Strategic Financial Health Definitive Guide 2021
What does your institution’s financial health look like to external organizations – such as accreditors and state agencies? This question is being asked more and more – and some organizations are answering it for an institution on their behalf, without institutional input! This Strategic Financial Health Definitive Guide 2021 helps senior leaders understand the data that is publicly available, what it says about their institution, and ways to add institutional context – even if you aren’t asked. In this definitive guide, we’ll discuss the organizations that currently collect and/or analyze financial health data, what that means for institutions, and what’s likely to come next (hint — IPEDS Financial Health data). The Definitive Guide is broken into four segments:
1) Why the heightened focus on financial health?
2) Who are the organizations that assess financial health and what data points do they use?
3) Action & Resources
4) How to get your institution’s financial health report — so you know what others already know about your college/university/
While it seems that institutional financial health has surged as THE focus point for colleges and universities. The truth is that finances, value for the degree, financial health, etc. have been important topics for decades. It is hard to believe that anything could be more important than enrollment – but institutional financial health has moved up to the #1 top slot. True – finances and enrollment are correlated. But the focus is on institutional financial health. This has decision makers – within as well as external groups such as state agencies and accreditors focusing on financial accountability. As a result, college and university leaders are enhancing their strategic financial health plans. What does you’re your institution’s strategic financial health accountability report look like?
We’ve intended this guide to be a practical one. I’m not a CPA – but – I have over 20 years in higher education, institutional research, accreditation, federal data, etc. This guide is intended for the non-financial folks – and helping them understand why they should dig into the financial data as well. Financial data … it’s not just for CFO’s anymore.
In the next section, we’ve culled together the organizations that collect data and/or rate institutional financial health.
At this time, five organizations collect and/or evaluate the financial health of colleges and universities. Each organization is listed below along with details of their methodology, parameters of who they assess, and the data elements they include in their assessment.
IPEDS Financial Health Data
- Beginning in April 2021, IPEDS will collect from degree-granting institutions, the numerator and denominator on four metrics. These data will be gathered through the Finance survey.
- IPEDS will not calculate the ratios, however, ranking organizations will likely perform the calculations and incorporate it into their rankings.
- The new IPEDS Financial Health metrics are the result of an IPEDS Technical Review Panel (TRP), which found “The financial health of higher education institutions is noted as an important issue for policymakers and consumers. Panelists noted the lack of metrics regarding financial health currently available in IPEDS and agreed that NCES should make available to the industry financial health indicators that expand on the revenue, expenditure, and balance sheet portions of the current Finance survey component. They suggested adding a new screen to the Finance survey component for institutions to report the underlying data for NCES to calculate the following ratios (based on NACUBO’s Composite Financial Index calculations, which are published for NACUBO members for strategic planning analysis). The suggested ratios and underlying data (numerator and denominator) are summarized in Table 1” (p. 6).
Edmit College Search
- The Edmit modeling approach is summarized by asking: “Given previous revenue and expense trends for institutions, and institutions’ net assets, to what extent are institutions at risk of insolvency?”
- The Edmit college financial health model looks at past financial measures to predict future finances.
- Edmit added a COVID-19 impact that includes two additional metrics: 1) the college’s experience with distance education and 2) the college’s reliance on international student enrollments.
- Edmit assesses private not-for-profit institutions only.
- Data elements include:
- Revenues exceeding expenses
- Net assets greater than 0
- Revenue and expense “shocks” on institutions’ financial health due to COVID (not including CARES Act funding).
Forbes’ College Financial Grade & GPA
- Forbes analyzes all private not-for-profit colleges in the U.S. with enrollments greater than 500, grading them on a variety of publicly available data points from the federal government. Authors “averaged the figures from the two most recent ‘final release’ fiscal years, 2016 and 2017.”
- Forbes assesses private not-for-profit institutions only.
Data elements include:
- Endowment Assets Per FTE
- Primary Reserve Ratio*
- Viability Ratio
- Core Operating Margin
- Tuition As a Percentage of Core Revs
- Return On Net Assets
- Admission Yield
- Percent Freshman Getting Institutional Grants
- Instruction Expenses Per FTE
Hechinger Report Financial Fitness Tracker
- The Financial Fitness Tracker uses publicly available data provided by the NCES.
- Colleges are rated on four criteria on a scale of 0 to 3 (with lower scores indicating stronger financial health)
- Hechinger assesses private not-for-profit and public institutions.
