Letting Numbers Tell the Story
Every morning, Brett Sweet, vice chancellor and chief financial officer at Vanderbilt University, gets a one-page snapshot of the university’s endowment.
It lays out information that one might expect, such as how changes in the market affected the university’s $3.5-billion endowment, as well as a breakdown of where the institution is investing. But there’s also a category that says exactly how much cash the university could reallocate in an emergency and how quickly it could do it. Every day, Sweet knows exactly how much cash he could access in a day, in a week, in a month, and in a year.
Five years ago, few institutions went into that much detail on a daily basis. But that was before the financial crisis that began in the fall of 2008, when large institutions, including some of the nation's wealthiest colleges and universities, had a difficult time quickly converting assets into cash, and many had to take out taxable debt.
Now, liquidity -- the ability to turn assets into cash, and how quickly that can be done – has become a prominent financial concern for the sector. “Before 2008, we didn’t track this nearly as well as we should have,” Sweet said. “If there is a silver lining to the 2008 crisis, it’s that it opened our eyes to our ability to access liquidity.”
Liquidity -- and how colleges manage it and share information about it -- has come under the microscope by agencies that rate institutions’ credit-worthiness, and therefore has become a priority for financial managers. Several signs indicate that colleges and universities, in an effort to improve liquidity, are being slightly more conservative with their investments than in the past.
Administrators have also begun developing new techniques to track information not only about liquidity, but also their institutions’ financial picture as a whole. Some are also working to better communicate that picture to those who invest in the institutions' bonds, as well as other stakeholders, including, at public universities, lawmakers.
That Was Then
Before the economic downturn, colleges were notorious for not sharing financial information. “Many colleges and universities believe that timelier reporting is not necessary because their finances are stable and based on an annual business cycle,” wrote Edith Behr, vice president and senior credit officer and manager for the higher education and not-for-profits team at Moody’s Investors Service, in a report released in September. “In their view, quarterly statements would not, therefore, provide material insight into their financial condition and would bring unwarranted focus to volatile short-term investment results. As a result, it is rare for colleges or universities to prepare external quarterly reports.”
In many sectors, financial reports are updated on a quarterly basis. But most higher education institutions publish financial statements only once a year. “When I was working for a corporation where we had calls with Wall Street analysts, we were constantly telling people the story using the financial information,” said MaryFrances McCourt, treasurer at Indiana University. “You had to have information readily available at your fingertips. Higher education didn’t operate that way, but that’s changing really fast.”
Several financial officers said the crisis was a wake-up call. Because things changed so quickly in late 2008 and early 2009, one of the major challenges that colleges and universities faced was an inability to generate the cash to cover obligations like debt payments. Even institutions with multibillion-dollar endowments couldn’t readily find the cash to cover some costs. “I think a lot of institutions were unpleasantly surprised how difficult it was to access these reserves,” Sweet said. “We have all this money, but you often can’t get to it.”
While they have always considered liquidity as a factor in determining an institution’s credit rating, agencies such as Moody’s and Standard & Poor’s Ratings Service began to look at liquidity with a more critical eye after the crisis. Liquidity also became a bigger factor in downgrades. Since 2005, insufficient liquidity has been one of the most cited factors in downgrading a college or university.
Because liquidity became such a focus, institutions have begun keeping a more watchful eye on the liquidity of their assets. Some track it on a daily basis, while others might include it in annual financial reports. Vanderbilt does both, and Sweet said the institution has adopted a metric it had not previously used -- "monthly days cash on hand,” which measures how many days’ worth of cash the university can get within a month.
While few go into the depth that Vanderbilt does, there are signs that the issue is on the minds of a lot of financial officers. Preliminary data for an upcoming survey about endowments by the National Association of College and University Business Officers and Commonfund indicate that institutions are keeping a larger share of their endowments in cash, a conservative investment tactic that allows the cash to be reallocated quickly but also doesn’t generate significant returns.
“If you’ve invested your money with money managers, you can’t always get at it immediately,” Sweet said.
A Moody’s report earlier this year found that colleges and universities have significantly improved their liquidity since before the recession. "Liquidity risks have stabilized for most universities nearly two years after unexpected cash shortages caused fifteen highly rated private universities to borrow more than $7 billion in taxable debt to bolster their liquidity,” the report stated.
Simply improving liquidity isn’t necessarily enough for institutions. In the wake of the recession, ratings agencies, investors, and other stakeholders have also demanded better information about how an institution manages its finances, who manages them, and what the institution’s overall financial strategy is.
Because of this pressure, because of new technologies available, and because more higher-education finance officers are coming from the corporate world, university financial administration is starting to change.
In a survey this year by Inside Higher Ed, fewer than 40 percent of business officers at public and private institutions said their colleges or universities were very effective at using data to inform decision making. But there are signs that some institutions are doing a better job than others.
Some financial administrators have begun using comprehensive financial dashboards, which display a variety of ratios and indicators that can be used to measure university performance. “The best-managed universities have developed management dashboards that track debt and financial metrics, and make comparisons to peers and competitors,” Behr wrote.
McCourt, who came to Indiana after working in the private sector, said she initially developed the dashboard as a way to understand higher education finances. But she soon realized that it would be an ideal management tool. It includes everything from capital planning to strategic financial ratios to employee counts, and tracks it all over a five-year time period. “It has now become a tool for doing very detailed work behind the scenes,” she said.
Analysts said such management tools reflect a style of leadership that inspires confidence. “It institutionalizes a way of tracking performance and success and failure with various strategies,” Behr said in an interview.
Analysts also cite some of Vanderbilt’s new practices as positive changes in financial administration. In addition to sharing liquidity information on a daily basis and incorporating it into annual financial reports, the university also distributes a treasurer’s report to division heads on a daily basis.
Increased public disclosure, such as the liquidity information included in Vanderbilt's annual financial reports, is a radical change for higher education, analysts said. “Driven by investor and regulatory demand and new accounting standards, disclosure by some of these organizations is more timely and detailed than it was prior to 2008, but remains far from optimal and neither as timely nor as robust as for-profit corporations,” Behr wrote.
All sectors of the municipal market have come under increased pressure to improve disclosure over the last 20 years, Behr said in the interview. Higher education institutions are just now catching up to where hospitals have been since the mid-1990s.
Those universities that offer bonds, a group that includes many large public and private universities, must provide adequate information to potential investors if they want their money, and this is one of the main drivers of increased public disclosure, analysts said. “A handful of investor-oriented universities, including Indiana University, Stanford University, University of Texas, and Vanderbilt University, have posted these dashboards and other comprehensive disclosure on their university web sites," Behr wrote. "A few have even added significant liquidity and other pertinent information that is more current than the data provided in the annual financial statement.”
How much is being disclosed varies by institution. For institutions such as Vanderbilt, more information about liquidity in the annual financial report might be all there is. Others, particularly some large public institutions, have increased the frequency with which they publish information.
Given that their stakeholders include the public at large, state universities including Texas and Indiana have placed a significant amount of financial information online. McCourt said disclosing such information helps grow confidence in the institution, especially at a time when budgets are being cut and lawmakers are questioning how the university is spending public money. “All of our stakeholders want this information,” McCourt said. “It just makes sense to me that if you’re not going to be transparent with me, then I’m not going to invest with you.”
Better sharing and disclosure of financial information might help the sector as a whole become more efficient. Faculty members and administrators tasked with adopting efficiency measures at Cornell University, the University of California at Berkeley, and the University of North Carolina at Chapel Hill said the lack of shared metrics makes it hard to determine whether a single institution is using money wisely.
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