The College Financial Health Show with Matt Hendricks & Gary Stocker for August 20, 2024

It's the College Financial Health Show with Matt Hendricks and Gary Stocker. This is the only show that looks at the financial health and even the viability of private colleges throughout the United States. We share data from multiple sources, and Matt and I will talk about that, and we offer our analysis and even our recommendations. This is valuable information for college leaders, for faculty, for staff, for students and their families, for community members, and even for reporters. Hi, my name is Gary Stocker, founder of College Viability.

And I'm Matt Hendricks, founder of Perspective Data Science. Today we're looking at 3 schools in Wisconsin. Those schools are Alverno College, Bellin College, and Lawrence University. Before I dive into the data, I'll just give you a quick overview of what we're looking at. Also, we don't have a healthy school in this one financially. All 3 are running deficits. They're all a little bit— we have some unique ones though. We have one that's being sort of propped up by an affiliate organization and another one that is, you know, again, using its endowment funds to keep its cash flow positive and drawing too much from the endowment like we've seen in the past. But we'll dive into these and I'll show you those details. All right, and show you Alverno College in Wisconsin. All right, so like before, the most important indicator here is just to double-check that their revenues are— their operating revenues are enough to cover their operating expenses. And you can see this school is not— it's not the case, virtually never the case. They've had 7 out of 8 years, only 1 year where they had a positive net income margin. From operating activities. And so they have negative every year but one. And then recently you can see there is a big nosedive that's happening. And the— they're also not able to cover their cash expenses or operating expenses from their, from their cash flow. So again, they're having to borrow to cover their, their operating expenses. We've seen this a bunch of times already on this show. This particular case, they're doing a similar thing we've seen in the past.

They—

you can see right here a big nosedive in investments relative to expenses. So this is the ratio of investments to expenses. It was— they used to have $1.30 per dollar of expenses. Now they have less, uh, 98 cents per dollar of expenses. So there's a big nosedive. And keep in mind, this happened during a year when the stock market was up. So you can see the average median school and the percentiles, top 75, bottom 25, all increasing their investments relative to expenses. Alverno is not. The reason is Alverno— I dug into their audit— the, the reason is they had a $9 million or $8 million net cash deficit from operating activities, and they covered that deficit by selling about, I think it was $9 million in investments. And also sold some real estate, sold a building and some equipment. So the scary thing here about Alverno is that their unrestricted net assets decreased by 23% in just one year. And I'll show you— I think it might be worthwhile to just see these on the audits. So their net assets— that's the cash flow that I had here. Yeah. So there's a $7 million decrease in their investments despite having a big investment return that year. So that's on the balance sheet for 2023, going from $56 million to $49 million. And their unrestricted net assets, you can see, went from $45 million, $45.7 or so in 2022, to $35.4. So that's a big drop in their unrestricted net assets, which is going to be problematic if that continues. You start running out of options basically. And so that's what causes problems for these schools. All right, so that's El Verno. Again, another case of a school using its unrestricted investment assets basically to pay its bills and cover its deficit from operating activities. Bellin College. This is the first time I've seen this. Bellin College, you'll look at these and be like, what the heck is going on? Like I was. So again, looking at the top number here, income margin. Negative, positive, negative, negative. Only 2 years positive out of 8. All right, so again, really bad. Similar to Alverno in that they have a sharp drop here in recent years, although it did get a rebound in 2023. So they have negative, uh, net income from operating activities. Um, actually, I think this school does not split out operating activities, so it's just change in net assets, unrestricted net assets.

negative.

