Despite current economic challenges facing private colleges and universities, presidents can adopt management strategies that help maintain an institution’s fiscal health, according to representatives of Moody’s Investor Services.
    Susan Fitzgerald and Naomi Richman, both senior vice presidents at Moody’s, said during a Presidents Institute session that colleges face significant financial challenges driven by endowment losses, declining philanthropic support, an increased focus on affordability, the need to invest in campus facilities, and increased competition for students. When all of these pressures are added up and applied to small, regional, lesser-endowed private institutions, the institutions tend to be regarded as a significant financial risk. Accordingly, the financial services sector will often assign their lowest investment grade rating, which is a Baa at Moody’s, she explained. Data from Moody’s show that private institutions with this rating tend to have revenue streams heavily dependent upon student charges (90 percent), with the remaining 10 percent derived from gifts, endowment, grants, and contracts. Institutions with the strongest rating, Aaa, tend to receive approximately 25 percent of their revenue from student charges, 45 percent from gifts and investment income, and 30 percent from grants and contracts.
    Although institutions have little control over the external factors that create these economic challenges, Fitzgerald suggested that presidents could manage their institutions so that the level of risk is reduced. One strategy is to achieve an appropriate balance between mission-driven activities that tend to increase financial risk, mission-driven activities that have a positive impact on the margin, and other activities that have a positive impact on the margin, but are less closely connected to mission. Additionally, she and Fitzgerald indicated that institutions can improve their ratings by doing the following:

• stratify pricing to capitalize on areas of strength;
  
• expand the student market without abandoning the core constituency;
  
• establish a fundraising contingency plan;
  
• manage expenses—for example, retirement benefits;
  
• engage in realistic budget planning and modeling;
  
• focus on investment allocation—find alternatives to equities; and
  
• rethink capital spending plans by focusing on functionality and
  flexibility in capital projects.

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Last updated: March 2003
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