How American University survived the financial crisis


When people think of the 2008 financial crisis, certain companies come to mind: Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG.

But what about an institution that was not greatly damaged by or a casualty of the economic collapse; one that managed to emerge from the crisis virtually unscathed? While other institutions struggled through the downturn, American University maintained “solid” finances and enjoyed enrollments that were “strong, record-setting in some categories,” as described by American’s then-Chairman of the Board of Trustees Gary Abramson in the AU 2008-2009 annual report. In fiscal 2009, the university generated an operating surplus of $50.8 million and was one of only two private higher education institutions whose bond rating was upgraded by Standard and Poor’s.

“It’s ironic that as institutions nationwide rethink their current liabilities and future priorities because of the current economy, American University is at a fortuitous moment in time,” AU President Cornelius Kerwin said in the 2008-2009 annual report.

American University officials attribute much of the school’s success during the financial crisis to the fact that less than 1 percent of its operating budget is dependent on endowment income.

“Other schools were forced to cut their operating budgets when their endowment income could not support their operating budget,” said Douglas Kudravetz, associate vice president of finance and assistant treasurer at American. “This has long been a strategy of AU to place minimal reliance on the endowment to support the operating budget – we forced ourselves to make tough choices during the prior 20 years of budget cycles, where some schools chose to balance their operating budget by taking more each year from endowment income.”

Consequently, when AU’s endowment market value fell 20.7 percent and endowment income dropped 12.5 percent, there was no “serious impact on operating budget,” according to Kudravetz.

AU also limited its exposure to alternative investments. Many institutions had large investments in private equity and hedge funds and were forced to sell those investments at a loss during the financial crisis.

“We moved cautiously in this area and have no investments in peril,” Kudravetz wrote in a 2009 financial report.

Moreover, AU restructured $220 million of its debt, further stabilizing the institution’s finances during the crisis.

The university also set up various financial safeguards and conducted a stress test to make sure those safeguards were sufficient. The safeguards include an enrollment contingency fund of several million dollars as well as funds held in reserve for need-based financial aid. Furthermore, in the event that enrollment drops sharply AU has developed plans to cut back certain parts of the budget, including salary increases and modernization of facilities.

Still, AU was not completely invulnerable to the financial crisis. The 20.7 percent decline in endowment market value from $394.0 million to $312.4 million still hurt the value of net assets on the balance sheet despite its lack of effect on the operating budget. However, Kudravetz said the endowment’s decline was not as bad as it seems.

“All investment/endowment portfolios declined during this period,” he said. “The average [decline] for colleges and universities was 25 percent plus. So we fared better than most… The only way to avoid [losses] was not to be invested in the global markets, and that is not a prudent long-term strategy.”

Although AU weathered the financial crisis better than many of its competitors, the university still faces challenges.

Tuition accounts for 82 percent of American University’s operating revenues — a high percentage compared to the figures of similar institutions. The university wants to diversify its revenue sources by increasing federally sponsored research and related overhead revenues, but this may prove difficult as the government cuts back research expenditures to reduce its deficit.

“While we would like to increase alternative revenue sources, realistically it is a challenge,” said Kudravetz.

Moreover, Moody’s Investors Service and Standard and Poor’s have cited AU’s $255.9 million in total outstanding debt – much of which is variable-rate – as a potential concern. Other concerns mentioned by the two rating agencies include the university’s increased capital spending, additional borrowing and 20 percent matriculation rate. This rate indicates that only 20 percent of students accepted by American decide to attend the college.

Regardless of these concerns, both rating agencies have expressed a stable outlook for American.

“Both rating agencies are satisfied with our progress to date,” said Kudravetz. “The points they cite are only minor concerns to them.”