UChicago Braces for $220M Deficit

Colleges and Universities A-Z University of Chicago ✅
1

https://www.chicagobusiness.com/education/university-chicago-braces-220-million-deficit

And the school will take steps “beyond salary and hiring freezes in response.”

Uh oh. That’s not good.

Also, being much more in debt than other peer schools does not help.

Honestly, COVID looks poised to set Chicago back, perhaps more than its peers with better finances.

I know, I know, I harp on Chicago’s finances - but where’s that rumored $10B campaign when we need it?

(Also, if ever there was the time for one of our billionaire board members to step up and give a couple billion to Chicago…)

2

FYI Northwestern anticipates a much smaller budget shortfall ($90M) and will tap a greater percentage of its $11B endowment.

https://www.bloomberg.com/news/articles/2020-05-11/northwestern-says-90-million-deficit-will-lead-to-budget-cuts

Again, a $220M shortfall with a $8.5B endowment (Chicago’s figures) are more grim…

I worry that Chicago - compared to its peers - is not particularly well positioned to weather this storm…

3

Cue, all colleges are taking significant financial hits with Covid-19 but maybe a silver lining is Chicago’s just completed $5B campaign because assuming that a good chunk of that was in the form of pledges over 5 years vs immediate cash deposits then Chicago can expect to receive hundreds of millions of cash flow over the next 5 years to partially offset some the deficits. If that is the case, then the endowment number of $8.5 billion is understated because it only reflects what has actually been given in the past and not near-term future money from campaign pledges.

4

For me the article appears to be behind a paywall.

“That’s not good.”

Well said.

I thought that one of the entire points of having a huge endowment is that you could handle one-time financial storms such as a pandemic without harming your academic quality. Perhaps I am confused.

5

Dad, the vast majority of university endowments are restricted meaning the money can only be used for specific programs and purposes as specified by the donors. When donors give large donations like $5 million or more, they almost never give the amount as an unrestricted gift to be used by the admin however it chooses because they want to fund something very specific that they are interested in and don’t trust the admin to spend the money wisely if they just gave it unrestricted. This, the endowment can’t easily be used as a rainy day fund to offset a rainy day.

6

Generally, universities try not to draw more than 5% of their endowment each year. In addition there is the question of cash flow as was mentioned previously. The reported deficit is about 2.5% of the endowment and should be manageable but not great. It is likely that they will cut all adjuncts (as other universities are doing) and maybe have some layoffs too. Northwestern was reported to be doing the latter in Tuesday’s Chicago Tribune.

This is going to hurt a lot of private universities and accelerate the trends that were already started.

7

NU is also furloughing (EDIT: this mentioned upthread). Chicago hasn’t announced that (yet). They can make a dent just by introducing a 10% across-the-board salary and benefits cut. That’ll reduce the budget shortfall to around $60 million based on last year’s financials (university only, not including UCMC or MLB). Haven’t seen the figures for the medical center yet but it will be nasty.

8

Schools will be experiencing a lot of pain in the months (years?) ahead. My main query here is to consider which schools are best positioned to weather the storm.

I worry that Chicago is not particularly well positioned. During the Great Recession, they accrued debt heavily, banking on better times in the future. (No one predicted a potential “COVID - Great Depression” just 10 years after the Great Recession.)

Chicago, I believe, is still highly leveraged, and has a lower credit rating than its peers. The budget shortfall ($220M) is also a little more striking for a school of its size (it’s a little smaller than NU, which only had a $90M deficit).

And, 20-21 isn’t going to look much better.

I also worry that this sort of disruption could impair Chicago’s abilities more than its peers. When the dust clears (in 2022? 2023?) what will Chicago’s place look like?

9

Now is the time for both Courage and Prudence. I imagine Boyer had the management of the University in mind as well as the qualities needed in the student body when he singled out those virtues as the ones needed for these times. He also spoke of the many crises the University has endured. Is this one worse than that faced by the University at the beginning of the Great Depression? Or in the fifties, as the neighborhood decayed, bringing the flight of faculty and students? Or in the decades of student demoralization and decline following the events of 1969? I suppose we can’t say for sure, but what we can say is that in previous eras the University faced crises and overcame them. Courage! Prudence! Those are the watchwords. This university began in that spirit. It can continue in it.

