Meredith College (NC) Financial Health & Viability Review for Colleges & Communities

Welcome back to the College Financial Health Show with Matt Hendricks and Gary Stocker, where each week we look at the financial health and viability of two private colleges in the United States. And Dr. Hendricks, before we get started today, congratulations, this is our first anniversary. We've been doing this show every Tuesday without fail, I think, for the first year, and we've reviewed the financial health and viability of some 130 private colleges. And Matt, I'll give you my observation. I don't have to look for colleges to put on the show. We get requests all the time, and our list now is into September sometime, I believe, for colleges to show. That's fascinating. And we've had 50,000 hits to the YouTube channel, not all of them for the show, but it's fascinating to see how quickly this has caught on. What's your observation in the first year?

No, it's the same. I mean, I kind of expected we would get a lot of, uh, I don't know, support and people watching the show, also some pushback. I guess one of the things that, like, looking back on this whole year, over 100 shows, one is I'm like amazed that we did 100 shows, 100 schools, not 100 shows, 100 schools. That's a lot. Another is that I feel like this, the show's evolved a little bit. Initially we started, at least my focus was more on like sort of getting the word out about schools that are struggling financially because it seems to be one of the big hurdles, right? It's a lot of schools are in denial or they just hide it or whatever. And I feel like folks should know that are at these places that they're in serious trouble and they should know it early. But it has sort of evolved from doing just that to more about also how can we point to things that could help the schools. So yeah, part of that was just kind of user feedback because we do have tools that are quite useful, of course, for identifying schools that are in trouble, but also things they might do to fix their budgets.

Right.

So. I like that evolution of the show. Yeah, all the requests are a little bit surprising to me, but it just goes to show you that there's a lot of— there's an information gap, right? And we're trying to fill it and there's a demand for that and we'll keep doing it. And I've enjoyed doing it this entire year.

Well, good. What calls do you have on our agenda for today?

So we have two. And again, I'll go into a little bit of depth to try to point to some things they should dig into, but we're starting with Meredith Colley. College in North Carolina, and I'll share my screen and go straight into the Advanced Compass. All right, so Meredith College, I'll bring them up. Oops, not I, E. Okay, Meredith College. Um, all right, so, uh, a couple things to note right away, and I hope this is really clear. I zoomed in here. Um, looking at net income margin, again, this is like the profit of the profit margin for the university, and you don't want these numbers to be below zero. Very often, certainly not this many times in the last 7 years. I think we have 1, 2, 3, 4, 5, 6 out of the last 7 years negative net income. So that is problematic. And so what is this going to mean? It's going to mean a lot of things. It's going to mean the school's not— is going to have depleting unrestricted net assets, which is a problem. And we can see it right here. I'll just show you. Unrestricted net assets over time. Well, one, they don't have a lot of unrestricted net assets. They only have $22 million. But it's basically they were up 23% up at one point, and now they're up only 1%. So, and then, you know, during this 7-year span, just no growth in unrestricted net assets, which is a big problem because as they're sort of stagnant, other schools are getting wealthier, right? Their competitors are getting wealthier, and it's not a great place to be. So we'll dig into what that means. But ultimately what it means is they're at risk of running out of cash and not having the capability of competing with other schools in terms of the pricing strategies and stuff like that that other schools are able to use that would be sustainable for them just because the school doesn't have a lot of resources, right? Yeah, um, they do have, uh, which is a little bit odd, they do have a decent endowment, but it's virtually all restricted. Um, again, only like $18 million of it I think is unrestricted. So that is, uh, an issue that the school's going to have to, to deal with probably forever. But, um, yeah, it— restricted endowment money is not quite as useful. Yeah, it supports the budget, but, um, it can't— you can't just sort of use it without Well, obviously without restrictions to sort of bail you out of a pinch.

All right.

So take a look at their endowment. Their endowment during this sort of rough patch of financials has also struggled. I think the rough patch started right here. Their endowment was growing faster than, than the median school in the country, but since then has fallen off quite a bit. And as you've seen if you've watched the show before, almost always the case is that they're just drawing too much or higher than normal amounts on the endowment. And you can see that's true during that 7-year period where the financials don't look quite, uh, look very strong. They're making massive draws, 6.5%. Their previous, last year's draw was 6.8%. And again, it's not, um not ideal. They're pulling down the value of their endowment, so they're losing unrestricted net assets. They're also— their endowment's not growing very quickly. So all of this is setting them up for a difficult future.

