5 myths about financial exigency

Expert Insight

5 myths about financial exigency

The COVID-19 pandemic has wreaked havoc on higher ed institutional finances. In response, some leaders are considering declaring financial exigency to stabilize their institutions. As a last-resort measure, financial exigency enables drastic restructuring efforts—like program restructuring and faculty downsizing—that can help keep an institution’s doors open and preserve its long-term viability.

While financial exigency is still a final recourse for struggling institutions, the financial realities of the current crisis mean more senior leaders are considering the tactic. But because financial exigency declarations are relatively uncommon, misconceptions about what this decision means for a campus abound. To help leaders separate fact from fiction when weighing financial strategy decisions, we identified five common myths about financial exigency—and the information you should promote instead.

Myth 1: Short-term crises—like COVID-19 or natural disasters—are sufficient grounds for declaring financial exigency

Some leaders hold that the COVID-19 pandemic is sufficient grounds to declare financial exigency, but experts warn that this is not a given. The American Association of University Professors (AAUP), which serves as the de facto national authority on financial exigency, has not issued concrete guidance on whether COVID-19 warrants declaration. However, the AAUP has a history of investigating institutions that have declared in response to natural disasters, like Hurricane Katrina. In one case, the AAUP argued that university administrators had wrongly declared exigency to justify unnecessary cuts.

While COVID-19 itself may not warrant financial exigency, it can precipitate a financial crisis that does. Institutions should therefore consider both their short-term financial situation and longer-term budget forecasts and downward trends when evaluating whether to declare exigency. For example, Central Washington University declared financial exigency in March due to short-term auxiliaries revenue losses caused by the state’s shelter-in-place order, as well as long-term projections about reduced state appropriations. Lincoln University declared in May after COVID-19 prompted state spending restrictions and accelerated projected long-term enrollment declines.

Myth 2: Institutions that declare financial exigency are destined for closure

Stakeholders often interpret a declaration as a precursor to institutional closure. In reality, financial exigency can help institutions avoid shutting down, since it allows leaders to restructure their cost bases to pay off unmanageable debts or close unsustainable deficits. For example, Chicago State University weathered a prolonged budget standoff in Illinois that deprived state colleges of funding for 10 months by declaring financial exigency and making reductions in force.

Further, Moody’s argues that financial exigency can be a credit-positive tool for universities in financial distress, since it signals a leadership team’s commitment to improving long-term financial sustainability.

Myth 3: Financial exigency violates shared governance and ignores faculty perspectives

Many faculty worry that financial exigency bypasses shared governance by enabling leaders to make significant changes to academic programs and staffing without faculty consultation. But in practice, faculty input is critical for successful implementation. According to most institutional policies, faculty must be involved at every stage of the financial exigency process, starting with the initial review of an institution’s financial health. For example, Texas Tech University must convene a Financial Exigency Advisory Committee (which includes the faculty senate president and three elected faculty representatives) to assess whether to declare financial exigency. Other institutions, like Oklahoma State University, require the president to get consent from a standing faculty budget committee.

Beyond initial declaration, many institutions task a faculty governing body with deciding how to select faculty for termination, if faculty downsizing is on the table. The University of Mary Washington, for example, requires the provost to consult the University Faculty Affairs Committee, which consists of six full-time faculty members.

Myth 4: Financial exigency allows institutions to rapidly reduce academic costs

Many leaders think that financial exigency will enable them to immediately scale back academic costs. However, the process of declaring financial exigency and making associated budget reductions can be time-consuming, and cost savings can take at least a year to materialize. Typically, the president must review financial data, seek input from other campus leaders and faculty, and solicit and receive board approval before declaring financial exigency. Following a formal declaration, institutional leaders must negotiate with division heads to develop budget reduction plans. For example, Tulane University gives individual schools a 30-day window to respond to the president’s proposed reductions and suggest alternative cost -saving measures. Then, after leaders agree on reductions, tenured faculty selected for termination are entitled to an appeals hearing before a peer committee prior to dismissal. Moreover, some policies—like Old Dominion University’s—require institutions to give terminated faculty advanced notice, meaning they can stay on payroll for up to a year after termination decisions.

Ultimately, most institutions that declare exigency achieve cost savings by combining program discontinuance with broader academic workforce reductions. For example, Missouri Western State University, which declared financial exigency in March, downsized its faculty by 30%. The university’s plan included a mix of redesigning programs (like Chemistry and Mathematics), phasing out other programs (like Economics and Political Science), and reducing staffing across all 18 academic departments.

Myth 5: Financial exigency allows institutions to immediately revamp their academic program portfolio

Although financial exigency enables institutions to scale down or discontinue existing programs, it can hinder new program launches in the short term due to restrictions imposed by accrediting agencies. Accreditors often require institutions to develop teach-out arrangements so that current students in discontinued programs can complete their course of study or easily transfer to other institutions. Since developing teach-out plans takes time and requires additional instructional costs, institutions may have to delay new program investments. And even if leaders have the resources to launch new programs, accreditors may outright refuse to accredit them until institutions have successfully graduated students in discontinued programs.

If institutions cannot rely on new program offerings to attract students and increase revenues, they may struggle to recover from exigency and achieve long-term financial sustainability.

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