COVID-19 put university CFOs to the test, with zero preparation time and no business textbooks for reference.
When a company is in financial free fall, traditionally the CFO takes charge. But at universities, financial decision-making can be a hot potato of responsibility, changing hands based on an amalgam of secondary factors.
At most corporations, CFOs are second in command, a strategic partner to the chief executive. They operate on a structured and cohesive goal: making money, and making sure money doesn't run out. In 2020, CFO performance was a mixed bag overall, as many companies flourished while others struggled. But few sectors have been left in a more unsteady, fraught position than higher education — which is, ultimately, a business, too.
A university CFO is often situated further down the totem pole than their corporate counterparts. Universities, with their provosts, trustees, faculty, students and alumni, operate under shared governance: everyone has a voice, and, theoretically, there's no such thing as unilateral decision-making. This even applies to use of perhaps the most vital source of spending: the endowment.
According to a study of 705 institutions by the National Association of College and University Business Officers (NACUBO), colleges on average spent about 4% more from their endowment in 2020 than they did in 2019, in large part to handle the disruptions, emergencies and needs posed by the pandemic.
"Endowments, year in and out, are an essential tool for enabling enrollment and encouraging student success," NACUBO CEO Dr. Susan Whealler Johnston said. "They also are key instruments in college and university long-term planning goals."
Additionally, new donor gifts, a vital resource, fell 16% from 2019. A survey by educational consultancy EAB found fundraising revenue at one in four colleges fell by more than 30% during the first half of fiscal 2021 from the same period the year before. (Most college and university fiscal years begin July 1 and end June 30.)
To grasp the scale of the damage, it helps to first understand what university CFOs are up against, and how their operating environment functions in practice.
Corporate crisis spending vs. higher education spending
Heading finance at the University of Alabama is much more difficult than being CFO of a for-profit company, Matthew Fajack said.
Fajack has been CFO of University of North Carolina—Chapel Hill and the University of Florida, directed financial affairs at Kent State University, and served as CFO of wealth management company Beta Capital Group.
In commercial business, finance leaders strictly study measurable variables such as profitability, expense ratios and stock price. And most people employed by a company exist to meet those goals in some way. These factors make measuring — and hitting — goals "relatively easy," Fajack, Alabama's vice president of financial affairs since 2017, said.
"I don't try to use my power to tell people they can't spend money," he said. "I do play the role of saying 'yes, that is' or 'no, that's not furthering our mission,' because rating agencies will downgrade us if we make unnecessary spending."
"[Public] companies have earnings calls and are scored every day on the stock market," David English, CFO of liberal arts college Denison University in Granville, Ohio, said. "But higher ed institutions aren't here to maximize profits. If any school does, people kind of look at you askance, because your mission is to educate students, not maximize net revenue."
In higher education, the standard isn't profitability; it's reputation.
Reputation, by Fajack's definition, is anything from rankings to publications to tenured professors, all of which ultimately boil down to the variety of reasons an individual might join a university, and all of which made leading finance at a university in 2020 a near-insurmountable task.
English likens reputation to branding. And Denison's brand is incredibly important; it's what attracts full-pay families, he said.
"Higher ed institutions aren't here to maximize profits. If any school does, people kind of look at you askance, because your mission is to educate students, not maximize net revenue."
CFO, Denison University
The first big decisions
One week before COVID-19 shut down the United States, the Washington University in St. Louis board of trustees (disclaimer: Washington University is the alma mater of the author of this piece) signed off on breaking ground on a state-of-the-art neuroscience research building.
Because the start of construction directly coincided with the university's emergency campus closures one week later, many school leaders wrung their hands over whether the time for the building project, which would cost $616 million, was right.
But Amy Kweskin, the school's CFO, made the call to proceed with the execution of a bond transaction. The school issued bonds in early April.
"People thought I was crazy," Kweskin said. "But it turned out to be a really great transaction for the university."
Kweskin calls giving the go-ahead for the execution of the bond issue one of her best and most vital early decisions of the pandemic.
"Not only will the research that will go on in that building be critical to the university, it provided jobs in the region for construction workers, engineers and architects," she said. "To have kept that moving forward, we really were an anchor institution, and it was really an important project."
But not all decisions came as easily.
In Tuscaloosa, though it ultimately remained profitable, the University of Alabama's auxiliary income — revenue generated from sources other than core products and services — dropped almost $43 million in 2020, its annual report showed.
By the spring 2020 semester's end, Alabama refunded students $10 million for housing and $6 million for unused meal plans, Fajack said.
English made the same call, refunding room and board fees for all Denison students, regardless of how much they'd paid originally.