But the curious thing about this school is they've always been— every year they have that negative net income, but they're at the same time every year having a positive cash flow. Although we had one negative here, but only one negative. The rest of them are positive. And I was wondering, how is that possible that their expenses are bigger than their revenues, yet their cash flow from operating activities is positive, and I figured it out. Turns out this school, in 2022 and '23, they're basically— they have an affiliate organization called Bellin Health Systems. That affiliate organization is basically providing Bellin College with administrative support, and it looks like to the order of $2 million, and basically subsidizing the college with $2 million worth of services. So what's happening is that $2 million expense is showing up here in the statement of activities for Bellen, but their affiliate is not making them pay that, right? So they're accumulating this cost, $2 million here, $2 million there. And it was also here present in these years as well. But the affiliate is not making them pay it.

All right.

So they owe $6 million to their affiliate now, but they have not yet had to pay it. So that's not a cash expense if they haven't paid it yet. That's how cash accounting is different from accrual. So, the interesting question to ask here, if you're interested, if you're attending this school or considering the school, one question to ask is whether the affiliate is going to make them pay the $6 million liability, essentially a debt to their parent organization. If they're not going to make them pay it, then I guess the school is is, is operating sustainably with this supplement from its affiliate. If they're going to make them pay it, though, no, it's definitely not. You can see the negative results here because of that. So interesting thing to see. Yeah, this is the first time I've seen that actually, where an affiliate is sort of propping up the, the child institution, which is the school. All right. So that's Bellin. Again, not sustainable. The only way that they're able to sort of make ends meet at the moment. I mean, maybe they could have done it without their parent organization, but certainly the parent organization is what's keeping them, um, uh, much more healthier— much more healthy than they would be, uh, which is not great at the moment anyway. Okay, Lawrence University. Lawrence, I'll show you— I'll sort of bring you through my thought process here when I was researching this one. So Lawrence University Yeah. So again, looking at their net income margin, this is from operating operations. They separate their operating expenses and revenues. So they did have a number of years of negative here in the late 2010s, but recently it's been positive, positive, positive. Right. So that's great. I thought the school initially when I looked at it was going to say, okay, this is a healthy school. They did have issues, but clearly they've been fixed. They fixed it. But, and here's another thing before I get into the why this looks so bad, let me just show you what the big but is. All right, so notice '21, '22, '23 all look good in terms of net income. The problem that I found quickly is that you can see here their endowment appropriations for expenditure have become very, very high. Abnormally high, especially in '22 and '23. What happens is they're pulling money out of their endowment and that's going into their operating income on their statement of activities. Just to put a number to it, they pulled $30 million out of their $440 million-ish endowment to support operations.

That's a lot.

That's— that is, you can see here, almost 7% of their endowment they pulled for operations. That's far, far higher than normal. Again, the normal amount is 4.2% of the end-of-year value, which means that if they had a normal draw from their endowment, their draw would be about $18 million, but they took $30 million. So that's problematic potentially because your endowment is going to shrink, right? And that's exactly what's happening in this case. I can put a number to it. Their unrestricted endowments shrunk by— and what was it? Um, I have the number here. It looks like I didn't write it down in my notes, but I did write it in a LinkedIn post. But that— I think their unrestricted endowment shrunk by something like 17% in just 3 years— 2 years, 2 years. So, um, you might say, okay, well, the market, stock market was down in one year, but it was up the next year. So really the stock market was flat over that period. The main reason their unrestricted endowment funds have dropped significantly, I believe 17% again, is that they're making these extraordinary draws from their endowment. Um, so again, it can be kind of subtle. Um, you got to pay attention to how they're actually getting these positive results here. In this case, they're getting it in an unsustainable way. Let me just make one quick note about this because it's actually really important. It looks like their cash flow is a complete disaster here, but they— this is one school, and a lot of schools do this, where their net cash from operating activities, they pull out any appropriation from the endowment and put that into a different section in the cash flow statement. I think it's about 50/50 schools that do it that way versus keeping that in. So this is the one that takes it out. So like I said, they take it— in this particular case, in 2023, they took out $30 million from their net cash from operating activities and put it into the investment section of the cash flow statement instead. So basically what that ended up meaning was, I believe this was a minus $28 million here. But if you put the net cash, put the endowment appropriation back in, that would push that positive. But again, it's only positive because they took $30 million out of their endowment instead of the sort of normal amount, which would be about $18, $19 million. Again, unsustainable. Okay, that's all I have for this. Gary, what do you think about these schools? Let me, let me get your thoughts.

