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Bassett Blog 2008/10: Trust in God, but Tie Up Your Camel
October 1, 2008
Patrick F. Bassett
NAIS President Patrick F. Bassett |
The current economic and financial meltdown in the United States and in the world requires a bit more reflection and a longer response than my typical blog. The crisis requires four lenses to focus on it: - At the macro level: "Why are we in this fix?"
- From the historic perspective: "What happened to independent schools in past recessions?"
- At the institutional level: "What financial contingency planning should we be doing?"
- At the micro level: "What should we be teaching our kids about finance and economics?"
Our listserves have been abuzz, of course, these past days, in reacting to the country's financial crisis and its implications for our schools. The dangers are real and imminent, a "perfect storm" of conflating and intersecting winds that threaten to blow some schools off course: - Higher than usual summer attrition and lower than usual enrollments resulting in a shortfall of students, in some cases up to 50 off budget.
- Current families of higher incomes starting to demand and qualify for financial aid as tuitions have skyrocketed while salaries remain flat and equity in homes and investments tanks.
- Variable bond rates that have soared, in some cases, from 3 percent to 10 percent, impacting heavily and unexpectedly the current-year budget's debt service obligations.
- A demographic downturn in the number of school-age children in many locales where independent schools are located, as housing stock and cost of living become prohibitively expensive for young families with children.
- A climate of caution, where even families with substantial dual incomes fear a job loss, could bring financial catastrophe, making independent school tuition, heretofore considered a necessity, all of a sudden considered a discretionary luxury.
- A chilling zephyr of feelings about one's wealth and capacity for eleemosynary giving.
Thus, we have what Jim Collins in Good to Great has called "the brutal facts." Let's not forget, however, that his brutal facts were also counterbalanced by "unshakeable beliefs." For me, the latter are rooted in three indisputable virtues of independent schools: - We have the freedom to act quickly and decisively when needed, since we are effectively independent of government or church in our governance and finance.
- We have the capacity to act with resources behind us since we have intellectual, physical, and social capital, unmatched by any other segment of the K-12 education market.
- We have confidence our schools "will not only endure but prevail," since history is on our side. For every other calamity, man-made or God-delivered, independent schools have weathered the storm remarkably well. If any institutions are "built to last," independent schools are.
At the Macro Level
The financial meltdown the U.S. is experiencing has lots of people pointing fingers — at Wall Street greed; at the "Devil-may-care" risk-taking by some within the banking and mortgage industries; at the lack of adequate governmental regulatory oversight; at consumers over-borrowing to the point where there was no reasonable expectation of repaying; at the failure of regulatory and legislative leadership. My favorite target: the very preposterousness of "ninja" loans: "No income? No job? No assets? No problem."
No problem, except, of course, the house of cards ultimately began to crumble, as it always does, when individuals and institutions don't make responsible decisions that take into consideration the impact on others.
NAIS has been consulting our own financial advisors to sort out what's the best current thinking to share with schools on how to protect their assets and continue conducting their business. Aside from the psychological and financial blows to current and prospective parent customers and to donors that we'll all have to factor into our messaging, goals, and budgets, there is the more immediate question of how to protect our assets.
Regarding school savings and money market accounts and investment portfolios, our current advice is to sit tight and ride out the storm (the exception being to make sure cash is in FDIC-insured savings or brokerage accounts). One financial advisor on the NBOA listserve reminded the group of the ancient advice from a Middle Eastern parable, to "Trust in God…but tie up your camel."
Another analyst noted recently, "Investments have historically yielded positive results to investors who bought when others were fearful, sold when most others were euphoric, and stood their ground when the situation was unclear. While past performance does not guarantee future results, one defense against short-term fear is long-term confidence."
The more technical and specific questions we're hearing and that seem to be causing the greatest consternation have to do with debt-financed bonds, and we turned to Jeff Lewis (lewis@icemiller.com), a bond lawyer operating out of Indianapolis and Chicago, whose practice focuses on higher education and non-profits, including independent schools and cultural institutions. His observation: Schools that had unspent bond proceeds invested in auction rate securities (as many of them do) started having problems when those assets became illiquid back in Feb 2008….. Clearly it's not a great time to begin a bond-financed campaign. For those that are already impacted by the credit crunch and related fall-out, there is not a single source of guidance. They should remain in close contact with their banking partners, bond counsel, and government regulators. Nobody has "the answer" because all of this is unprecedented…. [The NAIS] advice "to sit tight and ride it out" is good advice.... The Historic Perspective
Regarding enrollment: The most reassuring news is that, for the most part, in past recessions, enrollments in independent schools remained stable, and most schools did not decline in enrollment. What changed was that financial aid increased substantially, as the means by which schools could attract and retain numbers supporting full enrollment.
