Winners and Losers in the Shake-Up</p>
<p>When the stock market plunged 778 points last week, losing almost 9 percent of its value in one day, higher education responded in an uncharacteristic way: It began to buckle.</p>
<p>Colleges have often considered themselves recession-proof. But last weeks events compounded an already-difficult year for many institutions, which have suffered from declining state support, tightening credit, and losses on endowment earnings. As a result, the financial meltdownwith its promise of a prolonged economic downturnprompted some institutions to take radical steps and wreaked havoc on the way colleges do business.</p>
<p>Boston Universitys president announced he would freeze hiring and stop all building projects that had not already been approved. Colorado Gov. Bill Ritter tabled all taxpayer-supported construction, stalling several campus building projects. And Wachovia bank froze the accounts of nearly 1,000 colleges, leaving those institutions unable to access billions of dollars they depend on for salaries, campus construction, and debt payments. Some colleges are concerned they may not be able to make payroll.</p>
<p>Even as Wall Street rebounded a bit from its historic loss, campus leaders told The Chronicle they were considering other responses to the crisis: Public institutions talked about increasing tuition as other revenue falls, while private colleges said they would dip into their endowments to increase student aid and counter a growing scarcity of private student loans. Campus leaders discussed offering classes in the evenings and on weekends to maximize campus efficiency. And they said they would consider hiring more adjunct instructors instead of tenure-track faculty members and look for ways to boost cash flow by borrowing money from auxiliary operations like stadiums and bookstores.</p>
<p>Every downturn has its own unique features, said David W. Breneman, a professor and the director of the program in public policy at the University of Virginia. But this is a financial meltdown the likes of which we really havent seen since the Great Depression.</p>
<p>What also seems clear, though, is that the national economic crisis will not affect higher education evenly. There will be winners and losers.</p>
<p>Well-off private universities with large endowmentsand public universities in energy-rich states with strong balance sheetsare on the plus side. They will weather the financial turmoil and may even improve their standing, poaching faculty members from universities that are struggling and using their stability to attract donors who do have money to give. But small, less-selective private institutions that are dependent on tuition, and public universities in states where the financial outlook is already grim can expect to suffer. Some may even be forced to shut their doors. State legislators and education leaders in Michigan, for example, have already discussed the possibilityhowever remoteof closing a campus within the public higher-education system.</p>
<p>But one longtime university leader warned against overreactions and retrenchment. In times of economic distress, you have to be very prudent. But you also have to start reinvesting, said E. Gordon Gee, president of Ohio State University. The mistake of any university leader would be to hunker down. You invest in turbulent times. I never view it as an opportunity, but we need to take advantage of as much as we can.</p>
<p>Feast During Famine</p>
<p>In higher education, large-scale downturns in the economy have not necessarily been bad for business. When people cant find jobs, they enroll in college. Some officialsparticularly those at community colleges and low-priced four-year institutionsexpect that to happen this time, as well. Downturns are really good for colleges in terms of the supply of people into education, said Claudia Goldin, a professor of economics at Harvard University.</p>
<p>But any enrollment boost the current crisis may bring will probably be overshadowed by the financial pain and belt-tightening it will cause.</p>
<p>If past recessions, like the one in the early 1990s, are any guide, colleges will cut discretionary spending and stop investing in their staff and infrastructure. Campuses became dog-eared, John Nelson, an analyst with Moodys Investors Service, said of the last recession. But they limped along until the economy improved. Colleges are amazingly resilient, he said.</p>
<p>Still, some circumstances of the current downturn are different from those of the past. For one, institutions are carrying more debt. Most colleges devote around 5 percent of their budgets to debt service today, compared with around 3 percent 20 years ago, Mr. Nelson said. Debt service is an inflexible cost, not a place where colleges can tighten up. If the recession is a long and severe one, we would definitely expect the results to be different this time, said Mr. Nelson.</p>
<p>Another big problem: Banks have basically stopped lending money or started charging much higher interest rates to colleges willing to take out loans. For the many institutions with variable-rate debt, which has fluctuated wildly this year, that has taken a far-bigger chunk out of their budgets than they had planned.</p>
<p>Many colleges are also short on cash, said Dean W. Currie, vice president for business and finance at the California Institute of Technology. Whereas large research universities used to invest their endowments in stocks and bonds with a steady interest payout, institutions like Caltech have found they can earn more by investing in less-liquid assets like small start-up companies. But the payout on IPO’s can take months or longer. That creates a cash problem, said Mr. Currie.</p>
<p>It isnt clear yet how the financial crunch will effect personnel, although, like Boston University, other institutions told The Chronicle they would leave unfilled faculty and staff positions open.</p>
<p>Kirk Beyer, president of the board of directors of the College and University Professional Association for Human Resources, said colleges tend to prefer to lose positions across the board through attrition. But buyouts and layoffs are likely to be among the options if budgets continue to tighten, he said. The University of Memphis last week announced a voluntary buyout plan for 115 positions, including administrators, professors, and staff members, that will save the institution $1.5-million.</p>
<p>Some more-well-off campuses will undoubtedly consider this a time to raid professors from institutions that are struggling. Harvard could clean up in bad times, said Ms. Goldin, the economist there. But even deans at Harvard get scared in a bad economy, she said, so it isnt clear that will happen.</p>
<p>Endowment Effects</p>
<p>The health of college balance sheets is closely determined by the vitality of their endowments, which could suffer as earnings and giving drop. Ann E. Kaplan, director of the Council for Aid to Educations Voluntary Support of Education Survey, which tracks private giving to colleges, said donations typically slow down in a recession or stock-market drop, but recover quickly.</p>
