Platform Addresses Higher Education’s Liquidity Needs in Crisis
At the dawn of the year 2020, the higher education sector was already experiencing increasing stress primarily as a result of demographic trends and a competitive landscape. The COVID-19 crisis has amplified this stress, striking during a particularly difficult time in the academic year. Cash flow runs low in late spring and summer without incoming tuition revenue, and campuses have been shuttered at a time when prospective students and their parents would normally be taking campus tours, making attendance decisions, and sending in deposits. What’s more, institutions are facing unbudgeted expenses such as housing refunds, the unexpected costs of transitioning to remote teaching and bringing students back from abroad.
This crisis will impact the sector long after colleges and universities are able to re-open their campuses. Many analysts expect significantly lower enrollment in the fall 2020 due to the possibility that enrolled students may take off a semester or year because of COVID-19; the inability of prospective students to visit campuses and make a college choice; and personal circumstances such as ill or unemployed parents, or a reduced financial ability to cover the costs of attendance. While the federal CARES Act has earmarked funds for the higher education sector, the amount is largely viewed as inadequate. Other programs under the CARES Act may provide additional financial assistance, but may take time to trickle through to individual institutions. Little assistance is expected to come from state government, as the state budgets are being strained from the pandemic, too.
In an effort to preserve liquidity, our platform’s multidisciplinary professionals are helping many higher education institutions in their efforts to establish bank lines of credit or term loans, access federal relief programs, curtail unnecessary spending and/or seek relief from debt obligations in the form of loan payment deferments. Recent volatility makes capital market access unpredictable and uncertain at the present time.
A college’s endowment may be a tempting source of untapped liquidity. An institution’s ability to temporarily redeploy or borrow from endowment funds could be done relatively quickly and prove essential to bridge the gap and wait out delays from other potential sources of funding. However, institutions must be aware of the laws relating to donor restricted funds held in endowment. Pennsylvania law does not permit an institution to use charitable funds that a donor has restricted for a designated purpose (such as a scholarship fund or an endowed faculty chair) for other purposes, such as payment of debts or for operations, unless authorized by a court after an approval process. The language of the gift instrument governing each restricted fund is key to determining the donor’s intent as to whether such funds may be utilized for other purposes, such as operations, or are available for loans.
Our Stevens & Lee Trust and Estates professionals recently performed an endowment fund review for a small nonprofit Pennsylvania college facing an urgent liquidity need during the current COVID-19 crisis. The college had recently reviewed its donor restricted funds in conjunction with adopting the new accounting standard (ASU 2016-14) and believed it had identified all potential sources of available funds. However, after closely reviewing the governing documents for over 100 donor restricted scholarship funds, Stevens & Lee identified funds of approximately $2 million in the aggregate that, pursuant to the provisions of the underlying gift instruments, could be used for other purposes at the institution, including a temporary loan for operations pending receipt of other funds. On behalf of the institution, Stevens & Lee communicated its analysis and the institution’s proposed endowment loan to the appropriate state regulatory authority to ensure the institution’s compliance with the laws regarding charitable funds and to protect the institution’s board of trustees in fulfilling its fiduciary duties. With Stevens & Lee’s prompt assistance, the institution pivoted from facing a liquidity crisis to securing a lifeline to sufficient funds that will carry the institution through to its next academic year.
Our Stevens & Lee Trust and Estate professionals can assist your institution similarly with a restricted funds review to identify possible sources of untapped liquidity in your endowment while adhering to donor intent and applicable law. These professionals can also work with your institution in negotiating with current and prospective donors to bring in new gifts with flexibility to meet the institution’s urgent needs, now and in the future.
Stevens & Lee is full service law firm and an affiliate of our 200 professional, multidisciplinary platform of companies representing clients on a regional, national and international scale. The platform has vertically integrated industry groups, including a Higher Education Vertical, which is comprised of a diverse group of legal, financial and accounting professionals, among others who together work with over fifty colleges and universities. The professionals in our Higher Education Vertical are committed to providing sophisticated legal services, comprehensive strategies and creative financing solutions to our college and university clients.
Professionals from our Government Affairs team of our Higher Education Vertical are exploring the feasibility of legislative action which would allow colleges and universities to more easily access their donor restricted funds during this crisis and beyond.
For more information about our multidisciplinary platform, its Higher Education Vertical, or how we can assist your institution in connection with the COVID-19 crisis, please contact Rebecca C. Delia of FSL Public Finance. For information on how we can help you evaluate donor restricted funds, please contact Jennifer L. Nevins of Stevens & Lee.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.