Six key financial and operational metrics pinpoint higher ed risk

More four-year colleges and universities are at financial and operational risk than may have been previously thought, a new EY-Parthenon financial health metric shows. The Institutional Viability Metric (IVM) considers market demand, student outcomes and financial position to help institutional leaders get a dynamic view of their institutional health in time to take strategic and operational action.

For institutions for which all six indicators can be calculated with available data, indicators are scored 1 to 3 and then weighted to arrive at an overall IVM score. Thus, an institution can receive a maximum score of 3 or a minimum score of 1. An institution is “At Risk” if it receives an overall IVM score of less than or equal to 2. An institution is placed in the “Monitor” category if it receives an overall IVM between 2 and 2.3. An institution is considered “Stable” if it receives an overall IVM above 2.3.

The IVM seeks to be transparent in terms of variables used and scoring, rather than a “black box,” which can limit the interpretability and actionability of output. The IVM is also structured to be easily replicable, enabling it to be a diagnostic tool for institutions and comparable across peer sets and regions. Most importantly, the IVM is designed to be intuitive, modeling real cycles of risk and stability that we see in the market. 

Key findings on institutional risk

Using the IVM, the EY-Parthenon team identified all four-year schools open in 2019 and calculated their score 1) in 2019 using 2019 data (pre-pandemic score) and then 2) in 2020 using 2020 data (early pandemic score).

Among the insights:

•  Based on 2019 data, only about three in five four-year institutions are “Stable.” Roughly 20% of four-year institutions are “At Risk,” and another 20% of four-year institutions are in the “Monitor” category.
•  Higher risk schools are notably smaller on average — in terms of enrollment — in both the public and private sectors
• Intensity of risk varies geographically: there are only 17 states in which the share of institutions “At Risk” is less than 10%. In 22 states, more than 20% of institutions are “At Risk.” In 10 states, more than 30% of institutions are “At Risk.”
• On average, the proportion of enrollees that are Pell grant recipients is higher at “At Risk” institutions compared to “Monitor” and “Stable” institutions (46% vs. 41% vs. 33%, respectively).
•  Based on 2020 data (which includes early COVID-19 impact), roughly 20% of the four-year market remains “At Risk.” IVM scores were relatively consistent between years, though there was some movement in the “At Risk” and “Monitor” categories . We hypothesize that the full financial and operational effects of the pandemic remain to be seen, likely in 2021 and 2022 data, which may change the distribution of risk among four-year institutions. Early COVID-19 impacts are already reflected in the profit margin indicator; notably, the average profit margin of “Stable” schools dropped from 8% in 2019 to 1% in 2020. 

Using IVM to guide strategic conversations

Higher education institutions will need to be more proactive about their financial health to survive in an increasingly challenging landscape. The IVM can help institutions and their boards achieve earlier intervention on financial health so that strategic conversations can take place and guide institutions more effectively toward financial sustainability.

“Monitor” schools specifically may be best positioned to reverse declining positions if intervention is early and proactive. The “Monitor” category is where further EY-Parthenon exploration will focus.

We anticipate that the overall financial picture for 2021 and 2022 is likely to be distorted to some extent by the one-time federal relief funding received by institutions during this period. When we update this report with the next set of publicly available financial data, we will attempt to pull out the amount of one-time federal funding received by institutions to evaluate their financial metrics. It remains to be seen whether COVID-19 relief funding was a much-needed intervention, or one that set back higher education back to some degree in terms of change and transformation. In the words of one higher education Chief Financial Officer, “did institutions use the funding for transformation or as ibuprofen?”

Time will tell. Going forward, the EY-Parthenon team will re-assess risk for the four-year institutional landscape and work with individual institutions to conduct financial health reviews and evaluate strategic and operational options.