School Closures: Variables and Red Flags
I’ve learned a great deal over the past (almost) two years as a full-time consultant, especially when it comes to independent schools that are struggling and/or in financial distress. To those who are looking, there are clear signs that portend the degree of probability that a school will find itself entertaining closure, either in the immediate future, or in the not-too-distant future. Small schools tend to be front-of-mind when folks think about school closures, yet it should be understood that there are large (massive, actually) schools that exhibit similar signs.
Given the rate of school closures, related to—yet separate from—merger and acquisition threads of discussion in independent school circles, there is a need for an effective study of school failures. Such a study would confirm these common, clear signs and delineate paths to closure, highlighting key points of timing along the way when schools could/should be intentional about their futures, giving themselves and their communities (most notably, students and families) the gift of time: enough time to allow for tactical business model maneuvering before sounding the alarm on closure.
It was encouraging to see Higher Ed Dive publish an article on school closures in higher education this week, as there is much in that article that is analogous to independent schools. “We are not hospice: the race to get faster in predicting college shutdowns” features the learnings of one of the higher education accrediting bodies, Higher Learning Commission (HLC), relative to understanding the signs of distress in its accredited member institutions.
Top take-aways:
Timing does matter.
Cash is king.
If an institution begins seeking a merger partner when it’s already in dire straits, the effort could be doomed from the start.
When an accreditor can work more quickly to identify signals of an institution in distress, it might not result in saving the institution, but it could help shelter students and families from the fallout of an unexpected, emotionally gut-wrenching closure.
With 1,100 closings of institutions of higher education between 2010 and 2020 (with even more since then, click here to view a helpful graphic that shows closures since 2016, last updated April 2024) , the role of the accreditor in identifying and flagging institutions in distress has been under increasing pressure from the federal government. The idea of getting ahead of problems early is what drove the HLC to examine closures among its own members. “What are the predictive measures of this? How could we have predicted whether an institution was going to close?” Those key questions from an HLC vice-president of accreditation relations hold immense value for independent school accrediting bodies.
Thirteen HLC institutions closed between 2019 and 2024. Scrutinizing that data set, HLC leadership looked for “statistically significant variables as well as anecdotal red flags.”
Key Variables, Themes, and Red Flags
low scores on financial health
low cash-to-expense ratios
decreases in staffing (i.e., outward sign of cost-cutting)
diminishing cash reserves
audits that fell behind schedule
leadership turnover (not just the top position, but wider senior leadership)
falling enrollment
borrowing from the endowment with no clear plan to repay the endowment
faculty express shock at learning about an institution’s troubles, then blame the institution for not being transparent
Deanna McCormick, retired college financial administrator, underscored during HLC’s recent conference panel on this topic that “cash is king.” She pointed out that “college cash flows tend to be cyclical rather than smooth, with money flowing into institutions during the early spring and fall[,] around registration time. That means colleges can run out of cash to pay the bills during the downtimes if they can’t borrow, draw from their endowment[,] or find some other source of liquidity.” This comment surely resonates with those independent schools that find themselves needing to use deferred revenue (advance receipt of tuition payments for the following school year) to pay the current year’s bills and payroll. Massive red flag. McCormick also noted that, due to these cash flow issues, institutions have been seeking release of restrictions on endowment funds from the state attorney generals, as a means of plugging holes and paying bills.
To be sure, there are differences between accreditation bodies for higher education and independent schools (e.g., federal rules and regulations). However, both face a steady (if not increasing) rate of school closures, non-profits as well as for-profits, which require accreditors to examine and perhaps reconsider the regular (e.g., annual) data submission requirements for schools, as well as what accreditors do with that data — how it is studied and analyzed, followed by what actions the accreditor may need to take in an effort to support a school through candid assessment of its position, and the increased probability for community/stakeholder fallout. It may also call into question the length of the accreditation cycle, and whether a longer cycle (e.g., 10 years) unintentionally obfuscates the signs of distress, resulting in reactive rather than proactive measures the accreditor might employ, when distress is discovered.
This is a time of courage for schools as well as for accreditors. For independent schools, governing boards and school leadership need to coalesce around an essential agreement to face their distress as soon as possible, in order to ensure a longer tail for tactical maneuvering. For their part, independent school accreditors need to consider how they might introduce mechanisms designed to support schools in creating the opportunity for a longer tail, while ensuring that schools don’t feel as if it’s a burdensome and unreasonable compliance requirement.