LEANING INTO TURBULENT TIMESAn Overview of the Impact of the Changing Economy on Higher

Education

Joy E. Brathwaite, B.Sc., M.S.A., E.M.B.A. Vice President for Finance & Business AffairsNorth Central UniversityMinneapolis, Minnesota

From Whence the Storm?

2008 Economic Crisis Effect on Higher Education

Industry challenges Institutions’ response◦ Internal◦ External

Foci for University & AdministrationMy journeyHERS for meReasons I stay in Higher Education

Higher Education – Pre - 2008◦ Colleges were price setters◦ Endowment funded budgets◦ Streams of predictable donations/contributions ◦ Perception of value◦ College degree considered worth the price

Higher Education – Pre - 2008◦ College degree leads to jobs & improved life◦ Parents’ willingness to use equity and assets to

fund college◦ Parents’ ability to use equity and assets to fund

college◦ Adult students employers’ able & willing to pay◦ State funding slow but some growth

2008 – 2010 WINDS OF CHANGE

• FINANCIAL FALL OUT • REGULATORY CHANGES• IMPACT ON FAMILIES• IMPACT ON UNIVERSITIES

NINJA MORTGAGES Mortgaged backed securities

September 2008 – Long Hot Month

Story of Lehman Brothers◦ 4th largest investment bank◦ Owed 44 times what it owned◦ Stock $85 a share to 3 cents

Too Global to Fail? Fed decision not to be lender of last

resort this time Rejection by Bank of America & Barclays Undercut by Merrill Lynch

Underestimated world wide damage

REGULATORY CHANGES

The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)◦ Financial Stability Oversight Council and Orderly Liquidation Authority Monitor banks that are ‘too big to fail’ Support weak financial institutionsMonitor insurance companieshttp://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp

REGULATORY CHANGES

Consumer Financial Protection Bureau (CFPB)◦ Discourages predatory mortgage lending

practices◦ Enforces credit card company disclosures

Volcker Rule◦ Regulates how banks invest money◦ Sets reserves and restrictions on poor

performing investments◦ Restricts derivative investments

2008 Effect on Higher Education (HE)

FINANCIAL RESOURCES & RELATIONSHIPS

500 bank failures ¼ small local banks vanished◦ 2003-2008 5◦ 2008-2009 165◦ 2010-2011 250◦ 2012-2014 73https://ilsr.org/vanishing-community-banks-national-crisis/

2008-2012 HE Industry Turbulence

• Banking (capital and other loans)• % of reserves & negative portfolios

• Moody’s negative outlook on HE• Terms and Opportunity for Debt

worsened• Low Investment & Endowment

earnings• Donor challenges• State/Federal funding• Value (Outcomes) vs. Cost • College ranking• Demographic changes

State Funding & Appropriations

Change in National State Funding (only 1.3% Increase in 7 years)

FY07 State Funding = $75.3BFY14 State Funding = $76.3B

Intense pressure on public institutions Adjusted for inflation, 48 states are spending

less or the same in FY14 than before recession (Alaska and North Dakota two exceptions).

Most states are trying to reverse this trend, but 8 states reduced their spending in FY14 (WY, WV,LA, WI, NC, KS,AR, PA).

Federal Concerns• Accreditation Scrutiny• Proprietaries/private for profit

• (Wax and Wane)• Declining State Support• Student Debt

• Bankruptcy• Federal Debt• Denationalization

• Impact on PellOICU Excerpt, Todd Jones, May 2, 2015 BOT In Service

FEDERAL PROGRAM CHANGE IN REAL DOLLARS

Increase of $425 from 2009 to 2015

Increase of $981 from 2003 to 2009

Where was I in 2008 – 2010?

Challenges• Endowment lost 46%• 35% budget reductions• Layoffs• Retirement losses• Raises stalled• Health care revampedRecovery?• Slow but steady

Where was College A in 2008 – 2012?

