American higher education caught in perfect economic storm

The COVID-19 pandemic has hit America’s colleges and universities like a category 5 hurricane. After a very tough spring and summer, campuses are doing their best to open. 

Those that cannot have gone virtual, which has generated demands for refunds of housing, meal plan fees, tuition and other fees. These refunds in combination with COVID-19 related compliance and safety-related expenses and major investments in technology and training to go virtual have just added to the pain. The losses that schools incurred from the spring shutdowns were only partially offset from the federal Coronavirus Aid, Relief and Economic Security (CARES) Act and additional funding from the federal government is questionable.

The refunds and additional expenses are being compounded with the loss of revenue from international students and students taking a gap year.  Future revenue is likely to be impacted due to projected demographics showing domestic college-bound students down or flat for the next decade throughout most of the country.

Many larger schools rely on their football and basketball programs to generate the revenue that is needed to support their other sports programs. The loss of revenue from the cancellation of the NCAA basketball and baseball tournaments and a significantly reduced or eliminated football schedule has meant billions in lost revenue.  

Very few schools have the reserves to deal with the financial deficits that they are experiencing and lie ahead. Smaller schools are at a particular disadvantage because they do not have the scale to spread these costs like their larger competitors, and average tuition has been increasing at more than two times the rate of inflation, so many schools have reached the limit of tuition that can be sustained. So cost cuts may be the only viable option. 

Many schools have been attempting to reduce costs by deferring maintenance on their buildings. According to JLL (a leading international real estate advisory firm), the average school has more than $123 per square foot of deferred maintenance and that number is expected to grow. Donors love putting their names on new buildings but have little interest in providing new roofs or HVAC systems, so these costs will continue to burden future cash flows.

Many schools with historic campuses are located in small towns that have lost employers over the years that provided the local tax base to help support these community pillars. Many of these smaller schools have excellent programs and educate students that become the teachers, nurses, local business entrepreneurs and other skilled positions these communities and America desperately need.

Unlike their larger competitors, smaller schools also have smaller alumni bases to fund endowments needed for capital improvements, upgrades and future capital expansions. Lastly, higher education institutions of all sizes worry about the trending occurrence of litigation, with COVID-19 claims and issues of moving to virtual academic delivery generating even more claims. 

If this were a true category 5 hurricane, the Federal Emergency Management Agency (FEMA) would have a team dealing with this disaster. The federal government has been less than helpful, creating roadblocks to help these schools work through their issues and restructure. Years ago, Congress enacted a law (the Higher Education Act) that prohibits universities and colleges from taking federal student loans and grants (Title IV Funding) if they look to the bankruptcy courts to help them through a judicial restructure. These federal funds are the life-blood for many institutions. 

The opposite is true for community hospitals and other not-for-profits that can continue to receive federal funds (Medicare, Medicaid, VA, DoD, etc.) and come through a judicial restructure process never closing and always meeting their community health care mission. Why can’t colleges and universities do the same?

Without the ability to utilize a judicial restructure, a distressed school must severely cut costs, reduce services, borrow at higher and higher rates, which create a death spiral. Students eventually feel the pain and leave. The school is left with no choice but to liquidate, which is a disastrous outcome to the students, alumni, community, donors and higher education in general.

The Senate’s Health, Education, Labor and Pensions Committee needs to allow colleges and universities to utilize judicial restructuring when it re-authorizes the Higher Education Act (HEA). Given the impact of the government-mandated shutdown and the current economic environment for schools, Congress and the Department of Education should make the changes necessary in the HEA to eliminate the prohibition on schools utilizing a judicial restructure.

The act could include a provision requiring the Department of Education to review and approve the restructuring plan. That would be the beginning of an education lifeline, especially to schools that do not have large endowments and are facing economic collapse because of this perfect storm. Optimally, schools that do not have the resources to meet their longer-term missions could combine with other schools. These combinations could generate the scale to provide higher quality facilities and academic offerings.

Judicial restructure could allow these schools to combine without risk of unforeseen liabilities and litigation. A university that becomes a collection of smaller schools, could leverage shared services and eliminate duplication so that additional cash flow could be invested in upgrading their facilities and excess properties could be liquidated to provide additional investment capital.

These changes allowing schools to utilize judicial restructuring are needed now. If we wait until 2021 to begin this process, many schools will likely need to shut their doors and their assets will be liquidated. This is the “Perfect Storm — COVID Category 5 Hurricane,” and we need Congress and this administration’s assistance so that higher-education leaders have the tools they need to survive.

• Tim Meyers is the past board of trustees chair of George Mason University Foundation and has been an adviser and board member for more than 50 growth companies and not-for-profits. He also helped advise a historic private college with its combination with a public university in 2019.

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