State Colleges Face New Financial Stress Test

Source: Auditor of Public Accounts

The Virginia Auditor of Public Accounts has applied a nationally-recognized strategic financial analysis tool to Virginia’s fourteen public colleges and universities, revealing that only one – the University of Virginia – has a strong financial foundation and several are vulnerable to stress.

The work done by Eric Sandridge, Director of Higher Education Programs at the APA, was published in a full report in late October and was summarized in a presentation to the House Appropriations Committee on November 13.  It is the first of what are planned to be annual reports tracking the results over time, focused on the same kind of risk created for the state by stressed local governments.

The key composite financial index (CFI) he used has a ten-point scale. “A score close to one indicates that the institution may be very light on expendable resources and have difficulty meeting operating demands in the current environment,” Sandridge wrote in his main report. Longwood University, Christopher Newport University, Norfolk State University and the University of Mary Washington have all had recent years with a composite score of one or below.

A CFI score of three is considered healthy and of one is concerning. And then there is UVa. Source: APA

The College of William and Mary’s scores have only barely exceeded a one on this scale in recent years, but look far better when the financial resources held in its foundation are factored in. Several of the schools see better scores with their foundations included in the measurement. But not all have substantial endowments.

A score of three “generally indicates that an institution is financially healthy,” Sandridge wrote in his report. Even with their foundations included, eight of the fourteen schools miss that mark, although Radford University is close.

The University of Virginia is everybody’s rich uncle, to the point Sandridge pulls it out of some averages. VMI’s endowment is also off the charts for public schools of that size thanks to its loyal alums.

CFI Test with foundation resources included, improving the position of several schools. Source: APA

“The Composite Financial Index or CFI combines four core ratios by assigning various weights to generate an aggregate score for financial strength and stability. These ratios: Primary Reserve ratio, Viability ratio, Net Operating Revenues ratio, and Return on Net Position ratio provide for an understanding of the institutions’ available resources and results of current operations,” is how Sandridge summarized the method, devised by the accounting firm of Prager, Sealy & Co., LLC.

The various financial tests, similar to those a business analyst might use, look at the schools’ debt, the comparison between their operating revenue and expenses and available reserves. Their auxiliary enterprises are measured, along with their endowment and the investment success on that endowment. The age of facilities is factored in. Enrollment trends count. The haves and have nots comparison that results is stark, but it is not clear just what if anything the state might do about it.

One possible conclusion:  Virginia is the only school well-positioned to fully end its status as a state school.

Sandridge was the APA expert called in when the University of Virginia’s Strategic Investment Fund was making headlines, and the legislative attention on that issue might have sent the state looking for a deeper analysis tool.

One of the slides he used with the House broke down endowment divided by student head count, and the disparity there really underlies much of the rest of the report. The per capita amount at the University of Virginia exceeds $260,000 and the per capita amount at George Mason is just one percent of that, about $2,600.

You don’t get more have and have not than that.

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15 responses to “State Colleges Face New Financial Stress Test”

  1. LarrytheG Avatar

    I’m not exactly sure I understand the nexus between endowment and operation financials or maybe I did not understand.

    In the end – one would think that no matter what the endowment size was that the college would have to operate on a tuition/state aid in – operational expenses out – basis. I guess I’m just not sure what role endowments actually play in the day-to-day costs of operation.

    1. Steve Haner Avatar
      Steve Haner

      Hence the measurement which disregards them. But they are a reserve with at least some utility in a pinch.

    2. smoretva Avatar

      “I’m not exactly sure I understand the nexus between endowment and operation financials or maybe I did not understand.”

      I didn’t read the report, but I will offer a couple thoughts on the connection between endowment and operation financials. While most of endowment funds are restricted to specific purposes, those purposes for research universities typically include supplemental funding for faculty chairs and professorships, operational funds for various colleges and units, and financial aid, among other dedications. Accordingly, a large endowment per student can mean that a substantial portion of the total operating budget of an institution is covered by endowment earnings along with tuition, state general fund support, and sponsored research, as well as auxiliaries, such as housing, dining, etc. (which I think often are budgeted separately).