And Matt, we have to wonder, we've seen before in other states where colleges in trouble will go to the state's attorney general to ask for reallocation of restricted endowment to unrestricted. Do you think that Meredith is a candidate for that?

Yeah, well, not quite yet, but certainly when that unrestricted money, if it runs out, right, which their deficits aren't huge on a net income margin basis, but we've seen schools that run, run along kind of sputtering for a while and all of a sudden, bam, the deficits are massive and they only have, you know, only have $20 million in unrestricted net assets that could be eaten up. Pretty fast in some cases. So they may be a candidate for that down the road. But yeah, and they need to be— there's more and more cases I'm seeing people are using restricted endowment assets as collateral on debt, which I think is actually illegal. And they may be doing it without knowing that it's illegal in most states. And there was a recent court case with Finlandia University in Michigan that did the exact same thing. And I think they lost, right? I think the bank had to give the money back. If you're a bank taking collateral from a university, make sure it's not restricted money because you can't probably keep that if the school were to close. It's not collateral. Anyway, that, that I don't want to give the impression I don't think the school is at risk quite yet. Like I said, the net income losses are not massive, but there are a lot of warning signs here. So don't let it creep up on you. So other warning signs we see with schools that struggle. Is they don't invest in their physical plants to the level they should. Right. So what I'm looking at here is the ratio of cap spending on property, plant and equipment relative to depreciation. Ideally, this would always, or at least on average over like, say, a 5-year span or so, be above 1 at least. Right. And you can see it's not in their case. They're only above 1, 1 year. Out of the last 8 or so, only twice out of the last— how many years do I have here?

10? I think it's 9.

Yeah, twice out of 9 years. So, so not ideal. And what you'll see in those cases is the— obviously the value of the property is declining, right? So the average school's value of property, plant and equipment over this period is up 17%. Theirs is down 11%. All right. So that— and I don't think they sold any buildings. And so it could be part of selling buildings, stuff like that. But you're just like eroding your capital stock, right? The computers might be old. The, you know, the place might not be well kept. Roofs might be leaking, windows, all the stuff that happens, parking lots crumbling, that kind of stuff. You worry about that. And again, these are all warning signs that the school is not operating in a sustainable way financially. So let's take a look at what we usually do to try to help schools out is take a deeper dive on their— still a bit, a little bit high level, but we take a deeper dive on the revenue side and the expense side and offer some insights into what's happening. So I'll show you total revenue and then we'll dig into, and then we'll dig into the expense side as well. So their total operating revenues are not great. I mean, they're down 6%. And again, just don't get into the habit of thinking that's normal. It's totally not normal, right? A normal school is up about 17% on operating revenue. Okay, so a serious red flag here to be down, especially while we've had double-digit inflation over this period. So in real terms, your operating revenue is way, way down. Um, okay, so that's part of it. Net tuition revenue.

And that way, while you're bringing that one up, it goes back to something we always talk about, and it's compare. Yeah, harp on this all the time. You just can't— in the 21st century, you can't rely on just comparing your own internal data. You need tools like the Private College Advanced Financial Compass to compare yourself to everybody else.

Yeah, and net tuition revenue is down 22%. Again, totally not normal. I know schools like to get into this discussion about, oh, all of higher ed is struggling and this is normal. It's not normal. Okay. This is totally not normal to be down 22%. It's normal to be up 2% in net tuition revenue. So what's causing the decline? It actually doesn't appear to be price to me. This price looks pretty constant, not in real terms, but in nominal terms it is. Kids were paying about $19,000 on average tuition, still paying about $19,000 on average. So the big driver here is going to be enrollments, and I'll show you that. Students headcount FTE is down 3%.

Ouch.

With a, with a sharp decline here. Um, that is abnormal. You usually don't see really sharp drops in enrollment, right? Because it's a, a cycle that really has like a 4-year, uh, sort of transition to a new steady state. So to have a sharp drop like that is bizarre. Maybe they cut some programs or, um, change something sharply right here. I'd look really closely at what happened with this drop. That's pretty catastrophic in one year. Um, I was like, in order— so just to put it in perspective, to basically get that kind of drop— so this is almost like a 20% drop. If you were, if you were a school, a 4-year typical 4-year school, and you didn't enroll any freshmen How much would your enrollment drop? About 25%, right?

Yeah.

So that's how dramatic, that's how large this impact is in one year. So I really am tempted to dig into this and figure it out. And I have more advanced tools I use with school, over 150 schools I've used this with basically, that dig into why this could be happening or what happened, what was the driver. There's some new things you find there.