So let's talk about, Matt, let's talk about Lawrence. For a second. Now, you mentioned they have pulled about $30 million out of a $440 million endowment. Let's engage in some educated speculation here. Is it fair to speculate they're betting that their enrollment will go up and their tuition discounts will go down to recover some of that excess endowment draw?

Yeah, I think that would be a good guess. I mean, uh, yeah, I'm just guessing. Uh, I mean, I would hope that they know that what they're doing with their endowment right now is not sustainable, it's not normal. And that's the whole point of the app that I made, right, to make sure that it's obvious when, when people are not, uh, or schools are not acting normal in terms of their financial management. But yeah, I think in just in general, I think you've seen this a lot, um, there tends to be, um, uh, excessive optimism about the future for these schools, and they, they seem to overestimate, uh, the returns they're going to get from different investments and sort of underestimate losses, it seems. It's sort of a chronic thing. So yeah, I think it's a safe bet to say that they are expecting some return on something, but I guess we'll see if that actually happens.

So let's look at 2 years from now. Let's say we bring Lawrence back up on August 20th, 2026, and you see the same pattern. Would that be a really, really bad red flag? How would you categorize that if they continue to draw something like $30 million a year just to keep the lights on, just to meet payroll. Right.

Well, so the, so the problem with what they're doing is it snowballs really fast, right? I mean, their next year's draw, if they still take an abnormal draw, they'll get a lower— so to say they take the same 7% draw from their endowment next year, they're going to get less money in revenue from that because their endowment is basically smaller, right? Actually, I think it's really sort of maintained its size, but you've got inflation and everything else, right? It's not growing relative to inflation. So, so it snowballs really quickly. Once you start losing these assets, you have to take a bigger and bigger percentage just to break even. Eventually you have to go back to the normal sort of draw of 4 or 5%, right? Which is going to be a very difficult thing or a painful thing for them. You're talking about losing like 12, plus $1 million in operating revenue, right?

Yeah. Yeah. And then the other question I have is on Bellin. First of all, great research on finding out that they have that administrative firm supporting them.

Yeah.

No business is, is gonna want to lose $2 million a year into perpetuity. Engage in some educated speculation as why, why you think that might be happening. Might Bellin be thinking about a national program? And then you're using that just to get started because this is in Green Bay, Wisconsin.

It's— yeah, by the way, it's only— I mean, just to put it in perspective, Lawrence, in a normal endowment draw for Lawrence, they can get almost $20 million from their endowment sustainably and operate, use that for operating revenue. Bellin's entire budget is $17 million. Right. That's just to put it in perspective. So Bellin is tiny and they have this affiliate. I didn't do much research, any research at all on Bellin's health system, their affiliate. It could be really big. Maybe it's just like a drop in the bucket for them to lose $2 million, I don't know. But you know, I was thinking about this earlier. If I'm a student thinking about applying or attending Bellin, one question I think has to be asked is, is that affiliate gonna make you pay the $6 million next year or the year after? Are they going to make you start paying this? And if they do, it might be a bad time to be attending that school because, you know, you're going to have— you know, it's not just that it potentially could close. It may, but it probably would survive. But you're going to still have an issue in that your college years are supposed to be fun, right? And you're learning from faculty. It's not going to be fun when your faculty are worried about their jobs. They have low morale. They're not engaged. Maybe they're working on their resumes, right, to get to a different job. So try to avoid that if possible. I've been through that. Trust me, it's not fun for students to endure that. As bad as it is for faculty, it may even be worse for students, to be honest.

