Guidance for Financially At-Risk Colleges

Lawrence M. Schall, a former university president and now head of a regional accrediting agency, answers two key questions.

October 13, 2020
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Recently, I received a call from a higher education reporter I got to know while I served as a university president. He had written several features on my university’s financial turnaround during the 15 years I worked there. He was interested in my perspective on the state of higher education today, as I have transitioned into my new role as president of the New England Commission of Higher Education, the accrediting agency of more than 200 colleges and universities in six Northeastern states.

Colleges and universities achieve accreditation from our agency by demonstrating they meet nine specific standards, each of which articulates a dimension of institutional quality. One thing I have learned over the first months on the job is that for almost every question that comes to us, a discrete standard of accreditation applies. Unsurprisingly, given today's COVID-hammered economy, the focus of most of the reporter's questions was Standard No. 7: Institutional Resources.

When a college or university closes its doors, that standard is usually the issue. The institution no longer believes -- or the accrediting agency has told it to be the case -- that it does not possess the financial resources to continue to fulfill its mission. Standard No. 7 has several subrequirements, including proof that:

  • The institution is financially stable, and its stability is not dependent upon vulnerable resources;
  • It has the ability to respond to financial emergencies and unforeseen circumstances; and
  • The integrity of its finances is undergirded by prudent financial management and organization, a well-organized budget process, appropriate internal controls, risk assessment, and timely financial reporting.

My reporter friend finally asked the questions he'd come for: Did I think we would see an increasing number of institutions failing to meet Standard No. 7? And what advice would I give at-risk colleges and universities to help them avoid this unwelcome fate?

The potential for colleges to fail financially is, in fact, not a new threat. Every region of the country has seen institutions of higher education close in the past decade, and every time it is a wrenching loss for the students, faculty, staff and the surrounding community. We provide a list of shuttered colleges and universities in New England on our website, going back decades.

But the pace of college closures and mergers, even pre-COVID, has quickened. And the demographics of New England, with decreasing numbers of high school graduates, would suggest this level of disruption is likely to continue for some time.

Will the impacts of COVID on college finances further accelerate the rate of closures? It’s hard to imagine that it won’t. The depth of the disruption will very much depend on things largely outside the control of individual institutions, including our country’s response to the public health crisis and how federal and state governments deal with the continued financial upheaval.

With all that a given, I’d also suggest that the vast majority of institutions will not meet this fate. Higher education in the United States has been remarkably resilient, and from my seat at NECHE, I continue to see our institutions adapt and evolve to meet today’s challenges.

But what about the reporter’s second question? What can an at-risk institution do? While a sitting college president myself, I had the unexpected privilege of inheriting a college in a full-blown and severe financial crisis. To navigate the emergency, I insisted that we align our expenses each and every year with our actual revenue -- i.e., that we rely on the cash coming in the door rather than overly optimistic projections about how much we might grow our revenue if we did this or that. Over my 15 years as president, we moved from a negative $4 million operating loss on a $20 million budget to a positive $4 million on a $30 million budget, while more than doubling admissions.

Given my personal experience in helping to lead our institution to financial security, other college leaders have often asked me to share what we learned about the dangers of following a broken business model, where expenses dramatically exceeded revenue year after year, and how to better manage a critical financial situation. I was always happy to describe what worked for us. Today, I am less inclined to provide such counsel outside of my official role, but I did offer a few thoughts along the following lines to my reporter friend.

First and foremost, it is the responsibility of the board of trustees to insist upon a business model that works. One often hears that the primary responsibility of a board is to hire and fire the president. But when a board hires and fires with increasing frequency and the business model continues to be broken, something is fundamentally wrong. More than ever before, boards must insist that revenue and expenses be aligned and that the institution has a strategic plan that it can -- and actually does -- execute. The details of how a president gets the institution to the finish line can be left to the administration, working within an environment of shared governance and decision making. But boards must step up and fulfill their fiduciary role from the start.

Second, some institutions as currently constructed will not make it. Again, boards of those institutions need to come to terms with that reality and ensure that students do not have their educational progress endangered by delaying a decision that is inevitable.

The changes that will be required at most at-risk institutions will impact people negatively. When 60 percent of the budgets of most colleges and universities is devoted to compensation, making significant reductions in what an institution is spending cannot happen without touching faculty and staff members. It’s that fact -- and the reality that injuring people's lives and livelihoods is immensely difficult and uncomfortable -- that has contributed to the position far too many institutions find themselves in today: financially on the edge, with the impacts of COVID potentially pushing them over it.

Serving as a university president is an incredible privilege, yet it is a privilege that comes with a tremendous weight of responsibility. That weight right now is overwhelming regardless of the type of institution one serves. And it’s essential now more than ever for boards of trustees to embrace their fiduciary role in the broadest sense of that term and both guide and support their presidents. This crisis will pass with an extremely high percentage of institutions intact, but strong leadership at both the presidential and board level will determine which of those institutions will come out on the other side stronger and even more vibrant.

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Lawrence M. Schall is president of the New England Commission of Higher Education.

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