“The university has a history of uneven financial performance with significant operating deficits,” S&P Global Ratings credit analyst Laura Kuffler-Macdonald wrote in her most recent report on the school. Yet she expects that “the financial performance will stabilize and be positive in 2017.”
The university reduced its expenses between fiscal year 2013 and fiscal 2016 to offset lower revenue from the hospital and higher expenditures in student financial aid. That strategy helped lift the school’s operating result, the difference between income and expenses, by 22 percent to $11.6 million at the end of fiscal 2016, according to documents provided by the school.
“Our plan for improving the financial picture of the university is sound and working,” Frederick said in an email. “We are moving toward consistent operating profits. This turnaround strategy is producing solid results, despite many significant and ongoing challenges. To continue on this path, the support of the entire Howard University community is necessary.””
Still, wrapped up in that performance is a 7 percent decline in operating revenue tied primarily to Howard University Hospital and the reduction in federal appropriations. In a memo, Howard’s chief financial officer, Michael Masch, explained that a decrease in medical insurer reimbursements and fewer patients between fiscal 2013 and 2016 resulted in a $19 million hit to the university’s bottom line.
The hospital has long been a drag on Howard’s finances and a key reason Moody’s Investors Service downgraded the school’s credit rating several times. Frederick’s critics have accused him of holding on to the medical facility, where he has worked as a physician, when a sale would be more beneficial. Some in the university community, however, say the teaching hospital is still an invaluable asset for the school.
At a news conference in the fall, Frederick said the hospital was making strides in achieving “financial and operational stability,” yielding a $4.3 million surplus at the end of June, the first time since 2012. Through the first 11 months of fiscal 2016, Moody’s said the hospital improved its net income by nearly $25 million. The Washington Post’s Cheryl Thompson reported that the surplus came a month after officials announced layoffs of 110 employees at the hospital.
She noted that Frederick has entertained selling the medical facility. At the news conference, Frederick said that Paladin Healthcare, a company that runs the hospital, could be a potential owner. But, as Thompson reported, the quality of care and management of the hospital could hinder a sustainable turnaround. S&P Global, nevertheless, expects that demand will stabilize and patient revenue will improve as management continues to improve clinical billing.
Another drag on the university’s finances has been congressional budget cuts under sequestration, which reduced appropriations by more than 5 percent to $222 million. That money accounts for nearly a quarter of the school’s operating revenue. Delays in appropriation payments during the budget resolution cycles resulted in Howard needing bank lines for liquidity, said analysts at S&P. And to manage liquidity over the fiscal 2013 to 2015 period, Moody’s said the school delayed vendor payments.
Enrollment at Howard has also edged down in recent years, lowering tuition revenue. Changes in lending criteria for federal parent loans in 2012 cut off access to credit for some families and depressed enrollment, which has been slow to recover. Howard is also admitting fewer students to bolster selectivity, reducing the acceptance rate from roughly 52 percent to 30 percent, according to S&P. At the same time, the university has pumped a lot of its own money into scholarships, which combined with lower enrollment has resulted in a decline in net tuition revenue — the money schools earn after student aid is taken into account.
Frederick has come under fire from some students for instituting stricter payment policies. With roughly $22 million in uncollected tuition, the university started requiring that students have a zero balance to register for classes or pay a third of their outstanding bill and be enrolled in a payment plan. The decision came down hard on some low-income students, but school officials pegged it as a necessary step toward financial stability.
“With soft prospects for revenue growth, Howard will likely have to manage through a sustained period of careful expense management without harming its reputation and programmatic strategies,” Moody’s analyst Dennis M. Gephardt wrote in his most recent report.
Analysts at Moody’s said Howard has significant fixed costs including debt service, pension and health-care benefits and is also contending with significant deferred maintenance. Those financial challenges existed long before Frederick took the helm at Howard, but some faculty leaders had expected more progress by now.
Howard Faculty Senate chairman Taft Broome, in a letter to his colleagues, complained of “unfulfilled promises of a new revenue stream from an online learning program…and the lack of a plan for an expansive path forward for Howard,” among other things. Broome and other members of the faculty council voted no confidence in Frederick last week but have received pushback from other faculty who question the way the vote was taken.
Stacey Mobley, the chairman of the Board of Trustees at Howard, told The Washington Post that Frederick should be commended for leveraging real estate and other assets to create new revenue streams. Credit analysts called Howard’s $22 million deal to convert a residence hall into luxury rentals a step in the right direction but said the university still has a long journey ahead.
“Howard’s strong enterprise and adequate financial profile with its position as one of the most prestigious African American institutions with a wide array of program offerings and diverse revenues” is a credit strength, said Kuffler-Macdonald at S&P. Still, “significant strategic challenges remain for both Howard and its hospital.”
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