Beyond Hand to Mouth

Another lapse

I have not posted in over a month.  I’ve been distracted by, among other things, a school debt restructuring that I will comment on once the transaction closes.  However, to be frank, I have become less motivated to continue writing about financial topics, since my perspective seems contrary to conventional wisdom, or at least from what is promoted by other advisors and associations.  And, short of stopping everything and writing a book, I am not sure how to add to the dialogue without becoming lost in the noise.

About a month ago, I attended a financial sustainability lecture from a prominent association.  There was (I felt) a pointed lack of specificity, aside from the generic conventions applicable from a previous era, but rather more of an uplifting tone that “this too shall pass.”  But while I suppose it is human nature to seek the positive in a difficult environment, I also believe it is disingenuous to stare down at the broken glass and exclaim it is half-full.

Independent schools simply must be realistic about the current environment.  The educational bubble has burst.  Bloomberg had a wonderful article, entitled “Colleges Flunk Economics Test as Harvard Model Destroys Budget,” which can be read here.

As a banker, money manager, and private school parent, I believe there are certain truths that are self-evident:

• The educational dollar is no longer inelastic.  Parents (in the aggregate) cannot afford the expense of essentially nineteen years of private education.  They cannot be counseled or somehow convinced that tuition loans are anything other than a very short-term solution. Lowering tuition sounds logical, but is a slippery psychological slope.  I know several schools who have raised tuition, and increased financial aid as a short-term tactic.  Ultimately, educational value must be realized and families who can, pay.
•  As such, the top third of private schools have the cache and/or the capitalization to survive the transition.  The bottom two-thirds can no longer count on a rising tide.  Many will not survive.  It is unjust to suggest otherwise.
• Meaningful fundraising from private school parents is different than for other not-for-profit organizations. Parents are already resentful at the tuition we have to pay.  Asking for even more money is a much greater challenge that the school must acknowledge and accommodate.  Successful fundraising must break the model, become more entrepreneurial.  The same whiny nag will not produce the raw dollars.
• Debt is a valuable tool, but one nonetheless crudely applied by commercial and investment bankers who are essentially financial product vendors.  The capital markets are resourceful and complex.  A financial advisor who is not simply a bond or swap shill can be invaluable.  Again, the top one-third of schools have all the options.  The others have to be smarter.
• I met with a school with $40 million in debt -and 150 student enrollment.  I have met a school so leveraged with variable rate debt, there was a cash-flow crisis if interest rates rose above 2%.   And they are looking for an interest rate swap.  Harvard’s debt problems are well-publicized, and yet they had 17 debt advisors.

And so, I do not often know where to begin.  The paradigm must change, but I am afraid it will only do so when it is too late, when critical options begin to disappear.  This blog has quite a few subscribers, but no comments on any of the topics.  And without feedback, I am unable to address the questions and topics that most weigh on the minds of independent school stakeholders.  And so I ask, if there is any value to this blog, that readers participate.