Having sent students home, what do colleges, universities and K-12 schools need to do now – today, tomorrow and over the next few days? Obviously, the most important issues are safety, doing the right thing, communicating clearly, building trust and creating a record of commendable performance.
So what are some of the other substantive and practical issues educational institutions need to address?
School and daycare closures across the country have sent school-age children home, and a new federal law entitles parents to paid leave in some circumstances to look after their homebound children if unable to work or telework in doing so. This new law also requires covered employers to provide paid leave for employees if unable to work or telework because they are quarantined or subject to an isolation order, self-quarantined per healthcare provider directive, showing symptoms of COVID-19 and seeking treatment, caring for individuals quarantined or self-quarantined, and other circumstances. McGuireWoods published a summary of this new law and its implications for employers, including colleges and universities, available on the firm’s website.
The Department of Education has instructed accrediting agencies to be flexible in suspending normal accreditation procedures, including those typically involved in approving distance learning. DOE has also encouraged accreditors to temporarily use virtual site visits to aid the accreditation process, even if the agencies’ normal procedures do not allow for virtual visits.
If accreditors choose to use virtual site visits, they should perform follow-up, in-person visits within a reasonable time to comply with regulatory requirements.
In addition, for institutions seeking accreditation renewals (as opposed to initial accreditation), DOE has authorized accreditors to extend accreditation periods to accommodate the temporary need to suspend in-person site visits. In response to concerns about ensuring that graduating students will be considered to have graduated from accredited programs, DOE reminded institutions and accreditors that accreditation may be retroactive. Of course, requirements may vary by state, and institutions currently involved in obtaining or renewing accreditation should stay in contact with their accrediting agencies to monitor how those accreditors are implementing this guidance. For details, see the full text of DOE’s recent guidance.
Educational institutions may face declining revenues and increasing operational expenses in the near term, coupled with significant losses in endowment and other investment assets. Some educational institutions may look to their endowment funds as an interim source for meeting current funding needs.
Educational institutions should exercise caution when considering spending endowment or other restricted funds to meet current financial needs. Endowment and other restricted funds are subject to donor restrictions, which may include limits on the purposes for which funds may be used and limits on how much may be spent. Without donor consent, educational institutions must abide by these restrictions and comply with applicable state law.
All states (other than Pennsylvania, which has similar statutory rules) have adopted the Uniform Prudent Management of Institutional Funds Act, which sets forth rules regarding the expenditure of endowment funds and procedures for modifying restrictions on endowment and other restricted funds. Educational institutions should seek legal advice before modifying their spending rate on endowment funds, using endowment funds as collateral for operational loans, borrowing funds from an endowment, or using endowment or other restricted funds to pay for operational expenses.
Bond Default Issues
When the time comes to look at finances, educational institutions should evaluate their cash position and check their loan document covenants. Tax-exempt bond proceeds are typically not available to pay operating expenses (and may be limited to specific projects that may now be stalled). Unless authorized by the underlying documents, taxable debt may not be available to pay operating expenses either (but it is likely to be easier to switch the use to a different project).
As discussed above, the endowment may be a source of funds for operating needs, but banks (unlike the public market) are still making loans and may be able to offer a credit facility that can provide liquidity to pay operating expenses. Before incurring any new debt, double-check the covenants in all existing debt documents. Publicly sold fixed-rate bonds are likely to have more flexible covenants than debt held by a financial institution. But a financial institution can be flexible when it comes to making payments or complying with existing covenants, and it can be difficult to obtain consent from fixed-rate bondholders.
For institutions with existing credit facilities, it may make sense to discuss with the credit facility provider all actions the institution has taken in response to the coronavirus and the projected impact before the need for a draw ever arises. Lenders may be wary of any draws on the facility because they fear that a draw signals pending financial distress or default. Discussing with the lender before any draw is made may ease the lender’s fears about the short-term (and long-term) impact on the institution’s finances.
Institutions that need to make a draw because of pending financial distress or default should know that, as part of a draw request, an institution may be required by the terms of its debt documents to represent that it is solvent and that no material adverse effect has occurred to the financial condition of the institution. In extreme cases, courts have found individual officers personally liable for knowingly misrepresenting the financial status of an organization.
Contractual Implications: Force Majeure, Impossibility and Frustration of Purpose
Schools may find that they have contracted for goods and services they no longer can use, and arenas for commencements that have been postponed or canceled. They may have contracts with third parties to provide services for students who are no longer on campus. Conversely, summer camps that once intended to use campus facilities may be seeking to terminate their contracts with the institution, and sponsors of canceled events may be seeking a refund of their deposits. To read more about this issue, see a McGuireWoods legal alert summarizing contractual implications of the coronavirus pandemic.
Federal, state and local governments are taking extraordinary measures to respond to the coronavirus.