"Some of our high-need students receive the full cost of attendance, so if we'd refunded them based on what they paid, they'd have nothing," English said. "Guaranteeing a refund floor was clearly a hit to our finances, and I have colleagues at other schools who couldn't afford to do that, but we thought it was the appropriate step."
"Guaranteeing a refund floor was clearly a hit to our finances, and I have colleagues at other schools who couldn't afford to do that, but we thought it was the appropriate step."
CFO, Denison University
Once Kweskin grasped the seriousness and longevity of the social distancing mandates, she opted to refund anything WashU students could no longer take advantage of, including meal plans, housing, parking, and health and wellness fees.
The school did not, however, lower or refund tuition, because, as Kweskin puts it, "we were doing everything in our power to let students continue to learn, and we provided every possible option for them to get their degrees."
"I was not popular with the tuition decision," she said. "But it was important for us, and it was the right thing to do. The housing and campus life fee refunds were the right thing to do."
"I was not popular with the tuition decision, but it was important for us, and it was the right thing to do. The housing and campus life fee refunds were the right thing to do."
CFO, Washington University in St. Louis
English's first priority at Denison was ensuring liquidity.
"We increased our line of credit by 50%, and drew all of it on April 1," he said. "As a private liberal arts college, we offer a premium product. We have a low student-to-faculty ratio and give a great deal of personal attention to students, which qualitatively is very good."
The school was able to fully repay the credit in August 2020.
"We wanted to ensure we had liquidity to continue operations and avoid making decisions that would impair our brand, just because we have a short-term cash constraint," English said. "That could take decades to get back."
Drawing on the line of credit in April allowed the university to make decisions on the basis of what will make it stronger in 10 years, rather than just react with short-term emergency spending.
"Unlike at a for-profit company, we didn't go by quarter, but went by what the right thing to do is to put us in a better position in five or 10 years, even if it costs more in the short term," English said.
University professors, particularly research professors, travel a lot, whether to continue their studies, present at conferences or study abroad, Fajack said. When that travel came to a halt, the university saw savings of $5 million a month.
Additionally, Alabama boarded up half of 16 million square feet of vacant campus buildings. That move drastically reduced heating and cooling costs. "Summer in Alabama," Fajack remarked. "That's a lot of money. Just utilities alone, we saved $1.2 million over the summer."
The school also temporarily froze hiring, paused its use of outside consultants and issued a nonessential purchase approval process. It did not lay off or furlough any faculty or staff members.
Like Alabama, Denison did not furlough staff, opting to save money by instead restricting operating expenses and spending that was not contractually obligated. And Denison self-operates, meaning its custodial and dining workers are Denison employees, rather than contractors.
In early spring 2020, WashU furloughed about 2,000 employees, including coaches, researchers and residential life workers. But the school ensured that, among its lower-compensated employees, government assistance filled the gaps. It also continued paying for employees' health insurance.
By August, WashU rehired nearly every furloughed employee, save for a couple hundred who opted to leave, and a handful who were laid off due to restructuring.
At each institution, some of the largest financial decisions revolved around room and board.
Room and board fees comprise about 60% of Denison's revenue. Students are currently back in dorms, at about three-quarters of normal housing capacity. While they didn't empty out any large buildings, they did repurpose a few small ones to serve as isolation spaces.
Over 40% of respondents in NACUBO's survey said their institution's cash flow declined in 2020, stemming from lower enrollment and lost revenue from student housing, dining and parking.
At WashU, "big auxiliary units, like parking, dining and housing, have made a huge financial impact," Kweskin said. "We're still challenged by them."
WashU dorms are now about 50% full, and the school has entered master lease agreements with nearby hotel and apartment complexes for the overflow. It has also adjusted its room and board fees to accommodate a shortened semester, provided dining and housing credits, and reduced parking costs. All told, Kweskin had to revise the school's budget three times.
In making the call to reduce dorm capacity and cap in-person classroom learning at 50%, Kweskin and her team consulted infectious disease experts from the WashU medical school.
"From a financial perspective, I didn't want to have to do that," Kweskin said. "But we wanted to do everything in the community's best interest."
3 schools' 2020 endowment spending
Amid events such as COVID-19, where crucial spending decisions must be made quickly to preserve a university's livelihood and mission, one might think all eyes point in the same direction: the endowment fund.
But endowment spending is much more complicated and restricted than it might appear. Most non-profit organizations have broadly adopted 4-5% of their respective endowments as "a sensible baseline for spending."
The 5% payout guideline was instituted in 1981 by the IRS, according to Pensions & Investments, a division of Crain's. It only applies only to private foundations, but most non-profit organizations have broadly adopted it as "a sensible baseline for spending."
