Kappler: higher education financial trends

cliffWith all the news about college graduates having student loan debt problems, it appear that some colleges are running into financial difficulty, and even closing their doors. Jim Kappler recently sent the following information to Anderson County legislators that summarizes the financial sustainability of 1700 colleges and universities in the United States, including 32 in South Carolina. Jim also prepared a graph and table that show the financial trend of the SC colleges mentioned in the report.

Anderson County Legislators,

The information presented below about colleges having financial trouble, including several in South Carolina, brings up the following questions that you will likely have consider as legislators, if the trends presented come to pass:

* Colleges have closed in other states from financial difficulty. What is the likelihood of any South Carolina college or university having its finances deteriorate to the point where it will have to close?

* What is the likelihood of a South Carolina college asking for a “bailout” from the General Assembly?

* Is any South Carolina college or university “too big to fail”, and would the General Assembly “bail out” that college, or let its doors close?

* What would be the impact on the SC higher education system and taxpayers of having the entire student enrollment of a failed college transferring to other SC colleges? How would other SC colleges accommodate this?

* If a college closed, how would this impact the local area businesses that rely on that college for employee training and education?

Why some small colleges are in big trouble
http://www.bostonglobe.com/magazine/2013/04/13/are-small-private-colleges-trouble/ndlYSWVGFAUjYVVWkqnjfK/story.html
(Excerpt)
In an analysis of the financial records of 1,700 US colleges and universities, the Boston-based consulting firm Bain & Company estimated that one-third of them were on an unsustainable financial path, with operating costs increasing faster than endowment returns and other revenues could cover them. This is  a problem the colleges can no longer solve, as they once did, by simply increasing tuition.

Analysis of the financial records of 1,700 US colleges and universities
http://www.bain.com/Images/BAIN_BRIEF_The_financially_sustainable_university.pdf
(Excerpt- List of trouble signs for a college or university at financial risk)
You might be at risk if….
1. You are not a top-ranked institution
• Your admissions yield has fallen and it’s costing you more to attract students
• Median salaries for your graduates have been fl at over a number of years
• Your endowment is in the millions not billions, and a large percentage is restricted

2. Your financial statements don’t look as good as they used to
• Your debt expense has been increasing far more rapidly than your instruction expense
• Your property, plant and equipment (PP&E) asset is increasing faster than your revenue
• You have seen a decline in net tuition revenue
• Tuition represents an increasingly greater percentage of your revenue
• Your bond rating has gone down
• You are having trouble accessing the same level of government funding

3. You have had to take drastic measures
• You are consistently hiking tuition to the top end of the range
• You have had to lower admissions standards
• You have had to cut back on financial aid
• You have reduced your faculty head count

Interactive point and click matrix showing financial trends of colleges and universities
(Additional images showing SC colleges below)
http://www.thesustainableuniversity.com/
(Excerpt)
This matrix is a trend analysis, displaying the direction of the higher education industry’s macroeconomic health.

The matrix displays the trend of each institution’s financial sustainability, using views of the institution’s balance sheet (equity ratio) and income statement (expense ratio) to indicate whether an institution’s financial position is getting stronger or weaker. The financial sustainability of institutions in the upper right (red) sections is deteriorating. The sustainability of institutions in the lower left (green) sections is improving.

The matrix does not represent an institution’s absolute financial position because it does not measure its starting point nor ending point. Instead, it shows, over a five-year period, whether these institutions were moving toward a more sustainable financial future or toward a less sustainable one.

The color coded image below shows the above table with 32 South Carolina colleges ranked as:
Green: These colleges and universities are financially sound according to the latest available data (41%)

Yellow: These colleges and universities are at risk of slipping into an unsustainable financial condition (25%)

Red: These colleges and universities have been on an unsustainable financial path in recent years (34%)

http://paycheckeconomics.files.wordpress.com/2013/04/sc-college-financial-trend-table.jpg
http://paycheckeconomics.files.wordpress.com/2013/04/sc-college-financial-trend-table.pdf

The graph shown below is a plot of each college’s Asset Ratio change vs. Expense Ratio change over the last few years. Areas on the graph are color coded Green (Sound or Improving), Yellow (at risk of deteriorating), and Red (not sustainable) as above to indicate how the colleges finances are trending.

http://paycheckeconomics.files.wordpress.com/2013/04/sc-college-financial-trend-graph.jpg
http://paycheckeconomics.files.wordpress.com/2013/04/sc-college-financial-trend-graph.pdf

Thank you for your time and consideration.