| The Effect of Recession on Giving in NAIS Schools | | Years (Recession Years in Red) | Average Enrollment | Annual Giving per Student | | 1968–1969 | 339 | $170 | | 1969–1970 | 345 | $147 | | 1970–1971 | 337 | $150 | | | | 1972–1973 | 347 | $203 | | 1973–1974 | 359 | $220 | | 1974–1975 | 361 | $203 | | 1975–1976 | 360 | $173 | | | | 1979–1980 | 387 | $267 | | 1980–1981 | 390 | $420 | | 1981–1982 | 397 | $313 | | | | 1989–1990 | 403 | $862 | | 1990–1991 | 408 | $875 | | 1991–1992 | 414 | $907 | | | | 2000–2001 | 487 | $1,248 | | 2001–2002 | 485 | $1,273 | | 2002–2003 | 482 | $1,343 |
Regarding giving: Giving USA Spotlight (Issue 3, 2008) data shows that in the last 40 years (1967–2007), the US has had six recessions lasting six or more months, and during each of those recessions, total giving to all charities rose on average 6.2 percent (as contrasted to the average yearly increased in constant dollars of 8.4 percent in non-recession years). The one segment of the charitable enterprise market that is the exception to sustained giving is education: It is the only sector to lose ground in recession years, but the loss is modest: about 1 percent during short recessions and about 2 percent during recessions lasting over eight months. The message from Giving USA is that giving can be sustained if advancement messaging is targeted and cultivation maintained.
The trends reported in Giving USA for higher ed also play out similarly for independent schools (see table at right). Giving tends to be stable, sometimes with fewer gifts, but those fewer gifts were more substantial, with donors knowing the school needed their financial support more than ever.
While history does not always repeat itself, it mostly does, so we can take some comfort and proceed with some confidence in making the case to our constituents that they can and should find a way to continue and increase support to our schools.
At the Institutional Level
Schools need to prepare a financial contingency plan... and a financial disaster plan.
For most schools, one's financial contingency plan that covers a shortfall of 5–10 percent in revenues, let's say, would be put in place: Freezing of discretionary expenditures; postponing of renovations and replacements; doubling up of assignments to cover staff attrition rather than hiring replacements; etc. In the contingency plan, one should have the expectation to expand financial aid for current families newly demonstrating need. One should consider mid-year enrollments, net tuition revenue discounting, and merit aid: whatever it takes to fill the school. What not to do: borrow more or take a larger draw from the endowment, since mortgaging the future only exacerbates the factors that contributed to our problem in the first place.
For the "worst case" scenario, we need look no further back than to Hurricane Katrina and its devastating impact on New Orleans schools for an example of a cataclysmic storm, literally and figuratively, that independent schools battled and won. When 20–50 percent or more of one's enrollment disappears overnight, and part or all of one's school is under water, dramatic measures are called for, so one puts in place the school's "financial disaster plan." Under such circumstances, boards and school leaders are forced to make very touchy decisions under duress, including some or all of the following: - An heroic commitment to maintain full services, to the extent possible: Independent schools, as Katrina showed us, often become the one anchor in the storm for a community. Families need to know they can count on schools to continue "business as usual" so that parents can put the rest of their lives together with confidence that, at least at school, their children will experience some degree of normalcy.
- "Rightsizing" the school: If losses in enrollment appear to be more substantial and long-term than manageable and short-term, schools begin to have to downsize staffing. The hidden benefit to some of the New Orleans schools was that the schools discovered that "downsizing" could mean "right-sizing": i.e., they could get to more financially sustainable ratios of students:staff and become more efficient organizations for the future. In the rightsizing mode, boards need to support the head's call on which faculty and staff will no longer be employed, and heads need to reassure their boards that they will treat departing staff with generosity and dignity, but they won't waste the one-time opportunity to prune the shrub so it can grow back strongly.
- Mergers and Acquisitions: Necessity being the mother of invention, under dire circumstances, the idea of merging neighboring independent schools together begins to look more attractive and less impossible.