Yeah, and before I jump into my stuff, you know, for viewers, Bellin provides degree, undergraduate and graduate degrees in just healthcare disciplines. Radiology, physical therapy, nursing. That's all they do. They don't do anything else. So that's what their focus is. And then, you know, the resume thing, you would talk about in the context of Bellin, and that may or may not be the case, but that, Matt, is probably happening in many, many private colleges that faculty are legitimately concerned. You and I are faculty and have been faculty in some regards. And that's, you know, I've talked before, we know some colleges will continue to close, but even those that don't close, Matt, you got to wonder about the morale, if the faculty compensation is too low, if they're worried about that job, they see cutbacks all across the country. Be at their location. That's just scary, right?

I mean, I always said it. Yeah, just one anecdote about that. I mean, one of the issues is nobody wants to fire anybody, right? So instead of just tearing the Band-Aid off and fixing the budget with one swoop, right, and getting everything back on track, we tend to have these little, like, little cuts, little cuts, little cuts. Nobody gets raises, nobody gets retirement benefits, you know, we cut their health insurance. And all of these things erode morale to the point where it's just not a fun place to be, right? If you're a student or a faculty member, I think honestly, I think it's better if they just rip the bandaid off, right-size the staff and fix the thing in one swoop and get back on track.

But so as we go to the private college viability app, I brought up the 3 colleges that we're going to look at. And Matt has talked about them in great detail. And again, he provides a perspective that I don't think anybody else provides. And that's looking at the data. And, and Matt, you know, the technology he uses— and Matt, I'm going to brag on you for a second before I get into my stuff— he has developed the skills and the capacity to bring data together from multiple sources. And I don't know of anybody else doing that. So if you're looking for a source of information that's real-time on especially cash components of a college, you know, we'll put Matt's email address in the show notes. But reach out to Matt and get his guidance, get his support, because he does stuff that I don't think anybody else does. Back to the College Viability app. And again, we can see the graduation rate. And those that listen to me on all of the media that I do know that I harp on this a lot. And let's just look at the 2022 graduation rates for these 3 colleges. And the minimum I use is 50%. Alverno doesn't even come close to that. Matter of fact, you can see they've gone from pathetic to less than pathetic, but not much more. Um, I make the case that a college that can't even graduate 40% of its students is really, Matt, not even a college. It's kind of a tuition collection agency. But on the other hand, to their credit, Bellin and Lawrence do graduate folks despite the financial challenges that Matt's talking about. And those might come to roost, come home to roost a little bit later on. But the 4-year graduation rate is a good indicator of quality. Are they graduating students or not? And a big function of that always starts with enrollment. So let's take a look at the enrollment for our 3 colleges. And again, you can see Bellin has been able to grow from a startup kind of company. They're not that old of a college. To about 500 students. Nice growth as a percentage and as an absolute number. And as Matt, as we see many other places, both Alverno and Lawrence, just like almost every other but not every other college, have had decreasing full-time equivalent enrollment over the last 8 years. And just a quick definition, full-time equivalent is a calculation based on enrollment. It's just the one I think offers the most standardized comparison of enrollment at colleges. So you're looking at that kind of stuff. You know, we can even look at pictures if we want to. You know, there's a picture of that. You can see that the enrollment is down, the enrollment is up, the enrollment is down. This is the kind of data that we talk about for colleges across the country. This is the Moneyball era. This is when people like Matt Hendricks and Gary Stocker and many others take data and make it mean something in all sorts of different ways. And after we look at enrollment, let's take a look at the tuition and fees that come from that. So again, kind of an inside baseball number. We can see from 2015 to 2022, these are the last 8 reported years of data from something called the National Center for Education Statistics and its IPEDS database. And you can see that both Alverno and Lawrence have decreased, substantially decreased tuition fee revenue over the last 8 years. Now, the analogy I always use, Matt, if you and I had a coffee shop and our revenue went down for each of the last 8 years, we're probably not running our coffee shop anymore. Now, colleges are different, I understand. Don't throw stuff at your screen, which, if you're watching this, but at some point, at some point, that major source of revenue, tuition fees, has to turn around. We talked about the data that Matt talked about with Lawrence, and it's reasonable, Matt, I think, tell me if you disagree, that Lawrence is betting on the come that the industry is going to turn around. And that's why they're borrowing against their endowment today in anticipation of— I think it's false anticipation. I think it's a false flag of the industry turning around because I don't think it's going to turn around anytime, not just anytime soon. Do you agree with that?

