Home Current Events How Should We Measure Financial Solvency for Colleges and Universities?
How Should We Measure Financial Solvency for Colleges and Universities?

How Should We Measure Financial Solvency for Colleges and Universities?

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Inside Higher Ed’s Rick Seltzer writes about two initiatives related to measuring institutional financial health. Mr. Seltzer reports that the National Council for State Authorization Reciprocity Agreements (NC-SARA) voted to continue to use the federal financial composite scores as the primary factor for evaluating whether or not institutions are eligible to be members.

NC-SARA is the organization approved by 49 of the 50 states to provide policies guiding interstate standards through which postsecondary online educational institutions operate. NC-SARA’s decision occurred during a period when college lobbyists have pushed for a suspension of the collection and evaluation of the federal composite standards.

Ironically, those federal composite scores have been criticized in the past for their limited ability to assist regulators, accreditors, and consumers in evaluating financial solvency. The numbers are based on financial data submitted from audited year-end financial statements and are about 18 months behind on average.

The other initiative is from Edmit, an advising company, that developed a financial model predicting how many years private non-profit colleges had until they would run out of money and close. Before the company could publish its findings, it opted not to release the data, based on litigation threats from some of the colleges.

Edmit’s revised model takes into consideration the coronavirus-related impact on colleges, but does not include the estimate of how many years before the college may close. Instead, the model categorizes colleges as high, medium, or low risk of closure. Pre-coronavirus, 235 institutions were considered a high risk to close over the next six years. Post-coronavirus, 345 are at high risk, a 47% increase.

In a previous blog post, I wrote about Robert Zemsky’s latest book, The College Stress Test. Zemsky and his co-authors utilized federal data submitted by colleges and universities to the Department of Education’s Integrated Post-Secondary Education Data System (IPEDS), but utilized a methodology to project enrollment trends as impactful for future financial risk. Despite calculating a score for all colleges, they opted not to post the scores but provided specific guidance on how the score could be calculated.

Zemsky and his co-authors estimated that 10% of all colleges were at high risk of closing. In a later interview with the Chronicle of Higher Education, Dr. Zemsky stated that the coronavirus pandemic could double that number if institutions were forced to close again in the fall.

Is there a right answer? I would argue that none of these measurements reflect the current situation of any institution. The availability and access to cash is most critical for any organization: non-profit or for-profit, higher ed, or any other business. If the business operates a substantially fixed-cost model (meaning that the majority of its cost of operations are the same and difficult to adjust if revenues increase or decrease), a sudden decrease in revenues can tip the scales toward insolvency if there are no cash reserves.

This doesn’t just apply to private non-profit colleges, but any college. Yesterday, the state of Georgia announced that its colleges and universities will have to cut $361 million to meet the state’s 14% budget cut requirement. While Georgia has access to much more capital than many small colleges, the administrators in charge of making those cuts may consider closing some of their smaller institutions.

Critics of the federal composite ratios argue that a college may find a generous benefactor who funds the cash shortfall. While that’s true, I argue that the probability of that event occurring is less than the probability that a donor is not available, particularly during this coronavirus-induced recession.

Barring a bailout by the federal government, the only certainty in this environment is that there will be more institutions that close. Decisions like this are not easy, but hopefully, the decisions will be made before students are on campus. Knowing that your institution is on the high risk list is important, but knowing the loss of enrollment this fall from last year will be an important factor to consider as well.

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Wally Boston Dr. Wallace E. Boston was appointed President and Chief Executive Officer of American Public University System (APUS) and its parent company, American Public Education, Inc. (APEI) in July 2004. He joined APUS as its Executive Vice President and Chief Financial Officer in 2002. In September 2019, Dr. Boston retired as CEO of APEI and retired as APUS President in August 2020. Dr. Boston guided APUS through its successful initial accreditation with the Higher Learning Commission of the North Central Association in 2006 and ten-year reaccreditation in 2011. In November 2007, he led APEI to an initial public offering on the NASDAQ Exchange. For four years from 2009 through 2012, APEI was ranked in Forbes' Top 10 list of America's Best Small Public Companies. During his tenure as president, APUS grew to over 85,000 students, 200 degree and certificate programs, and approximately 100,000 alumni. While serving as APEI CEO and APUS President, Dr. Boston was a board member of APEI, APUS, Hondros College of Nursing, and Fidelis, Inc. Dr. Boston continues to serve as a member of the Board of Advisors of the National Institute for Learning Outcomes Assessment (NILOA), a member of the Board of Overseers of the University of Pennsylvania’s Graduate School of Education, and as a member of the board of New Horizons Worldwide. He has authored and co-authored papers on the topic of online post-secondary student retention, and is a frequent speaker on the impact of technology on higher education. Dr. Boston is a past Treasurer of the Board of Trustees of the McDonogh School, a private K-12 school in Baltimore. In his career prior to APEI and APUS, Dr. Boston served as either CFO, COO, or CEO of Meridian Healthcare, Manor Healthcare, Neighborcare Pharmacies, and Sun Healthcare Group. Dr. Boston is a Certified Public Accountant, Certified Management Accountant, and Chartered Global Management Accountant. He earned an A.B. degree in History from Duke University, an MBA in Marketing and Accounting from Tulane University’s Freeman School of Business Administration, and a Doctorate in Higher Education Management from the University of Pennsylvania’s Graduate School of Education. In 2008, the Board of Trustees of APUS awarded him a Doctorate in Business Administration, honoris causa, and, in April 2017, also bestowed him with the title President Emeritus. In August 2020, the Board of Trustees of APUS appointed him Trustee Emeritus. In November 2020, the Board of Trustees announced that the APUS School of Business would be renamed the Dr. Wallace E Boston School of Business in recognition of Dr. Boston's service to the university. Dr. Boston lives with his family in Austin, Texas.

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