The Financial Resilience of Independent Colleges and Universities

Financial Resilience report cover

​Each time a liberal arts college or university closes its doors, predictions abound that many more smaller private colleges will close soon as well. The challenges faced by independent colleges are well documented and contribute to this outlook (Townsley 2009; Marcus 2013). These include economic pressures, rising operating costs, and market competition, as well as concerns about college affordability, demographic shifts, and high discount rates. All of these factors combine to raise questions about the financial resilience of the independent sector of higher education.

This report seeks to answer the following questions:

  1. Are small and mid-sized private colleges at risk financially?
  2. Do the financial trends over the last several years provide insight into the financial condition of private colleges?
  3. What characteristics influence the financial resilience of these institutions?

The analysis is based on 14 years of financial data (from fiscal years 2000–2001 through 2013–2014) from 559 private baccalaureate and master’s-level colleges and universities. Using the methodology developed by Tahey, Salluzzo, Prager, Mezzina, and Cowen (2010) in Strategic Financial Analysis for Higher Education, institutional financial health is measured by four core financial ratios and a Composite Financial Index (CFI). The four ratios are the Primary Reserve Ratio that measures resource sufficiency; the Viability Ratio that measures debt management; the Return on Net Assets Ratio that measures overall change in assets, including investments; and the Net Operating Revenues Ratio that measures operating results. These ratios are combined into a fifth, comprehensive measure of financial health, the CFI.

The long-term trends of the four ratios and the CFI indicate that while private nondoctoral colleges and universities have experienced fluctuations due to the impact of macroeconomic conditions, their overall financial health remains stable. The ratios and the CFI indicate that institutions have successfully weathered the 2007–2009 recession. Two-thirds (67 percent) of small and mid-sized private colleges and universities had achieved a level of financial health at or above the 3.0 CFI threshold of viability by 2013–2014, the most recent year studied.

Institutional characteristics such as student enrollment, tuition and fees, discount rates, and endowments offer no clear indication of whether an institution gains, maintains, or loses financial stability (see Table 4 on p. 21). Further examination of institutions that increased, maintained, or decreased financial performance as measured by the CFI over the 14 years shows small differences by region, financial resources, Carnegie Classification, and enrollment size. Yet none of the institutional characteristics is systematically related to financial condition over time.

In order to maintain or improve financial stability, institutions have had to execute purposeful strategies in the midst of market fluctuations. A recent CIC report supported by the TIAA Institute and the Lumina Foundation reveals that private baccalaureate and master’s institutions have implemented a variety of innovations and approaches to position their institutions for the future (Hearn and Washaw 2015).

The results of this new analysis of institutional financial conditions demonstrate several points:

  • The majority of small and mid-sized private colleges and universities are not financially at risk;
  • The trends for key financial indicators, including the CFI, have been largely on an upward trajectory since the 2007–2009 recession, indicative of increasing financial health; and
  • A combination of strong institutional leadership and multiple institutional factors are likely to be more determinant of institutional financial resilience than any single characteristic.

​Council of Independent Colleges
By Hollie M. Chessman, Harold V. Hartley III, and Michael Williams
August 2017