And viewers, Matt's talking about the Strategic Compass, which is a tool dedicated to look at all the, all of the how-to-fix-things data that Matt's talking about. Yeah.

Yeah. It's not normal to have sharp jumps like this. And this, here's another one here. These are, these are both very bizarre. So I would look very closely at that. Okay. So while their revenues are really struggling, the expense side is not. Tracking correctly. So expenses are up 5%, right? Yeah, they've kept them pretty well flat for a long time, but you can't— it's not good enough when your revenues are decreasing, right? Yeah. So school's got deficits.

All right.

So what can we do? What might they do about it? Let's take a look there on the expense side. The expense side is obviously the quickest easiest part of the process, in my opinion. Don't, don't just sit around and wish for enrollments to increase and your revenues to increase. For one, you just might not have time, right? Remember, it takes 4 years. Anything you do today, you won't realize the full impact of that on your revenue for at least 4 years, probably longer. And talking about making massive investments today, right, to try to bring up enrollments. You're not even going to get to break even for probably at least 6, 7, 8 years, right? So a lot of schools just don't have the time span to just focus only on the revenue side. It just doesn't move fast enough.

Yeah.

Okay. So let's take a look at expenses. And the big one for them is staffing. It's almost always right. Every show here, right? It's either staffing or, or vendor contracts or wild shifts in sort of paradigm on the expense side. Okay, so here's what I'm saying with the employee count. Employee count's too high relative to the size of the school, relative to FTE, and also relative to their revenue. It's also higher than normal. So that's just the number of employees, right? And then if you dig into also like the compensation part, most employees are what we're going to be labeling other employees. These are other than directors and officers. and per FTE, again, very high. You're spending $16,000 per student on employees. That's not even including the upper admin. All right.

Tuition was like $19,000.

Yeah, almost all your money is sort of, yeah, all your unrestricted revenue, a lot of it, not all of it, is a lot too much of it is going to salaries. And it's two things, probably they have too many people and maybe the compensation packages are not in line with what's normal. But here's the, um, per operating revenue. So you can just see right here, they're spending 46, 47% of their operating revenue, unrestricted operating revenue, on other employee salaries and wages. That, again, that's not including the directors and officers. Let's look at— look at them. They're probably going to be high as well. Yeah, that's a little bit high.

A little bit higher.

Yeah, a little bit high per FTE.

We've seen a lot worse, but yeah, that's high.

Much worse. We're going to see one that's much worse here in the other show we're recording for today. So it looks like they need to take a deep dive on the staffing. And again, another thing that's offered through the other tools that I provide, and I also offer like support, like really integrated support to go in and dig into staffing levels at the department occupation code. Level, right, and title level, right, and get a sense of what's normal. I have a very good sense of what's normal because I have these massive data sets on all of this, but usually becomes pretty clear where the abnormalities are, which departments are looking weird. And it can be in anywhere from like security to office support staff to the library. It's in weird areas that you probably wouldn't guess unless you did the analysis. Other stuff to check. Fundraising expenses don't look right. Um, I'll show you that. Another thing to take a look at— fundraising expenses are off the charts. Again, this is a 75th percentile year, so they're spending $42,000 for every $1 million in operating revenue, which may not sound like a lot, but it's a lot of money, right? Like raw values.

And it's mostly for restricted $2.3 million.

Yeah, uh, that's too high. It is, it seems. I would look really closely. Again, this just gives you direction on what to look at at the school. Um, take a look at these expenses, right, compared to the normal. Most schools are spending about the same, if not less, on fundraising, and this school is increasing substantially. If their donor support is not following the same track clearly there's a disconnect here and there's a problem on the return, the ROI you're getting from your fundraising strategy.

So, and Matt, you've talked about, you know, Meredith College is not in imminent danger of closing, but talk about that red line that you just had up there.

Yeah, these, these schools in red are already closed. So I just like to benchmark them on every, every graph just to say sort of like a warning that potentially, uh, that this could be, you know, the path to not to avoid. All right. Especially on net income. I think a lot of folks— I mean, I still have debates with folks about what's normal net income. Should we budget for depreciation and stuff like that? I mean, it's just kind of crazy that we still have this debate. Yes, you have to budget for your depreciation. Okay. It's a real expense, not like some made-up thing. Otherwise you end up like these schools, right? A normal net income including depreciation is positive. Plus 1% for years before we had COVID. Then we had this big increase here, and then schools, I think, are still spending that down on average. So on average, you're looking at plus at least 1% net income, which includes your depreciation expense. All right. And so, yeah, you can see obviously the key indicator here— these schools took deep dives right before they closed.