      1. “I’m not exactly sure I understand the nexus between endowment and operation financials or maybe I did not understand.”

        I think Larry has a couple of reasonable points. First, there are well known universities in Europe, like the London School of Economics, that have relatively small endowments ($169M), but no one talks about them being at risk because there is a strong demand for spots. Second, endowment does provide a cushion in a pinch, as Steve says, but it isn’t what a university would want to tap unless they absolutely have to and even then there are some issues to overcome. If there is a short term shortfall, most schools would probably rather use a line of credit than unwind some investments they would rather hold. And most endowments are targeted. They have an “owner” that is usually a school or a program. When Harvard was trying to justify a multi-billion dollar fundraising campaign (despite already having a $30B+ endowment), one of the points they used was that 85% of the endowment was restricted as to purpose and only 15% was unrestricted. That ratio is pretty common. If you think of this in the context of UVA, for instance, the law school would probably not be happy about having to bail out the architecture school. Sweet Briar had to get a ruling and an agreement to be able to use restricted funds for operations.

        What I’d like to know is which schools are struggling to fill seats at a net price that is sustainable. A quick look at Longwood shows it has gone from a 60% acceptance rate in 2004 to 92% in 2017. And as I think I mentioned in another post, they only net about 30% as much per student as UVA or W&M.

        1. Reed Fawell 3rd Avatar
          Reed Fawell 3rd

          “What I’d like to know is which schools are struggling to fill seats at a net price that is sustainable?”

          In the private sector, look at Mary Baldwin, a strong school before, that now is essentially open admissions. The four sisters that were strong before UVA and others opened admission to women, have had various troubles adapting, obviously. And of course, Mary Baldwin acquired Stanton Military Academy as well. Was that a mistake?

          In contrast, look at Bridgewater College, at 52% admissions. That school appears well managed, doing things the right way, always has been best I remember. And, of course, Bridgewater was too my knowledge has always educated men and women. And always had a more local character, unlike Mary Baldwin. On the private non profit side a significant number of Virginia schools appear to fall into this binary system of circumstances, with differing profiles of success or its reverse.

          Izzo, I have yet to get my arms fully around this restricted versus unrestricted distinction. And why in substantial part it does not substantially dilute over time.

          All monies invested tend to compound cumulatively, and equities can sky-rocket, over time. The wizards who handle these endowments with brilliance, know how to manipulate numbers, growing them enormously in good and even fair times. Yes, I understand the annual pay out requirements on restricted funds, but surely there is a way to work around this limitation to growth over time.

          Plus you have the Ford Foundation example, where Henry Ford’s wishes are grossly violated with impunity for generations without shame, or second thought.

          1. Reed, I think that is why UVA administration was so excited about the SIF. They didn’t have too many strings attached. When Batten gave money for the leadership school, they couldn’t take that money and hire a brilliant immunology researcher away from another school.

  2. djrippert Avatar

    UVA should purchase itself from the Commonwealth of Virginia and become the private institution it has always wanted to become. The original grounds should be retained by the state and made into a State Historical Site. The state should use the many billions it will receive from UVA to dramatically augment STEM programs at universities located within Virginia’s urban areas.

  3. Great scoop, Steve.

    Wow, this report is a data gold mine. It is without question the best financial analysis of Virginia’s public higher ed institutions I’ve seen. It’s really dense reading, though, so I doubt many of our intrepid peers in the mainstream media will spend much time with it. Bacon’s Rebellion can mine this material for blog posts for months to come!

  4. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    I figure that starting 18 years from now more and more colleges and universities in Virginia each year will run out of students and money. Most particularly tuition income and students at more and more institutions will evaporate. Never even apply.

    These colleges and university will begin to empty out, into vacant relics, museums from the past, broken silent places that few among us have any reason to visit, save for growing numbers of homeless.

    “In 2017, the US birth rate hit a record low for the second year running. Birth rates are declining among women in their 30s – the age at which everyone supposed more Millennials would start families. As a result, some 500,000 fewer American babies were born in 2017 than in 2007, even though more women were of prime child bearing age. Over the same period, the number of children the average American women is expected to have fell from 2.1 (the so called replacement rate …) to 1.76.” End quote.