Yeah, I mean, I've said it a bunch of times. The enrollment cliff's not here yet. You know, it's, it's not. It's going to be here in like 4 or 5 years. I just calculated again the first class that's normal. or that's smaller than normal, just finished 9th grade, I believe. So you have a few years still before that sort of cliff arrives.

Yeah. Yeah. And this is— this is— I just want to show one field on this. And Matt does a much better job of analyzing this than the College Liability App does. But just look at the revenue. This is total revenue, total expenses. And again, I'll remind viewers that this is data. This is from data that the colleges themselves submit. To a federal site called the National Center for Education Statistics. And really, none of the three show— from 2022— none of the three show a higher ratio of revenue to expenses. So for example, Bellin, for every dollar in expenses, has 98 cents in revenue. Lawrence, for every dollar in expenses, has 35 cents in revenue. Again, Matt's analysis is much more appropriate, but this gives you a feel for what Matt talked about just with a simple number. These colleges, our three examples today, are not generating the kind of revenue over expenses that other businesses need to, to operate. Now, every business can handle the occasional off year, no question, but you can't do it year after year after year. And maybe you don't close, Matt, but what impact does that have on the quality of your education if you can't afford new technology, new books, if you can't maintain the buildings, if you can't pay competitive salaries to your faculty, all that kind of stuff that comes into play. And then lastly, I wanna take a look at, this is truly an inside baseball kind of number. and it's something called institutional grants. And I'll look at both of them today. This is a funded one. A funded institutional grant has real dollars behind it. And you can see that of our 3 colleges, uh, Averno has $1.5 million, Bellin not even $1 million, and Lawrence has $12 million. All right, of the 3, I could sort them. I'm not going to sort 3. You know, Lawrence has a decent amount of funded scholarships. Now, funded scholarship is a Matt Hendricks Technology Scholarship. Matt has donated $1 million to Lawrence University— I'm making this up— and they're using the earnings from that million dollars to fund scholarships. That's a funded scholarship. On the other hand, as Tevye said in his musical Fiddler on the Roof, on the other hand, the unfunded versions— these are simply discounts. So we can— this is unfunded. There is no money at Alverno College that goes from a scholarship account to an individual student's to pay an individual student's tuition. Just doesn't exist. So we can see of the 3 in the 8 years we're reporting on here that Alverno has tried to manage theirs. They've, they've actually dropped their unfunded discounts, um, $1.3 million. Um, Bellarmine has had to raise theirs a little bit. I don't consider that really a big deal. Um, but look what Lawrence has had to do. And Matt, this might tie into some of the stuff you talked about. They've had to, they've had to raise their unfunded discounts, and this is simply money they don't collect, right, from $26 million to $39 million over the last 8 years. They're discounting tuition just to get students in the door. And Matt, you've heard me tell this story before. The prototypical case for this is Iowa Wesleyan University. When they closed a little over a year ago, their enrollment had actually gone up a few hundred students over the 8 reported years that I researched, but they had discounted their tuition so much, Matt, that they didn't have the funds to keep the lights on, to meet the payroll, all those kind of things. So you want to watch that. Yes, it's good for the student. Discounting tuition is really good for the students. I'm long past that stage. I think Matt's looking forward to that stage someday when his child, children, go to college. But that's good for the student, but Matt, not necessarily good for the college. And then finally, I would— then the final bit of data that I want to show today is new. We've not done this before on the College Financial Health Show. And I'm going to look at the market share, kind of, of private colleges in Wisconsin. Now, this is going to be more than just our 3. We're looking at 26 colleges. And I'm just going to look at a couple of disciplines. Let's go to biology. So I'm going to look at all the biology programs in all the 26 private colleges in Wisconsin. In Wisconsin. And I'm going to sort by the 2022 bachelor's. And we can see Marquette dominates. And let's just scroll down to R3. So I scroll and I scroll and I scroll. And I see Alverno has 11 bachelor's in biology. I see— I don't even see— oh, yeah, Lawrence is up there. Lawrence is at 52. And Belen doesn't even make the list. All right? Let's take a look at health professions. Again, I'm going to sort by the 2022 bachelor's. If you want to buy this application, it's available on the College Viability website. I'm going to start by 2022 bachelor's in health professions. Marquette, of course, is going to dominate in all of Wisconsin. Let's scroll to our 3. Bellin, all right, to their credit, that's what they focus on, and that's all they focus on. They're at least in the top 10. Alverno is right below them. And do we see Lawrence anywhere? I missed it the first time. I don't see Lawrence at all. They might not do health— they might not do health profession programs, and that's fine. Here's why this is important. And here's the guidance I give to both universities and the students and their families. If you're a university, Lakeland University, that offers 3— had 3 people complete their bachelor's degree in health professions, why do you have health professions? What is the cost-benefit of that when you've got competitors like Marquette, Viterbo, Concordia, and others throughout the state who have a much larger enrollment and can almost certainly, Matt, afford to do much more with their programs? And a college with much less net. Now, this doesn't actually show percentages. I'm, I'm working on a version of the app that will. But in this case, you know, Marquette probably has 30% of the market. You know, why not look at a scenario both for colleges— for colleges in particular, approach Marquette, approach Viterbo, approach Concordia to do your health professions, negotiate some kind of revenue share based on that. And students and families, be careful about choosing You know, Mount Mary or Wisconsin Lutheran, Stritch is already closed, or Carthage College, even though there's 65 there, do they compete? Do they have the resources to compete with larger colleges? And this is just for Wisconsin. If we brought in adjacent states, Illinois, Minnesota, Michigan, those numbers would change a lot. So Matt, comments on what I've shared with the two versions of the college viability apps today?