<p>Edith H. Falk, chief executive of Campbell & Co., a fund-raising consulting group, said she expects well-established fund-raising operations that have been around longer to do better. Colleges with smaller, newer programs may struggle.</p>
<p>The impact on fund raising varies in different parts of the country: Institutions in places like New York, where the housing market has been hammered and the financial crisis has hit closest to home, are feeling the effects of the down economy more than those in Dallas or Houston, which have been more insulated because of record oil profits.</p>
<p>Some institutions already are changing their plans, based on the economic troubles. The University of Colorado had been gearing up to start a fund-raising campaign but might now delay it, said Ken McConnellogue, a spokesman for the Colorado system.</p>
<p>Westminster College in Missouri was also preparing a fund-raising campaign to double its endowment, starting this year. We may push that off a year because we think that our donors are so nervous about their own money, said Wayne Lowen, vice president for business and finance.</p>
<p>Like other campuses, Westminster had suffered a decline in its endowment earnings even before last weeks market fall.</p>
<p>Westminsters 10-year model had predicted a return of 7.2 percent on its $55-million endowment. But the college changed its forecasting to 0 percent in the last year and ended up making 0.5 percent. Now, the colleges board has asked Mr. Lowen to figure out how Westminster would fare if its endowment actually lost money.</p>
<p>At Winona State University, in Minnesota, which has undertaken its first-ever capital campaign of $10-million, donors are being affected in different ways. Last week at the groundbreaking for Winona States new wellness center, Merchants Bank announced a $500,000 gift to the college, the largest in the banks history. At the same time, James Schmidt, vice president for university advancement, said one of the universitys most loyal alumni, a man in his 80s, has told the college he wont be able to give as much as he would like. The man held more than $750,000 in Wachovia stock and has now lost a significant amount of money on its dividends.</p>
<p>It just about made him sick to tell us that, said Mr. Schmidt.</p>
<p>But some people will make money in this market, and fortunate universities may benefit from that. Consultants say some wealthy donors may actually increase their gifts. And fund raisers expect loyal donors will still continue to give, but it may take longer for them to fulfill their pledges.</p>
<p>Squeezing the Middle Class</p>
<p>Donors are not the only ones whose financial situations are now uncertain. Economic instability is also making it more difficult for families to afford college. That, combined with the shrinking availability of loans and the prospect that the economic downturn may lead to increases in tuition next year, may push some students out of the equation.</p>
<p>Low-income kids counted themselves out of higher ed long before the economy tanked, said Sara Y. Goldrick-Rab, an assistant professor of educational policy studies and sociology at the University of Wisconsins Madison campus who is surveying 3,000 Pell Grant recipients in the state. How will this affect their expectations? Will starting and finishing college be an affordable possibility with a real payoff?</p>
<p>At Fordham University, 150 students who had private loans last year dont this year, says Peter A. Stace, vice president for enrollment. If students financial situations change drastically over the course of the academic year, colleges can adjust their aid forms. A student already on the bubble might become eligible for a federal Pell Grant or for more grant money.</p>
<p>Like many other colleges, Fordham also keeps a pool of institutional aid set aside for students who fill out forms late or have major changes in their financial situations. This year, it has a fund of several hundred thousand dollars.</p>
<p>Vassar College already has had to dip into a contingency fund and into endowment earnings because it is spending $1-million more on student aid than it had planned.</p>
<p>The increase is due to a combination of things. This year Vassar moved to need blind admissions, and more students overall qualified for aid than the college predicted, including upperclassmen whose families were hit by the failing economy. For example, one students parents owned seven large rental properties which provided the bulk of the familys income. But the family suffered foreclosure on all the properties and is selling its own home. Vassar awarded the student a $40,000 scholarship in addition to federal aid.</p>
<p>Building next years class may also present challenges for colleges. In a tight economy, families are likely to focus more on affordability and less on finding just the right college for a student academically, socially, and culturally.</p>
<p>Students will probably apply to more colleges and shop around for the best financial-aid package, said Robert A. Sevier, senior vice president for strategy at Stamats Inc., a company that advises colleges on marketing. As a result, colleges may see their yield, the percent of accepted students who ultimately enroll, go down and become even harder to predict.</p>
<p>Private colleges may also simply lose students to more-affordable two- and four-year public institutions. Enrollment at Tidewater Community College, in Norfolk, Va., is already up this fall to about 26,750 students, continuing a trend of steady growth.</p>
<p>Deborah M. DiCroce, the colleges president, believes the current economic situation will bring even more students to Tidewater. She expects to see not only adults who are out of work or need new skills, but also recent high-school graduates who decide that studying for two years at a community college makes more financial sense than going straight to a more-expensive university. At $1,523 for a 15-hour semester, Ms. DiCroce said, Tidewater costs about a third of what the states four-year colleges do on average.</p>
<p>Campus officials are hoping for the besta quick turnaroundbut preparing for the worst. The crisis will force them to make tough choices: Should they reduce payouts to protect their endowments or increase them at a time when students are sure to need more help? And if they have less to invest in people, programs, and buildings, which should come first?</p>
<p>At a time like this, you have to make trade-offs and do some things, but not others, says Catherine B. Hill, Vassars president. For us, the big question is, Are these financial changes cyclical, or are they permanent?</p>
<p>This article was reported by Elyse Ashburn, Scott Carlson, Audrey Williams June, Eric Kelderman, Kathryn Masterson, Beckie Supiano, and Robin Wilson, and written by Ms. Wilson