Outlook for University Liquidity Management
By Lisa Jordan
In a session at the NACUBO 2011 Endowment Management Forum in January, John Nelson, Moody's managing director for public finance, offered an external credit perspective on liquidity management, while Martin Dorph, senior vice president for finance and budget at New York University, offered the private university perspective.
Nelson said financial statements are inadequate for assessing liquidity. Instead, look at what's available to spend—information derived from an audit and supplemental data—which will be unrestricted operating funds plus the lesser of unrestricted board-designated endowment net assets or endowment funds available within one month or one year. Monthly liquidity tends to be the most critical measure in most cases, as it can address unexpected events or demands on liquidity. Annual liquidity takes into account the stability of the higher education industry, and the fact that many liquidity demands are both predictable and not immediate.
Private institutions, on average, have a lower percentage of monthly liquidity than do publics, Nelson said, due to richer balance sheets compared to operating costs, and better coverage of debt. Public institutions tend to have high relative monthly liquidity: an average of 65 percent. Tuition dependence for private institutions is loosely correlated with liquidity position, but there are many outliers; numerous highly tuition-dependent institutions are not liquid, and liquidity among the least tuition-dependent institutions is still very diverse.
Endowment dependence is also loosely correlated with liquidity, but again, there are many outliers. The least endowment-dependent institutions show no pattern in percentage of monthly liquidity. The most endowment-dependent institutions show the least percentage of monthly liquidity, but still vary widely between 10 and 50 percent.
The use of "demand" debt structures is one reason for the widely diverse liquidity positions among private institutions. A minority of universities are surprisingly illiquid considering their "demand" debt risk. In terms of Moody's ratings, they are loosely correlated with liquidity; credit ratings result from diverse risk assessment. Nelson stressed that individual university risk assessment trumps averages.
How Much Liquidity?
Dorph followed with his perspective from New York University. With 40,000 students, NYU is the largest private university in the United States. It has a $2.4 billion endowment and a $2.3 billion budget, with endowment spending 4 percent of the operating budget.
"How much liquidity is enough?" asked Dorph. Considerations include financial structure (large versus small, tuition-dependent versus endowment-dependent) and philosophy (balance sheet as a profit center versus balance sheet as support for the mission). These drive risk tolerance, and choice of variable rate/synthetic fixed rate debt or fixed rate debt.
NYU manages its balance sheet to its philosophy. In terms of operating cash, there's no investment of working capital long term, and a rainy-day fund can be used only with board permission. Long-term investments are reviewed monthly for short-term liquidity by asset class and open capital call commitments. There is limited exposure to private equity; hedge funds are primarily in strategies using publicly traded securities. All debt is fixed rate except construction in progress.
NYU manages liquidity with very granular monthly cash flow forecasts that consolidate operations, capital, and endowment flows. The 10-year financial plan incorporates the operating budget, capital, fundraising, and use of designated and restricted funds.
LISA JORDAN is associate director of communications at NACUBO.