    An extremely troubling culture shift is occurring in America.

    Among many in America, sex is booming, but without producing children, nor marriage, nor relationship, but with individuals alone, or with same sex partners. Growing number of men and women are alone, totally alone, whether it be for sex, or for living and dying. Save for a shrinking minority of our elite and now even among our elite, we are becoming a nation of strangers, alien to one another, to our own families even, if we have any at all.

    See “The Sex Recession, Why young people are retreating from intimacy – and what this means for society,” written by Kate Julian, in The Atlantic, December, 2018

  5. I think Reed makes a good observation on the real risk from of demographic and enrollment shifts. The most at risk schools, if they are highly dependent on tuition, will probably be the ones that struggle to fill slots with paying students, more so than the ones that may have a somewhat lower ratios. Sweet Briar used to be considered a relatively wealthy school on a per student basis, but it had to discount sharply to fill seats, and that eroded its financial position. In business, they call this type of ratio cited in the article a quick ratio, and you don’t really need a very high one if your revenues are predictable (i.e. good demand for spots). Some of the schools that have low ratios, like CNU or MWU, may be making investments that will be making them more attractive long term. Alternatively, they may just be profligate.

    There is a lot to digest here, but I noticed a few things on a quick read through. First, kudos to VMI. It actually has the highest ratio once foundations are included. It also graduated two of the most powerful politicians in the state in Northam and Norment. Second, I’m not sure if there is any implication to having separate foundations. VMI and W&M appear to have primary endowments in separate foundations, but UVA does not. If the institution needs the money, are the assets of the foundation under control of the administration and board? If the answer is yes, there wouldn’t appear to be much value in separating them in the analysis. If the answer is no, there is more risk for the institutions with separate foundations.

    Third, having a medical division seems to be a big deal — the two largest endowments are UVA and VCU. Setting aside for the moment UVA, which probably would have a sizeable endowment in any event, VCU has an endowment far above GMU and ODU, which I would otherwise consider similar schools in size and mission. VCU’s endowment is 9X ODU and 24X GMU! How much of the VCU endowment comes from or is associated with the medical division? Did it come from gifts or operational surpluses (these used to be called quasi endowments)? A quick check seems to show VCU does not actually outraise VT or W&M, so I suspect a significant amount is from operational surpluses. If it is operational surpluses, what is the obligation to the medical center if it has shortfalls (e.g. collection or reimbursement rates change)? Does this obligation change how the ratios should be viewed? Is the same true of UVA? If the medical division there has a shortfall, what should happen (or what should have happened) to the SIF?

    I agree with DJ. Virginia should soon rationalize and refocus higher ed at some point. I just don’t see the GA doing that, though.

  6. LarrytheG Avatar

    Like there are in businesses – there will be effects from population changes and demographic shifts as well as how education changes but I don’t expect Higher Ed as an institution to go away.

    Some of them will – but others will adapt to the changing times and change their programs to appeal to what people want, albeit not as the price they prefer – really no different than what happens with other big ticket items like cars and homes – they cost what they cost – and the market works to the price that most are willing to pay.

    The fact that the govt is involved in “funding” it – is not going to “force” it to change – if anything, such govt involvement will function like govt involvement in any other programs – like FLood insurance or for that matter –

    If institutions like Sweet Brier and Longwood go away – it will be viewed not much differently that boarding schools going away or for that matter mom/pop businesses as WalMart and other big box supplant them.

    Others – like Va Tech, for example, are going to go to where the workforce is and they’re going to offer education the workforce wants … they’re not going to shrivel up and blow away because they are too expensive. All they need to be is competitive with others not just on price but on product – offering what people want. Most will want the Cadillac for the Yugo price but then reality sets in and people make choices.. what they don’t do is say “it’s all too expensive and I’m not going to college at all”.

  7. I agree that the institutions need to adapt, and I think the Virginia Tech new campus announced along with the Amazon decision is a great and positive example. I just think the state needs to make some strategic choices as well. We’ve talked about this on this board for a while, but I just don’t see it happening due to the political landscape.

