Private Higher Education: Coping with Financial Downturn

1. Private Higher Education: Coping with Financial Downturn • NFMA Annual Conference • Presented by: • Roger Goodman- VP & Team Leader • Higher Education Team • Moody’s Public Finance Group May 7, 2009

2. Topics • Highlights of our 2009 Outlook • How are Colleges Responding?

3. Oct 2008: Impact of Credit Crisis • Long Term Risks: • Tipping Point for Tuition? • Philanthropy Slows • LT Investment Return Assumptions too Rosy? • Short Term Risks: • Interest rate spike • Swap mismatch • Failed remarketings • Self liquidity draws • Illiquidity of alternatives and other investments “Good Management and Governance Now Even More Important”

4. 2009: First Time Negative Outlook for Entire Higher Education Sector • Intensified pressure on household income and net worth causes pressure on tuition and financial aid • Broad impact of investment losses on operations and philanthropy • Illiquidity of balance sheets, amplified by alternative investments • Volatile debt markets, reduced market access • Variable rate debt structures & swaps are problematic

5. HAS DOOM FINALLY ARRIVED FOR ENDOWMENTS?Big, New Worries About Investments & Giving -3% FY 2009 YTD: -30% with spending

6. Large Loss of Household Net Worth:Tuition/Enrollment Impact is the Big Unknown • Remained Strong in Prior Recessions; Is This Cycle Different? • Net worth losses already much larger than 2000-2002 • Financial wealth decline at same time as home equity loss • Borrowing capacity reduced; Student Lenders & Home Equity • Political & Mission constraints tighter than economic constraints? Loss is 5-6x the amount of 2001/02 Source: Moody’s Economy.com; Federal Reserve

7. LARGEST ENDOWMENTS MOST IMMEDIATELY AFFECTED Current Year Budget Cuts, Layoffs, Lower Endowment Spending Endowment % Revenue Resources to Debt Source: Moodys 2007 Private College Median Data

8. TUITION-DEPENDENT COLLEGES RECKONING TO COME? Current Year Impacts Slight, but more Competitive Risks Are Inevitable; Market Innovation Needed Source: Moodys 2007 Private College Median Data

9. Comparing Challenges of Aaa/Aa and A/Baa Universities • Price takers-competition with publics • Endowment rarely major component of budget; change in value not that important • Philanthropy often helped around edges but capital came from operations too • Similar risk for investment illiquidity; less staff to oversee/react • More centralized control and ability to respond • Market access and bank credit access real concerns • Price Setters-tuition and aid driven by choice of class make-up • Endowment losses mean substantial budget changes • Philanthropy was major source of capital; concern for next few years • Large allocations to private investments impact liquidity • Budget reductions/capital spending delays have more of an impact on psychology? • Market access and bank access of only limited concern

10. Responding to Liquidity Pressures • FINANCIAL STATEMENTS DO NOT REPORT LIQUIDITY • Endowment losses (-30%) will be disproportionately reported in unrestricted net assets (-60%) • UPMIFA might make things look worse than they are • Unrestricted cash not even required reporting • Board-designated unrestricted net assets: not “liquid” • Moody’s is developing new liquidity ratios: • Operating needs • Capex • VRDO/CP collateral • Swap collateral posting • Capital commitments to managers

11. Responding to Liquidity Pressures • Sampling of actions taken: • Liquidation of marketable securities (equities and hedge funds) • Freeze on new alternative investment commitments • Converting daily/weekly vrdo’s to CP • Freeze on capital spending • Taxable fixed rate bond sales (mainly large endowments)

12. Responding to Student Market Pressures • Acceptance rates will likely weaken as prepare for worse “yield” on admits • Boosting financial aid budgets • Large increase in outreach regarding costs and financial aid ability • Tuition increases likely lowest in many years for private colleges

13. Responding to Budget Pressures • Ability to cut spending is real—untapped resource after long period of high growth • Hiring freezes/Salary freezes/Layoffs • Benefit reductions • Program rationalization • Loosening socio-economic enrollment goals • Growth of enrollment • Non-salary budget cuts • Partnering for cost savings (eg. Purchasing collectives) • Many Choose to Take Pain Early • Small endowments haven’t seen revenue declines but are cutting immediately in preparation • Large endowments won’t see endowment spending policy impact for 1-2 years; take cuts now

14. Responding to Market Access/Credit Pressures • Market access, including investor relationships are strategic focus of top treasury teams • Better focus on covenants and bank agreement terms • Despite challenges, taking firmer stances with banks • Disclosure still lagging and weak • Moody’s developing new liquidity metrics • Some universities focused on improving • Many diversifying banking relationships • Swaps, LOC’s, lines, underwriting, etc. • Frequently reducing market access exposure (refi VR to Fixed) when possible

15. Reasons to be Optimistic from Past Lessons:Survival Tactics of Small Private Colleges • FOCUS ON RETENTION: Cheaper than recruiting new students • OLDER STUDENTS: More students over 21 will stay in college to get a masters or return to college to complete degree; veterans on GI bill, retirees will be interested in some education content • ON-LINE CLASSES: Booming potential, especially in recession • INTERNATIONAL MARKETS: Some potential even now • PARTNERSHIPS/MARKET OUTREACH: Locating new programs in more favorable locations, sharing costs with other colleges, even community colleges and public universities • DONORS: Even Baa-rated colleges get 6% of revenue from unrestricted gifts; alumni rally, bequests, deferred gifts • COMMUNITY SUPPORT: Most college towns value their colleges highly and presidents/board members can rally support • ENDOWMENT BORROWING: Might require court approval • SUSPENSION OF TENURE: Requires declaration of financial exigency; faculty often agrees to deep cuts to prevent this

16. Questions and Comments