For all the data and analyses out there about colleges, remarkably little of it lets the public easily or systematically spot institutions that are in financial trouble or on the brink of closing.
To judge a college’s health, one would need either benchmarks against which to measure or a clear way to see a trend line in its financials. Or even better, both. But few if any public benchmarks exist. “There is a need for a better understanding of what ‘good’ looks like,” says Richard Staisloff, founder and principal of rpkGroup, a consultancy.
Several data sources are available, and we offer a guide to the most comprehensive ones below. But the numbers come with plenty of caveats.
For example, many of the public data sources are based on colleges’ financial data taken as of the last day of the fiscal year. For most institutions, that was Tuesday, a day on which colleges may have taken a huge financial hit not because of their own economic health but because the crisis in Greece is dragging down world markets.
Perhaps a more relevant way to size up a college is to measure where its own trends are headed: Is the value of its net assets declining over time? Has its discount rate been rising? Is the institution having to increase its endowment spending to stay afloat?
Some of that information can be mined, but when drawn from public sources, it’s often at least a couple of years out of date. And even if available, the information can be confounding.
“You’d practically have to have a finance degree to read some of this stuff,” says John Griswold, executive director of the Commonfund Institute, the education and research arm of the Commonfund, which manages school and college endowments. And even if an M.B.A. were nearby to crunch the numbers, the answer would be of limited value without the proper context. For example, a college could have good reasons for a decline in assets — say, if it has invested in new programs that will attract students — while another college with growing surpluses might be hoarding cash rather than, say, fixing the residence halls or hiring top-flight faculty members.
Even if that deep dive into the data did highlight financial weaknesses, the information would be hard to assess in the abstract, without a similar analysis of many other institutions. None of the available sources, for example, would have publicly indicated the financial problems facing Marian Court College, the Massachusetts institution that recently announced it would be closing, or the financial challenges facing Sweet Briar College, the Virginia institution that last month said it would not be closing after all.
All of that said, here is a rundown of the major data sources that parents, boards, students, and others might look at when trying to assess the financial health of colleges:
Financial-Responsibility Scores
These metrics are produced by the Department of Education once a year, based on the audited financial statements that all private colleges must submit. The department calculates a single “composite score” — ranging from minus 1 to 3. The composite is based on a weighted calculation of three ratios that take into account such factors as debt, assets, surpluses, and deficits.
The scores were designed to guide the department in determining whether federal student-aid funds advanced to the college might be at risk because of the institution’s shaky financial health. Colleges with scores of 1.5 and above are deemed to be financially responsible; those with lower scores can be required to post letters of credit or be subject to oversight known as “heightened cash monitoring,” which entails extra scrutiny and more restrictions on how student-aid funds are advanced to them.
The scores were not made public until a few years ago, when The Chronicle obtained them under an open-records request. The department subsequently said it would publish them on a regular basis, although there is no set schedule for when they are released. The latest scores were published in March.
The scores have become one of the only nationally available assessments of colleges’ financial health. But they are a source of contention as well. Private-college groups say that the department is misapplying its own rules when calculating the scores, and that it often produces scores that are erroneous or misleading.
But public colleges don’t receive the scores. Only private colleges, nonprofit and for-profit, get them, on the assumption that a public college has the financial backstop of its state and local governments. And the limited range of the scores allows for little differentiation between institutions at the high and low ends of the financial-health spectrum.
According to the latest list, Sweet Briar had the highest score: 3.0. Marian Court had a score of 1.1, low enough to trigger extra scrutiny but not enough to require it to have posted a letter of credit with the department.
Heightened Cash Monitoring
When the Department of Education finds reason for concern about a college’s ability to safeguard federal student-aid funds, it can put the college on one of two levels of so-called heightened cash monitoring.
Until this year, the list of every institution facing such scrutiny was not public. But the department in March published a list of such colleges, following a public-records request from the website Inside Higher Ed. The department has said it would update the list regularly. The agency says the latest list is valid as of March 1, 2015.
All colleges, even public ones, could be subject to heightened cash monitoring, so this list offers a window into the finances of those institutions that the financial-responsibility scores do not. Several colleges were put on the list because their state auditors were slow to submit audits to the department. But it is in many ways derivative of the financial-responsibility scores.
Sweet Briar is not on the list. Marian Court is under HCM 1, the lesser of the two levels of restrictions.
Measures of Endowment Wealth
Each year hundreds of colleges provide information about their endowments to the National Association of College and University Business Officers, or Nacubo, which releases data showing which institutions are the richest.
But knowing the size of an endowment in isolation doesn’t reveal how dependent the college is on its investment earnings. The Nacubo report no longer breaks out data like endowment dollars per student, but that information could still be compiled by combining the Nacubo data set with enrollment information from the Education Department’s Integrated Postsecondary Education Data System, or Ipeds.
For the most recent year’s data, a researcher at Nacubo actually did that for The Chronicle, although the unofficial list is just a rough cut of the data that omits some major endowments for systems where enrollment figures were not readily available.
Yet the endowment-assets-per-student ranking by itself is just slightly more instructive than the ranking by endowment as a whole, because it indicates nothing about how colleges are using their money. And even a relatively hearty endowment does not necessarily translate into financial health, or at least not financial flexibility. A majority of endowment assets are restricted, which means proceeds from their earnings can be used only for the purposes the donors designated. In 2007, Nacubo estimated that as much as 80 percent of public-college endowment assets carried some restriction on how they could be used; for private colleges, the estimate was 55 percent.
Sweet Briar’s endowment stood at $94 million as of June 30, 2014. Marian Court’s endowment was not part of the Nacubo survey.
Debt and Equity
Obviously debt can be a drag on colleges’ finances. But taking out loans can also be a wise way for institutions to finance projects over time, particularly when interest rates are low, as they have been for the past few years.