10

When people speak of the endowment at $8.5 billion, are they aware that there has been a stock market crash? The endowment probably lost billions.

11

Encouraging words, @marlowe1 ! But I am curious, what is your view of the financial history of the University? We may be looking at this through different lenses.

Here’s my view: buoyed by one of the largest higher ed donations ever (from Rockefeller) UChicago started hot out of the gate in the 1890s (pesky Chicago fires aside). Within a generation, they emerged as one of America’s top 3 research universities, with an endowment to match. (Harvard and Yale were probably the two others, although Michigan and Wisconsin were strong.)

The school’s financial health dipped during the Great Depression - like its peers. It did enjoy some war-time momentum, again, like its peers.

The late 1940s is when the divergence started. While its peers enjoyed a post-war boom, Chicago went south. For a variety of reasons (some you mention), the school enjoyed almost none of the GI-Bill related benefits found at other great universities.

The endowment went south, too - falling from the top 3 into the teens. Sadly, the school has never really financially recovered from the post-WWII struggles.

Buoyed by new ambition in the Sonnenschein/Zimmer era, it took a risk to finance eminence with debt during the 2009-10 Great Recession. The debt financing led to forward momentum in the 2010 decade, but COVID times threatens this greatly.

My view is the University is still recovering from the financial wreckage of the 1950s. COVID could lead to a steeper, downward turn for Chicago quite quickly.

My fear, frankly, is not without a comparator. If the U. takes too many hits, I fear the University will resemble UChicago Medicine - a once eminent hospital system (in the top 10-15 in the nation), that sustained decades of struggle, and is a shadow of its former self.

12

Someone will have to count those beans, Cue, but I’m not the man. If the University can’t withstand a diminution of income that amounts to one-half the annual draw down on its endowment, then it needs better bean-counters. It would be a shame if the Medical School cannot claw its way back to pre-eminence through an infusion of multi-millions, but I hardly have my heart set on that: I do not see the Med School as the crown jewel of this institution. In any event wringing one’s hands doesn’t do much good.

Hutchins’s ideas brought the University to great prominence - probably the greatest it has had at any time since its founding. But his vision was always contested and over time it decayed. It was not well-suited to take the University of Chicago into the Elysian fields of prosperity and universal recognition of a Stanford and Harvard - if that’s your only measure of success. You hate the turn that the University took. I say it put the University on the map and made it the distinctive place it remains today. You and I are never going to agree on that, but what’s the point of looking at the present situation and whining about how much better it would all have been if Chicago had acquired that great big Endowment it surely would have if it had only stayed on the straight and narrow track to ivy nirvana.

The Great Depression and the decay of the neighborhood were phenomena that the University could not do anything about, though it begin to take action in the early sixties on the latter front. Student discontent peaked in the late sixties, and this was especially fierce at an institution which was by that time beginning to lack a vision for undergraduate education and even to doubt the mission itself. A low point ensued. You yourself had the misfortune to suffer through it. Then came the revival of the last decades. So it is with great institutions. History has many bumps in the road.

But here we are today: You are either in the battle or you are out of it. I say it’s exciting times and that out of this crisis will come something interesting that perhaps neither of us has foreseen. In any event the institution itself will survive and keep its eminence. Care to place a bet?

13

“The Market” was recorded as 2812 (S&P 500) on 5/13/19 and was 2870 yesterday so up 2% over this time last year. At June 30, when the $8.5 billion endowment was officially reported, it was 2942. So down 5% from 6/30. The “crash” was from a Feb. high of 3386 on Feb. 19. So yeah, a decline of 15% from the 2020 high. But not from further-back history.

Chose S&P because it’s easily available. Stock prices tend to be correlated. However, UC’s consolidated investment portfolio* - per their financial report last June - consists about 1/3 of “global public equities; primarily international.” Didn’t peruse the report to understand that better but taking a look at my own international portfolio, it’s down about 15-20% from last year (both this date and June 30) and about 23% from its high in Dec. Furthermore, to the extent that UC’s portfolio also holds less liquid assets such as private equity or real estate - another 1/4th of their overall portfolio from what the notes indicate - they will take a sizable hit there too in a mark-to-market valuation.