Uh, yeah, I mean, I think we see the same themes again with, uh, you know, enrollment's clearly a, a a pain point for some of these schools. I think we need to be realistic. Like I said, the, you know, the enrollment's likely to get worse for, for the average school. So when we're projecting out and making budgets, I think you should plan for that rather than, you know, mortgaging the future of your institution and making a bet that's probably pretty risky, right? Pulling pulling so much out of your assets and not having those sort of available when things get really hairy in 4 or 5 years with the cliff. That's not looking forward far enough, right, and preparing. So I think it would be best to get your financials in order now while things are relatively stable, and then hopefully it just makes it a lot easier to sort of deal with the pressures of the enrollment cliff that are about to come.

Yeah. And as you and I talked about many times, this is the college moneyball era. And it's not just Matt Hendricks, it's not just Gary Stocker. There are many others looking at this data, making analysis, doing recommendations. It's out there. So college leaders, if you look at this data on the screen, either Matt's visualizations or mine, and you say that's not right, well, ladies and gentlemen, boys and girls, it's your data. You're, you're the ones submitting this data. We're just the ones analyzing it, put it in a readable format, and doing comparisons. It's something that we do uniquely because, Matt, we haven't seen accrediting agencies do this. We haven't seen the Department of Education do this. It's something that what I call higher education data entrepreneurs are doing. And so until next time, I'm Gary Stocker.

I'm Matt Hendricks. Thanks for watching. Uh, if you guys have any comments, questions, uh, we'll put our contact information in the comments. Also, if you have a request for a particular school for us to look at, that would be interesting. Um, be happy to take that into consideration for our next show. Uh, until next time, I'm Matt Hendricks, and we'll see you next time. Thanks.