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The University of Alaska recently declared financial exigency to help deal with the state's huge budget cut to the system. The decision has drawn attention to the relatively rare use of financial exigency in higher education, which typically is used for colleges to eliminate jobs, including those held by tenured faculty members.
While the mechanism allows colleges to quickly cut fixed costs, it can risk reputational damage and increased oversight, including by accreditors, said Moody's, the credit ratings agency. It also can lead to costly litigation.
However, Moody's said in a recent report that financial exigency, when done as part of a broad restructuring, can be credit positive and play a key role in preserving an institution's viability.
"Since approximately two-thirds of higher education expenses are related to personnel, employee cuts are difficult to avoid in times of budgetary crisis. However, the tenure system, along with unionization of faculty and staff in some cases, inhibits significant rapid reductions in compensation," said Moody's. "When faced with an exogenous event, such as a major, unanticipated reduction in a funding stream, or longer-term competitive challenges, a university can use financial exigency to eliminate costs or restructure operations and programs by dismissing tenured faculty."
