exigency

29. With sharply reduced
expenditures, questions arise
Why doesn’t the
university reduce the
number of
administrators instead
of faculty members?
(Irate faculty member)

30. ANSWER
Universities must retain administrators to ensure
compliance with an ever-growing array of
regulations imposed by federal agencies and to
raise money (enrollment managers, development
officers, etc.)
Furthermore, it must pay competitive, market-driven
salaries to attract qualified administrators.
Why doesn’t the university reduce the
number of administrators instead of faculty
members?

31. With sharply reduced
expenditures, questions arise
Why does the
university keep so
much money in
reserve accounts?
(Curious faculty member)

32. ANSWER
Legally the university must maintain some
restricted reserve funds to cover debt obligations,
including pension and healthcare funds.
In a crisis, the university will draw down its
unrestricted rainy-day reserve funds but leave a
balance to mitigate unexpected emergencies.
Why does the university keep so
much money in reserve accounts?

33. With sharply reduced
expenditures, questions arise
Why can’t the
university use its
endowment to
compensate for lost
income?
(Wishful faculty member)

34. ANSWER
The university can, indeed, increase income from
its endowment in a fiscal emergency.
• It can adjust its payout from the typical 4.5 percent to
as high as 7 percent without incurring suspicions of
imprudent fiscal management.
• It can also dip into its endowment principal during a
dire emergency.
Why can’t the university use its endowment to
compensate for lost income?

35. Alternative approach:
Generate income by issuing long-term debt
Universities can borrow money (e.g. issue bonds) at
historically low interest rates to offset revenue loss.
This spreads the economic costs of the COVID-19
pandemic over many years.
NOTE: interest and principal payments
come out of the operating budget.

36. Bottom line:
Exceptions include institutions with:
• Pre-existing financial difficulties
• Unprofitable hospitals
• Chaotic governance
Unsettling financial disruptions have occurred, but
catastrophic financial disaster has not occurred

37. Looking forward:
After the COVID-19 crisis has passed, several
financial issues will require reckoning

38. Re-start suspended operations
For example:
• Restore on-campus instruction facilities
• Re-open dormitories and dining halls
• Implement precautions against COVID-19

39. Prepare to close campus again in case of
resurgent COVID-19
For such high tuition
costs, we expect our
child to receive on-
campus instruction. We’re suing the
university because
our child caught
COVID-19 in a
campus classroom.
(Concerned parents)
(Angry parents)

40. Restore operational reserve accounts
Rainy-day reserve balances must be brought back
to about 3 months of normal operating expenses.
Some states and most governing boards mandate this
reserve; it is not discretionary.
For a $120 million operating budget, this will subtract $30
million from the operating budget, equal to $6 million per
year for 5 years. Deductions that large will impact
programmatic activities.

41. Restore exceptional reductions in
restricted accounts
For example:
• Pension-fund accounts
• Endowment accounts
Restoration of these accounts may be spread over several
years to blunt the impact on academic operations.

42. Bottom line:
This is a rare opportunity to make significant
academic and operational adjustments .
BUT:
Very important!
Operating budgets will decrease,
probably for several years

43. Realign the budget with refreshed
strategic plans
Significant reallocations may occur
Update:
• Academic priorities
• Business models
• Operational strategies

44. Reset operational strategies
Reset:
• Tuition rates and discounts
• Room and board rate structures
• Athletic event ticket prices and policies
• Other financial parameters

45. The COVID-19 pandemic disrupted higher
education
No more “business as usual”
(The ultimate optimist)
The pandemic
left the cup at
least half full.
BUT:

46. Contact Information
Dean O. Smith, Ph.D.
dosmith@post.harvard.edu
Barney
Contact information

47. COVID-19
2019
2020
2021
COVID-19 Affected the FY2021
Budget Cycle

48. COVID-19
2019
2020
Immediate
impact
2021
COVID-19 Affected the FY2021
Budget Cycle