Safeguarding the interests of students - EY - US...In 2013, Harvard Business School Professor Clayton Christensen, known for his studies of disruptive innovation, predicted that “50%

May 2019 EY-Parthenon Education practice

Ernst & Young LLP

Safeguarding the interests of students:A new student-centered financial health metric for higher education institutions

Safeguarding the interests of students

EY-Parthenon

Table of contents

Executive summary ............................................................................................ 1

Part I: The problem ............................................................................................. 2

Part II: Current oversight and practices ................................................................ 5

Part III: A new metric ........................................................................................ 10

Part IV: Application of the SER metric ................................................................ 15

Conclusion ....................................................................................................... 18

Appendix 1 ...................................................................................................... 19

Appendix 2 ...................................................................................................... 22

A new student-centered financial health metric for higher education institutions

EY-Parthenon | III


EY-Parthenon

Executive summaryIn the midst of a period of heightened financial risk for institutions of higher education and following the closures and mergers of nearly a dozen schools each year in states across the country (and predictions that these figures will rise), the EY-Parthenon Higher Education team sought to better understand this challenge. This report discusses the key findings emerging from our research and analysis, and puts forward a new, student-centered metric to help higher education stakeholders, including presidents and boards, understand when their institutions are potentially facing financial difficulty and could be at risk of not meeting their educational obligations to students.

The report makes four key points:

• First, publicly available data indicates that many institutions across the US are in an increasingly precarious financial situation.

• Second, existing metrics and oversight alone may be insufficient to safeguard the interests of students in these changing times.

• Third, a new diagnostic tool may complement other metrics through earlier identification of institutions that could be at risk of being unable to meet their obligations to students.

• And finally, key stakeholders — boards and leadership of institutions of higher education, accreditors, and state departments and boards of higher education — could leverage this tool to work together and improve policies, oversight, and institutional decision-making. Surfacing and discussing challenges in a potentially earlier time frame could allow more time for institutions to develop and execute plans to meet their promise to students on their own or, in the event a stand-alone solution cannot be identified, to pursue a strategic alliance or a strategic exit in a manner that safeguards the interests of students.

This report focuses on private, nonprofit, four-year institutions. While a broader study could certainly be conducted, this segment of the higher education landscape has, over recent years, seen an uptick in closures and consolidations, and thus warrants particular focus.


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Part I: The problem Many higher education institutions are in an increasingly precarious financial situation, potentially putting students at risk.

In 2013, Harvard Business School Professor Clayton Christensen, known for his studies of disruptive innovation, predicted that “50% of the 4,000 colleges and universities in the U.S. will be bankrupt in the next 10 to 15 years.”i While reality has so far been less stark than the prediction, there is mounting evidence of a problem brewing in higher education. In July of 2018, Moody’s Investors Service, a leading Wall Street bond rating company, released a report predicting a tripling of the number of closures of private nonprofit institutions in the coming years compared to the average of the last decade.ii

The country has seen an uptick in closure and merger activity: from 2010 to 2018, the US has seen approximately 54 institutions close (and approximately 82 mergers), while the current decade looks to average over 10 closures per year.iii That this much activity has already occurred is, in some ways, unsurprising: private institutions tend to be at greater risk of closure — they are, on average, smaller and more tuition-dependent than public institutions. Four-year private, nonprofit colleges and universities (hereafter referred to as nonprofit institutions of higher education or NPIHEs) account for 3.7 million students or 32% of all students who attend four-year institutions. The number of NPIHEs actually grew after the 2008 recession, when there was increased demand for higher education amid more limited job opportunities. Before the recession, the US had 1,536 Title IV participating four-year NPIHEs (2008); this increased to a high of 1,606 by 2015, but has subsequently fallen to 1,587 as of 2017. Overall enrollment has begun to decline since the recession, but NPIHEs have been affected differently based on their size. Large NPIHEs with enrollment of 10,000 held flat from 2011 to 2017, while small NPIHEs with under 1,000 students saw the greatest annual enrollment declines at -1.6% annually.iv

Analysis of a number of publicly available metrics indicates that anywhere from one-quarter to over one-third of NPIHEs in the country show some signs of financial stress. The following statistics summarize the state of NPIHEs nationwide:

• 31% saw cumulative decreases in fall enrollment greater than 10% during FY2012 to FY2017, up from 14% of NPIHEs during the prior five- year period.v

• 40% saw expense growth increase by five percentage points or more above revenue growth from 2012 to 2017.vi

• 25% received a C- or below on the Forbes Financial Grades list in 2017.vii

• 35% saw a decline in their average U.S. Department of Education Financial Responsibility Composite Score in the five-year period ending in 2017 vs. the five-year period ending in 2012 .viii

• 10% received a U.S. Department of Education Financial Responsibility Composite Score of 1.5 or below in 2017.ix

-1.0 0 1.0 2.0 3.0

-1.0 to 0.9 — Institution is financially irresponsible

-1.0 to 1.4 — Institution flagged for monitoring -1.5 to 3.0 — Institution is financially responsible

Figure 1: Department of Education financial responsibility composite score scale

Source: U.S. Department of Education


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Moreover, the demographic drivers that are contributing to this financial instability show few signs of slowing. One of the most significant factors contributing to financial difficulty among institutions is a decline in the number of domestic students of traditional college age. As shown in Figure 2, the number of high school graduates is projected to decline by over 6% nationally by 2030.

