RubinBrown Colleges & Universities Stat Book | NOT-FOR-PROFIT INSTITUTIONS

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COLLEGES & UNIVERSITIES STATS NOT-FOR-PROFIT INSTITUTIONS

A publication by RubinBrown LLP

EXECUTIVE SUMMARY

RubinBrown is pleased to present the 2019 Colleges & Universities Statistical Analysis, focusing on not-for-profit institutions, compiled by RubinBrown’s Colleges & Universities Services Group. Included in the report is statistical information for 53 not-for-profit colleges and universities in Colorado, Illinois, Kansas and Missouri. Select statistical information for 36 public institutions in Kansas, Illinois, Iowa and Missouri is also included. The source data for this report was obtained from publicly available documents of each institution. For questions, please contact the Colleges & Universities Services Group (see page 6 for contact information).

Industry Overview Two calculations that accreditors and regulators use to evaluate the financial health and fiscal responsibility of an institution are the Composite Financial Index score (CFI) and the Department of Education’s Financial Responsibility Composite Score. The CFI is published in the Strategic Financial Analysis for Higher Education: Identifying Measuring & Reporting Financial Risks (Seventh Edition) by KPMG LLP; Prager, Sealy & Co., LLC; Attain LLC. The Higher Learning Commission (HLC) utilizes the CFI for public institutions and Department of Education’s Financial Responsibility Composite Score for private institutions when evaluating financial indicators. The HLC defines a private institution as any not-for-profit or for-profit school. The HLC sets forth certain CFI score ranges for each type of institution. The scores indicate if an institution’s financial indicators are deemed acceptable or if they warrant further review.

Above the Zone If an institution falls above the zone, no follow up is required. In the Zone If an institution reports a score that falls within the zone for the first time, the HLC will issue a letter of concern. If reporting for the second consecutive year, HLC will require the institution to submit a report and undergo a panel review process in which three peers review the information and evaluate whether or not the institution is at risk of not meeting the Criteria for Accreditation. Below the Zone If an institution reports a score that falls below the zone, the institution will be required to submit a report to the HLC and will undergo the panel review process described above.

The Higher Learning Commission Ranges for CFI Scores

Below the Zone

In the Zone

Above the Zone

Private Institutions

-1.0 to 0.9

1.0 to 1.4

1.5 to 3.0

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RubinBrown Colleges & Universities Stats 2019

Financial Responsibility Composite Scores The Department of Education has established score thresholds to evaluate not-for-profit and for- profit institutions based on an institution’s Financial Responsibility Composite Scores. Institutions with scores greater than or equal to 1.5 are considered financially responsible. Institutions with a score of less than 1.5 but greater than or equal to 1.0 require additional monitoring. The Department of Education determines what additional monitoring is required for each institution, but generally requires the institution to utilize heightened cash monitoring and may require the institutions to operate under a provisional certification of the program participation agreement. If an institution with a score of less than 1.5 posts a letter of credit of 50% or more of the Title IV aid it received, it is deemed financially responsible and additional monitoring would not be required. · Follow heightened cash monitoring requirements · Post a letter of credit that is equal to a minimum of 10% of the Federal Title IV student financial aid an institution received in its most recent fiscal year Given that the HLC uses the same score established by the Department of Education for financial evaluation, many institutions feel significant pressure to be at or above either 1.0 or 1.5. Depending on the institution’s financial condition, a score above 1.0 or 1.5 could avoid additional oversight or negative ramifications of posting a letter of credit. Although the Department of Education’s Financial Responsibility Composite Score measures financially responsiblilty of an institution during a given year, it may not be the best tool to compare its financial condition to other institutions due to the scores limited range and emphasis on current year results. For example, in fiscal year ending 2017, Institution A, with a Department of Education score of 2.3, had a CFI score of 0.3, while Institution B had an ED score of 2.2 with a CFI score of 6.4. Institutions with a score less than 1.0 must: · Continue to participate in Federal Title IV student financial aid programs under provisional certification

