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Hot on Campus | August 30, 2012

Out of context

Finances

School officials argue a recent report on institutional financial health offers only a sustainability snap shot

The Altus Bell on the Hendrix College campus, in Altus, Ark. (Photo courtesy of Hendrix College)

A new report released in July paints a dire picture of the financial sustainability of higher education. It concludes 60 percent of colleges and universities have weakened financial portfolios that put the institutions on the brink of disaster or on the path to the precipice. Researchers declared only 40 percent of schools "financially sound."

The report, co-authored by the educational branches of private consulting firms Bain and Company and Sterling Partners, surveyed 1,692 U.S. colleges and universities for financial sustainability. The list included public and private schools, both secular and religious. Using a business model, the authors examined each school's income and expenses and the health of its assets, including endowments. The report concluded that too many schools have increasing expenses and declining sources of revenue, an imbalance that could lead to "staggering social and economic implications." Although the report isn't specific about those implications, it suggests schools will either be forced to accept fewer students or close altogether.

"If the current trends continue, we will see a higher education system that will no longer be able to meet the diverse needs of the U.S. student population in 20 years," the report claims.

But critics of the report - although not summarily dismissing the analysis - argue the study lacks context. The timing could not have been worse. The study's results should be viewed within the context of the study period--between 2006 and 2010--a time when "everybody got whacked," one critic said. And researchers didn't account for important revenue streams before they declared schools as notable as the University of Notre Dame and as unassuming as PCUSA-affiliated Lyon College "unsustainable," critics say.

The Bain and Sterling report developed a matrix in which schools were rated as financially sound, at risk, or on an unsustainable financial path. Researchers put schools in categories based on the comparison of two criteria: expenses as a percentage of revenue and equity as a percentage of assets.

Prestigious schools declared "unsustainable" include, but are not limited to, Harvard University, Cornell University, Dartmouth College and Georgetown University. Christian colleges Azusa Pacific University, Baylor University, Palm Beach Atlantic University and Regent University also made the unsustainable list. Some of the "at risk" institutions include Wheaton College, Covenant College, Oklahoma Baptist University and Indiana Wesleyan University.

Notre Dame officials declined to comment on the study, but Lyon College President Don Weatherman said the report didn't tell him anything he did not already know.

The Batesville, Ark. school of 600 made it to the "unsustainable" list because its expense ratio climbed 36 percent while its equity ratio declined 11 percent, putting the school in the bottom 15 percent of colleges surveyed.

Even with an annual contribution of $1million per year from a single faithful donor, the school was in the red $1.5 million when Weatherman became president in 2009. The financial troubles began in the 1980's when the school began drawing from its $40 million endowment fund to cover operating expenses. Since 1994, the institution has drained $75 million from its endowment just to pay the bills.

In order to bring expenses in line with income, Weatherman cut one degree program and turned another into a minor. Administrative expenses decreased from 35 percent in 2007 to less than 20 percent this year. As a result of its healthier bottom line, the U.S. Department of Education gave the school an improved rating and removed it from the department's "watch list" for financial solvency.

"We are out of the business of borrowing money," Weatherman said. "We are in much better shape than we were three years ago."

Although the report accurately captured Lyon College's current situation, it doesn't account for improvements in the school's financial management, Weatherman said.

A spokesman for Hendrix College, a United Methodist Church-affiliated school listed as "at risk" by Bain and Sterling, also noted the report did not take into account quantifiable and intangible markers. The school recently received an A- rating from Standard and Poor's, one of the agencies investors use to determine an institution's financial stability. The S&P ranking proves the school's not in the dire situation suggested by the Bain and Sterling report, Communications Director Rob O'Connor said in a prepared statement: "Data that is not part of the report gives us reason to be upbeat about the college's financial stability and its future."

Although Hendrix College, a liberal arts school in Conway, Ark., showed a decrease in expense ratio of 12 percent, its equity ratio declined by almost as much--11 percent. The decline put the school "at risk" of financial unsustainability, according to the report. But the school of 1,400 boasts a healthy endowment of $99,509 per student.

The school's successful $100 million fundraising campaign also flies in the face of the Bain and Sterling financial assessment, O'Connor contended. The campaign financed capital improvements, supplemented institutional financial aid, and contributed to an academic endowment, all of which are "prudent investments for our long-term progress and future stability," O'Connor said.

Schools that got an unfavorable ranking in the Bain and Sterling report insist the analysis doesn't tell the whole story. And those ruled "financially sound" agree the business model approach lacks context, even as they benefit from other school's financial difficulties.

In a state where the future of higher education does not look so bright, one small California college can't build fast enough to keep up with demand. William Jessup University (WJU), an evangelical liberal arts college just outside Sacramento, was among the 40 percent of schools judged "financially sound" by Bain and Sterling.

"We are very sympathetic to what our brothers and sisters in higher education are going through," said Eric Hogue, WJU vice president for development.

Shortfalls in state funding have led to tuition increases, faculty shortages, and reductions in new student acceptance rates in the University of California (UC) and California State Systems, leaving some students in the lurch. Nine of the 10 UC schools surveyed by Bain and Sterling received an unsustainable or at risk ranking. UC San Francisco was not included in the study.

In a climate where students don't know from year to year what they will pay in tuition or whether they will get accepted into one of California's state universities, private schools like WJU look more appealing. WJU's enrollment has doubled to 1,125 in the past two years, forcing the school to lease hotel space off campus this semester for some of its students. With the Board of Trustees' anticipated approval, the school will break ground this fall on a $15 million, 210-bed residence hall. This fall the school opened 54,000 square foot of facilities including a dining hall, gym, classrooms and music rehearsal rooms at a cost of $17 million.

WJU moved to its current location from San Jose in 2004, poured money into capital campaigns. In 2008 - the height of the economic downturn - the school reduced tuition by two percent. At the same time, WJU managed to reduce its expense ratio by 17 percent and increase its equity ratio by 10 percent, between 2006 and 2010, according to Bain and Sterling.

The school has a relatively small endowment fund of $1,971 per full-time student.

Representatives from Lyon College, Hendrix College and WJU would not speculate as to how Bain and Sterling calculated the expense and equity ratios. But they all agreed the report lacked context. Rating a school based on a limited time frame - and a difficult economic timeframe, at that - can give a skewed perspective of a school's fiscal bottom line, said Gene De Young, WJU's vice president for finance and administration: "That's the challenge of these reports."