This demographic challenge is especially acute in New England, where the number of high school graduates is projected to decline by approximately 25% by 2030 from the peak in 2007. Given that 47% of higher education enrollees in New England attend a NPIHE, the highest of all regions, and many hail from within the region, this decline could have a significant impact on all New England schools. It may also have a disproportionate effect on small NPIHEs, which generally serve “traditional” students in the 18-to-24 age range and typically have a more local enrollment catchment area than the larger, more research-intensive NPIHEs. Other regions, however, look likely to fare significantly better, as the pipeline of high school students is growing in the states served by the Northwest and Southern regional accreditors (growing by 26% and 32% by 2026, respectively). States served by the Middle States, North Central, and Western regional accrediting organizations will see the high school graduate population remain relatively steady over the next decade, after which they will see some declines in the high school graduate population.xi

Figure 2: Total public and private high school graduates in the United States, by accrediting region, indexed to 2005 (2005–32F)

Source: Western Interstate Commission for Higher Education: Knocking at the College Door: Projections of High School Graduates, December 2016

0.00

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2005

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Southern Association ofColleges and Schools

Northwest Commission onColleges and Universities

Reported Counts of HighSchool Graduates (National)Western Association ofSchools and Colleges

Higher Learning Commission

New England Commissionon Higher Education

Great Recession Great RecessionBirth Dip

Middle States Commissionon Higher Education

The Department of Education Financial Responsibility Composite score (DOE Score) is a composite of three ratios derived from an institution’s audited financial statements. The three ratios are a primary reserve ratio, an equity ratio, and a net income ratio. The composite score reflects the overall financial health of institutions along a scale from -1 to +3. As seen in Figure 1, a score of -1.0 to .9 indicates that an institution is financially irresponsible, while a score of 1.0 to 1.4 flags an institution for monitoring. A score of 1.5 to 3.0 is considered financially responsible. A school that is considered “not financially responsible” can continue to participate in Title IV funding programs under provisional certificate, but it is subject to cash-monitoring requirements. x


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On the other hand, international enrollment may moderate some of the regional demographic trends. For example, New England has historically benefited from a steady enrollment of international students — and unlike other regions of the country — New England has been more resilient against the recent downturn in international student enrollment. Conversely, the Southern and Northwest regions saw some of the highest declines in international enrollment in 2017.xii Institutions in these regions also serve more diverse age groups and have a generally low percentage of students attending NPIHEs. Table 1 in the Appendix shows that less than 14% of students in the Southern and Northwest regions attend NPIHEs, indicating that NPIHEs do not necessarily benefit from their regions’ youth population growth.

Figure 3: Potential impact of closures on students

Sources: Boston Globe, Fox 42 KPTM, Oregon Public Broadcasting, ABC 10News, Patch, Newsday, BSU Daily News, VT Digger, Boston Herald, Boston Business Journal

Given the changing population, some level of reduction in the overall seat capacity to serve students, especially in some parts of the country, may be inevitable. With that in mind, it is likely prudent for institutions that may not be able to safeguard the interests of their students on a stand-alone basis to consider other paths to continuing their mission. This could include partnerships, alliances, or mergers, or, in the extreme, closing responsibly and with dignity. When schools close — and particularly when they close suddenly — it can lead to a number of damaging consequences for students, as highlighted in Figure 3. The question, then, becomes how to better protect these students and make sure that they and their families can make informed choices in this ever-shifting landscape.

Potential impact of closures on students

Financial loss Time wasted Inconvenient location

“ She was offered several lucrative scholarships, which is why we decided on that school. Other programs are going to cost us up to $17k more a year.” — Parent of freshman at closing

institution, Patch (2016)

“ As freshmen, we thought we’d be done filling out college applications, and now we have to go back and fill out more.” — Freshman at closing New York

institution, on-campus newspaper (2017)

“ Students will be automatically accepted for fall enrollment at [another institution] more than 50 miles away.”— National newspaper (2018)

Negative effect on resume Loss of personal fit Specialized majors unavailable

“ I wonder if my degree will still be valid [when the school closes].” — Senior at closing institution,

Newsday (2016)

“ [Other schools] didn’t fit me because I was working. This school was flexible and we had a lot of support here.” — Student at closing institution,

local newspaper (2016)

“ I chose [this school] because it was the best school for my major, and now I am left without an institution.”— City business journal (2018)


4 | EY-Parthenon

Part II: Current oversight and practices Current oversight and metrics alone may be insufficient to safeguard the interests of students in these changing times.

Oversight of NPIHEs involves four main entities, with varying levels of interactions, illustrated in Figure 4. At the institution level, the Board of Trustees is responsible for setting the mission and directing the institution toward fulfilling that mission. Within this broad mandate, the board’s purview includes responsibilities such as providing financial monitoring and stewardship, selecting the president, fundraising and approving key policies.

The U.S. Department of Education (DOE) primarily focuses on federal student financial aid, such as Pell grants. The

DOE also produces the Financial Responsibility Composite Score. This score was intended as a way for institutions to demonstrate that they are maintaining the standards of financial responsibility necessary to participate in Title IV federal financial aid funds.xiii Over time, the U.S. Department of Education’s Financial Responsibility Composite Score (henceforth referred to as DOE Score) has evolved into a metric that is frequently considered by accreditors and states alike as part of an overall assessment of the financial health of institutions under

Figure 4: Oversight entities

Note: As a general rule, accreditors require institutional teach-out plans during closure and withdrawal of accredited status following two years of probation for financial risk. Source: EY-Parthenon interviews and analysis

Institution

Administration

Board

StateFocus: consumer/

student protection

Department of Higher Education

Attorney General

Consumer Affairs

AccreditorsFocus: education qualityand institutional mission

Regional

National

Programmatic and Specialized

U.S. Department of EducationFocus: student financial aid

Office of Federal Student Aid

Accreditation group, supported by the National Advisory Committee on Institutional Quality and Integrity (NACIQI)

