Smaller colleges must be savvy in a down market

Much has been made about large losses to the endowments of the nation’s wealthiest colleges and universities. Hiring freezes and limitations on capital projects and development have followed in the wake of these losses. For all of the justified concern that has been expressed about these institutions, however, a graver fate may await the many smaller private colleges and universities in New England and elsewhere that depend not on large endowments for their annual operating expenses but primarily upon tuition.

Facing the prospect of declining enrollments, these institutions must make some very hard choices now in order to improve their odds of long-term survival.

Although tightening job markets have historically been a boon for higher education demand, current forecasts suggest that enrollments will be down for many private colleges and universities for the 2009-10 academic year. Administrators fear that budget-conscious families will look for what they perceive to be lower-cost options in four-year state colleges and two-year community colleges.

And while financial aid packages at some private institutions can include grants to students that make the cost to attend those schools competitive with the cost to attend public schools, many smaller institutions lack the resources to offer such grants and rely on external lenders to supply aid in the form of loans only to students.

These funds are becoming less available, however. In a survey of the 2008-09 academic year conducted by the National Association for Independent Colleges and Universities of its member schools, 75 percent reported increases in demand for student aid. At least as tellingly, 85 percent reported losing Federal Family Education Loan Program lenders, and 90 percent of those participating in private loan programs reported losing private lenders.

Given this context, many of the traditional answers to declining enrollment simply do not wash. Decisions to raise tuition must be weighed against the risk that even current tuition levels may be prohibitively expensive. And decreasing the cost of tuition – by increasing financial aid or discounting tuition – might make balance sheets uncomfortably tight or even untenable.

Making adjustments

Schools should refuse to accept declining enrollment as inevitable. Although the luxury of price-inelastic demand is unknown to many smaller, private colleges and universities, adjustments in marketing strategy may yield results.

Some institutions already have executed on changed strategies, which have included emphasizing the advantages of financial independence from shrinking endowments and projecting an image of stability by highlighting recently completed capital projects.

Smaller private schools also should frankly assess their course offerings and faculty. Discontinuation of certain courses may be advisable in order to better deploy resources.

Schools also should consider adding courses in the evenings and on weekends.

Hand-in-hand with assessment of course offerings are questions of whether and how to make faculty adjustments. In order to increase course offerings, it may be necessary for existing faculty to teach more. Covering these course offerings may also be possible, however, by adding less expensive adjunct faculty. And schools might reduce cost still further through voluntary buyouts of tenured faculty and replacement of those faculty with less expensive adjunct faculty.

Schools should ensure that they are optimizing their relationships with potential donors. This work should include fortification of alumni relationships. Schools should also look to other organizations and individuals with similar orientations as potential funding sources.

And although it is not a donor, as such, government – at all levels – should be reviewed for possible support, including through research and other grants.

Smaller private institutions should look for optimal arrangements with respect to real estate they own or use. This might include the leasing of space owned by the institution to non-institution interests. It also could entail the sale and lease-back of certain properties. Because real estate can function as security for needed credit, real estate arrangements should be managed carefully.

Still other institutions may need to make hard decisions on how to restructure existing debt and how best to take on more.

Indeed, in times such as these, balance sheets in general cannot be too carefully watched.

Daniel W. Sklar, senior counsel with Nixon Peabody, concentrates his practice in lending transactions, loan workouts and liquidations, bankruptcy reorganizations and lender liability. Brian M. Childs, an associate with the firm, is a member of the firm’s Financial Services and Securities Litigation practice group.