Rethinking Debt and Revenue
Sessions in this track presented the latest in endowment management, liquidity, and debt.
A Complicated Fiscal Outlook
"Higher education continues to be a valuable long-term investment," said Edith Behr, vice president and senior analyst, Moody's Investors Service Inc., in the session titled "New Approaches to Funding Higher Education."
Even with that acknowledgement, she noted that Moody's placed a negative outlook on the higher education sector early this year because of the pressure institutions are facing on all revenue streams, including tuition revenue, federal student aid dollars, and research funding. Yet despite these pressures, John Augustine, managing director, Barclays Capital, noted that colleges and universities are presently attractive to investors and institutions, and "can once again call their own shots in the debt market."
Overlaying such factors with their institution's educational and research missions, business officers at the Ohio State University (OSU) recently undertook a study in an effort to understand how best to allocate limited resources to achieve desired changes. The university conducted a "look-back" at the previous 25 years, examining not only university finances, but also student finances, student debt, tuition, government support, philanthropic giving, and other factors.
Geoff Chatas, OSU's senior vice president and chief financial officer, outlined how this review led to a current strategy of placing the institution on a firm financial foundation by identifying areas for savings, redirecting existing funds, and growing new and innovative revenue streams—including commercializing research, building the university's endowment, and utilizing unique outsourcing opportunities.
Strategic Debt Management
Risk should be a primary focus when institutions consider restructuring their debt portfolio or taking on new debt, according to Remy Hathaway of Prager & Co. in the session, "Active Management of the Debt Portfolio."
Starting with risk, and taking into account various types of risk, allows the institution to decide where and how much risk is acceptable. Hathaway broadly categorized portfolio risk as debt service risk and liquidity risk. But he also warned about an often-overlooked category, which he termed "brain damage" risk. How much management and staff time is dedicated to managing the debt portfolio? How much time does the board spend on it?
Sherry Mondou, University of Puget Sound, and Thomas Richards of the University of Missouri System Office, joined Hathaway to talk about their efforts to improve debt management strategies at two very different institutions. Puget Sound needed to expand on-campus housing but first wanted to assess its outstanding debt portfolio and better match its risk portfolio to the board's risk tolerance. The first step was to refine the university's debt policy, followed by a comprehensive risk analysis and a rebalancing of the portfolio.
The University of Missouri undertook a strategic restructuring of its $1.3 million debt portfolio and the launch of a $350 million commercial paper program. In the end, the university increased its total variable rate debt while decreasing its daily self-liquidity requirement by $20 million.
Streamlining the Structure
The arrival of a new chief financial officer at Virginia Commonwealth University, Richmond, Virginia, served as the catalyst for streamlining organizational efficiency across the institution. In a session titled "Collaborating to Create Efficient Financial Structures," three campus leaders detailed how VCU, its related foundations, and the VCU Health System drove cultural and structural change to become a more efficient organization-and then took those savings and invested in the institution's strategic plan.
Describing a complex change management process involving dozens of separate and distinct financial entities were David Hanson, chief operating officer and senior vice president; Pamela Currey, associate vice president; and Thomas Burke, interim vice president for development and alumni relations. The steps involved creation of a 17-member universitywide financial structure task force; creation of a financial integrity stewardship committee; development of a financial services request for proposals; and implementation of various changes recommended by the financial structure task force.
And all this transpired over a period of 18 months.
This was the first time in his two-decade career at VCU, said Burke, that all financial stakeholders had been together in the same room to discuss the merits of streamlining financial and investment operations to gain economies of scale. Hanson concluded, "Traditional financial resources for higher education are strained-we have to maximize what we have."
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