Limited interactions

Frequentinteractions and bilateral

communications

Varies by state agency based on mandate


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their purview. Accreditors also have fairly frequent interaction both with the DOE and with the institutions themselves. There are six regional accrediting bodies across the United States, though there also exist national and specialized program accreditors. Regional accreditors focus on ensuring that institutions maintain education quality and an ability to meet their missions — accreditors have the power to deny accreditation status and apply sanctions to institutions that fail to meet these standards. Almost all consider the DOE Score as part of their financial review xiv of schools, but also carry out a holistic review of institutions’ financial position (which can involve reviewing a range of financial documents rather than putting stock in a single score) to determine, on a periodic basis, whether institutions have the resources to fulfill their missions. Additionally, some accreditors use the Composite Financial Index (CFI), or a modification of it, to examine institutional financial health and flag schools that might be of concern.xv

Accreditors play different roles throughout the life cycle of an institution (as displayed in Figure 5). Regional accreditors typically coordinate with the NPIHE’s governing body (trustees) and leadership to understand, among the many different issues to which they pay attention, whether there are any challenges related to enrollment and overall financial health. Accreditors require schools to assemble plans to address these risks if identified (though if the challenges are not proactively raised by school leadership, they may be identified only through fairly infrequent data submissions). Most accreditors do not rely on any single specific metric, which means there is significant variation in how to identify and address serious financial issues. Accreditors also report that they typically do not raise financial issues with other entities (state or federal) until late in the process, when they must withdraw accreditation or a school must close.

Figure 5: Sample oversight practices

Source: EY-Parthenon interviews and analysis

Accrediting bodiesRole in financial health assessment of institutions

Regular review

Closure andteach out

Monitoringhigher risk

IHEs

• Analyze annual IHE data submission, considering relevant financial metrics (e.g., CFI, DOE Score)

• “Holistic review” evaluation based on professional judgment of all available facts and context

• Follow-up with institution to gather additional data or site visits, as needed

• Create report on cause for concern, where accreditation is withdrawn by set date if no evidence of improvement

• Institution responds with plan to address concerns

• Follow-up actions include: • Accreditor reviews new information • Guidance or training if desired • Further sanctions as necessary • Withdrawal of accreditation period

after exceeding the maximum probation period

• Teach-out plan review and approval based on established criteria

• Continued engagement: • Accreditor monitors closing process • Ensures transfer of student records • Reviews plans for disposal of assets • Intervenes if necessary to support

teach-out agreement process across institutions


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Finally, the fourth relevant set of entities are at the state level and can encompass the departments of higher education and their boards, as well as the attorney general’s office. These entities are largely focused on student and consumer protection, but levels of oversight over private nonprofit higher education differ by state. To help states consider their approaches going forward, this report offers an overview of existing practices at some example states, as summarized in Figure 6.

Based on this sampling of states, some states have broad oversight over private institutions, while in other states there are a number of institutions exempt from jurisdiction of the state department of higher education based on religious mission, years of good standing, or characteristics of the charter. States also differ in terms

of their relationships with accrediting bodies — while some coordinate fairly closely with accreditors and are aware of their oversight practices, others generally do not coordinate with accreditors unless a school has begun to enter closure proceedings. Finally, states have access to a number of oversight practices, which could include reviewing the annual report of schools, authorizing and reauthorizing institutions or programs, approving new programs, and setting eligibility requirements for state financial aid. Some of these available oversight practices could help states better monitor institutional financial health (e.g., setting eligibility requirements for institutions to access state-funded student financial aid, which could include providing additional financial transparency to the state).

Figure 6: Sample state oversight practices

Note: “Oversight” reflects assessment of breadth of private institutions covered by state oversight (e.g., how many are exempt) and level of oversight practices.Source: EY-Parthenon analysis and primary research

These findings are based on a select sample of states with relatively high concentrations of private institutions. EY-Parthenon conducted phone interviews with representatives from the departments ofhigher education in these states to understand the varying levels of state oversight and enforcement.

Massachusetts New York Virginia

Oversightpractices

Review annual report

Authorize institutions andprovide licensure

Approve programs

School eligibility requirementsfor financial aid

Reauthorize institutionsor programs

Ohio South Carolina Virginia


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issues of financial difficulty in only 50% of cases — and even then, only one to two years prior to closure. Crucially, four years before the schools closed (when students were applying and making their decisions about which school to attend), almost none of these institutions had a DOE Score that would have fallen into the territory of “financially irresponsible” or even “flagged for monitoring.” Instead, according to the analysis, the DOE Scores suggested that these schools were “financially responsible,” even though they were ultimately unable to fulfill their four-year commitment to most of the students they were admitting at the time.

