In Higher Ed Bigger Is Better... Generally

A recent interview with Alice L. Brown, former president of the Appalachian College Association and a long-time champion of small colleges, found her saying "It's a mess out there for these little schools", adding that "A lot of struggling colleges should give up the fight to stay alive." And she is right.

Recent data on the viability of colleges is sobering. A September 2015 Moody's Investor Service report highlights a persistent inability among small colleges to increase revenue, which could lead to as many as 15 institutions closing for good by 2017, well up from the usual rate of five annually. The main threat for many small colleges, defined by Moody's as private colleges with operating revenue below $100 million and public colleges below $200 million, is declining enrollment. In fact, 72 institutions have shut down since 2007, 86% with enrollments less than 1,000.

Presenting at a recent California Higher Education Innovation Council seminar Dave Hoverman, Managing Director at Parthenon-EY, noted that higher ed enrollments have declined from their 2010-11 peak, the consequence of changes in demographics and the labor market. Many institutions have increasingly targeted adult learners and online enrollments as a way to offset declining revenues in the face of increasing expenses.

At the same conference, Robert S Lytle, Managing Director and Co-head of Education at Parthenon-EY, also noted that a large number of subscale institutions have struggled in the recent economic downturn. Enrollment trends between 2010 and 2013 have been negative for institutions with less than 10,000 students, ranging from a -5.2% in those with less than 1000 students to -0.8% for those with 5000 to 9,999 students.

Furthermore, the number of 4-year, private not-for-profit institutions with expenses greater than revenues has been rising. In 2007, 271 (or 13.9% of the total) met these criteria, while in 2013, 394 (or 17.8% of the total) did so. As a result, ratings downgrades have accelerated. For example, S&P ratings for U.S. colleges and universities in 2006 resulted in eight downgrades and 27 upgrades; in 2015, as of August of that year the agency had already issued 33 downgrades and only four upgrades in rating.

Mr. Lytle noted that there were several risk factors that were fairly predictive of institutional closure, including:

• Enrollment under 1000
• No complete online program has been developed
• Annual tuition increases greater than 8%
• Tuition discount greater than 35%
• Tuition dependency greater than 85%
• Ratio of endowment to expenses less than 1/3
• Debt service greater than 10% of expenses
• Expenses greater than revenues

The number of institutions demonstrating 1, 2, 3, 4 or 5 or more of the above risk factors comprised 39%, 27.6%, 14.1%, 3.1%, and 0.6%, respectively, of 2297 4-year, private not-for-profit and public institutions in 2007. Only 14.8% demonstrated no risk factors. Not surprising, institutions with more than 5 of these signs were more likely to close than merge. Most concerning is that currently there are 122 institutions that exhibit more than 4 risk factors for closure, almost all of them in the smallest institutional size category.

So bigger is better, at least where financial stability is concerned.

However, it is also clear that many small institutions are providing a needed service for remote communities. As Alice Brown reminds us many students do better if they attend colleges that are not too far from home and that can give them a lot of personal attention. And a few schools with small enrollments may succeed by intentionally defining and serving a specific a niche. But as Brown notes, "we don't need three colleges with 600 students apiece within a 30-mile radius, where the only difference is their denomination."

While closure may be in the near future for some schools, many more will benefit from greater collaborations, partnerships, alliances, systems of shared services, or even outright mergers. In fact, Moody's predicts that the number of university/college mergers will double, reaching four to six a year; up from the 10-year average of only two to three a year.

And there are many more institutions than those facing closure that should explore these alternatives. For example, using 2013 data, Lytle noted that 35% of 4-year, private not-for-profit and public institutions (77% of those with less than 1000 students vs. 15% of schools with 5000 to 9,999 students) demonstrated 3 or more risk factors for closure. Many of these institutions should consider how to become more efficient and how to better serve their students. And they should do so now.

Yes, as for any other industry bigger is (generally) better.

And bigger can be better on a number of different planes, not just in administrative efficiency and financial survival. For example, the number, variety and richness of the academic programs offered to students and support services offered to faculty can be enhanced at little or no additional cost. Options worth exploring.... If only university executives and oversight boards would do so.