Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice

 
Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice
Higher
education:
COVID-19 and the
associated economic crisis

EY-Parthenon Education practice
Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice
Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice
Challenging times
for higher education
       The COVID-19 pandemic and associated economic
       disruptions come at a challenging time for the US higher
       education sector. Flat enrollments, intense competition
       over students, increasing tuition discounting, rising costs
       and shifting demand preferences were among the myriad
       challenges US institutions were already managing. In
       addition, approximately one in five private institutions
       was facing substantial financial risk before the onset of the
       global pandemic.1

                                                     “
       Since the outbreak of COVID-19 in the
       US, institutions have been consumed
       with operational triage. They canceled
                                                      With the most
       study-abroad programs, cut athletic
       seasons short and requested students           immediate triage
       leave campus for an indeterminate period,
                                                      completed, it is time to
       among numerous other decisions. Within
       a week, almost all classroom learning          ask, “What should we
       shifted to a remote delivery model, often      expect?” and, ultimately,
       using commercially available collaboration
       tools as the foundation. This makeshift        “What actions should
       remote learning solution should not            we consider?”
       be confused with best-in-class online
       courseware, delivery infrastructure and
       supporting services, as high-quality
       online delivery is often the purview of
       scale institutions with sophisticated
       operations honed over years.

                                        Higher education: COVID-19 and the associated economic crisis |   1
Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice
What
to expect?
In an unprecedented confluence of                       From a planning perspective, it is prudent to assume that:
events, discerning what comes next
                                                        • Ancillary revenues derived from              • Student retention rates for many
requires some speculation. Typically,
                                                          summer programs will likely disappear.         institutions may decline due to one or
higher education enrollments are
                                                                                                         more of the following reasons:
counter-cyclical, but it is unclear how                 • Institutions may face other financial
that will evolve in this crisis. Historically,            challenges due to refunds associated           • The emotional hold on remote
at the height of the Great Recession,                     with housing and dining and online               students is weaker.
despondency seeped into the psyche of                     learning, lost revenue from canceled
                                                                                                         • Many of those students will
prospective students, and enrollments                     university programs and events, and
                                                                                                           experience subpar remote learning.
flattened instead of accelerating as they                 increased operating costs (e.g., switching
had in previous years.2 Today, many                       to remote delivery).                           • Many parents and students will
projections suggest that COVID-19                                                                          view their current institution as a
                                                        • The impact on international students,
precautions may continue or, if they                                                                       nonessential luxury.
                                                          while unknown, is likely to be
were to be lifted in the summer, may                      substantial and negative.                      • Absolute financial strain (barring
return next fall.                                                                                          significant intervention by the
                                                                                                           government) will place higher
                                                                                                           education out of reach for
                                                                                                           some students.

2   | Higher education: COVID-19 and the associated economic crisis
Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice
• Fall semester first-time, full-time         • Many students may elect to enroll in         Prior to the crisis, increasing competition,
  enrollment, while not something that          online programs that allow them to           changing student demand and rising
  most institutions could take for granted      be employed or be at home with family        financial pressures were driving inevitable
  even before COVID-19, is even more            due to the unstable environment.             change to the higher education sector
  unpredictable now.                                                                         and forcing mergers and closures on some
                                              • Institutions that rely on endowment
                                                                                             institutions. The crisis will accelerate
  • Campus visits, which helped students        returns to support their operating
                                                                                             these trends. Revenue losses, combined
    and families make decisions, are no         model will see the value of that
                                                                                             with potentially increased operating costs,
    longer an option.                           endowment reduced in the
                                                                                             could overturn the traditional higher
                                                short to medium term and must
  • Some students may decide to                                                              education business model and lead to
                                                anticipate higher volatility for the
    postpone full-time college, especially                                                   a sector shake-up.
                                                foreseeable future.
    if their families’ circumstances
                                                                                             Not all institutions will survive this crisis.5
    demand it, or students may opt to
    work and study part-time instead.3

  • Other institutions will recruit and
    discount right up to convocation,
    including students already committed
    to or enrolled in another institution.4

                                                                               Higher education: COVID-19 and the associated economic crisis |   3
Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice
What are actions for consideration?
Institutions must navigate the crisis within their own context, but there are clearly
emerging crisis management themes. Currently, most institutions are focused on
surviving the disruption and establishing business continuity. As operations resume this
week, universities and colleges will turn their attention toward enterprise resiliency late
this spring and summer. By late fall, with at least one foot upon terra firma, they can
begin to reframe their future.