This was the result of a greater emphasis by the Department of Education’s score on current operations compared to the CFI score, which weights the institution’s ability to continue into the future on current expendable net assets. In this example Institution B’s expendable net assets exceeded Institution A’s expendable net assets by approximately $250 million. When comparing these two institutions, they are both considered to have nearly the same level of financial responsibility in the current year; however, Institution B is better poised to continue into the future. CFI Score Factors The CFI score is generated through weighting four different ratios in order to evaluate the overall financial health of an institution. Those factors include: The primary reserve ratio and viability ratio are both inputs for the CFI score that measure the ability of an institution to utilize its expendable net assets to fund operating expenses (primary reserve) and existing plant-related debt (viability). The net operating revenue ratio and return on net assets ratio are more focused on the current year increase/decrease to the unrestricted (net operating revenue) and overall (return on net assets) bottom line. CFI & Department of Education (ED) Scores RubinBrown reviewed the financial statements of 53 not-for-profit colleges and universities and calculated the CFI scores for 2016, 2017 and 2018. The mean CFI was 2.5 in FY16 and 3.1 in FY17 and FY18. In FY18, signs of improvement and financial difficulties were again observed among the various institutions. For FY16, the average ED score for the institutions reviewed was 2.3 with a range from 0.5 to 3.0. The average for FY17 was 2.4 with a range of 0.8 to 3.0. For institutions with net assets over $100 million (equaling 36% of the population reviewed), the average CFI score in FY18 was 5.3 and the average CFI score for · Primary reserve ratio · Viability ratio · Net operating revenue ratio · Return on net assets ratio

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Not-For-Profit Institution Scores

INSTITUTION SCORES PUBLIC

CFI Score Distribution by Percent of Institutions

Department of Education’s Responsibility Score Distribution by Percent of Institutions

50%

40%

7.5%

5.7%

22.6% 24.5% 26.4%

30%

18.9% 24.5%

13.2% 15.1% 22.6%

22.6% 24.5%

24.5% 15.1%

9.4% 3.8% 18.9%

20%

FY2016

3.8% 5.7% 3.8%

10% PERCENT OF INSTITUTIONS (%)

0%

86.8%

0 to 2

2 to 4

4 to 6

6 to 8

-4 to 0

8 to 10

FY16

FY17

FY18

5.7%

5.7%

CFI Score by Size of Institution

FY2017

Net Assets > $100m Net Assets < $100m

FY16

4.63

1.34

FY17

5.17

1.99

88.6%

FY18

5.31

1.87

0.0–0.9

1.5–3.0

1.0–1.4

institutions with net assets under $100 million was 1.9. This indicates greater financial health for the larger not- for-profit institutions compared to smaller institutions. Primary Reserve Ratio Given the volatility in enrollment and in contributions from year to year, institutions should be evaluating how well they can function on their existing expendable assets going forward. The primary reserve ratio seeks to provide an institution with a snapshot of how long it could operate without generating any additional revenue. This allows an institution to see how flexible it might be in expanding into new programs or may indicate how dependent the institution is on future sources of revenues to support or expand its mission.

The primary reserve ratio is calculated by dividing expendable net assets by total operating expenses. Expendable net assets exclude property, plant, and equipment net of the related long-term debt. Therefore, it is possible to have negative expendable net assets after excluding property, plant and equipment net of related debt. This can occur sometimes when an institution has permanent restrictions on its net position that exceed its liquid assets. Not-for-profit institutions experienced an average primary reserve ratio of 0.69 for FY16, 0.75 for FY17, and 0.78 for FY18. While the average was much higher for not-for-profit institutions than their public counterparts in FY16 through FY18, there were seven, eight, and six institutions in each year, respectively, whose scores were at or below 0.0.

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RubinBrown Colleges & Universities Stats 2019

Primary Reserve Ratio Frequency by Percentage of Institutions

When an institution’s viability ratio falls below 1:1, it runs a greater risk of not being able to sustain itself with institutional resources in the event of a market or industry downturn. Certainly some institutions can thrive at a viability ratio of less than 1:1, but each one should evaluate how affordable its debt might be and work towards its targeted threshold. Not-for-profit institutions had an average viability ratio of 1.24 in FY16, 1.16 in FY17 and 1.20 in FY18. Institutions that had little or no outstanding debt at year-end were not included in the calculation of averages or ranges. There were six institutions in FY16 and FY18 and five institutions in FY17 that had no debt outstanding at their fiscal year end. Additionally, there were two institutions in all three years with so little debt that the viability ratios were excluded from the calculations for both years. Notably, 41% in FY16, 44% in FY17 and 47% in FY18 of the not-for-profit institutions with debt had viability ratios in excess of 1:1.