Challenges $3 million loss in 2009 (20%) Broken bank covenant

Recovery?• Slow• Broken bank covenant 2013 and 2014• New Enrollment Emphasis• Change in Programs• New Fundraising Emphasis• Refinance Asset Based Lender (2015)

Where was College B in 2008 – 2012?

Challenges $2 million loss in 2009 (50%) Broken bank covenantRecovery• Careful savings• Fundraising• Refinance (2011)• New facilities

2012 President HE Score Cards Pressure

• Race to “A First in the World”• Standard Financial Aid Shopping

Sheet• Link state and federal funding to

Score Card• Access• Affordability• Higher Ed – priority for Stateshttp://chronicle.com/blogs/ticker/obama-wants-to-link-some-student-aid-to-affordability/40012

Value, Debt and Cost perceptions

• Families’ ability to pay (39% real income decline 2008 – 2010)

Value, Debt and Cost perceptions

• Families’ willingness to pay• Public perception of the value

of higher education degree

Debt Scare• Institute for College Access and Success

• (only 4% at $100,000 or more)• (71 % of 2012 college graduates with

average debt load of $29,400)• Price of a new car!

Outcome Focus:Change in College Ranking

• US News and World Report (30 years)

• Forbes Top Colleges (Financial Grades)

• Education to Career Report (new)

http://www.forbes.com/sites/ccap/2014/09/11/u-s-news-vs-forbes-college-rankings/http://www.forbes.com/sites/schifrin/2013/07/24/is-your-college-going-broke/

US News & World Report MetricsIvy Leagues at top of list

• Academic reputation

• Retention

• Selectivity

• Financial resources

• Alumni giving

• Faculty resources

• Graduation Rate 2012 – new rubric

Forbes Financial Grades MetricsIvy Leagues at top of list

• Balance sheet health

• Operational strength (margins, low tuition dependence)

• Instructional spending

• Institutional aid

• Admissions yield

• Financial resources per student

• Endowment per student

NEW : Education to Career Report Employability Earnings after college Differs from US W&N and Forbes◦ Ivy Leagues at bottom of list◦ Large well functioning flag ship publics

at top of list UNC, Chapel Hill #1

Value and Cost

• Parents/Employers are unwilling to pay without ‘guaranteed outcomes’

• Trusteeship Spring 2013 Article (reading)• College too expensive• Moody’s downgrade of Higher Education• Move from containing costs to balance budget

to OUTCOMES• Need for market demand programs• Culture shift

Demographic Changes: Ethnicity1995- 2025 ***2015

http://www.dol.gov/dol/aboutdol/history/herman/reports/futurework/execsum.htm

Demographic Change: High Schoolers2012-2027 -<1%

Excerpt from NAICUO Presentation Fall 2010, Source: Western Interstate Commission on Higher Education

Pressures on Institutions Decreasing enrollment Attracting & retaining Attracting & retaining ethnic students

Lower state funding 48 states reduced or flat funding

Inability to raise tuition price Average 5% pre 2008 Low point –(0.44%) 2012Delayed faculty retirementsClosures and mergersWeathering the Storm-Chronicle-Aug 2014

INABILITY TO RAISE PRICES $

Pressures on Institutions (Cont’d) Inability to plan carefullyProjections based on past become

inefficientHigh cost of accurate data for

decision makingExtensive cost reductions Increased tuition discounting 42 to 48.8% NACUBO Fall 2008 to

Fall 2014 discount rate Lower net revenue & marginsWeathering the Storm-Chronicle-Aug 2014

HARD LESSON Selling on discount not value

leads to Lower Net Revenue per student Lower Number of students

Lower Net Tuition RevenueAttempting the same business with lower revenue & resources