No single organization compiles and tracks colleges’ debt; nor is there a universally accepted standard for how much is too much. But some information about debt — and, in many cases, institutions’ wherewithal to manage it — is available from a number of sources.
One such source is the bond-rating agencies. For virtually all debt that is issued and traded on the public market, colleges typically seek a bond rating from Moody’s Investors Service, Standard & Poor’s, or Fitch Ratings. Sometimes they get more than one rating. The ratings assess the capacity of the college to manage the debt. Each summer Moody’s, the major ratings player for colleges, publishes its college financial ratings, offering one of the most comprehensive indications of the relative health of the 500-plus institutions it rates. For those who aren’t Moody’s clients, the report is available for purchase.
Not all colleges issue public debt or get a bond rating. But all private nonprofit colleges are required to file an annual tax return, the Form 990, on which they list their debt — along with revenues, expenses, and other financial information. The Form 990 is publicly available from the college and on websites like GuideStar. But the information from the Form 990 probably won’t offer a comparative assessment, unless you’re the kind of person who likes to comb through thousands of tax returns and then extract, compile, and analyze data.
In 2012 two companies, Bain & Company and Sterling Partners, did something similar to that, and issued a report based on data found in Ipeds. They looked at the finances of nearly 1,700 public and private colleges, weighing changes in their assets relative to their liabilities, and changes in their expenses relative to their revenues. The report called the former the “equity ratio” and the latter the “expense ratio.”
The report said that a third of the colleges were on an “unsustainable” path from the 2006 through the 2010 fiscal years and that an additional 28 percent were at risk of doing the same. Because the period covered by the report included the Great Recession, some thought its conclusions were overly alarmist.
In 2014 Bain updated the data in response to that criticism, adding numbers from the 2011 and 2012 fiscal years (and dropping out the earliest year). In the intervening two years, Bain found that gains in the stock market had improved the equity ratio for some colleges but “many did not get their expense ratio down,” according to Jeff Denneen, the Bain partner who oversaw both reports. For such colleges, he says, “what concerns me is the revenue’s not there.”
For each report, Bain classified institutions by how much their equity and expense ratios had changed. In the 2010-12 period Bain found only 22 percent of colleges on an “unsustainable” path (meaning both ratios had changed for the worse by more than five percentage points), compared with 30 percent in 2006-10. (In the course of the update, Bain revised some of the figures from the earlier report and added 28 institutions to the later period’s analysis.)
But it also found fewer colleges on a financially sound path (37 percent, versus 42 percent in 2006-2010) and substantially more colleges (41 percent versus 28 percent) in the category it calls “neutral.” Mr. Denneen says most of those in the neutral category benefited from a recovery in their endowment values, which lifted their equity ratios. Most of them, he says, “could easily tip over” financially if that slips.
As Mr. Denneen notes, the Bain study “is not about the absolute financial health of institutions” but rather a reflection of changes in two key metrics. Institutions that are financially strong could do poorly in the analysis if they “are starting on a bad trajectory.”
While the bond ratings are probably the firmest assessment of a college’s ability to pay off the bonds (despite continuing public skepticism about a system where the issuer pays the agency for a rating), there are other indicators. For example, if bonds are trading below their face value, that could indicate that traders consider them a higher risk.
Information on bond prices for all publicly issued debt can be found on the website known as EMMA, run by the Municipal Securities Rulemaking Board. But as with the Form 990, unless you’re a computer whiz, extracting the pricing data for comparative purposes won’t be easy. And it might not even be helpful; bonds can sell at a discount for all sorts of reasons (an unattractive interest rate, for example) besides doubts about the issuer.
In November 2014, Standard & Poor’s revised its outlook for Sweet Briar’s bonds from “negative” to “stable,” and affirmed the bonds’ BBB status, the lowest rating generally considered investment grade. Marian Court does not appear to have bonds that have been rated. According to Sweet Briar’s most currently available Form 990, for the year ending June 30, 2013, it had long-term debt of $27.6 million, The most current Form 990 for Marian Court, for the year ending June 30, 2014, shows it had no long-term debt (but it did have $3.1 million in expenses along with $2.6 million in revenues).
Other Measures
While not a direct measure of a college’s financial health, a high proportion of student-loan defaults within three years of graduation might point to underlying problems, according to some experts.
At the very worst, institutions risk losing access to a key lifeline of financial support — federal student loans and Pell Grants — if their default rates exceed a 30-percent threshold in three consecutive years. The Education Department publishes a list of colleges’ default rates each fall.
Colleges that receive federal student aid must be accredited by a recognized accrediting agency. Those organizations don’t always make it clear publicly when their actions are tied to financial concerns.
The tuition-discount rate, the proportion of institutional revenue from tuition and other sources that is redirected back into scholarships and other financial aid, can also be an indicator of financial health, if it’s low, or of financial concern, if it’s high. But how high is too high depends on the institution and its tuition price. Even a high percentage may be OK, for example if the net tuition revenue covers a substantial portion of the expenses.
Both Nacubo and Moody’s conduct annual surveys of tuition discounting but neither names the colleges alongside its published results. Last year the Nacubo survey of 401 private colleges found discount rates for first-time, full-time freshmen reached a record high of 44.8 percent for the 2012-13 academic year, and an estimated 46.4 percent for 2013-14. The next survey by Nacubo is expected soon.
Considering the enrollment challenges many colleges indicated at the start of the academic year in a Chronicle survey, Nacubo’s report is unlikely to tell a positive story about colleges’ finances. But in that survey, as with most of the other measures — including our own, which promised anonymity to respondents — the most vulnerable colleges won’t be identified.
Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her new book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.