Now                                                     Next                                       Beyond
Establishing business continuity                        Building enterprise resiliency             Reframing the future
First and foremost, institutions                        Late spring and summer will see            As summer peaks, institutions will begin
prioritized safety, communication and                   institutions shoring up the structures     to reframe their future. First, quality
education continuity. They rapidly                      they immediately put in place. Remote      online courseware will become standard,
moved students out, confirmed that                      learning structures will need continual    and all the infrastructure to support
faculty and staff were safe, stood up                   enhancement and support, and               it — technology, course designers, sound
business-continuity planning teams                      processes strained by remote staff will    studios, student support services — will
and crisis management centers, built                    need adaptation. Some infrastructure       need to be present at well-governed
out communications protocols, and                       will need scaling, and some may require    institutions.6 The business processes for
initiated remote learning. Let us not                   repurposing or mothballing.                supporting students — bursars/financial
underestimate the strain these tasks                                                               aid offices, health — will be redesigned
                                                        If cash was king before, it will soon be
placed upon institutions. Having                                                                   and capable of transitioning seamlessly
                                                        emperor, and many institutions will
addressed the immediate needs of                                                                   between “present” and “remote” delivery.
                                                        need to focus on liquidity and cash
students and staff, understanding the
                                                        preservation. The impact of the crisis     This will also be the time that institutions
risk of near-term institutional instability
                                                        on covenants and composite scores is       take objective stock of their strategic
through a rapid assessment of student
                                                        equally important to understand while      position. It will be no time for sanguine
retention, the incoming fall cohort, and
                                                        parallel efforts are underway to secure    futurists. Some institutions will need to
cash or liquidity realities is paramount.
                                                        exemptions from these, in addition         seek stability in the structures of a more
                                                        to access to low-cost debt across the      stable peer. Others may band together
                                                        sector. Equally important, this will be    through shared services, collaboration
                                                        the time to assess insurance gaps and      and mergers to build scale. Some will
                                                        begin the process of appropriately         become white knights and absorb
                                                        documenting claims and anticipated         institutions with questionable stability.7
                                                        federal emergency funding.
                                                                                                   While the higher education sector is in a
                                                                                                   clear crisis, it has endured reformations,
                                                                                                   revolutions, civil wars, global wars and
                                                                                                   more. Universities and colleges are
                                                                                                   resilient institutions with a critical role to
                                                                                                   play in society. They will undergo change,
                                                                                                   but they will endure.

4   | Higher education: COVID-19 and the associated economic crisis
Higher education: COVID-19 and the associated economic crisis - EY-Parthenon Education practice
Higher education: COVID-19 and the associated economic crisis |   5
Take action                                                                                                     Now
                                                                                                   Establishing business continuity
The chart at right highlights                                                        • Get everyone to safety (duty of care)
and sequences several, but                                                1
                                                                        Student      • Shelter those who need to remain on campus
certainly not all, actions                                            experience/    • Stand up crisis center and communication project
                                                                       continuity
institutions will need to                                                              management office (PMO)
                                                                                     • Establish remote delivery protocols
address over the next six
                                                                                     • Assess retention risks
to nine months.
                                                                                     • Determine risk to incoming class

                                                                                     • Assure safety of staff and community (duty of care)
                                                                          2
                                                                                     • Create a crisis center and communication PMO
                                                                  Stakeholder
                                                                     care

                                                                                     • Modify and readjust remote operations as necessary
                                                                          3
                                                                 Infrastructure      • Assess vendor/partner risk
                                                                       and
                                                                   operational
                                                                     support

                                                                                     • Understand short-term liquidity requirements
                                                                          4
                                                                    Financial
                                                                                     • Assess cash needs through summer and fall
                                                                  implications

                                                                                     • Connect with political leaders to identify
                                                                          5            emergency funding opportunities in response
                                                                      Local, state
                                                                      and federal      to the COVID-19 pandemic
                                                                       linkages

6   | Higher education: COVID-19 and the associated economic crisis
Next                                                                  Beyond
                 Building enterprise resiliency                                            Reframing your future

• Enhance remote learning with online learning tools                 • Enhance online learning capabilities and migrate all courses
• Support faculty and students with technical/                         to high-quality online offerings (vs. remote learning)
  pedagogical challenges                                             • Re-recruit existing/accepted students
• Address equity issues associated with remote learning              • Target enrollment enhancements
• Plan for remote/online in the fall as a contingency
• Deploy retention and accepted-student care teams