- Data elements include:
- Change in enrollment of first-time undergraduate students (for four-year institutions)
- Retention rate (for four-year institutions)
- Change in the average tuition-and-fees revenue per student (for four-year institutions)
- Change in state appropriations (for public four-year institutions)
- Change in the ratio of endowment to total expenses – excluding any hospital costs (for private four-year institutions)
- Change in entering student enrollment (for two-year institutions)
- Change in the ratio of tuition-and-fees revenue to instructional costs (for two-year institutions)
- Change in state and local appropriations (for two-year institutions)
- Professor Galloway/USS University assembled a worksheet of 441 universities included in US News and World Report’s Top National College Rankings. Based on the ratings, institutions were placed into four quadrants: Thrive, Survive, Struggle, and Challenged.
- USS University assessed private not-for-profit institutions only.
- Data elements include:
- Value-to-Cost ratio (three metrics: credential, experience, and education calculated as (Credential * Experience * Education) / Tuition.
- Vulnerability score calculated as (Endowment / Student and % International Students)
US DOE Composite Score
- The US DOE releases its measure of overall financial health annually on the FSA website.
- Scores range from -1.0 to + 3.0, with higher scores indicating stronger financial health.
- US DOE assesses private for-profit and private not-for-profit institutions only.
- Data elements include:
- Composite Financial Index (CFI)
With each organization’s approach and methodology for rating institutions defined above, we look next to a side-by-side comparison of the financial ratings. In the tables below we offer a comparison of:
- Institutional types included in the analysis
- Data elements used to rate each institution
- Special notes related to each entity’s rating process
Context for any number matters – a lot. Without context for the numbers – misinterpretation (both positive and negative) is likely. NACUBO notes that context is critical in understanding an institution’s Composite Financial Index (CFI) Score. “The CFI only measures the financial component of an institution’s well-being. It must be analyzed in context with other associated activities and plans to achieve an assessment of the overall health, not just financial health, of the institution. As an example, if two institutions have identical CFI scores, but one requires substantial investments to meet its mission-critical issues and the other has already made those investments, the first institution is less healthy than the second. In fact, a high CFI is not necessarily indicative of a successful institution, although a low CFI generally is indicative of additional challenges. When put in the context of achievement of mission, a very high CFI with little achievement of mission may indicate a failing institution” (NACUBO, 2010, p. 142).
Review Your Data
Given the growing focus on institutional health, colleges and universities need to look at their financial data BEFORE submitting their data. Once data are submitted to external organizations, the data cannot be corrected or updated until the following year. So – if you (or someone external) notices an error in the public data – you have to live with it for a year until the next submission.
If you’d like to learn about on-the-shelf metrics you should be reviewing regularly in the interest of your institution’s financial sustainability, check out the recent article, co-authored by IEHE President Kristina Powers, and published by EvoLLLution. It’s full of great ideas about how to use what you have to start forming an institutional data strategy.
View the Data As an External Reviewer
As noted and shown earlier – there are currently 5 organizations that are collecting and/or analyzing financial health data – and there are 5 different ways of calculating the numbers. Thus – it is important to view your institution’s data in the ways that external organizations are calculating the numbers. Why? Because the institution needs to add context to the numbers and tell their story for themselves – not have it told for them. Additionally – a DEEP look at the data from multiple internal viewpoint often can reveal insights, reclassification of funds, and better understanding of how the institution operates.
The Strategic Financial Health Report offered exclusively through IEHE, provides institutions with a comprehensive view of how external organizations view their data. Additionally, peer comparison data can be included (when available), yielding additional insights and information to better tell your institution’s story to external agencies such as your accreditors, state agency, Boards, etc.
Want More Resources?
Here are some resources for further reading:
Five Facts You Need to Know about Financial Responsibility Scores
As a senior leader, it is hard to digest external data like this piecemeal for your institution. There is so much information out there. And it takes time to collect it and put it in a format that you and other campus leaders can understand and act on.
That’s why we’ve created the Strategic Financial Health Report.
The IEHE team develops custom reports for each institution. Your report provides a comprehensive financial health profile based on publicly available metrics. We compile your institution’s ratings by each applicable agency and explain what they mean. The IEHE Strategic Financial Health Report will show you what others see about your institution in one easy to understand report.
You can even include your peer comparison group so that you can see how your institution stacks up against the competition.
Reach out to the IEHE to get your Strategic Financial Health Report today.