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A Different Lens

March/April 2020

By Sue Menditto

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Although private institutions are viewed differently than public institutions regarding their financial planning and results, their need for reserves is equally great.

THE PRIVATE INSTITUTION PERSPECTIVE

 

The definition of reserves is fairly standard across private and public higher education. Reserves funds increase an institution’s ability to enhance programs, expand mission-related activities, respond to environmental changes, and address unforeseen events. The need to explain reserves to diverse constituencies is also universal. That said, rather than a broad discussion about reserves for both private and public institutions, the article “Rainy-Day Reserves” intentionally focuses solely on public higher education.

Since all public colleges and universities receive state funding, there is greater pressure on them to make sure that external stakeholders—especially state legislative bodies—have confidence in their planning efforts and understand their financial position. Private institutions generally can be less publicly transparent about their planning and reserves. And, local media outlets cover their community’s public institutions with a different lens, as the perception of abundant cash balances gets the attention of news consumers who are also taxpayers.

The Need for Planning

According to 2017 projections from the Center on Budget and Policy Priorities, states have collectively cut funding for public higher education by 16 percent over the past decade, and appropriations are an ever-declining percentage of operating budgets. Still, private, nonprofit institutions would certainly give a proverbial arm or leg for an extra 15 percent of funding for operations, even if such amounts are projected to decline over time. The reality is that the political and financial landscape for private institutions is different than that for public institutions.

Removing research grants from the equation, independent institutions rely on tuition (and other student program revenue), contributions, and endowment funds to operate. Although institutional aid to undergraduates is approaching 50 percent of tuition charged—according to the 2018 NACUBO Tuition Discounting Study—and high-need students use outside grants (from federal, state, and local sources) to offset costs, on average students pay more for a private higher education than for a public one. Independent colleges and universities—especially the most tuition-dependent ones—must carefully plan their use of resources to attract students, offer quality programs and relevant degrees, and continue robust operations.

Experts predict that an enrollment crisis is coming, especially for the most vulnerable private institutions. National Student Clearinghouse Research Center data show that fall 2019 college and university enrollments decreased 1.3 percent from 2018. Over the past eight years, undergraduate enrollment has declined by 11 percent. When compared to public higher education, nonprofit private higher education saw the largest decline in first-time, traditional-age college students, and smaller private institutions experienced the largest drop.

Weathering the coming enrollment storm while responding to a new economy and changing employer expectations will require a blueprint informed by careful analysis, planning, forecasting, and results assessment—the foundations of reserves planning and funding.

Objectives and Risks

In a presentation at the NACUBO 2019 Higher Education Accounting Forum, Mark Oster—Grant Thornton’s managing partner for its not-for-profit and higher education practices—noted that reserves goals for private institutions should depend on institutional objectives. He elaborated that the appropriate amount of reserves is also influenced by known institutional risks. Further, a financial model and plan should be established that helps leaders evaluate how risks shape business model objectives.

In 2010, with knowledge of how independent institutions were impacted by the Great Recession, the authors of the seventh edition of Strategic Financial Analysis for Higher Education (KPMG LLP, Prager, Sealy & Co. LLC, and Attain LLC) explained that institutions must implement a plan with a series of action steps that are required to achieve strategic objectives. Additionally, understanding and influencing the drivers behind key ratios is a worthwhile activity that should be intertwined with forecasting and organizational behavior change. This is why many institutions use the composite financial index (CFI) as part of their planning and reserves evaluation schematic.

Stay Tuned

NACUBO continually hears that private institutions are evaluating their business models; having intense and inclusive internal conversations; using forecasting tools to test assumptions about new majors, campus expansion, and who receives educational programming, as well as how it is delivered; and intentionally designating resources—reserves—to realize goals.

Given all the priorities for today’s private higher education leaders, future Business Officer articles will include interviews with CBOs from independent institutions to encourage idea-sharing and comparison of best practices related to their reserves targets, operational tactics, and approaches to transparency and change.

SUE MENDITTO is senior director, accounting policy, NACUBO.


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