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Scores of Problems

March 10, 2014

By the U.S. Department of Education’s standards, a small institute on the verge of collapse in California and numerous beauty schools across the country have lately been in better financial health than any university in the Ivy League.

Georgetown University, meanwhile, is barely avoiding additional government oversight because of its performance on the department’s measure of financial responsibility, which covers the college budget years that ended in late 2011 or summer 2012. If Georgetown’s score falls much lower, the university with a $1.3 billion endowment will have to get a letter of credit from a bank to assure the department it won’t go under.

The department’s current Financial Responsibility Composite Scores were created two decades ago to keep track of private colleges’ finances. The scores are an effort by the government to make sure federal financial aid isn’t going to students at colleges that may abruptly close. And some observers have cited the list as evidence that colleges are or are not financially stable.

Yet the scores have been strongly criticized by private colleges and their trade groups for a variety of reasons, including accounting methods they say the department is getting wrong.

But perhaps no better criticism of the list can be found than the list itself, the latest version of which was recently made public. The scores go from a best score of 3.0 to a worst score of -1.0.

Stanford University is doing well, as one might imagine for a prestigious university with wealthy donors. It has a score of 3.0, the best. But so does its Palo Alto neighbor, Sofia University, a 500-student graduate institute that has lately been on the verge of insolvency.

Colleges with less than a 1 are not considered responsible to handle student and public money.  Colleges with a 1 to 1.5 are considered responsible but in need of more oversight. A 1.5 or above is responsible.

The list has many curiosities. None of the Ivy League colleges, all with their large endowments and long histories, get a perfect score. Cornell University, Dartmouth University, Harvard University and Yale University all received a 2.2 on the scale, the same score as Cooper Union, which is changing its entire financial model to try to survive.

Colleen O'Hara's Beauty Academy in California, the Joe Kubert School of Cartoon & Graphic Art in Delaware and the Diesel Driving Academy in Louisiana also got a 2.2.  

What kind of colleges scored better than a 2.2? The Hypnosis Motivation Institute, a 46-year old institution in California, did. But so did other more traditional colleges that have recently shown signs of financial stress. They include Midway College in Kentucky, Holy Family University in Philadelphia and Anderson University in Indiana. All three have cut staff lately. By the department’s measure, Midway was in perfect shape in 2012. Even before the scores were released, though, Midway announced it would lay off around a dozen of its 54 faculty members.

The scores are all retrospective, based on financial filings made to the department as long as two years ago. That means some of the colleges with good scores but notable troubles may have problems undetected only because of timing.

An Education Department spokeswoman, Dorie Turner Nolt, also said the scores are not intended to draw large distinctions among colleges. So, she said, there’s nothing inherently wrong if a major institution and a smaller institution have the same score.

Yet, oddnesses abound: Cornell College, in Mount Vernon, Iowa, has a 2.8, which is a better score than Cornell University’s 2.2. The college has a $67 million endowment; the university has a $5 billion one. 

Georgetown and Montreat College, a Christian college in North Carolina that until last month was planning a merger that could have closed its main campus, both have a 1.7. If Georgetown’s falls by 0.3 points, it could have to go to the bank for a sort of insurance policy to assure the department it’s not about to collapse. Georgetown, which had a near-perfect 2.9 score last year for its 2011 finances, blamed this year's score on investment returns in 2012, which were poor.

"We agree that the methodology which is reliant on financial statement ratios is backwards looking and subject to wide swings, in part driven by year to year swings in market performance," a university spokeswoman, Rachel Pugh, said in an email. "Georgetown's balance sheet ratios will show improvement for FY'2013, in part due to market returns, so we expect we will see year to year swings again -- this time upwards."

The University of Miami, the big private college in Florida, has already fallen below that threshold. It scored a 1.3.

The university disputes the value of the scoring system.

“This metric fails to accurately capture the size, complexity and continued success of a large organization like the university,” a spokeswoman, Margot Winick, said in an email.

So what is the point of all this anyway?

Sarah Flanagan, vice president for government relations and policy at the National Association of Independent Colleges and Universities, was working on Capitol Hill in 1992, when Congress amended its financial aid laws to try to respond to fraud and abuse by for-profit colleges. The financial scores were part of that response.

NAICU and the National Association of College and University Business Officers and the Council of Independent Colleges have all taken exception to how the department does its reckoning.

In a report released in 2012 – which the associations put together in part because the department said it lacked the resources to study the scoring system itself – the groups said the department wasn’t even following its own regulations or generally accepted accounting standards. Among major issues the task force identified, the department is said to be counting endowment losses as operating losses. 

Hal Hartley, senior vice president at the CIC, said there are “major problems with the way the department is going about this."

“There isn’t even consistency within the department about how they calculate these scores,” he said.

Hartley would like to department to dump its current formula and adopt a metric called the Composite Financial Indicator, which CIC uses internally to benchmark its own institutions.

Even if the department does change the accounting practice or its formula, Flanagan said the scores are the government trying to avoid precipitous closures, not necessarily more gradual closures.

“It seems to me that even if you fix all this stuff, you might not be asking the right questions,” Flanagan said.

Hartley said when the Obama administration announced last year its plan to rate colleges’ overall quality and then tie federal funding to those rankings, his first thought was the now controversial financial responsibility scores.

“What is going to happen with any other measure they try to use?” he said.

This year’s scores did, though, indicate some troubles ahead for some institutions. Chester College of New England, for instance, received a 0.6 score. It closed in 2012. The National Labor College, which is closing, received a -0.7 score.

Hartley said colleges that do fail or merge tend to have have low scores, but low scores do not necessarily indicate colleges will fail or merge. But the failing scores mean colleges that may be struggling temporarily have to set aside money for letters of credit which they should be using on other things and also the scores generate headlines that can hurt institutions.

“In the vast majority of cases, the headline isn’t warranted,” he said.

But there are non-financial factors the scores fail to take stock of. Based on its performance in 2012, Mountain State University, a nonprofit college in West Virginia, received a 2.2 – the same score as Harvard and other elite colleges. But just days after the end of the 2012 fiscal year, Mountain State lost its accreditation and weeks later announced it would shut down and be taken over.

The Sawyer School, a for-profit in Rhode Island, abruptly closed in 2012. The department had given it an even better score than Mountain State: a 2.3.

 

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