I doubt this investment strategy is fundamentally different from other large universities.

  • University+UCMC+MBL; didn't see breakout for university on its own but it might be in the report somewhere.
14

^Marlowe and Cue at #10 and #11: the university has more competent leadership today and this crisis hit all higher ed institutions. No opportunity for Harvard to enjoy a boom while UC goes south; Harvard has announced the same hiring and salary freezes as Zimmer did. This is more of a “we’re all in this together” crisis. No doubt some smaller places will fold; they were heading that direction anyway. The larger research universities won’t. The fact that UC is sacrificing a lot in order to keep - and even expand! - need-based FA should tell you that its head is on straight for this one.

15

Yes, all U.s - from Harvard on down - will utilize hiring and salary freezes, but which schools will, b/c of financial necessity, need to institute layoffs? How deep will those cuts go?

I agree the U.‘s leadership now is quite competent (we are far removed from Hutchins’ iconoclastic days), but they’re wedded to an already cash-strapped U. There are only so many levers they can pull before they need to make more dire steps.

@marlowe1 - you ask us to use our crystal balls and assess how the U will do, post-COVID.

I am very confident Chicago will survive, but its eminence and standing will degrade. I predict its bond rating will go down farther behind its peers (maybe in the Moody’s “B” range), and the endowment will sink from its current position (roughly in the top 15 in the nation) to the top 20-25. The wealthiest schools (Law and Booth) will maintain their places, but other schools (med, Harris, etc.) could degrade.

I also predict Chicago’s college rankings (which factors in financial resources) will drop, from their current position of #6 to the #11-15 range - where it was for most of the 90s/oughts. Chicago’s position in the “ivy plus” group may falter (I could see NU replacing it as the most common member after Stanford, MIT, and Duke).

Those are my thoughts. Others want to make predictions?

16

We’ll see, Cue. As a Permabear you’ve been saying versions of this for as long as I’ve been reading you. Why would you let a crisis, any crisis, go to waste when it allows you to find even more reasons for gloom and doom? Maybe some day you’ll actually be right, you know, the way a stopped clock is.

My interest is primarily the College, as measured by the type and quality of education it is offering and the type and quality of kids who are coming for it. I can’t see these things changing, and I care not a whit for U.S. News.

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17

I’m not concerned about the College, really. It will probably still be in the top 15 (maybe even top 10) or so post-COVID, and will continue to feature those particular characteristics you enjoy.

The real hurt will be on Chicago’s standing as a major research institution. That is my biggest interest, and this very much seems to be in peril.

18

From what I’m hearing, hiring and tenure clocks are all on hold everywhere. Not sure any one large university stands out. Maybe the publics will have it worse if state funding declines (which it will). All universities are facing a significant decline in international numbers - those are typically full-pay students at the UG level. That’s a newer twist to the saga; however, for the most part we can look to see what happened during the economic downturn in 2008 to get an idea of how much a particular university’s research function might be damaged.

19

@Cue7

“ I predict its bond rating will go down farther behind its peers (maybe in the Moody’s “B” range), and the endowment will sink from its current position (roughly in the top 15 in the nation) to the top 20-25. ”

That betrays a real lack of financial knowledge.

Incidentally this was their debt rating and report mid March, pre the shutdown.

https://www.fitchratings.com/research/us-public-finance/correction-fitch-rates-university-of-chicago-il-2020ab-revenue-bonds-aa-outlook-stable-12-03-2020

It’s encouraging that they did a very prudent and heavily equity financed expansion.

They will feel some pain as all universities will be they will be fine.

20

@arbitrary99 - I hope you’re right. What’s your prediction? What position will Chicago’s endowment be in after this - will it maintain its status in the teens, or drop?

My background is not in finance or economics (although I’m not sure you need degrees here to see chicago is lagging in fundraising and has a notable budget gap).