Protecting the American Dream: A Difficult Balancing Act for Higher Education
TEENA HOSTOVICH, Senior Vice President, Lockton Insurance Brokers LLC
Over the past 20 years, tuition and fees have grown faster than the gross domestic product, and college inflation has hovered at a level of approximately 3.6 times higher than general inflation. However, this growth will not be sustainable, and traditional revenue will decrease. Student demographics are rapidly changing. The baby boomer "echo boom" is projected to end in 2013, resulting in a dramatic drop in applicants.
In addition, a paralyzing set of circumstances is leaving students and their parents with fewer resources to finance their education. With the credit crunch, there are fewer student loans and government aid programs. Equity lines are no longer available as housing prices continue to fall. 401(k) plans and other investment vehicles are severely impacted. Furthermore, the depressed job market makes working through school an uncertain option for students.
The financial crisis has severely crippled endowments, reducing budgets and operating income at the same time. Fundraising continues to be a challenge in the current economic environment. According to a recent report from Moody's, most U.S. colleges are struggling with endowment losses between 20 percent and 30 percent.
These forces have set a perfect storm for higher education institutions, placing pressure on revenue to an extent never seen before. Higher education administrators are forced to make tough decisions about changes in capital improvements and facility operations, from campus construction and maintenance projects to food services and library hours. For some administrators, the ultimate survival of their institution is being threatened along with the dreams of future generations.
SURVIVING FOR LONG-TERM SUSTAINABILITY
During these times, it is paramount for administrators and risk managers to ensure they are not sacrificing long-term viability for short-term gains, a balance that requires commitment and a focus on outcomes.
Phillip Doolittle, executive vice president of the University of Redlands in California compared the situation to a "tsunami."
"And the way you are going to be affected by the tsunami depends on which part of the coastline you are on," he said. "Southern California has a set of issues, which are unique from the East Coast. We have been planning for a long time to mitigate the risks that could threaten our future, and our commitment remains strong."
There are many opportunities to save money immediately by reducing coverages or changing from a long-term, loss-sensitive program to a short-term guaranteed-cost program. Colleges and universities may be tempted to cut safety programs or discontinue business-continuity planning.
These immediate cost-saving strategies, though, can ultimately place long-term sustainability at risk. Taking a holistic approach to managing risk by using enterprise risk management as a tool is a valuable way to ensure the right decisions are made. An effective ERM program will excel at containing costs, which will be critical as revenues decline or grow at a slower pace.
Colleges and universities should set aside a portion of today's operating income for strategies that will reduce losses for future gains. A shift in the paradigm is needed to create an environment of risk management and safety, as well as a plan for the next financial risk around the corner--like the evolving risks of technology and current pandemic outbreak.
STRATEGIES FOR MAXIMUM FUTURE SAVINGS
A successful ERM program can reduce the risk of losses and create meaningful savings to fund future strategic expenditures. Several key areas that maximize the ERM process and open up potential for future savings are catastrophe
insurance coverage, workers' compensation, and employee benefits.
Catastrophes take many forms for higher education, ranging from Hurricane Katrina to a residence hall fire to the tragedy at Virginia Tech. In California, institutions face a high risk of a catastrophic earthquake that can potentially close their doors indefinitely. At the same time, the insurance market is affected by reduced capacity and increased pricing.
One approach to consider is "endowment protection." This approach focuses on protecting the endowment by evaluating how much risk is tolerable and structuring a corridor program. The program must be one that meets the institution's specific needs while managing costs. In addition, the policy language used is carefully constructed to reflect intent and coverage, much more so than in a traditional placement. Endowment protection coverage can be extended to other risks unique to a geographic area--flood and hurricane, for example.
"I do not want to be standing in front of $40 million dollars of rubble following an earthquake without a clear plan for recovery," said Rich Haluschak, senior vice president and chief financial officer of Art Center College of Design in Pasadena, Calif. "Our long-term goal is to be here for future generations of students, so we work carefully with our broker to base our risk management and insurance decisions accordingly."
Workers' compensation is another area in which, with a proper approach, risk managers can save millions of dollars over time while cultivating a safety culture and mitigating risk. Universities that take control over their claims, including defense and investigation, can reduce the number of litigated claims and protect the value of the institution.
"Our workers' compensation program allows Cal Arts to actively partner with our broker and carrier in claims management, giving us much greater control over the annual cost. It has resulted in tremendous savings that can be more effectively deployed," explained William Schaeffer, vice president of finance and administration for California Institute of the Arts in Valencia.
High employee benefits insurance costs due to rising medical inflation and the uncertainty of future delivery systems can be mitigated by structuring wellness programs to benefit both the workers' compensation and employee benefits plans.
The investment risks upsetting the performance of endowments have also hit 403(b) plans for faculty and staff. Institutions are not only faced with protecting these retirement plans, but have also acquired the fiduciary responsibility for these plans in compliance with the latest round of complex regulations.
Using a solid methodology and matrix to evaluate the management and composition of the funds and fee structure, as well as to monitor loans, distributions and compositions, is a critical part of the ERM process.
Higher education administrators and risk managers face a difficult charter in these turbulent times. However, taking a thoughtful, measured and long-term approach to risk management will help mitigate today's losses and protect the future of their institutions.
"The transmission of civilization" is how Ariel Durant described education. Without the success and prosperity of our colleges and universities, we cannot continue to compete at the top of our game in a global economy. This investment is the best one for society--today and tomorrow.
August 1, 2009
Copyright 2009© LRP Publications