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College financial statements reveal healthy position

Colleges need cash, and fortunately, Carleton has enough. 

Carleton’s 2019 financial statements indicate that the college is confident it will generate $127 million in sources of liquidity, which are assets that generate cash, in the upcoming year. This figure will help the college nearly cover its $152 million operating budget. Carleton’s $127 million in assets available to make payments in the coming year is a stark contrast to St. Olaf’s $37 million, a figure that’s only enough to cover three to four months of budget needs, according to St. Olaf’s 2019 financial statements. St. Olaf isn’t imperiled, though, because it’s not insolvent and will continue to receive cash and investment income. 

“Our cash flow position actually improved year over year,” said Linda Thornton, the college’s comptroller. 

What’s intriguing about Carleton’s latest financial statements is a footnote that reflects a new accounting standard: higher education institutions are now expected to disclose a projection of investment returns for the upcoming fiscal year. This is because investors in the college––bondholders, donors, alumni and families of students––want to ensure that Carleton has enough of a cash cushion in the case of a potential market downturn. Historically, the financial statements only disclosed information regarding the previous year’s investment returns, but readers now want to see strength in the year ahead given that so many higher education institutions are in precarious financial positions, said Thornton. 

The Carletonian read and talked with Thornton about the college’s 2019 financial statements. Although Carleton’s independent auditor, CliftonLarsonAllen LLP, did not identify any material weaknesses––which are deficiencies or shortcomings in the college’s internal controls––several parts of the financial statements tell a deeper story about how daily life at Carleton is impacted by the nitty gritty of accounting. 

Balance sheets show an institution’s financial position: how much money it has, how much it owes, and where that money is being held. 

On the college’s balance sheets, net receivables––the amount of money owed to the college that it actually expects to be paid back––more than halved year over year. That has to do with the timing of when OCS and Global Engagement programs are billed. There were also fewer summer off-campus programs last year. This figure tends to vary based on program offerings and annual billing cycles, Thornton explained. 

Net receivables consist of gift pledges that have been made to the college; government reimbursements; and student receivables.

Another important part of net receivables has to do with student account balances. “For the last three years, all graduating seniors have graduated with no account balance due, so they’ve been paid in full by graduation,” said Thornton. This means that no graduating seniors had outstanding balances on top of their loans. 

Prepaid expenses, which are advanced payments for goods and services, nearly doubled year over year. This was primarily because the library prepaid for subscriptions in order to get a discount for the following year. 

Loans to students decreased year over year because the federal Perkins loan program, which subsidized low-interest loans to low-income students, failed to renew in Congress in 2017. Under the Perkins loan program, U.S. colleges and universities themselves were able to issue loans to students, precluding the need for a student loan servicer. This portion of the balance sheet will look like a declining asset until it clears out, since the college is no longer able to issue these kinds of loans to students. 

One of the college’s smallest, but perhaps most interesting liabilities, is an obligation to investment firm Morgan Stanley. In 2005, the college entered into an interest rate swap agreement, which is a contract that enables two parties to exchange future interest payments with one another. According to the Roosevelt Institute, a progressive think tank, interest rate swaps were sold to colleges as a way to insure against rising interest rates, but the terms of such deals were often tilted in favor of big banks. 

Fifteen years ago, the terms of the Morgan Stanley swap sounded great to Carleton, Thornton said, but the 2008 financial crisis was a game-changer. “Unlike many institutions that got rid of their swaps, we held onto our variable rate debt to basically ride the economic current, and our swap is essentially nearly break-even now,” Thornton explained. The college could have lost more money on the swap, but the amount of money it owes the bank has decreased each year since the crisis as the markets corrected themselves. Right now, Carleton owes roughly $135,000 for the swap, and that figure might inch closer to zero before it terminates the agreement in April. 

Net assets are the value of the college that has accumulated over its lifetime, including assets like property and the endowment. The change in net assets dropped year over year, but that’s because the college was using some of its accumulated reserves for construction projects, Thornton said. “Rather than taking out debt to cover all the costs of Weitz and Anderson, knowing we were going to have pledge payments from donors coming in, we used internal reserves to cover the costs,” Thornton added.

Traditionally, colleges and universities rely on banks to provide short-term loans, known as bridge financing, to support capital expenditures like construction projects. But successful financial planning allowed the college to finance the construction of Anderson Hall and improvements to the Weitz Center with a mix of its own cash reserves, gifts from donors and some debt––amounting to less debt than the college might otherwise incur. Such a decision is unusual at a time when higher education institutions are increasing their debt burdens to fund their operations. 

Without donor restriction––meaning without accounting for donations to the college––net investment return is up to $2.99 million compared to roughly $564,000 last year. This is good news, Thornton explained, because rising interest rates and increasing cash on hand meant that the college earned additional income on its investment balances. The college will use some of this additional investment income for construction payments, Thornton said. As a nonprofit organization, Carleton is required to reinvest any additional income to support the mission of the college, meaning all of the college’s money must be put to good use. This contrasts for-profit organizations, which can hold onto extra income or pay it out to shareholders in the form of dividends. 

The endowment, Carleton’s most significant asset, valued at just over $892 million as of June 30, 2019, is up from a little over $878 million in 2018. 

When it comes to budgeting, a college’s significant dependence on tuition to cover operating expenses––between 80 to 90 percent––tends to signal that an institution might not last for long, according to a March 2019 Inside Higher Ed report. The country’s wealthiest colleges and universities are generally able to fund a sizable portion of their operating expenses with endowment income, said a March 2019 EducationDive article. Take Grinnell, for instance. Grinnell’s $2.1 billion endowment and smaller size––roughly 1,700 students––means it can fund 59.8 percent of its operating expenses with investment income from its endowment. Macalester, for another example, has an $809 million endowment, from which it uses 32.9 percent of investment income to fund its operating expenses. Carleton, on the other hand, has an $892 million endowment as of June 30, 2019. Investment income from the endowment funds 27 percent of Carleton’s operating budget, and student fees fund 71 percent. 

Just over half of the endowment is invested in alternatives, such as private equity, hedge funds and real estate, while the rest of its allocation includes traditional investments like treasuries, stocks and bonds. The college’s endowment return for fiscal year 2019 was 3.2%, below the 7% return target, according to Chief Investment Officer Kelsey Deshler. Deshler added that the Investment Office reallocated some of its assets, already resulting in improved performance for the upcoming fiscal year. The endowment is up 4.4% to date for fiscal year 2020, Deshler noted.

“Higher education is just not in favor right now,” Thornton said. “You don’t have to look very far to find funding to be reduced for educational programs. We’re hoping to see this trend change, but in the meantime small private liberal arts institutions have felt this burden more than any other niche in higher education.” In Forbes’ November 2019 “College Financial Health Grades,” Carleton received an A+, standing out among its peer private colleges in Minnesota––St. Olaf and Gustavus Adolphus both received a B+, and Macalester received a B.

“I’m very proud of the fact that our financial statements reflect the quality of the investment that has been made in Carleton by alums, donors, students and parents,” Thornton added.

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