Friday, June 10, 2016

Reinterpretation of Small Colleges and Their Struggles is Certainly Overdue

Will Wootton authored an interesting post, "The Real Reason Why Small Colleges Fail," for The Chronicle of Higher Education.  He comments that he takes Burlington College's demise personally and that the closure " a number of other small institutions recently shuttered or nearly so, reinforces the idea that such institutions are inherently frail, that their size renders them unsustainable.  Conflating that stereotype with assumptions about academic quality, curricula, student success, and institutional history leads to a conclusion that small colleges are suspect--they must be because they fail."

Wootton's post certainly struck a chord.  He notes that 30% of private nonprofit institutions in the United States have enrollments under 1,000 and then comments, "...I can tell you from experience that if it were small size alone, if the diseconomy of scale were that overwhelming, then all these places would have expired years ago..."

Review of changes in financial ratios using an approach from certainly underscores Wootton's commentary.  Stars are placed on the diagram below for three of the institutions mentioned in the article based on changes in their equity and expense ratios from FY2011 through FY2015.  None of the three stars fall in the financially unsustainable section of the grid, even though the fall 2015 f.t.e. enrollments ranged from 112 to 360 students.

Financially sound does not imply there are no struggles, but for the moment, these institutions are not in the unsustainable position others are facing.

Out of personal interest, I placed another star for Martin University after posting their recent announcement that they will be adding a fascinating teacher education program in fall 2017.  Martin U. was founded in 1977 and their fall 2015 f.t.e. was 262.  Martin also appears to be financially sound and they appear to be moving forward in a determined way by working with other local partners to meet a serious local need.  The new program is consistent with their mission to serve people in the neighborhoods of Indianapolis where Martin is located.  I'm guessing they will do just fine!

So, what about other small colleges?  I focused on roughly 300 institutions with f.t.e. enrollments between 250 to 750 students that submitted financial data to IPEDS permitting calculation of equity and expense ratios for two different periods, from FY2004 through FY2008 and from FY2011 through FT2015.  The resulting picture is one of relative stability and once again supports the argument Wootton makes in his article.   

Over one hundred of the institutions, roughly one-third, of these very small institutions, appear to be financially sound in both time periods.  And, in spite of a lot of blog posts and other rhetoric or hand wringing, the number of financially unsustainable institutions decreased from 100 to 86.

So, I agree with Wootton that we need a more nuanced conversation when it comes to small colleges and universities.  Some are under sufficient stress that they will close...however, there are also many that are managed in such a way that they will likely be able to continue serving for many, many years.

The risk of seeing small enrollments as a problem is that the usual prescription then calls for chasing enrollment.  We've all seen how this can lead to unsustainable policies with respect to discount rates or use of debt financing.  

Managing expenses to match revenues is a difficult endeavor in the best of times.  And, I'm guessing there are a number of business managers and trustees serving financial committees of boards that deserve a lot more praise than they have received!!