Private colleges in deep financial distress must be extremely adroit to survive. Specifically, presidents of these colleges will be forced to devise financial strategies that do not violate the law but will teeter on the edge of credible and acceptable actions by creditors, bankers, auditors, accreditors, and government officials.
Examples of the Slender Thread
- Auditors’ final report –
- Going Concern Issue, affects credit standing and capacity to borrow;
- Assets are reduced placing college in violation of debt covenants;
- Positive Net Change in Net Assets Revised to Negative Net Change placing college in violation of debt covenants;
- Indicates that the college has been borrowing from the endowment in excess of allowable amounts; placing the board of trustees at legal risk and the college at risk to pay back the excess;
- Indicates that the college has significant bookkeeping errors that raise questions about the validity of financial reports filed with lenders and regulatory agencies.
- Accreditors action –
- Rejects new program that was expected to produce sufficient revenue to cover future deficits;
- Rejects policy changes needed to cut academic costs;
- Places the college on warning notice.
- Government Regulatory action –
- Federal financial score for financial aid falls below minimum leading to the government requiring a substantial set aside of credit to be available to continue to receive federal aid. This could deplete cash reserves to the point that continuing operations is not possible.
- State regulator rejects a new program with a similar consequence as with accreditors rejection.
- Local government turns down zoning changes that would permit the construction of a new revenue generating building with similar consequences to the rejection of a program.
While these cases are hypothetical, many colleges have had to deal with them. In some instances, unexpected negative reports from an auditor, accreditor, and federal or state agency has pushed a college to the very edge of financial collapse.
The Slender Thread Can Bring a College to Its Knees
When It Snaps!
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