Ultimately, when it comes to safeguarding student interests and notifying them when a school may be in financial difficulty, it is not clear that the responsibilities of these four entities — federal, regional accreditors, state or institutional boards — are clearly delineated. Even if they were, the metrics that are typically used to evaluate financial sustainability today may be insufficient alone to flag risk in a timely manner, as exhibited in Figure 7. An analysis of a sample of recently closed or financially struggling institutions suggests that the DOE Score, which is typically considered by states and accreditors, flagged


8 | EY-Parthenon

Figure 7: DOE Scores for previously closed/financially distressed and probationary IHEs

Note: Financially distressed or probationary NPIHEs have been flagged by accreditors for probation or monitoring. Source: Integrated Postsecondary Education Data System (IPEDS); Inside Higher Education, “Too Late for a Fix?,” August 8, 2018; Inside Higher Education, “2 New England Colleges Placed on Probation,” August 22, 2018

DOE financial responsibility composite score

–1.0 to 0.9 = Not financially responsible 1.0 to 1.4 = Flagged for monitoring 1.5 to 3.0 = Financially responsible

Institutions only 50% of cases. StateDate

closed2017

DOE Score2013

DOE Score

Sample of previously closed IHEs

Dowling College NY August 2016 Already closed 1.9

Saint Joseph’s College IN February 2017 Already closed 2.2

Grace University NE May 2018 1.7 2.0

Mount Ida College MA May 2018 0.8 1.8

Marylhurst University OR August 2018 2.2 2.2

Coleman University CA August 2018 2.3 3.0

Newbury College MA May 2019 1.8 2.7

Financially distressed or probationary IHEs*

The College of New Rochelle NY Announced closure 1.8 1.8

College of St. Joseph VT Announced closure 1.4 2.5

Green Mountain College VT Announced closure 1.3 1.5

Memphis College of Art TN Announced closure 1.9 2.8

Southern Vermont College VT Announced closure 2.3 2.7

DOE Scores 1–2 years before closure suggested financial issues in only 50% of cases

The DOE Score four years before closure did not suggest issues, which is crucial as this is when students are making their college choice.

•

Already closing High and moderate risk Low risk

Select individual institutions Limited group Majority of institutions

• State-dependent, but in most states, schools must follow the Department of Higher Education regulations, which could include: • Submit notice of closure and associated fees as far in advance as possible

• Get student educational resources metric plan approved

• Ensure preservation of student records

• How can states and accreditors: • Identify these schools? • Appropriately engage these higher risk institutions to safeguard the interests of students?

• No additional responsibilities

Ove

rsig

ht t

o sa

fegu

ard

stud

ents

High risk of closure due to financial health

Financially capable of meeting obligations to studentsIn closure

Figure 8: Spectrum of institutional financial health status

Source: EY-Parthenon interviews


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There are several reasons why the DOE Score alone may be unable to adequately flag financial risk:

• It is a lagging metric, utilizing data that may take time to show signs of distress.

• It is somewhat vulnerable to manipulation. For example, a sale of institutional real estate during a financial cycle (e.g., fiscal year) or taking out loans to provide liquidity before immediately repaying them are potential ways to avoid falling below problematic DOE thresholds.

• Unrelated to the DOE Score methodology, some accreditors also only “flag” a school that has fallen below the threshold for multiple years in a row, creating unintended incentives for schools to get just over the threshold in the years directly following ones where they have fallen below.

The current situation presents a conundrum for those who want to better protect students from the harms of closure discussed earlier. States and accrediting bodies do not necessarily have regulations that proactively protect students when institutions are financially challenged, and

the extent of communication among the entities (and who bears the burden of communication) is often not clear. At best, these policies often just result in a probationary period, which may or may not be communicated to students and families. But even if states and accrediting bodies had more proactive policies, the metrics traditionally used to verify that colleges are in good financial health demonstrate a lag and do not give enough warning to students and families that they may be attending or planning to attend an institution with a risk of closure.

States across the country are attentive to this challenge. In Figure 8, the role of the state when it comes to outright closures is clear — in most states, there are state regulations that lay out what the state’s responsibilities are when a college is closing.xvi Additionally, the state likely does not need or want to add regulatory burden to the schools that are at a very low risk of financial difficulty — the majority of private nonprofit schools today. But the group in the middle — schools that may be at higher risk of closure due to financial health — is the one that raises the most questions about the collective role of state departments and regional accreditors.

Part III: A new metric A new diagnostic tool may identify — earlier than existing metrics — institutions that are at risk of being unable to meet their obligations to students.

The metrics currently used, such as the DOE Score, to monitor the fiscal health and viability of NPIHEs utilize data and can be susceptible to manipulation. They are also focused on institutional characteristics, not the potential impact on students. As state policymakers and accreditors continue to think about their role in a higher education landscape where the risk of school closure is increasing, a metric that puts students at the forefront may be worth consideration.

This report introduces the concept of a Student Educational Resources (SER) metric, a screening metric that helps assess when an institution’s financial challenges reach an extent that could cause the institution in question to not be able to deliver on the “promise” made to students upon matriculation. The Student Educational Resources metric assesses a four-year institution’s ability to provide the resources required to allow currently admitted and enrolled students to complete their degrees within a reasonable time frame at that institution. It asks a simple question: given its revenue, cost structure, assets and financial obligations, can the institution teach its current students all the way through graduation? This concept could also be thought of as a “teach-out.”

The concept of a “teach-out” carries a very specific meaning in the higher education regulatory and accreditation space. Federal, state and accrediting bodies often require schools to develop a teach-out plan for students when they are faced with closure. A teach-out plan generally means that schools need to ensure that students have access to reasonably similar programs, which they can complete in a reasonable timeline.xvii The plan must also include provisions for continuing to provide the necessary academic support services to students. Most schools faced with closure will create a teach-out agreement with a nearby institution rather than host the teach-out on their own campus. For the purposes of the SER metric, we are using the term “teach-out” in a much broader sense. We look at whether schools can continue to teach their students over a reasonable period of time to get them to graduation (for the purposes of the analysis, we assume that this would be a period of four years for a matriculating student and proportionately less for remaining students). It is important to note that the SER metric does not represent or recommend an actual teach-out plan for institutions, nor does it assume that any institution will actually find itself in a situation where it needs to teach out students. Rather, it analyzes a hypothetical scenario in which an institution terminates enrollment of new students at a given point in time.