High Cash Burn VALUE IS KEY

Weathering the Storm-Chronicle-Aug 2014

Impact Resulting from Funding Sources

Struggling if… Large endowment

losses Ongoing Capital

Campaigns Dependent on

tuition dollars Tuition dependent

with falling enrollment

Low state funding

Managing if… Small endowment

losses At end of capital

campaign Dependent on

tuition dollars but increasing enrollment

Strong research institution

StrategiesPrivate (4 year smaller) Increased enrollment More full pay

students Small increase of

frozen tuition New market driven

programs Distinct/unique

program Increased focus on

fund-raising Expand/new online

Public (4 year) Increased enrollment

Small increase or frozen tuition

New market driven programs

Distinct/unique program

Expand/new online

Strategies (Cont’d)

Private (4 year smaller) Data driven decision

making Increased faculty load Cost cutting

Facility use year long Delayed spending on

plant

Public (4 year) Data driven decision

making

Cost Cutting

Facility use year long Delayed spending on

plant

How do we respond?

Re-look at Business Model◦ Trusteeship Spring 2013 Return on Investment Outcomes Market Demand Death of the “Build it and they will come” model

3 Examples◦ Public 4 year◦ Private 4 year◦ Public community college

Spring ’13 Trusteeship 3 Examples

How do we respond?

Re-look at Business Model◦ Data baseline Where are we right now? What are the revenue sources? What are the patterns for revenue? What will affect our revenue? Environmental (we cannot change) Internal (we can change)

◦ Leadership team Who are the correct stakeholders?

◦ Action and Communication Plan

Chronicle: Weathering the Storm

Chronicle: Weathering the Storm

Chronicle “Weathering the Storm”

How do we respond?

Chronicle “Weathering the Storm”◦ Careful research & planning◦ Normalize enrollment◦ Control expenses◦ Invest in the future at the right time

Control Expenses – How? Most colleges cannot afford what they

have become (R. Dickeson) Re-examine your needs Re-examine how the internal community

values the university Re-examine how your external community

values the university Inspire discipline “Do nothing” is not a strategy Choose a plan and work it

Normalize Enrollment – How? Early loyalty and connection◦ School outreach earlier & earlier PSEO

◦ Camps◦ Connection to the campus

Connection to the community Adult needs◦ Some college no degree◦ Need for promotion

College as an investment Programs (CAO is CMO) Perception of value

StrategiesPerception of Value

Connect with future students Present College as an

investment Educate parents on specific

College’s DNA Find students who fit and

persevere to keep them Provide Spiritual Formation Provide Intellectual Formation Provide Leadership Formation Offer hard skills education Offer soft skills education Produce global citizens Offer a few distinct/unique

programs Increase focus on fund-raising Expand market

Willingness to Accept Truth Financial resources are reduced Tough decisions are necessary Prioritization is necessary Programs are top recruitment

tool Courage to choose a plan Courage to keep it simple Ability to choose a plan Ability to execute Support from boards and

donors Be great at your core offerings

Stamats ABACC 2016 Presentation

Administration Main foci – Balance Budget & Reserves◦ All revenue streams (predictable as possible)◦ Controlled spending◦ Margins for investment (Income statement)◦ Assets growth (Balance Sheet)◦ Health rubric/ratio scores◦ Risk management◦ Regulatory compliance◦ IT assessment/data accuracy◦ Capacity for long term planning

Healthy Institution Rubrics/Ratios DOE Stability Ratio (Title IV) Internal cost rubrics/benchmarks e.g.◦ Retention◦ $ spent per $ raised

Compliance Unqualified audits Deferred maintenance Risk Management CFI Peer comparisons

Margin and Asset Growth

Revenues more than expenses => Good margins Good margins =>

Asset Growth Asset growth =>

Fiscal health Support the mission Enhance academics Enhance student life Reward excellent employees Planning to add resources (technical, physical,

people) for long term prosperity

What keeps a CFO up at night?

1,000 students 45 full-time faculty 210 full-time staff 200+ part-timers Annual # of closed private◦ Doubled in 2009-2013

Annual # of merged private universities◦ Tripled in 2010-2013

http://www.bloomberg.com/news/articles/2014-04-14/small-u-s-colleges-battle-death-spiral-as-enrollment-drops

What allows a CFO to fall back asleep?

