COVID-19 Will Hit University Finances; Risk Managers Need to Prepare Now
Higher education is normally insulated from economic disruptions that sink other businesses. After all, a degree is still a necessary ingredient for success in most careers, and many people pursue advanced degrees instead of looking for work when prospects seem poor.
But the disruption caused by COVID-19 is unique, and no sector is shielded from the effects.
On April 15, Ernst & Young hosted an informational webinar for the higher education sector detailing the financial impacts of COVID-19, potential sources of funding, and the outlook for summer and fall operations.
Though this situation changes daily, the presenters sought to clear up confusion around what funding colleges and universities may be eligible for, how to use those funds, and how they should prepare for the rest of the fiscal year and beyond.
Here are the key takeaways for higher education risk managers:
Planning for Prolonged Revenue Shortfalls
Colleges and universities are losing revenue from room and board fees for the remainder of the spring semester, and likely the summer semester as well. The inability to host athletic programs and events is also robbing schools of a key revenue stream.
Tuition revenue depends on enrollment, and it’s unclear exactly how enrollment will be affected going forward. Some people who had not been considering higher education may choose to pursue this path in hopes of improving their hireability in an increasingly dismal job market. Totally remote programs may also appeal to adult learners who are juggling education with work and family obligations.
On the other hand, prospective students experiencing unexpected financial hardship may choose to delay enrollment. Recent high school grads who want a traditional, residential college experience may also choose to hold off.
The shift to virtual learning also may not appeal to everyone. Not every student, after all, has access to a laptop, a reliable internet connection, and a quiet study space in their homes. If remote learning is not sustainable, these students may drop out or choose to delay enrollment as well.
Actions to Take Now: Though many institutions hope to reopen their campuses for the Fall semester, they need to create contingency plans in case that doesn’t happen. This includes investing in more robust IT infrastructure and professional development for faculty that support a higher quality online learning experience.
Schools should also develop a recruiting strategy that will help them tap into that category of prospective students for whom virtual learning is a good fit. At the same time, they should develop a long-term plan to address the inequities that prevent some students from succeeding with online learning.
They should also look for ways to monetize or sell properties that continue to sit idle on campus.
Making the Most of Available Funding
The two most likely sources of funding to cash-strapped schools are FEMA and the Coronavirus Aid, Relief and Economic Security (CARES) Act — at least until Congress passes additional stimulus packages.
Here are the key things to know about each:
FEMA funds can only be applied to emergency expenses, such as medical care, shelter, security, and energy equipment for any personnel and students who must remain on campus. They do not reimburse institutions for lost revenue nor cover normal operating costs like payroll.
Institutions can retroactively apply FEMA funds to eligible expenses incurred as far back as January 20. Presenter Robert Reeves, partner, Insurance & Federal Claims, Ernst & Young LLP, stressed the importance of thorough documentation.
“You need a detailed tracking mechanism now for eligible expenses,” he said, which will help institutions “avoid duplication of benefits from CARES act and insurance. Poor documentation is a leading cause of de-obligation and can slow down the overall process.”
2) CARES Act
The CARES Act makes a total $2 trillion in funds available, but two funds within the legislation have particular relevance for higher ed institutions.
The first is the Coronavirus Economic Stabilization Fund, which makes loans of anywhere from $1 million to $25 million available to businesses and nonprofits with between 500 and 10,000 employees. These funds can be used for a wide range of eligible expenditures not covered by FEMA relief, including normal operating expenses.
Though institutions aren’t required to use the funds to maintain payroll, they must commit to making “reasonable efforts” to retain employees. The only restriction is that the money cannot be used to pay down debt. Unlike loans disbursed under the Paycheck Protection Program, these loans will not be forgiven. Interest rates range from 2.5% to 4%, though payments are deferred for one year.
The second applicable CARES Act fund is the $14 billion Higher Education Emergency Relief Fund. This will be disbursed according to enrollment.
Half of any funds received must be used to provide emergency financial grants to students to cover expenses directly related to disruption caused by the pandemic. These expenses could include emergency housing, meals, course materials, health care, child care and technology. Students should be instructed to keep all receipts in order to document eligible expenses.
The other half of the grant should be used to cover costs associated with the shift to online learning, including updates to IT infrastructure.
Actions to Take Now: EY’s presenters stressed the importance of very thorough documentation both of accrued expenses and how any influx of funds is being applied. This will not only help institutions avoid disputes down the road, but also avoid duplicating funding requests that could ultimately result in missed opportunities and wasted resources.
As moderator Kasia Lundy, principal of Education, EY-Parthenon, Ernst & Young LLP said, “The fundamentals of disaster planning still apply — utilize all sources of funding and understand the interplay” to ensure you’re not leaving any gaps or money on the table.
Their second recommendation: keep your eyes peeled for new stimulus packages. Congress is likely to pass more relief legislation over the next couple of months. Institutions should be ready to apply for new loans and grants as they become available. &