• Adapt business processes for administrative staff                  • Adjust contracts
• Establish new norms for constituent care                           • Develop remote workforce options for both faculty and staff

• Enhance business processes around remote operations                • Invest in online learning infrastructure (e.g., instructional
  (e.g., systems, technology, training)                                designers, learning management systems (LMS), sound
• Scale systems infrastructure                                         studios)
• Establish that cybersecurity protocols for altered                 • Monetize non-core physical capacity
  technology infrastructure are in place                             • Enhance business disruption planning
• Repurpose or dispose of unneeded property, plant and
  equipment (PP&E)

• Forecast liquidity and FY20 cash                                   • Reforecast budgets/financial modeling
• Assess impact to debt covenant ratios, potential covenant          • Redeploy assets
  amendments, and Title IV access/composite score                    • Strategize how to build out urban and rural broadband
• Reprioritize capital spend to extend liquidity runway                infrastructure to address remote working and learning
• Preserve cash and determine working capital actions
• Prepare for insurance and federal aid (e.g.,
  FEMA) compliance
• Assess new debt

• Communicate with key political leaders and educate them on the impact of the crisis and need for relief
• [For public universities] Advocate that universities be eligible for refundable tax credits that the Families First Coronavirus
  Response Act (FFRCA) provided for private employers
• Request regulatory flexibility including, but not limited to the following: support for graduate students and the cost for
  research activities
• Determine the feasibility of accessing capital through low- or no-interest loans
• Work with sector (higher education associations, state agencies) to secure low-cost loans, relief from covenants and composite
  scores, etc.

                                                                                Higher education: COVID-19 and the associated economic crisis |   7
Endnotes
1
    	See EY-Parthenon’s The other looming                 4
                                                               In December 2019, the National Association
      educational debt crisis: institutional debt               for College Admission Counseling agreed to
      and safeguarding the interests of students: a             allow member institutions to recruit students
      new student-centered financial health metric              already committed to another school and pursue
      for higher education institutions, https://               transfers of enrolled students.
      www.parthenon.ey.com/po/en/perspectives/             5
                                                               Indeed, the first university to stop accepting new
      the-other‑looming-educational-debt-crisis--               students is Notre Dame de Namur. “Notre Dame
      institutional-debt.                                       de Namur Not Accepting New Students,” Inside
	EY-Parthenon’s macroeconomic assessment
2
                                                                Higher Ed, March 24, 2020.
  of enrollment drivers uses “mean weeks of                6
                                                            	For an overview of “table stakes” in online
  unemployment” as a proxy for this despondency               education, see EY-Parthenon’s University
  factor, which showed substantial explanatory                strategy in a digital world: online and hybrid
  power as it continued to climb long after the               programs, https://www.parthenon.ey.com/po/en/
  recession hit its trough in June 2009. Mean                 expertise/university-strategy-in-a-digital-world.
  weeks unemployed rose from 17 weeks in                   7
                                                            	More perspectives on cross-institutional
  December 2007, when the recession began,                    collaboration and mergers can be found
  to a peak of 41 weeks in July 2011, and then                in EY-Parthenon’s Strength in numbers:
  fell back only very gradually. Mean weeks                   strategies for collaborating in a new era for
  unemployed is an indicator that by its nature               higher education, https://www.parthenon.
  responds with a lag to events in the economy. In            ey.com/po/en/perspectives/strength-in-
  the current episode, unemployment is likely to              numbers--higher-education-collaboration, and
  rise very sharply, coinciding with declining GDP,           TIAA Institute’s Mergers in higher education:
  while mean weeks unemployed will again lag.                 A proactive strategy to a better future? Azziz, R.,
  It is possible that a despondency factor could              Hentschke, G.C., Jacobs, B.C., Jacobs, L.A.,
  again suppress enrollments this time around but             Ladd, H. (2017). New York, NY: TIAA Institute,
  could do so more quickly than last time, because            https://www.tiaainstitute.org/publication/
  of the severity and speed of the downturn and               mergers-higher-education.
  extreme uncertainty about the future. Mean
  weeks unemployed may not be the best indicator
  of that despondency in this episode.
3
     igher-ed consulting firm Art & Science Group
    H
    found that one in six high-school seniors who
    expected to attend a four-year college full-time
    before the pandemic now say they may take
    a gap year, enroll part-time or consider a less
    expensive institution. See the firm’s Impact of the
    COVID-19 pandemic on college-going high school
    seniors, March 2020.

8      | Higher education: COVID-19 and the associated economic crisis
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