The Department of Education Composite Score is a way for schools to demonstrate financial responsibility. The methodology results in a range of scores from 0 to 3.0. A score of 1.5 is considered to indicate a financially responsible institution. In the fiscal year 2019, the mean score for schools was 2.4, with some getting a 3.0. In fiscal year 2023, the mean score was 1.8, still above the threshold to be considered financially responsible. Based solely on the composite scores, it would not have been obvious that these ten schools were going to announce their closure.
The average enrollment of the schools in fiscal year 2018 was 1,522. The average enrollment declined to 1,063 students in 2023, the result of a percentage decline in enrollment each year that was greater than the previous year. An enrollment decline from one year to the next has a compounding effect of approximately four years total, as the decreased enrollment proceeds through graduation. It was particularly difficult for these schools to overcome the effects of persistent declines in enrollment over several years.
Consistent with the enrollment decline noted, revenues from tuition, auxiliary, contributions, and non-COVID grants declined overall from fiscal year 2018 through fiscal year 2023. Fiscal year 2021 was the greatest outlier in the trend, where revenues from the aforementioned sources declined the greatest.
To contrast that decline in 2021, when investment returns and federal COVID funds are included in the revenues in 2021, the total revenues increased to the highest levels in the examined period and all entities reported an increase in net assets. In 2022, unfortunately, as investment gains flipped to losses and federal COVID dollars were no longer as available, the total revenues declined to be back in line with the trend seen before fiscal year 2021. Ultimately, fiscal year 2023 saw the lowest total revenues in the examined period.
Additionally, after fiscal year 2021, the deficit gap between tuition, auxiliary, contributions, and grants to cover total expenses (excluding payments to students as a result of a federal COVID program) widened in a way that would indicate that tuition increases were unable to keep pace with increased costs (including inflation).
In a set of financial statements issued under Generally Accepted Accounting Principles, an entity is required to include a paragraph describing management’s plan if there is substantial doubt about the ability to continue operating as a going concern. The threshold for substantial doubt is that it is probable (70-80% chance) that the entity will be unable to meet its obligations as they become due within one year after the financial statements are issued.
In 2018, two of the ten schools had a "management's plan" paragraph. In 2023, six of the ten schools had a "management's plan" paragraph, indicating that substantial doubt existed. In other words, in 2023, four of the ten schools that announced their closure did not meet the threshold of “substantial doubt” about its ability to meet its obligations as they became due within one year after the financial statements were issued, which indicates that access to financial resources in the short term was not a primary driver of the decision to close.
The analysis supported that while there might be many factors that contributed to the decision to close, institutions should monitor other performance indicators beyond the Composite Score. Notably, the impact of declining enrollment seemed to be a consistent and significant factor across all the schools sampled.
Published: 10/31/2024
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