Yeah.

Uh, this is a set of 6 schools here that closed in '23 or '24. So, all right, so that's my best advice for them. Look at the fundraising strategy. I can just match up the revenue side here. Let's take a look at unrestricted gifts. Yeah, let's see, per FTE, per million. Okay, so we have— you already have it right here, right? Only one year that they got decent gifts. Pretty good gifts, actually. But the rest of these years, they're still spending a crazy amount of money, it looked like, on fundraising. And their fundraising is terrible, right? This is very, very low for how much revenue they have and very low for how big the school is. So really quick, something's wrong with the advancement side, okay? Also, something's wrong with the staffing side, and it actually could be linked. Okay, so I'd look really closely at that. Contractors look good, by the way. I'll show you that per FTE. It's a little bit low, actually, so there could be opportunity here to, like, outsource some stuff and save more money. And that's what you look at in this case, but it looks fairly normal. And I didn't see any contracts that need to be flagged, Meredith. Yeah, the food service contract gets a little bit of color here, but that's almost normal. About $1,500 per student is what you really try to get at. But then all over, I'm not going to argue with this one, right? $1,800 is way better than a lot. Advertising. Yeah, it looks like that's a new one. Make sure that you're getting good ROI on that. Investment management. That may be worth a look. All of this stuff is always worth a look, right?

Yeah. Yeah.

Always make sure you've got, if you have a contract that's this much money on a tiny budget, relatively, you need to make sure you're getting the best deal possible. Always. Every year they should be reviewed, to be honest. But I'll leave it at that. I'll kick back to you, Gary.

Interesting. So let's take a look then at some of the other tools that you and I use, Matt, for, for part of the show. And the first one we're going to take a look at for Meredith is the 2025 College Viability App. And as I always do, I start with graduation rates. And this is a little bit interesting. You can see that Meredith College started in 2016 graduating 49% of their undergraduate students in 4 years, and it's up 15 points, which is number one, good, good growth. We've talked about this many times before. This is a college that at least graduates its students more than most colleges, and yet their financial health profile is what, Matt? Modest at best with some risks behind it, and yet they're doing a good job of graduating students. That concerns me. I can understand colleges that can't graduate students also having financial issues, but we've seen this, I don't know, Matt, 20% of the time? Something like that. A college that at least is doing what they're paid to do, which is graduate students, but yet still having financial issues. And that, to me, Matt, that speaks to the whole industry and just reinforces the, the economic facts. There are too many colleges, both good and bad colleges, and not enough students willing to pay even heavily discounted tuition to go to those colleges. Let's take a look at admissions yield for Meredith College. You know, not, not bad, not awful. It's gone down a little bit, but most admissions yields across the country have gone down a little bit. Something to watch. And again, the Strategic Compass could help identify reasons for that decrease in the yield.

Can I stop you for a sec? So didn't we show their enrollment was way down, like 20-some percent, and then the yield's only down 8%? Is that right?

Yeah. So then the enrollment is down 3.

Oh wait, I don't think the math exactly the way I was thinking, but yeah, I just wonder, uh, that's a decent yield still. So probably just low on applications at the front end. I wonder, uh, I guess that's my first instinct is to check the front end of the funnel.

And you can show that on the Strategic Compass, right?

Yeah.