At the Micro Level At the micro-level, if it were not evident before, it is surely obvious now that financial literacy be incorporated into what we teach, both to educate the generation in our schools for their own financial well-being, but also to prepare future leaders to make wiser institutional decisions than some of those we're witnessing now. On this front, we have a host of schools already leading the way with programs in economics, entrepreneurship, philanthropy, and financial literacy. A small sampling of interesting examples would include the following: - Saint Andrew's School (Florida): Frontiers of Science and Technology, a project-based class to produce an invention: including the components of technical writing for the project proposal; creation of a technical manual for consumers; patent proposal; and marketing plan.
- Greenhill School (Texas): Economics and Society courses present principles of
- microeconomic theory — markets; taxation; and social issues like health care, poverty, and the environment
- macroeconomic theory — fiscal and monetary policy, investment, and international trade
- the math of finance
- the math of economics — comparison ratios, simple calculus techniques to compute producer and consumer surpluses, Gompertz curves to compare rates of growth; Lorentz curves to look at income and production distributions, statistics, particularly the area of regression analysis).
- Westminster Schools (Georgia): Coursework in philanthropy as well as their Center for Philanthropy.
- Linsly School (Wheeling, WV): Economics courses (entrepreneurship, personal finance, the stock market game, and starting and running a business).
- Holton Arms School (Maryland): Eighth Grade "Paycheck Project," AP economics, upper school "Investment Club," middle school "Financial Literacy Club" (run by an alum in the financial services field).
- Choate Rosemary Hall (Connecticut): Courses in macroeconomics, microeconomics, and international economics, as well as the International Economics Olympiad.
- Tampa Preparatory School (Florida): Macro economics course (SimCity 2000 and the stock market game; design a prospectus — presented to venture capitalists — on a business of their choice).
- Sayre School (Kentucky): Financial literacy coursework (Don Jacobs Personal Financial, Legal, and Civic Seminars — six seminars on earning, owing, spending, investing, saving, and giving, with guest speakers and mentors.
Beyond real-world-based economic and financial coursework and project-based learning, schools should use their reflection time to also consider how well we're doing in leadership training. To what extent is leadership training a part of the first curriculum, with dedicated faculty and programming, as opposed to being only part of the "second curriculum" where we imbue values and skills on a more opportunistic "teachable moment" basis? And what model of leadership are we teaching? The conventional, leader-as-hero and "positional authority" model we are having difficulty transcending; or the new leader as coach, "influential authority" model that the world of the workplace and the public square seem increasingly to respect and demand?
The initial failure of government and political party leaders to persuade Congress to enact a rescue plan reveals rather dramatically the shift in leadership models that the culture is undertaking: Will independent schools, long known for producing leaders, consciously address this change and teach and model leadership accordingly?
Peter Cobb, consultant to schools, recently wrote a piece on "Scarcity and Privilege," that the new economic scarcities and resource depletion we are experiencing will "require a paradigm shift in the architecture of our schools and in the architecture of our lives," an overdue shift to recognize that "to live life abundantly, this generation of young people does not need to live" wastefully, and "to live life richly, this generation of young people does not have to consume" ceaselessly.
It seems to me that in the challenges of our current crises lie the opportunities for our future salvation: - a dramatic commitment, school by school, to sustainability financially, environmentally, demographically, programmatically, and globally; and
- a transition from our truculent commitment to independence to a more efficient commitment to interdependence, as we collaborate with other schools and other sectors, to market ourselves, to share resources, to co-create 21st-century schools.
Do you agree? A PowerPoint presentation of this blog is available on the NAIS website.
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Reader Responses
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1. On 10/01/2008 Jeff Lewis (lewis@icemiller.com) replied: |
We live in interesting times. [Some history]: The first major fallout on the tax-exempt bond market from the subprime credit problems occurred over the winter and spring with the collapse of the auction rate securities market followed by the essential demise of the municipal bond insurers. I don't have a sense that the independent schools were much affected by the auction rate problems, which were more focused on health care and some higher ed. However, the downgrades of bond insurers have caused two different problems. Bond insurance provided high-end market access to investment-grade credits on long-term fixed-rate debt. For the price of a premium payable from bond proceeds and annual monitoring of credit covenants, borrowers like independent schools could buy a AAA (or other) credit rating by purchasing bond insurance. This could reduce interest cost significantly and grant broader market access for fixed rate debt. For all intents and purposes that option is no longer available, and so independent schools will not be able to upgrade their credit rating in this fashion to gain access to public markets more favorably. This will have an impact on market access for schools which do not have the financial resources (endowment in particular) to carry their own high credit rating, which includes most schools. There will be a lesser impact on the wealthier institutions.