    I looked a bit more closely at the report Steve linked to and one of the things that jumped out at me was the huge disparity between schools on how much net tuition and fees they collect. (It is described as “Student tuition and fees, net of scholarship allowances” in the report.) UVA and W&M are north of $20K per FTE student per year in net tuition and fees. In contrast, a number of schools are only collecting 25-30% as much. As we have discussed here, UVA and W&M may be charging a lot to chase prestige, so there is that to consider, but I wonder how much the “scholarship allowances” are when a school is only getting $6K or so per student per year. If you take Longwood, for example, tuition and fees are listed at $13,219 for in-state and $28,687 for out-of-state students. According to the report, Longwood only nets about $6,500. It would be interested to see where has gone over time.

  8. Out of my own interest, I looked up the history on how the VCU endowment developed, but thought I would pass it along. The endowment in 2012 was $438M. $877.9M was reclassified as endowment for 2013, with the bulk coming from VCU health system. The amount reclassified from the health system was, in comparison, greater than the total endowment of Virginia Tech at the time. It would have accumulated from operating profits in the not-for-profit health system. The primary source of revenue for the health system is Hospital and Patient services fees, net of charity care. (I bet Hampden-Sydney wishes it could have held on to the medical division.)

  9. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    Izzo –

    Thanks for your excellent comments.

    The mystery on the fabulous wealth spun off by “non-profit” university hospitals continues. Where’s this cash come from? Why? And toward what is it applied. Teaching?

    I recall in Spring of 2011, during Dragas / Sullivan’s splenetic cage match, one of the claims alleged were spiraling out of control University costs coupled with hemorrhaging of cash losses at the University of Virginia, most particularly at the university hospital, without a plan to deal with problem.

    That was the stated nub of the dispute, best I could discern.

    After Sullivan’s reinstatement, an “expert” from the John’s Hopkins medical system was put on the board and presto – within a few years the $2.1 Billion Strategic (Research) Investment Fund pops into view! A Texas oil gusher of $billions seemingly out of nowhere, yet said to be in gestation for decades.

    How did all this happen? The official line was vague in the extreme, and story remains to be told, I believe. As if UVA does not want the public to know where the money is drawn from, while UVA gets richer than Croesus. And as you pointed out at the time, Izzo, its a central unanswered question around the country, as its answer impacts how these institutions are run, and for whose primary benefit they are run. This question grows in importance if our system of education faces growing financial challenges.

    For, in sharp contrast to UVA’s exploding wealth, we have worrisome trends that appear to threaten growing numbers of thinly financed hand to mouth institutions, operating on narrower margins coupled with the possibility of whammys coming down the road, namely:

    1/ The sharp decline in children born,
    2/ The collapse of the two parent family,
    3/ The inability of far too many primary, middle, and secondary public schools to adequately prepare college qualified kids,
    4/ a growing slippage of wealth and home ownership of their parents, from the Gen-X generation and also rising the Millennia generation.
    5/ A growing cultural collapse at a time of rising college costs piling debt on kids that throttle their future.

    For example,

    The Gen Xers (born 1965-1980) took a big hit to equity and financial heath during the 2008 recession, are slow to recover, indeed are irreparably harmed in many cases. Millennials (born 1980-1995) are having an even harder time getting off the ground, even out of their parents house. Things now are beginning to improve, thanks largely to Trumps’ new economy but the trends have yet to prove its permanence, particularly if we end up with socialist government two years hence.

    Where does this leave our already over supply of seats in our colleges and universities? That oversupply is already plain to see. Some institutions are struggling to keep their heads above water, including a number that were strong in my day but non- selective now, hobbled by deep discounts in tuition, and very high acceptance rates, this problematic on many fronts.

    The governor and speaker’s new education plan, coupled with Amazon deal are the kinds of solutions we need. They are practical and real, not theory.

    1. Reid, according to the report Steve provided, UVA medical division appears to be about a $100M+/yr tax-exempt cash cow. For some reason, VCU medical is accounted for separately and isn’t in the report, but may be substantial. What should be the appropriate accountability and use for these funds?

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