Failure Has Many Causes
Why are some colleges seemingly collapsing overnight? There are many causes for some private colleges surviving at the brink, but it takes a particular set of circumstances for a sudden collapse. What follows are factors that could drive a massive financial crisis. This list is based on research on financial collapse and interviews of leaders who passed through a cataclysmic financial crisis.
Elements of a Massive Financial Crisis
• The board of trustees miss signals that the college faces a financial catastrophe.
• The board needs to receive sufficient and accurate information about the financial condition of the college.
• Cash reserves are less than two months, and the next federal tranche is not expected to arrive until after cash is exhausted.
• Over-collateralization of property eliminates the college’s flexibility of selling property for cash.
• Handbook rules that prevent an immediate reduction-in-force plan or lead to ambiguity over who has decision authority over academic matters.
• Third-party enrollment contracts in which a contractor receives a portion of the tuition and fees from new students. A college with a high tuition discount rate, and if it is combined with the contractor’s rate, can find that it receives little or no cash out of new student tuition. For example, here is a case where a college discount has a discount rate of 75% and contracts with an enrollment agency that charges 25% of new student tuition revenue; this college will only receive 5% of new student revenue.
• Buildings that are empty and have been financed by loans. These buildings are a dead weight on the college’s finances.
• Very low student-faculty ratios result in a too expensive faculty and insufficient tuition revenue to support their compensation. Even worse, many colleges have low bars for tenure that makes it challenging to do a reduction-in-force or even to reduce their pay.
• Board meetings fail to have a quorum.
• Neither the president nor the board practice due diligence on plans or contracts.
• Neither the president nor the board involve legal counsel who is experienced in higher education law to vet strategies and operational plans.
• Either the president or the board chair or both publicly announce that they expect the college to close. The result is devastating. New students withdraw their applications, and donors stop giving to the college.