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In the wake of COVID-19, California’s largest higher public education institution, California State University (CSU), announced its plan to go completely virtual in the fall of 2020. This means that CSU’s 23 campuses with eight off-campus centers, enrolling 484,300 students annually with 26,858 faculty members, will not be physically opening their doors in the fall for students. Along the same lines, the UC (University of California) system is also looking to follow suit and not allow students to physically attend classes at their 10 campuses throughout California serving over 285,000 students.
This may be bittersweet for prospective and current students, but financially speaking, the college campuses are facing huge financial challenges in the near future i.e., a shortfall in student housing revenue and other revenue streams.
In this article, we will explore the future of college towns and how they are likely to bear the brunt of financial challenges due to no students in their respective towns.
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Most of us may agree that, given the current pandemic and its rapid spread, the best bet for college campuses is to not allow their students to attend classes physically and transition to online/virtual learning. However, what does it all mean? It means that we shut down campuses, allow limited staff to run virtual operations, no student housing either on campus or near campus, and virtually no spending on events hosted by the universities in their respective towns.
But, what happens when you take a large portion of a relatively small city’s “population” and disburse it throughout the state and/or out of state? What happens when the apartments, condos and other residential units remain empty? What happens when a large portion of your city’s consumer base move away?
The answer is that the city will lose a significant portion of its revenues generated through the student body that previously resided within the city limits: they spent their money at restaurants, bars and other expenses within the City’s jurisdiction, which generated sales tax revenues; they paid rent and other forms of living expenses that created a flow of funds in the local economy; they attended events, which generated different forms of revenue streams. Historically, the student body from local higher education institutions served as a lucrative tax base for many small to midsize cities throughout the United States. However, with the students staying home and learning through online classes, the college towns are bound to face some serious financial troubles, along with small businesses that rely on college town traffic.
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Let’s take a closer look at a California college town that may be in a similar predicament. The city of Turlock has a population of a little over 73,000 residents and houses one of the California State Universities called CSU, Stanislaus. This university has an annual enrollment of around 11,000 students, which means that the student body accounts for roughly 15% of the city’s population. Now, allowing for the fact that some students may already have lived within Turlock’s city limits, the campus closure in the fall will definitely serve as a double whammy for the city’s finances and all the local business that relied on student spending. Furthermore, the city has recently seen a growth of housing complexes near the college campus, which was likely to be built for student housing. However, they will also feel the financial strain along with other housing complexes meant for students.
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Looking at the city’s FY2020-21 budget document, 33-37% of the total general fund revenues come from sales tax, which is directly driven by the consumer spending within the city limits. In quantification, almost $16 million of the $43 million general fund revenues is generated through that sales tax.
With that high dependency on a single revenue source (sales tax) and 15% of the city’s population being college students – the majority of whom are likely to be disbursed out of Turlock’s city limits – the city may soon be facing some serious cuts to its revenue expectations for the FY21, expenditure cuts and/or tapping into its cash reserves to make ends meet.
The financial strain caused by COVID-19 isn’t limited to job losses and companies filing for bankruptcies throughout the world, it is also hitting hard at local and state governments along with transportation agencies.
Even after the CARES Act funding, provided by the federal government, many cities are still scrambling to find ways to make ends meet – one of the most common options being both budget cuts and tapping into some sort of financial reserves.
Investors should carefully analyze the financial statements produced around the fiscal year-end (June 30), like the budget book and the comprehensive annual financial reporting (CAFR), to assess the risks associated with any given local and state government.
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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. The information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.