10 | EY-Parthenon

Preliminary analysis conducted with the SER metric indicates that it could have promise as an additional proactive screening metric for NPIHEs. It appears to offer a number of benefits:

• First, the SER metric can identify potential financial stress early. Based on analysis of the same sample of recently closed institutions and institutions in probationary status, the SER metric indicates the majority of these schools as potentially at risk, and does so about 3 to 4 years earlier than the DOE Score would have.

• Second, the SER metric is intuitively understandable. The metric indicates that institutions with operating profits and/or significant assets are generally more stable than those with operating deficits, low assets or high reliance on onetime gifts — a potentially more intuitive way of understanding financial issues than the more complex ratios that are often used.

• Third, the SER metric also has a very specific purpose: it is intended to be an assessment of where institutions are today in terms of their ability to support the cost of educating their students. It is meant to address one specific question (“Can an institution teach its current

students all the way through graduation?”), rather than analyzing all aspects of financial health. The metric is not meant to be a forecast of which institutions might fail in the future. Instead, it could be used by policymakers and accreditors as a screening tool to help identify institutions with which they should be holding additional discussions about existing financial challenges and potential plans to remedy the situation. It may be that these institutions have clear and reasonable financial plans. The SER metric does not actually assess the likelihood that any institution’s specific plan will work. It is simply intended to serve as a trigger, or early warning indicator, that occurs early enough in the process to make the very creation and execution of potential plans more viable.

• Fourth, the metric aligns with the general focus of states: to prevent disruption to students.


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The SER metric uses a series of assumptions about an institution’s changing enrollment, revenue, expenses and assets over the period of a four-year teach-out, as visualized in Figure 9. These assumptions have thus far been evaluated with several private nonprofit institution CFOs, and have been refined based on their insights. At this point in time, the SER metric is calculated using publicly available IPEDS data on each institution. As such, the analysis undergirding the metric holds all schools to the same standard of having to meet their obligations to all their current students.

As states and accreditors consider how to safeguard the interests of students in a new age of higher education, the SER metric can be a potentially more effective screening

tool and early-warning indicator than current published metrics, as illustrated in Figure 10. Utilizing the same sample of recently closed schools, the SER metric flagged signs of financial difficulty among this group in almost all instances, and, in most cases, several years before the DOE Score. This means that states and accrediting bodies would have had more notice and time to engage with schools to assist in creating plans that could better safeguard the interests of students.

Initial analysis of the SER metric suggests that schools around the country will likely fall into four main categories based on their ability to fully cover a four-year student educational resources metric, as seen in Figure 11.

Figure 9: Overview of the SER metric

Source: EY-Parthenon analysis; SER metric

Year 1 Year 2 Year 3 Year 4Enrollment and associated revenue decrease as students graduate or leave.

Tuition and fees, educational, and auxiliary revenue for undergraduate enrollment

Other revenues decline faster than enrollment.

Contracts/grants

Private gifts

Graduate revenue

Investment revenue

Some expenses are linked to enrollment more than others.

Instruction

Student support

Benefits

Some expenses cannot be reduced until full closure.

Property, plant and equipment (PP&E)

Increasing losses can be funded by available (liquid) assets. Available assets

Rev

enue

Expe

nses

Asse

ts

Diminishing resources over time

Fewer resources

More resources


12 | EY-Parthenon

Figure 10: The SER metric applied to previously closed or financially distressed or probationary IHEs

Note: Financially distressed or probationary NPIHEs have been flagged by accreditors for probation or monitoring. *Marylhurst University generates an operating surplus per student, so the model predicts high levels of teach-out capability.° Coleman did not report a DOE score in 2013; score is from 2012. ‡ The College of New Rochelle did not report a score in 2017; score is from 2016.Source: Integrated Postsecondary Education Data System (IPEDS); Inside Higher Education, “Too Late for a Fix?,” August 8, 2018; Inside Higher Education, “2 New England Colleges Placed on Probation,” August 22, 2018


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DOE financial responsibility composite score–1.0 to 0.9 = Not financially responsible 1.0 to 1.4 = Flagged for monitoring 1.5 to 3.0 = Financially responsible

A SER “warning” is defined as less than

125% of teach-out covered. State

Date closed

2017 DOE Score

2013 DOE Score

DOE Score — fiscal year of SER warning

Fiscal year of SER warning

Previously closed IHEs

Dowling College NY August 2016

Already closed 1.9 1.3 2012

Saint Joseph’s College IN February 2017

Already closed 2.2 2.2 2013

Grace University NE May 2018 1.7 2.0 1.6 2014

Mount Ida College MA May 2018 0.8 1.8 1.5 2012

Marylhurst University* OR August 2018 2.2 2.2 N/A N/A

Coleman University° CA August 2018 2.3 3.0 1.2 2016

Newbury College MA May 2019 1.8 2.7 2.6 2014

Financially distressed or probationary IHEs

The College of New Rochelle ‡ NY Announced closure 1.8 1.8 1.8 2016

College of St. Joseph VT Announced closure 1.4 2.5 2.2 2016

Green Mountain College VT Announced closure 1.3 1.5 1.5 2012

Memphis College of Art TN Announced closure 1.9 2.8 2.1 2016

Southern Vermont College VT Announced closure 2.3 2.7 2.7 2013

Like the DOE scores, SER warning status lags due to reliance on publicly available data. If schools reported data earlier, then the SER metric could catch distressed schools even earlier.