"Now, it is the most widely used spending percentage by institutional investors today, setting the return they must exceed annually to ensure the endowment grows," P&I wrote in 2017.
The idea behind the 5% endowment spending cap is to keep money untouched, growing and existing in perpetuity. In practice, it can often mean passing on problems, such as crumbling infrastructure or sub-par scholarship options, to future generations.
"Endowments, year in and out, are an essential tool for enabling enrollment and encouraging student success. They also are key instruments in long-term planning goals."
Susan Whealler Johnston
The endowment model has worked well enough for universities for decades; most schools have worked out a system in which their immediate needs are met without having to draw an additional line of credit, drastically increase tuition or otherwise cut spending. But COVID-19 complicated the delicate formula.
Last year, the University of Alabama held steady on its 4% annual endowment spending threshold, though Fajack is trying to increase that limit.
"Our endowment is just short of $1 billion, so throwing off about $40 million is a lot of money, but relatively, not too much," he said.
But he remains concerned about uncertainty. "I worry about what's going to happen in future years if the market comes back strong," he said. "From the market perspective, we're doing well, and we're still getting a lot of gifts. But I worry about gifts and the market every day."
Denison also didn't change its endowment spending formula.
"We have a formulaic investment that's a combination of inflation for a portion of your spend, with the remainder determined by market value of your endowment," he said. "We do ours on a 12-quarter rolling average, and we didn't change that, or take out a special draw; we knew, if we needed money, it was there."
Denison's endowment provides about 30% of its budget, though most of that is restricted. "Some of the endowment can only be spent on sports, for instance," he said. "So, with no students on campus, we can't use it."
Since the beginning of its fiscal year last summer, WashU has kept its endowment payout the same, as opposed to increasing it by a few percentage points, which it typically does each year.
"If endowment spending is four-and-a-half to five percent, and inflation is between two and three percent, it needs to get a seven or eight percent return just to keep up with its spending commitment to the university," Kweskin explained. "My job is to [decide] how much spending can we take off of the endowment. During a period like this one, there's a lot of pressure to cut back."
Kweskin's spending formula informs the board how much out of the endowment can be spent to avoid volatility. "We wanted to follow that, so we kept the payout flat," she said. "We felt that was conservative."
The amount of endowment spending WashU can do comes out to about 10% of its total revenue, she said, noting most of that money will go towards scholarship and professorship commitments. "It's a really important piece, and it does a lot of good, but it's only 10%."
"COVID-19 was challenging financially because it crossed over two fiscal years for us," Kweskin said. In the fiscal year ending June 30, 2020, the endowment maintained a 4.6% payout.
Safety going forward
For the new school year, Alabama had steeled itself for up to a 25% reduction in enrollment. But out-of-state enrollment suffered only slightly, by about 6%.
As the new school year began in August, the school's finances took a hit to COVID-19, between testing, personal protective equipment, and the needed technology to facilitate online classes.
Fajack said the school invested in plexiglass for almost every classroom to facilitate more in-person learning.
Athletics took a big hit, because, with football and basketball games at limited capacity, many season ticket holders couldn't get tickets, he added.
"We'll probably have a $100 million decrease in revenue this year," he said. "But, because we cut $30 million in expenses, are more judicious in hiring and replacing, and aren't doing any traveling, we'll still be profitable."
The CARES Act, signed in March of last year, gave universities and colleges $14 billion in emergency funding. The second round federal relief, passed in December, provided around $23 billion in direct aid to colleges.
WashU did not apply for the CARES funding, and is currently reviewing the second funding distribution.
The CARES fund provided Denison with $6.5 million, $1.7 million of which it directly passed on to students, as directed by the bills, English said.
"We have been using the remaining funding to offset additional costs of testing, contact tracing, technology for remote classes, additional staffing and PPE costs," he said.
The fund gave Alabama $21 million. Fifty percent of that went to students receiving financial assistance, Fajack said. "The lower the expected family contribution, the more a student received." The other half was used to pay for students' housing and dining refunds.
Kweskin, after making the unpopular decision to continue charging full tuition, made another hard choice on the first day of the 2021 fiscal year, July 1, 2020. It was then that WashU stopped its 403(b) match program for its employees, instated a hiring freeze, and withheld merit increases.
But the temporary measures did not last long. In November, with board approval, the matching program was reinstated, the hiring freeze was lifted, and merit increases are set to return on April 1.
"We've been able to do a lot of really great things, and we always want to do more," Kweskin said. "Our whole goal has always been the safety and the best interests of the school and the St. Louis community; everything we did, we thought about that."