The second problem occurred on what are called "insured floaters," that is variable rate demand bonds or "low floaters" which were insured or guaranteed as to principal and interest by a bond insurance policy. These policies did not cover the "demand" or "put" rights under these instruments, so most users purchased liquidity facilities from rated banks for that purpose. When the insurers were downgraded, these instruments essentially crashed, because the presence of the bond insurance more or less made them toxic in the market place. Fear and greed, as Gordon Gecko put it years ago.... Most all of these instruments had to be refunded or converted in some way over the spring and summer. The strongest banks experienced great demand for their letters of credit during this time, and they began rationing their willingness to issue letters of credit and also increasing the cost to those for whom they would extend credit. This also limits market access.
The subprime crisis also affected banks, obviously, and their credit ratings, so that the availability and value of letters of credit generally diminished. Some of the banks with greatest perceived exposure to subprime credit problems began to trade poorly in the market place, if at all. The most recent general dislocation of the market has come from the events of the last couple of weeks, which have precipitated a far-ranging set of consequences. These are unique and unprecedented as was noted earlier.
It seems to me that, because of a fear of general collapse coupled with a more specific fear that letter-of-credit banks were not safe, vast amounts of money have simply fled the money market funds (which are the key investors in floating-rate debt) into treasuries. The result is that floating rates on high-grade instruments of all kinds have skyrocketed in the last couple of weeks because of a tremendous supply/demand imbalance.
The good news that, if the market settles down, much of that imbalance will be corrected. Then the problem will be more specific: that is, concerns about particular banks or investment banks. It will take longer to sort that out.
The fixed rate market is not affected nearly as much, but it is still very erratic.
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Jeff Lewis, Partner, Ice Miller Legal Counsel, LLP (IN)
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2. On 10/03/2008 Kris Charlton (KMCharlton@aol.com) replied: |
Morning Pat!
Your blog was just what I needed this morning and I am circulating it to my board right now.
It will be the pivotal piece at our Executive and Finance committee meetings this week.
Looking forward to having you with us in November.
We pray that God will guide the decision makers today!
Take care and thanks for "taking care" of your member schools.
Have a good day!
Kris
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Kris Charlton, Head of School, St. Thomas Episcopal Parish School (FL)
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3. On 10/13/2008 Jonathan Hancock (jhancock@canterburyschool.org) replied: |
Hi Pat.
I HOPE you are hearing from others that your blog and other pieces recently have been excellent. They have certainly served to put into perspective so much of what I, and I suspect my colleagues throughout the country, have been telling Board members for several months. Things are difficult. We are competing for discretionary dollars in a way that is far more acute than has been the case. We can fill the seats because our quality is recognized, but it is going to take extra financial aid to do so. Or we could decide not to fill them, hold our financial aid budgets tight, leave marginal tuition revenue on the table, look at deficits, raise tuition in response and thus perpetuate the cycle. Not to mention, we would be leaving some wonderful students out of our schools and failing to extend our missions and public purposes.
If there is any consolation in the current conditions it might be that educators are now behind both business and health care providers as the national whipping boys. Now if only we could tie up our politicians as well as our camels....
Best as always.
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Jonathan Hancock The Canterbury School
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4. On 10/28/2008 Anonymous (blog@nais.org) replied: |
Dear Pat:
I heard your excellent presentation at SAIS in Atlanta and I just wanted to add a perspective on tax-exempt bonds and whether they were or were not being called in any appreciable number. I think the answer is that there is a strong regional component to the picture. An unscientific reading of a small group I was in on Saturday morning revealed that of the 3 schools in the room, including my own, with variable rate bonds, we had all had to take some or all of our bonds back. The real fly in the ointment was not our perceived ability to meet increased interest rate costs but the weakness of the regional banks whose letters of credit were backing our bonds. With the banks in the south disproportionately affected by the mortgage crisis it is in the SAIS area that the regional banks are suffering the most and I think this is triggering a bond problem for the region. Fortunately, we had sufficient liquidity (and a 3:1 endowment:debt ratio) to cover the bond and so we temporarily held it ourselves. Just yesterday, following an announcement that our regional bank would be allowed to participate in the bailout, the investment company who had held our bond asked to buy it back believing that the associated letter of credit from the bank was now much stronger. Most schools would not have had the liquid assets to cover a bond and would have to have converted it into a regular loan at a higher rate. I'm not sure how many of us have been very willing to talk about our travails but I suspect the incidence of bonds being called is higher than we know and very regionally focused.
Regards and thank you for your encouraging and highly practical message.
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Anonymous
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