•

The point, ultimately, is that the SER metric is just one part of a larger solution. It could feed into a broader, more holistic process for states and accrediting bodies to engage more deeply with NPIHEs. Analysis of the SER metric, as applied to all NPIHEs in the US, helps to create a picture of the characteristics of schools that may be at risk. As seen in Figure 12, the schools in the “highest risk” segment are generally smaller, have declining enrollment with a lower endowment per student, and higher liabilities as a percent

of assets. Perhaps of greatest concern, “highest risk” schools enroll a disproportionate number of students (as share of total students) who receive Pell Grants. By federal rules, these students can access their Pell Grant money for only 12 semesters, which raises the importance of seamless postsecondary pathways for these students. They may also have access to fewer financial resources if their school closes abruptly. This reality highlights the importance of placing students first and protecting their future.

Figure 11: SER metric risk categories

Source: EY-Parthenon analysis; SER metric

Risk category

Percentage of four-year teach-out costs covered Description

Low risk 125% or more These institutions can cover 125% or more of four-year teach-out costs according to the analysis. Given their substantial assets and sustainable operating model, these schools show reduced risk of being unable to meet their obligations to students.

Moderate risk 75–124% Though analysis indicates these institutions exhibit some risk to meeting their full, multiyear obligation to all students, they are able to cover between 75% to 124% of teach-out costs, which is enough to establish, meet or revise plans that could either dramatically improve their financial position or proactively protect students (e.g., by having the students complete their degree at a nearby institution in stronger financial standing).

High risk 25–74% These schools are assessed at high risk of being unable to teach out their current students, as analysis indicates they can cover 25% to 74% of teach-out costs in their current financial situation.

Highest risk <25% Schools in the highest risk category are only able to cover 0 to 24% of teach-out costs according to the analysis.


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Figure 12: Characteristics of schools in SER metric categories

Note: All sample sizes are greater than 60 institutions; schools without undergraduate students or with no recorded first-time enrollment have been removed from this analysis, which also excludes two-year institutions. Source: IPEDS; SER metric

Student educational resources metric risk category

Descriptive characteristics Highest risk 4% of institutions

High risk 16% of institutions

Moderate risk 15% of institutions

Low risk 65% of institutions

Average size 960 2,500 3,500 3,300

Average acceptance rate 73% 71% 68% 63%

Average annual enrollment growth (2006–17) -1.6% 0.9% 0.4% 0.6%

Median endowment/FTE student $0 $6,500 $15,000 $26,700

First-time students awarded Pell Grants (median) 51% 41% 34% 33%

Liabilities as a percent of total assets 55% 42% 36% 28%

Part IV: Application of the SER metricThe SER metric has potential as a powerful screening tool to enable states and accrediting bodies to more effectively target resources.

These conceptual risk categories help to illustrate how the SER metric could be used as a screening tool. This kind of framework can help avoid a “one-size-fits-all” approach that might apply the same level of “intervention” to all schools regardless of the level of risk involved.

• For example, accreditors and states should have little need to further scrutinize the low-risk schools, as it is clear that these schools could meet their obligation to students. On the other hand, accreditors and/or states could ask high and perhaps moderate-risk schools to provide more recent data to assess their SER metric since publicly available IPEDS data has an 18-to-24-month lag. In that amount of time, it is certainly possible for some institutions to have developed and even begun implementing plans to improve financial sustainability and their ability to meet obligations to students. It is also possible for the SER metric to have worsened over this period of time. Even assuming that the data categories would be the same as what each school is already required to provide to IPEDS for federal reporting purposes, the value of calculating a more “real-time” SER metric for a subset of schools needs to be weighed against the potential additional burden on schools and accreditors/states of collecting and analyzing the data.

• The schools in the moderate-risk category present opportunity and need for further attention from the trustees and leadership of the schools to address what the financial future of their respective school may

look like. It is also the case that many schools may experience dips in their financial measures and be able to institute changes to their business models and finances such that they recover successfully. The SER metric does not attempt to adjudicate how successful these changes or plans would be, but merely identifies the potential need for conversation between NPIHEs, boards, accreditors and the state.

• Finally, schools in the high-risk, and certainly the highest-risk category likely warrant deeper and more urgent attention from states and accrediting bodies, given their potentially much more limited runway.

Each state has its own challenges and opportunities in the NPIHE landscape with unique regulatory environments for protecting students. Every regional accreditor has at least one state with a significant portion of students enrolled in institutions at the highest or high risk as determined by the SER metric, illustrated in Figure 13. New York, Indiana, Tennessee and Florida are among the highest in terms of the percentage of students enrolled in the highest or high risk NPIHEs. Many of these same states also have a high portion of institutions of higher education that are private nonprofits, as shown in Figure 14. While over 30 states have fewer than 10,000 students attending these institutions at highest and high risk, every state must still consider the implications of what happens if even just one institution must close abruptly.


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Figure 13: Percent of students enrolled in highest and high risk schools as a percent of total IHE enrollment

Source: IPEDS: SER metric

Note: Risky institutions include institutions that demonstrate medium or high risk on the TVMSource: IPEDS: TVM

Legend

0% 10%+Nationalaverage: 3%


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Figure 14: Percent of institutions that are NPIHEs by state vs. percent of students in highest and high risk institutions by state, 2017

Source: IPEDS: SER Metric

The SER metric offers a potential new way of approaching the issues discussed in this report, and could be part of a broader strategy to safeguard the interests of students. It focuses on students first, and is a relatively simple but powerful commentary on an institution’s ability to meet its obligation to current students. While there are many other factors that states and accrediting bodies may want to consider about an institution, the SER metric could offer a simple way to identify institutions where there is potentially greater risk for students.