The belief in the value of Higher Education The belief in mindful leaders’ ability to develop

impactful change

Why do I Stay in Higher Education?

Capacity of Higher Education in a new landscape

2nd best predictor of wealth stability Calling of Christian institutions within the

turbulence Community transformation Commitment to hope Personal calling developed and trained

Capacity – HE in a New Landscape Lumina Foundation Year of 2025 Job market needs 60-65% population with

college degree 2008 37% 2014 40%

Adults 2008-2014 $2.8 million adult degree

completions High quality post high school programs

Lumina Project - Goal: 60% by 2025 2008 attainment 37.9% 2014 attainment 40.0% (2.1% Increase)◦ 31% Undergrad◦ 9% Associate`◦ 22% Some College no degree◦ 26% High School Diploma◦ 12% School no diploma

2008 to 2014 $2.8 million adult degree completions

My Journey

Barbados Trinidad New York ◦ Brooklyn ◦ Wall Street

Springfield, Missouri Virginia Beach, VA Canton, OH Minneapolis, MN

Joy – Music -Finance –Education– Food - Travel

University X Project Peak Enrollment 2009 Tuition discount increase 7% Enrollment drop 2,600 to 2,000 Debt refinance (twice) Faculty support◦ Cost Containment ◦ Program closure◦ New programs

Cost reductions Enrollment and Marketing Emphasis

University X Project

Reaction◦ Athletics◦ Liberal arts faculty◦ Board

Grief◦ Jarring transparency◦ Colleagues departing◦ Cost reductions

HERS Project Supported Strategy

Transparency to community◦ 4 year model◦ Retention

Strategic plan 5 year budget model

TRADITIONAL UNDERGRAD PRELIMINARY PROJECTIONS & RETENTION STATS

A B C D E F G H I

NotesStudents

(FFTE)2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020

1 Retention Freshmen 376 410 416 422 431 416 416

2 70% Sophomore 317 263 287 291 296 302 291

3 82% Junior 253 261 217 237 240 244 249

4 93% Senior 321 235 243 202 220 224 227

5 Total 1,267 1,170 1,164 1,152 1,187 1,185 1,183

6 Fall 1,267 1,170 1,164 1,152 1,187 1,185 1,183

7 91% Spring 1,153 1,065 1,059 1,049 1,080 1,079 1,077

8Number FFTE 1,210 1,117 1,111 1,101 1,134 1,132 1,130

Visibility, Viability, Vibrancy Marketing new programs & curricular

changes Improving retention and persistence Using of resources for the changes Impacting student experience positively NEW REVENUE LESS EXPENES =

MARGIN

Malone

Strategy Map September 14, 2013

Mission “an education based on biblical faith in order to develop men and women

in intellectual maturity, wisdom, and Christian faith”

Visible Building Our Reputation

Viable Improving Our

Margins

Vibrant Transforming Our

Students

Student Stakeholders

Increase

Awareness

Diversify & Increase Revenue

Advance Learning

Outcomes

Financial Resources

Invest in Marketing Expertise

Optimize Return on

Investment

Align Resources with Priorities

Internal Processes

Develop Marketing Focus

Strengthen Infrastructure

Maximize Data- Driven Decisions

Organizational Capacity

Clarify Brand Promise

Build Strategic Financial

Understanding

Develop a Student-Centered

Culture

Foundational Principles

University X

HERS 2013 Moral compass◦ Five year plan

Reframing Networking◦ Fun◦ Career support

Re-center Project◦ 5 year model for budgeting◦ Program Launch/Implementation Task

Force

Re-center as a Leader Never doubt your instincts◦ Understand your strengths◦ Understand your blind-spots◦ Understand what you do not know◦ Understand what things you need to learn,

Do not doubt your instincts Do not sacrifice your core gifts/dreams for

a job Do not attach your self-esteem to things

out of your control

HERS ALUMNA 2013Just thankful…