Avoiding the Path to Closure

By Jennifer Ramey, Glenn McLaurin, & Mark Finlan

COVID-19 has disrupted university operations and increasingly threatens the financial stability of institutions. After a difficult spring that included rapid transitions to online course delivery, temporary physical shuttering of campuses, residence halls, and dining refunds, the outlook for fall remains uncertain. Although many institutions are introducing re-opening plans that include adjustments to fall calendars, hybrid instruction options, and physical distancing guidelines, as well as adjusting tuition & fees and dipping deeper into their waiting lists, it is not yet known whether these strategies will mitigate the risk of sharp declines in enrollment.(1) With state budgets facing cuts and revenue and cost pressures mounting, many higher education experts are predicting that this crisis will lead to the permanent closure of struggling institutions.

Prior to COVID-19, the most financially vulnerable institutions were small private and public regional institutions that faced a high degree of tuition dependency and limited endowments and primarily recruited students from a limited geographic area. The private institutions oftentimes featured a religious affiliation or focused on providing a visual or performing arts education, and the public regional universities frequently faced declining enrollment and limited state support. Questions regarding efficiency, stability, and level of preparation must now be addressed by all institutions, however, irrespective of their size, resources, or selectivity.

College Closures Driven by COVID-19

Between March 15, 2020 and July 2, 2020, at least 11 institutions have announced plans for closure, ceased enrolling students for the Fall 2020 semester, or declared exigency.

Can You Spot the Closing College?

The institutions that have declared exigency or plans to close are far from the only institutions facing revenue and enrollment challenges. Precisely predicting which colleges will close – and when – is notoriously difficult. The Government Accountability Office found that the Department of Education’s own financial health scores have only accurately predicted half of closures since 2011.(2) In some cases, such as with Sweet Briar College in 2015, institutions on the brink of closure have been saved through active alumni intervention.(3) In other cases, public outcry and legislative pressure have averted closures: in April, the Chancellor of the Vermont State Colleges System proposed and then withdrew a plan to close and consolidate three campuses facing enrollment declines and substantial financial losses due to COVID-19.(4)

When evaluating common indicators for financial distress, there is no clear sign that these institutions, alone amongst peers, would be the first to announce closure or exigency. For example, Department of Education financial responsibility scores for the listed private non-profit colleges range from 0.6 (triggering “heightened cash monitoring”) to the score cap of 3.0.

Of the listed private, non-profit institutions, most received a “financially responsible” score that was greater than or equal to 1.5. Only Pine Manor College and MacMurray College received “heightened cash monitoring” and “not financial responsible” scores of 1.1 and 0.6, respectively. These, however, are just two of 125 colleges which scored below 1.5 in FY2018.

Just as the Department of Education Financial Responsibility Score can indicate risk but is not an accurate predictor of closure, declining enrollment on its own is an informative but insufficient measure. Between Fall 2013 and Fall 2018, more than 600 institutions experienced a greater than 5% decline in size of the entering undergraduate class; nearly 675 institutions experienced total enrollment declines in excess of 5%. While enrollment for Fall 2020 is not yet known, credit rating agency Fitch Ratings has projected enrollment declines between 5% and 20%, with an expectation that many institutions will increase discount rates in order to attract price-sensitive students and families.(5) Public institutions may also suffer revenue shortfalls even if enrollment stays steady: a recent analysis by Moody’s has found that while states which traditionally “export” students could benefit if more students attend an in-state institution, the loss of students paying out-of-state tuition premiums could still harm revenue.(6) While the majority of listed institutions have recently experienced declines in entering class size, hundreds of other institutions are facing similar challenges.

With so many institutions facing financial concerns and negative enrollment trends, perhaps the question is not “why are these 11 colleges declaring closure, no new enrollments, or exigency?” but instead, “why have so few colleges made this declaration?”

Even the most financially distressed institutions may appear to outsiders as surprisingly robust prior to closure. Even as liabilities mount, operating income declines, and enrollment falls, the decision to cease operations, pursue a merger, or declare exigency is ultimately more of a reflection of specific leadership than a single decisive performance metric. The non-profit nature of higher education institutions, adherence to principles of shared governance, and widely varying interests and concerns of trustees and principal stakeholders means that institutions are apt to endure years of operating losses. Closure announcements may come as a surprise to the broader campus community, but the reality is that these institutions have been on the path to closure for years.

Recognizing – and Avoiding – the Path to Closure

For institutions whose financial conditions have been exacerbated by COVID-19, their goal for long-term survival should not be “avoiding closure”; rather, they should focus on “avoiding – or exiting – the path to closure”.

The path to closure may look different for each institution, but it is ultimately defined by revenue shortfalls exacerbating operating losses, leading to reductions in services and diminished capacity to recruit and retain students. Various strategies can abate the enrollment declines – common measures over the past decade have included tuition rate increases paired with more aggressive and targeted tuition discounting, establishing new academic program offerings, and recruiting international students. While some institutions have found success with these efforts, others lack the resources for sustained investment in new programs and scholarship strategies or have experienced significant volatility in international enrollment. As returns on these strategies diminish, the declining revenue eventually leads to reductions in administrative support and leadership turnover, and ultimately prevents the institution from effectively investing in its core missions of instruction, research, and service.

As institutions look to avoid, or leave, the path to closure, a critical self-assessment is as important if not more so than meeting specific financial ratios. Institutional leaders must engage in the difficult conversations with themselves, staff and faculty, alumni and donors, and community stakeholders around whether or not the institution can achieve the efficiency, stability, and preparedness necessary to navigate an uncertain future, or whether an orderly approach to a merger or closure is ultimately necessary.