So again, a plug— the Strategic Compass, Meredith College. If you're a leader, a faculty member, board member, and you want to identify the details and look at comparisons, and, and I'll leave my contact information in the show notes, we'll set up a private demo of what that Strategic Compass can do for you if you're interested to move forward. If not, you at least have an idea that is out there. And you might be a perfect example, those at Meredith College, where the Strategic Compass could be a valuable tool for you. And Matt, just a couple other things I want to take a look at showing. I'm going to take a look at the unfunded institutional grants. And again, these are what you and I commonly call merit aid and most scholarships. And Meredith has gone from $20 million in unfunded grants in 2016 up to $23 million. Not a big number, and that one doesn't concern me. Let's take a look at just something I always like to do that reinforces what Matt talks about— tuition and fee revenue. And again, you can see it's down from $37 million in 2016 to not quite— just a little bit below $30 million in 2023. And Matt, we've talked about this, it's been a while, but if you and I run a coffee shop, we can handle losing a couple bucks every once in a while, but we can't lose $7 million over the course of 8 years and still expect to run our coffee shop. You gotta generate net cash from operations. And in the case of almost all or preponderance of private colleges that comes from tuition and fee revenue. And then finally, we're going to look at the 2025 College Majors Completion App. This is internal market share for the years 2020 through 2023 for Meredith College, and we'll start on the high end as well. And you've heard me talk before, Matt, these numbers look okay. We're looking for a high dependence of internal market share. Anything above 30% concerns me. We don't see anything close to that. So Meredith College has a decent mix of majors with decent enrollment. But the other end of the spectrum is they have a fair number of programs for which their enrollment should not be— you gotta worry about the cost-benefit of that. Economics, religion, music— look at the small numbers. And I'll tell a story, and Matt, bear with me, I'll probably tell this story for quite a few weeks. For the folks at Meredith College, there's a number out there, and the state of Indiana had that a few weeks ago at the start of July, If a program doesn't have 15 major, 15 graduates in a major, the state of Indiana says close it. There was a news story out this week, Matt. The University of Houston has a different number but the same concept. If you're not averaging 20, if you don't graduate 25 students, 25 students in any given major, you need to think, you need to close that program. So now we've got 25 over 5 years, 5 a year. 15 over 1 year. And here's, here's the warning, Matt, and I'll quote Jeff Salingo on this. He has shared many times that this year may be the year that colleges realize they cannot continue to be everything for everybody. And so, Matt, bear with me because I'll share that story many times, but colleges looking at this, the folks at Meredith and the other colleges that we have done, the other colleges that we will do, yes, I understand tuition revenue follows I really do. But when we look at market share, let's look at that next for Meredith College. I've got Meredith College, I've got all the, all of the nonprofit colleges in the state of North Carolina. I'm looking at accounting. This is external market share. What I showed you before was internal market share. This is just for Meredith College. So psychology had 17% of the market share, internal market share, at Meredith College in 2021. The external market share tells us a lot, and this is the same kind of tool that almost every other industry uses, and that to my knowledge is the only one available for higher education. I've got all the nonprofits in North Carolina, I've got accounting brought up, and you can see the market share for each of these colleges. I can hover over the top and it will tell you Wake Forest and Elon and Campbell University have decent numbers on the side. But look at these colleges with small numbers. I can even zoom in to make it bigger. This shows us which of those colleges have decent market share or not. So the folks at Shaw University, the folks at St. Augustine's University, they have troubles anyway. What are you doing in that business? Let's go from accounting and let's look at biology, just another common one. And this is available for 64 majors, Matt, both undergraduate and graduate and associate. And again, we see strong performers, the colleges over here. and we see weak performers. And Dr. Hendricks, if you're a weak performer in a market, it ties into the expense things you're talking about, Matt. You have to really have that conversation. Is— are you providing enough? Are you graduating enough students to generate a quality revenue to have a quality program? And Matt, I don't know that that's the case. What are your thoughts on that?

Yeah, I mean, it depends. It depends on the— I hope you don't say that saying very often. It triggers my PTSD when I was at the University of Tulsa because they were saying that nonstop. We can't be everything to everyone. And then I started thinking, I was like, well, we almost can, right? Because our school had $1.4 billion endowment. So it kind of depends, right? I don't want a school like Ohio State saying that because it really looks bad in terms of credibility. But I mean, if you have, if you're a school with financials that look more like Meredith's, like we just did, of course, can't be it. You can't offer everything, right? So you probably are best served by just doing what you do well and do it the best you possibly can. There's a related question is, you may not want to have online programs, right? I know there's this big push to go online. But to be honest, when you go online, you're competing against a completely different set of schools that you're not actually competing against right now, which you're competing against the best schools in the world online. And, um, it's all about prestige and brand, right? And if you don't have a brand and prestige, it, you may find that you're gonna lose money online even faster than you are with your current operations. So, yeah.

Yeah, and that goes to the point that we talked about earlier, and I'm going to talk about again. If you're from Meredith University, if you're from any of the colleges and universities we've talked about, you've got to do comparisons. You've got to compare yourself to the rest of the market. Yeah, if you disagree with me, so be it, but you're wrong. You really need to be able to compare yourself to others, and that's the tools that Matt's developed. Those are some of the tools that I've developed. And again, my contact information will be in the show notes. We can have a conversation, go into more depth, more detail. We can show you the strategic compass. And Matt, I think Meredith College would be a great candidate for that because they have some opportunities to identify ways to limit expenses and grow revenues. Reach out, we'll set up that conversation and see where it takes us. So for Matt Hendricks, I'm Gary Stocker. Thanks for watching. We'll be back soon with another show.