Are you being served? Trends in university financial services: IHEs need to see financial services as a way to add value

University Business, July, 2005 by Ann C. Logue

In 2003, American consumers spent $112.2 billion on higher education, reports the U.S. Department of Commerce Bureau of Economic Analysis. As large a number as this is, it is dwarfed by the $267 billion in endowment assets that the National Association of Cortege and University Business Officers (www.nacubo.org) reports was hew by U.S. and Canadian institutions. Even if you subtract Harvard University's (Mass.) colossal $22.1 billion, the number is staggering.

Most of Harvard's money is managed in-house, by the 175-person staff of Harvard Management Co. And that's unusual. Few institutions have the in-house resources to meet their investment objectives white generating the 17.5 percent increase in assets that Harvard reported in 2004. Even the university's closest peer, Yale (Conn.), generated a 15.5 percent increase on its relatively smaller $12.7 billion endowment, and it uses outside service providers to help it do so.

Whether university funds will be needed tomorrow morning or decades into the future, the prudent manager must optimize risk and return. And that's a big business for financial services providers.

MISSED OPPORTUNITY

"We do business with just under 100 colleges and universities," says Dean Pavlakis, senior vice president and commercial product manager at M&T Bank in Buffalo, New York. He notices a wide variety of practices among these customers rather than a sharing of best practices.

But what most educational institutions have in common, Pavlakis says, is that they don't see financial services as a way to add value.

They are missing an opportunity to learn best practices, improve investment performance, and even enhance the academic program. "We think there are tremendous opportunities for schools to work with banks," Pavlakis says, to collect cash more efficiently, deploy it in the short term, and disburse it more efficiently.

Good financial services can help colleges educate their boards, update investment policy, run the endowment, run the treasury, reduce fraud, and handle administrative functions. But they can't attract donors or hold fiduciary responsibility--those tasks remain squarely with the institution.

Margaret Plympton, vice president of Finance and Administration at Lehigh University (Pa.), relies on outside providers to supplement

her staff's expertise. "Of course you want the annual visit from the provider, but you want a variety of folks telling you what their new services are," she says. "Because we have an asset allocation strategy at a sophisticated level, we hire a consultant to ensure our compliance with our allocation and to manage our currency mix." The fresh perspective has not only helped Lehigh manage its $796 million endowment, but it has helped the university fund its study-abroad programs better.

THE LIQUIDITY TRAP

"Where a tot of universities get stuck is in being too liquid," says Jon Speare, managing director at Commonfund (www.commonfund.org), a nonprofit corporation based in Wilton, Conn., devoted to enhancing the financial resources of educational institutions. Too often, universities structure their total investments so that the permanent endowment has a very long-term investment horizon, and the treasury account invests only in money markets and overnight securities. But there may be opportunities for intermediate-term investments to fund intermediate-term needs, like facilities improvements, or even to invest funds received in August that will not have to be expended until May.

A next key practice, according to Speare, is to sweep all of the cash within the institution, structuring the treasury as an internal bank. If many departments are holding on to petty cash funds, the aggregate amount can be large enough to warrant more sophisticated handling. The problem? The investment policy sometimes hamstrings educational institutions from better management of short-term funds, notes N&T Bank's Pavtakis. "They don't think of this as a place to add value," he says.

At Lehigh, Plympton says that better currency hedging has allowed the university to maintain and expand its summer study-abroad offerings despite the dollar's weakening. That allows the school to lock in its costs early in the school year, so that there are no surprises in tuition or in course opportunities when it's time for students to depart. Had they persisted in thinking of cash investments in money-market terms, Lehigh's faculty and students would have suffered.

SHARING POLICIES AND PERSPECTIVES

One of the most important services that outside providers can offer is contributing to the education of boards. "That's why we publish research," says John Griswold, executive director of Commonfund. "Some trustees might be aggressive investors in their own right, but then they get on the board and get very conservative."

Some of this education includes helping them draft investment policies and spending rules, where an outside perspective can help an institution update its practices. "We help a tot of our clients and prospects with investment policies. We take that part of the job very seriously," Griswold says.