For institutions ultimately facing a closure or merger, early communication and transparency with stakeholders is critical. With sufficient planning, the institutional legacy may still be preserved through a well-planned merger, such as the establishment of the O’More College of Architecture, Art, & Design at Belmont University or the Wheelock College of Education & Human Development at Boston University. Even more innovative solutions may be pursued as well: after a merger between the University of Bridgeport and Marlboro College fell through in 2019, three Connecticut colleges (Goodwin University, Sacred Heart University, and Paier College of Art) have announced plans to transform the Bridgeport campus into a “University Park” at which the three institutions will share common facilities.(7) Similarly, an orderly decision to close– while always painful – can nevertheless allow the institution to establish a teach-out program and provide sufficient support to students who must transfer credits in order to complete their degree.

For those institutions who determine that they can leave, or avoid, the path to closure without pursuing a merger or shutdown, maintaining or increasing revenues is a necessary but not sufficient strategy for financial success. Leadership must also ask the three following questions:

Are we efficient?

Efficiency looks different for each institution and institutional leadership should ultimately define these measures in terms of improved outputs rather than reduced inputs. Leadership should ask:

How do we as an institution define efficiency?

•  Are there opportunities to take advantage of economies of scale?
• Have we leveraged institutional purchasing power to improve terms with vendors, or explored consortium-based purchasing agreements?
•  Do we understand where administrative and business process bottlenecks exist and the root cause of these challenges?
•  Have we searched for duplication of administrative services or identified self-service opportunities?

What data are needed to allow leadership to spend more time focused on executing strategy?

• Can we track the enrollments, revenues, and costs associated with each academic program and are we prepared to continue to subsidize select programs as part of our strategic mission?
• Do we have a data-driven understanding of our institutional space in order to develop an integrated operating and capital planning budget and more strategically invest to expand facilities or address deferred maintenance?
•  Do we understand the true costs of our research enterprise and could we be more effectively managing and reinvesting F&A recovery?

Are we stable?

Institutional stability reflects financial and non-financial measures and requires assessments of short-term and long-term enterprise risks.

• What is the institution’s liquidity profile? For how long can unrestricted resources – specifically cash and short-term investments – cover operating expenses?
•  How dependent are we on a single revenue source like tuition, and can we diversify our revenue streams?
•  How much of our student pipeline comes from a single demographic group, geographic area, or depends on the competitive strength of a single program?

Are we prepared?

Institutions ideally conduct these self-assessments from a position of strength when they have the greatest flexibility and longest time horizon to implement operational and organizational changes. Even those facing financial stresses, however, should still take the time to evaluate how the institution may respond to worst-case scenarios. As painful as the impacts of COVID-19 have already felt, there will undoubtedly be more costs, instability, and uncertainty to follow.

• Have we established communication channels and ensured that stakeholders are engaged and understanding of the critical decisions that may be necessary to address future financial challenges?
• Can we quickly respond to another transition from on-campus to off-campus living and instruction?
• What debt covenants must be maintained, and what debt obligations are dependent on specific revenue streams? What capital plans can be paused indefinitely, and what deferred maintenance must be addressed to avoid critical failures?
• What are the first, second, and third-order cost-cutting strategies that could be implemented in the event of continued budget deficits? To what extent will these capture short-term savings or risk generating long-term costs or reputational damage?

Leadership’s sense of institutional efficiency, stability, and preparedness matters far more than satisfying specific financial ratios. The answers to these questions can help leaders determine if they are in fact on a path to closure and, if so, provide guidance to shore up operations or explore new opportunities. Institutions must take proactive action long before speculation begins around “when” they may be forced to close. Frequent, in-depth self-assessments are critical to avoiding the path to closure and can help prepare leadership to develop a more comprehensive strategy for difficult times to come.

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(1) Huron COVID-19 Insights: Structural Changes for the Fall Term. Published: June 30, 2020.

(2) Education Should Address Oversight and Communication Gaps in Its Monitoring of the Financial Condition of Schools. GAO-17-555: Published: Aug 21, 2017. Publicly Released: Sep 20, 2017. https://www.gao.gov/products/gao-17-555

(3) Agreement reached to keep Sweet Briar open. Kapsidelis, Karin. Richmond Times-Dispatch Published: June 20, 2015. https://www.richmond.com/news/virginia/article_4b2f03d8-a089-5f8c-9c39-6faa19da07ce.html

(4) After Backlash, Vermont State Colleges chancellor withdraws proposal to close three campuses. Bakuli, Ethan. Burlington Free Press Published: April 22, 2020. https://www.burlingtonfreepress.com/story/news/2020/04/22/vermont-state-colleges-closing-chancellor-withdraws-proposal-three-campuses-vtc-nvu/3003467001/

(5) Declining Enrollment Revenue Risk More Acute for Private Colleges. Fitch Ratings. Published: June 8, 2020. https://www.fitchratings.com/research/us-public-finance/declining-enrollment-revenue-risk-more-acute-for-private-colleges-08-06-2020

(6) Moody’s Documents Likely Enrollment Effects by State if Students Stay Close to Home Come Fall. Seltzer, Rick. Inside Higher Education Published: June 25, 2020. https://www.insidehighered.com/quicktakes/2020/06/25/moodys-documents-likely-enrollment-effects-state-if-students-stay-close-home

(7) 3 Colleges to Acquire U of Bridgeport. Whitford, Emma. Inside Higher Education Published: July 2, 2020. https://www.insidehighered.com/news/2020/07/02/university-bridgeport-be-acquired-three-nearby-colleges