0

20%

0 20 40 60 80%

Percent of total IHEs that are private nonprofit

Percent ofstudents

enrolled inhighest and

high riskschools

In this state 31% of higher education institutions are private nonprofits, with 5% of students enrolled in “risky” private nonprofit schools.

3%

National share of 4-year enrollment inhigh and highest IHEs

National share of IHEs that are private nonprofit28%


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18 | EY-Parthenon


Conclusion Given the apparent benefits of the SER metric, it is worth asking the question of whether this student-centered metric is one that could be seriously considered and one that warrants further study and investigation to fine-tune the metric for a state or accreditor’s needs. We hope that through this research and analysis we can inform a strong, robust dialogue among institutions, accreditors and state offices by shedding more light on the facts and current practices. In assessing the nature of the problem through this effort, it is clear that states across the nation are entering a new age of higher education. Institutions will be faced with many challenges, and some may ultimately need to merge, restructure or close. As institutions face these challenges, students and their interests will inevitably be at risk, posing the question of who will safeguard students’ interests and how this will be accomplished, as current metrics may be inadequate for the task. However, there is no one-size-fits-all solution here, and, as such, the next steps now begin for interested stakeholders to address complex questions such as:

• How can the interests of students best be safeguarded, and what can be done to help students and their families make informed choices in an ever-shifting landscape of higher education?

• How and when will states and accrediting bodies work together to identify schools that might be at high risk of closure due to financial health?

• How will these bodies work together to appropriately engage institutions at a higher level of risk to safeguard the interests of students?

• How will processes enable confidential conversations to take place between the institutions and accrediting or regulatory entities, to create sufficient space for plan development and evaluation, while also making sure that public interests are protected?

State Department of higher education Accreditor

# of students in higher education

% in private,

nonprofit IHEs

Alabama Alabama Commission on Higher Education Commission on Colleges of the Southern Association of Colleges and Schools 305,891 8%

Alaska Alaska Commission on Postsecondary Education

Northwest Commission on Colleges and Universities 29,655 2%

Arizona Arizona Commission for Postsecondary Education

North Central Association of Colleges and Schools 616,776 2%

Arkansas Arkansas Department of Higher Education North Central Association of Colleges and Schools 169,928 10%

California California Postsecondary Education Commission Western Association of Schools and Colleges 2,753,834 11%

Colorado Colorado Department of Higher Education North Central Association of Colleges and Schools 366,606 9%

Connecticut Connecticut Office of Higher Education New England Association of Schools and Colleges 208,085 35%

Delaware Delaware Higher Education Office, Delaware Department of Education

Middle States Commission on Higher Education 62,338 31%

DC Higher Education Licensure Commission Middle States Commission on Higher Education 93,604 84%

Florida Higher Education, Florida Department of Education

Commission on Colleges of the Southern Association of Colleges and Schools 1,127,665 18%

Georgia Board of Regents of the University System of Georgia

Commission on Colleges of the Southern Association of Colleges and Schools 539,288 14%

Hawaii Hawaii Post-Secondary Education Authorization Program Western Association of Schools and Colleges 66,190 15%

Idaho Idaho State Board of Education Northwest Commission on Colleges and Universities 125,092 39%

Illinois Illinois Board of Higher Education North Central Association of Colleges and Schools 788,696 28%

Indiana Indiana Commission for Higher Education North Central Association of Colleges and Schools 427,045 21%

Iowa Board of Regents, State of Iowa North Central Association of Colleges and Schools 268,178 20%

Kansas The Kansas Board of Regents North Central Association of Colleges and Schools 216,769 11%

Kentucky Kentucky Council on Postsecondary Education Commission on Colleges of the Southern Association of Colleges and Schools 261,622 17%

Louisiana Louisiana Board of Regents Commission on Colleges of the Southern Association of Colleges and Schools 250,600 11%

Appendix 1


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% in private,

nonprofit IHEs

Maine Higher Education, Maine Department of Education

New England Association of Schools and Colleges 73,161 31%

Maryland Maryland Higher Education Commission Middle States Commission on Higher Education 375,182 14%

Michigan Michigan Department of Education North Central Association of Colleges and Schools 594,895 15%

Minnesota Minnesota Office of Higher Education North Central Association of Colleges and Schools 424,637 17%

Mississippi Mississippi Board of Trustees of State Institutions of Higher Learning

Commission on Colleges of the Southern Association of Colleges and Schools 174,888 10%

Missouri Missouri Department of Higher Education North Central Association of Colleges and Schools 404,418 36%

Montana Montana University System and the Board of Regents


Nebraska Nebraska Coordinating Commission for Postsecondary Education (NCCPE)


Nevada Nevada System of Higher Education (NSHE) Northwest Commission on Colleges and Universities 119,439 4%

New Hampshire New Hampshire Higher Education Commission (NHHEC)


New Jersey New Jersey State of Higher Education (NJSHE)


New Mexico New Mexico Higher Education Department (NMHED)


New York New York State Education Department (NYSED)

Middle States Commission on Higher Education 1,302,646 41%

North Carolina North Carolina State Education Assistance Authority (NCSEAA) Southern Association of Colleges and Schools 567,993 17%

North Dakota North Dakota State Board of Higher Education (NDSBHE)


Ohio Ohio Department of Higher Education (ODHE) North Central Association of Colleges and Schools 675,629 21%

Oklahoma Oklahoma State Regents For Higher Education (OSRHE)



20 | EY-Parthenon



% in private,

nonprofit IHEs

Oregon Oregon Higher Education Coordinating Commission (OHECC)


Pennsylvania Pennsylvania State System of Higher Education (PSSHE)