50%

35.8% 35.8% 41.5%

40%

30%

22.7% 22.7% 18.9%

13.2% 15.1% 13.2%

15.1% 13.2% 13.2%

20%

13.2% 13.2% 13.2%

10% PERCENT OF INSTITUTIONS (%)

0%

>1.5

< 0.0

0.0–0.5

0.5–1.0

1.0–1.5

FY16

FY17

FY18

Average Primary Reserve Ratio by Size of Institution Net Assets > $100m Net Assets < $100m

FY16

1.37

0.30

Viability Ratio Frequency by Percent of Institutions

FY17

1.45

0.35

50%

FY18

1.53

0.36

40%

22.2% 33.3% 30.4%

This indicates a significant strain on their existing resources. Overall, approximately 60% of the institutions exceeded the target of 0.4 for FY18, while approximately 50% exceeded the target for FY16 and FY17. There was also a wide disparity in the primary reserve ratio between institutions with net assets over $100 million and those under $100 million. Institutions over $100 million in net assets had on average 18 months’ worth of expenses available to be met with expendable net assets in FY18. Institutions with net assets under $100 million only had approximately 4 months’ worth of expenses available to be met with expendable net assets. Viability Ratio The viability ratio is a similar tool for institutions to evaluate how they could use their expendable net assets to pay down existing capital related debt (excluding borrowing for liquidity purposes).

30%

17.8% 20.0% 23.9%

22.2% 13.3% 10.9%

20.0% 17.8% 19.6%

20% 10% PERCENT OF INSTITUTIONS (%) T 17.8% 15.2% 15.6%

0%

> 1.5

< 0.0

0.0–0.5

0.5–1.0

1.0–1.5

FY16

FY17

FY18

Average Viability Ratio by Size of Institution Net Assets > $100m Net Assets < $100m

FY16

2.01

0.82

FY17

1.93

0.74

FY18

2.09

0.71

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Not-For-Profit Institution Scores

INSTITUTION SCORES NOT-FOR-PROFIT

Revenue and Expense Analysis In the current economic climate, institutions face continued pressure to generate more revenue while keeping tuition rates low and increasing scholarships provided to students. The following analysis seeks to illustrate the trends in revenues and expenses over the last three fiscal years. Tuition Dependency Ratio The tuition dependency ratio illustrates how much tuition revenue contributes to the overall operating revenue of an institution. The average percentage of overall revenue generated by tuition revenue by not-for-profit institutions was 64.2% in FY16 and FY17. The score decreased slightly to 63.3% in FY18. On average the 36 public institutions reviewed by RubinBrown generated 35.0%, 33.9%, and 32.8% of their revenue from tuition in FY16, FY17 and FY18, respectively. Public institutions generally rely on state or local government aid for a significant portion of their revenue, and therefore not-for-profit institutions typically must have higher tuition rates to provide commensurate levels of service to their students. Contribution Ratios Contribution ratios seek to show how much of the total operating expenses are covered by certain types of revenue. In the following chart, it is noted not-for-profit institutions in FY18, on average, had a tuition and fees revenue contribution ratio of 62.6%, auxiliary revenue contribution ratio of 13.7% and a private gifts contribution ratio of 15.9%. The remaining 7.8% of expenses for institutions were either not covered or were covered by other revenues such as investment income. The chart also illustrates that institutions with

net assets greater than $100 million generally generate more revenue through tuition and fees and needed less contributions as a percentage of total revenue to cover operating expenses. Revenue Contribution Ratio Averages by Type of Institution Overall Average Net Assets >$100m Net Assets <$100m

