How Should We Measure Financial Solvency for Colleges and Universities?
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.