Rhode Island Rhode Island Office of Higher Education (RIOHE)


South Carolina South Carolina Commission on Higher Education (SCCHE) Southern Association of Colleges and Schools 249,553 14%

South Dakota South Dakota Board of Regents (SDBR) North Central Association of Colleges and Schools 54,011 13%

Tennessee Tennessee Higher Education Commission & Student Assistance Corporation (THECSAC) Southern Association of Colleges and Schools 337,481 25%

Texas Texas Higher Education Coordinating Board (THECB) Southern Association of Colleges and Schools 1,634,582 9%

Utah Utah System of Higher Education (USHE) Northwest Commission on Colleges and Universities 326,765 40%

Vermont Vermont Higher Education Council (VHEC) New England Association of Schools and Colleges 44,843 42%

Virginia State Council of Higher Education for Virginia (SCHEV) Southern Association of Colleges and Schools 560,921 24%

Washington Washington Student Achievement Council (WSAC)


West Virginia West Virginia Higher Education Policy Commission (WVHEPC)


Wisconsin Wisconsin Department of Public Instruction (WDPI)


Wyoming Wyoming Community College Commission (WCCC)


Source: IPEDS


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Appendix 2

Glossary of terms

Auxiliary revenue: Revenues generated by or collected from the auxiliary enterprise operations of the institution that exist to furnish a service to students, faculty or staff, and that charge a fee that is directly related to, although not necessarily equal to, the cost of the service. Auxiliary enterprises are managed as essentially self-supporting activities. Examples are residence halls, food services, student health services, intercollegiate athletics, college unions, college stores and movie theaters.

Gifts: Revenues received from gift or contribution nonexchange transactions. These include bequests, promises to give (pledges), and income from funds held in irrevocable trusts or distributable at the direction of the trustees of the trusts.

Grants and contracts: Revenues from governmental agencies and nongovernmental parties that are for specific research projects, other types of programs or for general institutional operations (if not government appropriations). Examples include research projects, training programs, student financial assistance, Pell Grants and reimbursement costs for financial aid.

Instruction: Expenses of the colleges, schools, departments, and other instructional divisions of the institution and expenses for departmental research and public service that are not separately budgeted. These include general academic instruction, occupational and vocational instruction, and expenses for both credit and noncredit activities.

Investment revenue: Revenues derived from the institution’s investments, including investments of endowment funds.

Student support: Expenses for admissions, registrar activities, and activities whose primary purpose is to contribute to student’s emotional and physical well-being and to their intellectual, cultural and social development outside the context of the formal instructional program.

PP&E: Property, plant and equipment.

Unrestricted net assets: The net assets of both FASB and GASB institutions that do not fit the definition of other categories of net assets. These are net assets held by the institution upon which no restrictions have been placed by the donor or other party external to the institution.


22 | EY-Parthenon

Endnotes

i Abigail Hess, “Harvard Business School professor: Half of American colleges will be bankrupt in 10 to 15 years,” CNBC, 15 November 2017, https://www.cnbc.com/2017/11/15/hbs-professor-half-of-us-colleges-will-be-bankrupt-in-10-to-15-years.html.

ii Rick Seltzer, “Moody’s: Private-College Closures at 11 Per Year,” Inside Higher Ed, 25 July 2018, https://www.insidehighered.com/quicktakes/2018/07/25/moodys-private-college-closures-11-year.

iii EY-Parthenon Closures Database.

iv Integrated Postsecondary Education Data System (IPEDS).

v Ibid.

vi Ibid.

vii Matt Schifrin, “2017 College Financial Grades: How Fit Is Your School?,” Forbes, 2 August 2017, https://www.forbes.com/sites/schifrin/2017/08/02/2017-college-financial-grades-how-fit-is-your-school/#220e05957d68.

viii “Financial Responsibility Composite Scores,” Federal Student Aid: An Office of the U.S. Department of Education, https://studentaid.ed.gov/sa/about/data-center/school/composite-scores, accessed March 2019.

ix Ibid.

x Ibid.

xi Integrated Postsecondary Education Data System (IPEDS).

xii “Projections of High School Graduates Through 2032” Knocking at the College Door, Western Interstate Commission of Higher Education, https://knocking.wiche.edu/, accessed March 2019.

xiii “Financial Responsibility Composite Scores,” Federal Student Aid: An Office of the U.S. Department of Education, https://studentaid.ed.gov/sa/about/data-center/school/composite-scores, accessed March 2019.

xiv EY-Parthenon interviews.

xv Prager, Sealy & Co LLC, KPMG LLC, and Attain LLC, Update to the 7th Edition of Strategic Financial Analysis in Education (Prager, Sealy, & Co. LLC, KPMG LLC and Attain LLC, 2016).

xvi “Institutional Closure,” Massachusetts Department of Higher Education, http://www.mass.edu/foradmin/closures/home.asp, accessed March 2019.

xvii NECHE, “Policy on Teach-Out Plans and Teach-Out Agreements,” https://www.neche.org/wp-content/uploads/2018/12/Pp13a-Teach_Out_Plans_And_Agreements_Policy.pdf, July 2016.


EY-Parthenon | 23

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Authors

Kasia LundyManaging Director EY-Parthenon Ernst & Young LLP +1 617 478 [email protected]

Haven LaddManaging Director EY-Parthenon Ernst & Young LLP +1 617 478 [email protected]

Ali HuberlieSenior Consultant EY-Parthenon Ernst & Young LLP +1 617 478 [email protected]

Kelly O’Keefe Associate EY-Parthenon Ernst & Young LLP

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