Does your university have a rainy-day fund?

How much money do US universities set aside for emergencies? A new book dives into liquidity across different types of institution

Does your university have a rainy-day fund?

Institutions in sound financial shape keep cash on hand to cover unexpected revenue shortfalls or unforeseen emergency expenses (such as the financial impacts of Covid-19).

You won’t typically find a specific fund to which money is allocated; rather, the institution will have cash accounts and cash equivalents (eg short-term investments) that can be liquidated almost immediately.

There are many measures of liquidity, most of which reflect available cash relative to expenses, with variants depending on how those two figures are accounted for.

One easy to understand example is “days cash on hand” that Moody’s uses in its ratings reports, and which is sometimes mentioned in a university’s annual financial report. It represents the number of days that the institution could cover operating expenses from cash.

Public institutions can typically cover a portion of a year while private institutions are usually able to cover hundreds of days and some even several years

For example, starting with some public institutions, FY2017 days cash on hand was: 210 at Indiana and 68 at New Mexico, that are both R1* (doctoral universities with very high research activity); 241 at Kent State, an R2 (doctoral universities with high research activity); 64 at Texas Southern, an R3 (doctoral universities with moderate research activity); and 134 at Midwestern State, an M2 (master’s colleges and universities – medium programs).

Examples from private institutions include: 620 at Vanderbilt and 954 at Notre Dame along with 187 at USC, all R1 schools; 457 at Loyola University of Chicago, an R2; 205 at Rollins College, an M1 (larger master’s institution); 534 at Kalamazoo College and 644 at Lafayette College, both BAS (small bachelor’s colleges covering the liberal arts and sciences) colleges.

Does your university have a rainy-day fund?
Indiana University

From these examples we can see that while there are differences in liquidity across all schools, there is also a differentiation between public and private universities. Public institutions can typically cover a portion of a year while private institutions are usually able to cover hundreds of days and some even several years.

The reason for the distinction is that private institutions typically keep a portion of their endowment as cash in addition to other operating cash reserves. This is not typically an option at public universities where an outside foundation holds the endowment and those funds are restricted. While endowment-related funds at a private university can fill a hole in the short run, if they are used, they will of course deplete the long-term resources of the institution. This public-private difference can be seen in Figure 10.9, which illustrates trends in simple liquidity ratios.

 

Unfortunately, while the data to calculate days cash on hand are readily found in individual university financial statements, sufficiently specific information to properly calculate days cash on hand for all schools is not publicly available, nor is it recorded in the Us Department for Education’s Integrated Postsecondary Education Data System (IPEDS). However, IPEDS does contain certain asset and liability data, from which simple liquidity ratios can be computed.

In the case of public universities, this simple IPEDS-based liquidity ratio is calculated as total current assets over total expenses, while for private universities it is calculated as total unrestricted net assets over total expenses. The numerator for the privates is a far broader quantity than that for the publics, which leads to two different scales as seen in Figure 10.9. Despite the resulting much higher ratios for privates versus publics, there are still some interesting differences among each group and some overall trends worth noting. At public universities, liquidity is similar across all sizes of institution except the group of small baccalaureate colleges that have lower cash reserves.

It was the recession that prompted far more attention to liquidity across all of higher education

Before the Great Recession there was variability in liquidity trends among the publics, but institutions made modest improvements to their liquidity post-recession. The privates, especially R1 universities and baccalaureate colleges, had distinct profiles pre-recession and they experienced dramatic reductions in liquidity as their endowments shrank.

Interestingly, because endowments are relatively low at the smaller private research and master’s institutions the impact of the recession on their liquidity was comparatively muted. Post-recession, liquidity improved slightly across all types of private institution.

In fact, it was the recession that prompted far more attention to liquidity across all of higher education: some institutions had to borrow money to meet debt obligations because their investments were inaccessible, and the credit rating agencies cited liquidity concerns in numerous cases as they downgraded institutions (Kiley 2011). Of course, liquidity is just one of many indicators used to assess institutional financial health, and composite financial indices are made available by the US Department of Education and in rankings exercises published by the media.

 

US universities: complexity and competition

Contemporary universities are part of a global higher education enterprise that has seen unprecedented expansion for decades, growing and succeeding, as the idiom says, like nobody’s business.

The breadth and complexity of how universities are funded and operated make them, in a managerial and practical sense, utterly unlike any other business either. Nowhere are these observations truer than for universities in the US.

During the twentieth century individual states invested in their higher education systems, sometimes more and sometimes less, while elite private universities continued to flourish. Simultaneously, the 1944 GI Bill [which allowed war veterans to access benefits to help pay for college, graduate school, and training programs], the introduction in 1965 of the Pell Grant program [grants for students in financial need] and unprecedented research investments at the federal level propelled US higher education into a position of world leadership.

The breadth and complexity of how universities are funded and operated make them, in a managerial and practical sense, utterly unlike any other business either. Nowhere are these observations truer than for universities in the US

These factors, along with the significant absence of unifying central control by a national ministry of education (unlike many other countries), produced a large, diverse system of universities and colleges and, importantly, an intensely competitive academic marketplace in which they function.

US universities are constantly competing for students, for faculty, for facilities, and for the resources to support them and further fuel their success, and generally do so as non-profits in a business environment like no other.

Does your university have a rainy-day fund?
Lafayette College

And, US universities have graduated, like no other, tens of millions of people, redefining the middle class to such an extent that a college degree has replaced a high school diploma as the ticket to career success.

Finally, add to all this our cultural embrace of universities, their simultaneously elitist and egalitarian aims, their parts in the concurrent pursuit of individualistic American dreams and civic Jeffersonian ideals, their uneasily parallel functions as engines of both social reproduction and of social change, their depictions in movies and novels as variously idyllic or sophomoric, the unique role of college sports, the considerable financial support by alumni and donors, and our obsession with ranking them.

In both senses of the phrase then – of a lot happening and of being unlike any other – it’s no wonder that the responsibility of running a US university has grown like nobody’s business.

 

This is an excerpt from ‘Like Nobody’s Business: An Insider’s Guide to How US University Finances Really Work’ (Open Book Publishers) by Andrew C. Comrie, a professor and former provost with over two decades of administrative experience at the University of Arizona. This book is an Open Access title available to read and download for free or to purchase in paperback, hardback and other e-book editions at doi.org/10.11647/OBP.0240

* The Carnegie Classification of Institution Higher Education is a framework for classifying colleges and universities in the United States. Categories include doctorate-granting universities (R1-R3), master’s colleges and universities (M1-M3), baccalaureate colleges and associates colleges.


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