A newly compiled analysis by the U.S. Department of Education and obtained by The Chronicle shows that 114 private nonprofit degree-granting colleges were in such fragile financial condition at the end of their last fiscal year that they failed the department’s financial-responsibility test.
Colleges that fail the test are subject to extra monitoring on their use of federal student-aid funds. The 65 of these that scored the lowest also have to post letters of credit with the department to help protect the safety of the loan and grant money that flows through their institutions.
Although not designed as such, failing the test can be an indicator that a college is in danger of not surviving. Over the past year, at least five of the institutions that show up as failing the financial test based on data from their 2007 orand 2008 fiscal years have either shut down, merged with a wealthier nonprofit college, or sold themselves to a for-profit college company.
Those include John F. Kennedy University in California, which affiliated with the National University system in April, Daniel Webster College in New Hampshire, which announced in April it would be acquired by ITT Educational Services Inc., and Myers University (renamed Chancellor University) in Ohio, which was bought in August 2008 by some of the same investors who bought Grand Canyon University a few years ago. It also includes Waldorf College in Iowa, which is in talks to be bought by the for-profit Columbia Southern University, and the College of Santa Fe, which closed in May and is now in purchase discussions with Laureate Education Inc.
Other institutions on the list have recently made headlines for failing to make their payroll (Lambuth University in Tennessee), or for cutting retirement contributions for employees (Dana College in Nebraska).
Wells College appears in department records as having a failing score, but officials there said last week that they had been assured by the department that its score was still “under review.” Department officials did not respond by press time to inquiries by The Chronicle about Wells.
Those that scored below 1.0 (on a scale of minus-1 to 3) must post letters of credit with the department equal to 10 percent of the federal aid they award, which further crimps their liquidity. In addition to a number of religious colleges, these geographically diverse institutions include Ava Maria School of Law in Michigan, Concordia University in California, Newbury College in Massachusetts, and Paul Quinn College in Texas. (See table, Page A22.)
A Financial Burden
Colleges are required to submit audited financial statements to the Education Department within nine months of the end of their fiscal year. Since that is June 30 for most institutions, the list obtained by The Chronicle under the Freedom of Information Act is based on the most current data available. (Some of the department’s scores are based on 2007 fiscal-year data.) It does not reflect the difficult financial pressures many colleges are facing this fiscal year.
Although colleges that do not meet the test can continue to award federal student aid, the added scrutiny that comes with a failing score can be a management and financial burden. “Our goal is to get ourselves out of the letter-of-credit situation,” said Joyce Hanlon, vice president for finance and chief financial officer at Newbury, which was required to secure a letter of credit guaranteeing $550,000 in February 2008 because of its 2007 financial condition.
Newbury’s finances improved by the end of its 2008 fiscal year, but not by enough to have the letter-of-credit requirement lifted. “We are just in the beginning phases of turning the college around,” Ms. Hanlon said.
Colleges that stumble one year sometimes recover the next.
Phillips Graduate Institute, in Encino, California., for instance, had been posting a $600,000 letter of credit until January of 2009, when, based on its 2008 fiscal-year financials, it scored high enough to pass.
“We’re out from under. We’re going to stay out from under,” said Linda Perez, the institute’s chief financial officer. In Phillips’s case, the master’s and doctoral institution shored up its finances by expanding enrollment, refinancing some debt, and reducing expenses. “It was a wake-up call,” Ms. Perez said.
The test involves calculation of a composite score based on three ratios that take into account such factors as debt load, expenses relative to income, and overall resources of the institution.
“It doesn’t take much to throw off a ratio,” said Todd S. Hutton, president of Utica College, in Upstate New York. “Our margins are razor thin.” Utica failed the test based on its 2008 financials despite record enrollment that year. But the college also drew down its cash reserves that year to undertake some construction projects.
Though Utica’s score wasn’t low enough to trigger a letter-of-credit requirement, Mr. Hutton said it was partly out of concern about its score that Utica decided to hold off on some expensive energy-improvement projects it had been considering. Even though the additional liabilities would have been temporary, it didn’t want them on its balance sheet “because of these kinds of issues.”
The financial circumstances of every institution differ, so it would be wrong to assume that every college that fails the test is in financial trouble. Tiffin University, in Ohio, said its finances are strong, but it has failed the test for the past few years because of the way it accounts for liabilities related to a university-owned retirement complex. Now that it has sold the complex (for “a modest profit” according to an official there,) it expects to pass the test when it submits its latest financial statements.
Still, with so few other public indicators of colleges’ financial health available, particularly of smaller colleges that are not subject to scrutiny by credit-rating agencies, this roster of colleges may be a bellwether of trouble.
Or, for a growing cadre of companies, investors, and entrepreneurs who scour the country in search of ailing nonprofit colleges as acquisition targets, it might also become a shopping list. Said Joseph Schmoke, chief executive officer at the all-online Andrew Jackson University, one investor looking to acquire a brand-name campus: “The trail has been blazed.”