Net Tuition & Fees

64.3% 71.7% 60.2%

Net Auxiliary

13.4% 8.9% 16.0%

Private Gifts

16.7% 10.5% 20.2%

FY16

Total Percentage

94.4% 91.1% 96.4%

Net Tuition & Fees

63.6% 71.1% 59.4%

Net Auxiliary

13.6% 8.9% 16.1%

Private Gifts

15.9% 9.1% 19.8%

FY17

Total Percentage

93.1% 89.1% 95.3%

Net Tuition & Fees

62.6% 70.1% 58.4%

Net Auxiliary

13.7% 9.0% 16.3%

Private Gifts

15.9% 9.8% 19.3%

FY18

Total Percentage

92.2% 88.9% 94.0%

Year-Over-Year Change in Net Tuition and Fees Revenue and Expenses The tables below illustrate that tuition and fees revenue increases have not met the increase in total expenses year-over-year as there is continued competition for enrollment in a climate of rising costs.

Year-Over-Year Percent (%) Change

Average

MO

KS

% with Increases % with Decreases

Tuition and Fees

0.58%

1.19%

-0.96%

52.8%

47.2%

2016 –2017

Total Expenses

1.88%

2.69%

1.38%

62.3%

37.7%

Tuition and Fees

0.85%

0.77%

2.47%

45.3%

54.7%

2017 –2018

Total Expenses

2.70%

2.78%

4.23%

66.0%

34.0%

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RubinBrown Colleges & Universities Stats 2019

Scholarship Allowance One way that institutions have sought to attract more students is by increasing the scholarship allowance through providing more discounted tuition to students. Smaller institutions with less specialized degree programs generally have had to provide more scholarships in order to attract students in the current competitive environment. This is evidenced in the following chart illustrating institutions with net assets of less than $100 million generally provide on average a discount of 40% to students while larger institutions only provide a discount of between 25%-27%.

important because it is a key indicator of an institution’s ability to expand operations. Widely viewed as an industry standard, 7.0% is regarded as the upper threshold for this ratio; however, some institutions can still operate successfully while exceeding this ratio. A higher debt service burden indicates that an institution has less flexibility to manage its operating budget. Institutions with diverse revenue streams might be more comfortable with a higher debt burden ratio than institutions that are highly dependent on revenue generated by tuition. Not-for-profit institutions exhibited a wide range of debt burden ratio results in FY17 at 0.0% to 19.8% and 0.0% to 25.3% in FY18. The average debt burden ratio was 5.5% and 5.2% in FY17 and FY18, respectively. There were five institutions in 2017 and six institutions in 2018 that had no debt outstanding at their fiscal year end.

Scholarship Discount Rate Frequency by Percent of Institutions

50%

40%

32.1% 34.0% 30.2%

Debt Burden Ratio Frequency by Percent of Institutions

18.8% 28.3% 16.8% 9

30%

18.9% 13.2% 17.0%

50%

15.1% 15.1% 13.2%

20%

9.4% 11.3% 9.4%

40%

5.7% 5.7% 5.7%

10% PERCENT OF INSTITUTIONS (%)

24.5% 24.5% 30.2%

28.3% 28.3% 26.4%

30%

0%

17.0% 20.8% 19.0%

17.0% 7.5% 15.1%

20%

60%+

13.2% 11.3% 7.5%

0%–19%

50%–59%

20%–29%

30%–39%

40%–49%

FY16

FY17

FY18

7.5% 1.9% 0.0%

10% PERCENT OF INSTITUTIONS (%)

Scholarship Discount Rate by Size of Institution Net Assets > $100m Net Assets < $100m

0%

10% +

0%–2%

2%–4%

4%–6%

6%–8%

8%–10%

FY16

FY17

FY18

FY16

24.85%

39.06%

COLLEGES & UNIVERSITIES SERVICES GROUP

FY17

25.94%

40.06%

FY18

27.00%

40.71%

Corey Robinson, CPA Manager 816.859.7943 corey.robinson@rubinbrown.com Chester Moyer, CPA Partner-In-Charge 816.859.7945 chester.moyer@rubinbrown.com

Debt Burden Ratio The debt burden ratio is typically calculated by dividing debt service by total expenditures. Debt service consists of the interest and principal paid on long-term debt (excluding principal paid on refinancing transactions). A significant number of institutions rely on debt to finance operations, so the debt burden ratio is

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Not-For-Profit Institution Scores

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