Ryan Craig's 'Gap Letter' is one I always read. Craig and his team are on top of the higher education-world's thought leaders.
His main story in his June 21st GAP newsletter was titled: The Financial Responsibility Emperor Has No Clothes
While the college focal point of the article is the mess at the University of the Arts in Philadelphia, Craig cites the bigger picture concern.
"The bigger story is that three levels of oversight – UArts’ board, accreditor, and the U.S. Department of Education – failed to anticipate fiscal peril and take appropriate action."
So, let's go to the data to set up the basic financial health and viability scene at of U Arts. From 2015-2022: FTE enrolment was down 30%. Tuition and fee revenue was down $4.6M. Admission's yield was down 13 points (not uncommon, but still noteworty). Total revenue down $7M but total expenses down only $1.4M. Revenue to expense ratio was 0.9. The data is from IPEDS. The trend analysis is from the 2024 Private College Viability App for Executive Analysis.
The data easily paints a picture of a college not in good financial health. Yet, the Department of Education, the college's board of trustees and the Middle States accrediting agency did nothing. Middle states only announced they were displeased with how the college closed. No reference was made to the college's financial plight.
Craig writes: "The premise seems to be that fundamental financial health is less important than the ability to beg, borrow, or steal from the endowment or other assets in order to cover operating deficits".
He continues later on: "There’s no check-in or filing required once fall enrollment comes in and a school knows what the year is going to look like and whether revenue from operations is likely to be sufficient to cover expenses."
So, what is a fix that would let college consumers and/or their advocates become timely financial monitors?
The first would be the 2024 Private College Viability App for Students and Familes. Click here to purchase ($29). Compare college enrollment, 4-year graduation rates, endowment value, average net price and admission's yield for 1,297 private colleges in the U.S.
A more timely resource would be for colleges to publicly share their quarterly financial statements. Public companies are required to do this. It is only reasonable to expect that a student's investment. College financial analysts, reporters and others would have a resource with which to provide more timely information about a college's financial health and viability. I know the revenue cycle of colleges are much different than almost every other business, but quarterly posting would allow for an 'apples-to-apples' comparison.
Craig's indictment of the three levels of financial monitoring of colleges continues.
"It’s clear ED hasn’t been measuring the right things. As Phil Hill (from On EdTech) reported in the wake of the UArts announcement, of the 34 schools that have announced closure or significant cuts this year, only three were subject to additional scrutiny by ED (i.e., heightened cash monitoring). For the rest, it’s been business as usual, including University of the Arts. Hill agrees that the “more important problem to solve is just how blind ED is when colleges are clearly showing signs of closure.”"
There is a clear need for independent financial health and viability monitors of private and public college's. My own College Viability App (Purchase the Executive Analysis version) uses the past 8 reported years to compare more than 30 government reports for more than 3,000 colleges. The app takes the data and makes it very user friendly to both select and compare colleges. Our operating premise is that it is the comparisons that matter. Users can clearly see which colleges are head in a positive direction and which colleges are not.
Finally, I would like to add the accounting firms doing the financial audits of colleges to Craig's list of those entities failing to anticipate fiscal peril.
Recently, I posted about a small research project I did on the lack of a heads-up (it is called going concern) from auditing firms of private colleges. Here is the blog post. It reflects miserably on accounting firms hired by these colleges to audit their books.
I went to the audited financial statements of two closing college and one in serious danger of doing so. I copied/pasted the lines in each regarding 'going concern'.
Wells College: In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the College’s ability to continue as a going concern
Fontbonne University: In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Fontbonne University’s ability to continue as a going concern for one year after the date that the financial statements are issued.
Columbia College (Chicago) In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the College’s ability to continue as a going concern for one year after the date that the financial statements are issued.
You will quickly note that they are effectively the same. Auditors only rarely bring up the issue of a college continuing as a going concern. There are even instances when the auditors noted a going concern - AFTER THE COLLEGE CLOSED. Clearly, neither the management nor the auditors are raising substantial doubts about colleges clearly in financial peril.
Caveat emptor - (let the buyer beware) has never been more true than it is today in higher education. Colleges and their current financial monitors have failed. The Department of Education uses antiquated ratios. Accrediting agencies worry more about dotted 'i's and crossed 't's. Most Boards of Trustees have a demonstrated inability to know, understand and act on the financial health of their colleges.
Ryan Craig nailed the disease. Independent financial health resources are the answer to provide students, families, faculty, staff, and other stakeholders with the timely comparisons and analysis needed to make decisions about any colleges financial health and viability.
Written by Gary Stocker, Founder, College Viability - previously published on the College Viability Blog.
