Higher Education Policy and Practice

Assessing Institutions at Financial Risk

Many college and university presidents want to know if their institution is at extreme financial risk. While there is no single standard for risk assessment, there are warning signals that indicate if risk is high. NACUBO, NCHEMS, studies by KPMG and Prager, along with meta-analyses by Terrence MacTaggart and Martin and Samels point to several common measures for assessing financial risk. Martin and Samels’ book, Turnaround: Leading Stressed Colleges and Universities to Excellence, provides a useful summary of risk factors from earlier studies. KPMG and Prager developed the Composite Financial Index (CFI) that should be added to the meta-list reported in the Turnaround book. CFI is a multi-layered quantitative tool for estimating financial risk by comparing an institution’s financial condition against ten scoring ranges.

The following list draws together major factors that would suggest that a college or university faces a high degree of risk:

  1. Tuition discounting is more than 35 percent.
  2. Student default rate is more than 5 percent.
  3. Debt service is more than 10 percent of annual operating budget.
  4. Average annual tuition increase has been greater than 8 percent for five years.
  5. Deferred maintenance is at least 40 percent unfinanced.
  6. Short-term bridge financing (credit lines) is regularly required in the final quarter of each fiscal year.
  7. Average alumni gift is less than $75, and less than 20 percent of alumni give annually.
  8. Enrollment is less than 1,000 students.
  9. The conversion yield–the percentage of students who attend the college after applying–is 20 percent lower than that of primary competitors.
  10. Student retention is 10 percent behind that of primary competitors.
  11. The institution is on probation with a regional accreditor.
  12. No new degree or certificate program has been developed for at least two years.

In addition to the preceding meta-factors, the financial risk of an institution is at the highest level when its CFI score is less than one. You can download a free copy of the CFI scoring tool by clicking here. Your chief financial officer should be able to provide the data to compute the Index score and to compute the qualitative scores for several of the meta-factors.

The best way of assessing the degree of financial risk to your institution is for the president to meet with the chief administrative officers to discuss the findings from the meta-factors evaluation and the CFI analysis. Presidents of institutions facing a high degree of risk can use these meetings as the first stage in a strategic exercise to build a new path to strengthen the institution.

Originally posted January 22, 2009

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