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Business Officer Magazine

A Vital Statistic

Considering net asset growth over time is another important measure of an institution’s health—one that can indicate the condition of its overall financial footing.

By James L. Doti

*Academic rankings of various kinds frequently populate print and electronic media, with the promise of accurately gauging a higher education institution's value. Very little attention is given, however, to a college or university's financial underpinnings as valid criteria for such rankings. These foundational supports can be comprehensively assessed by focusing on an institution's net assets—a balance sheet measure defined basically as "the difference between assets and liabilities," as shown in Figure 1. An institution's net assets can be a useful indicator of overall current financial well-being and the ability to support new programs and services in the future.

The income statement includes the sum of all revenues from tuition, auxiliary operations, gifts, grants, and investment returns, less all operating expenses. If the difference between those two figures is positive, then the resulting surplus can be invested in assets, such as endowment or buildings and plant. If negative, the resulting deficit can be funded by drawing down assets such as cash balances and/or endowment.

Feedbacks, illustrated by the dashed lines in Figure 1, suggest that activities on the balance sheet influence the totals on the income statement and vice versa.

For example:

  • Interest payments on balance sheet items, such as outstanding debt (liabilities), become operating expenses in the income statement.
  • Not only can buildings and plant (assets) be funded by increased borrowings (liabilities), but those same assets on the balance sheet also feed back to the income statement through their effect on revenue—because facilities can strongly influence where students decide to matriculate. But note that any portion of the value of a new building funded by debt will not positively affect net assets. The increase in assets represented by the value of the new building is offset by that portion of construction costs funded by new debt, a liability.
  • Higher or lower endowment values (assets) influence investment returns that, in turn, can be used to support student scholarships and grants, and other operating expenditures. An example of this is the use of endowed chairs and professorships to help provide funding in support of faculty salaries and research. All additions to endowment increase assets on a university's balance sheet.

Figure 1: Interaction Between the Income Statement and Balance Sheet

Chief business officers can readily access the data that inform the income statements and balance sheets of all institutions that report to the Integrated Postsecondary Education Data System (IPEDS). The fact that most of these income statement and balance sheet data are certified by independent auditors makes them more reliable and generally consistent in the way they are measured and defined.

Consequently, an analytical ranking model based on higher education financial trend indicators can add important perspective when it comes to comparing institutions. That is, since the net impact of a school's financial operations is ultimately included in its balance sheet, the aggregation of all schools' net assets can be used to assess the overall financial health of higher education—and the individual condition of specific institutions.

Net Assets Across a Decade

To understand how this model works, the following figures capture and sort net assets in several ways.

  • Total net assets for selected institutions. Figure 2 shows total net assets, between 2000 and 2010, for 251 four-year and graduate-level private colleges and universities that (1) were ranked in U.S. News & World Report's Best Colleges in both 2000 and 2010, (2) reported net assets of at least $100 million in 2000, and (3) annually reported all financial metrics in the IPEDS survey. (Note that specialty schools and those not included in both the 2000 and 2010 U.S. News & World Report rankings were not included in this study. Also, all figures are reported in nominal dollars—not adjusted for inflation.)

The relatively minor negative impact on total net assets of the short-lived 2000-01 recession and the much more deleterious impact of the Great Recession of 2008-09 are clearly evident in the shaded areas in Figure 2.

  • Changes in net assets. During the trough of the Great Recession in 2009, net assets dropped sharply, by roughly 20 percent. The reason the net asset figure moves with the business cycle is, in part, because of its dependence on gift income. The same dynamics are in play with another income statement item, highly cyclical investment returns, discussed later in this article.

Figure 2: Net Asses Total For 251 Selected Schools (Billions of dollars)

Evaluating Asset Variation

From 2000 to 2010, net assets for colleges and universities increased at an average annual rate of 3.2 percent. This overall increase, however, masks a great deal of variation by individual institution.

To better illustrate that variation, Figure 3 shows average net assets for the "Top 25" (top decile) and "Bottom 25" (bottom decile) colleges and universities that registered respectively the highest and lowest average annual percentage changes in net assets, from 2000 to 2010. (See Table for a listing of the Top 25 schools.)

As Figure 3 indicates, the overall average net assets of the Top 25 institutions almost doubled from $329.9 million in 2000 to $658.2 million by 2010. That growth represents an average annual increase of 7.2 percent. In sharp contrast, the average for colleges and universities in the Bottom 25 dropped, from $336.6 million in 2000 to $274.1 million in 2010, decreasing at an annual rate of 2.0 percent.

Figure 3: Net Assets Average for Top 25 and Bottom 25 Schools (Millions of dollars)

Interestingly, the Top 25 institutions began in 2000 with net assets $6.7 million lower than the average for schools in the Bottom 25 ($329.9 million less $336.6 million). However, by 2010, the Top 25 reported average net assets $384.1 million higher than the average of the Bottom 25 ($658.2 million less $274.1 million). That represents a swing of $390.8 million, on average, per school ($6.7 million plus $384.1 million).

The fact that the spread in net assets between the two groups widened between 2000 and 2010 is not the result of any recessionary impact or isolated event that occurred in select years over the sample period. The Top 25 grew net assets at a faster rate than did the lower-ranking institutions during every year of the 2000 to 2010 period despite economic conditions.

As noted, the balance sheet is largely determined by changes in revenues and expenditures as measured in the income statement. That indicates the Top 25 schools are generating changes in their income statements (revenues less expenditures) that are fueling stronger growth in their balance sheets. To get to the heart of the question of why some institutions are outperforming others involves analyzing the institutional characteristics and financial factors that help explain trends in the growth and decline of net assets.

Table: Top 25 Schools That Registered the Highest Average Annual Percentage Changes in Net Assets From 2000 to 2010

What Fuels the Top 25?

Conducting such an analysis, we used IPEDS data to identify the following characteristics demonstrated by the top-performing colleges and universities in terms of net asset growth.

  • Significantly larger student bodies. In 2000, the average full-time equivalent (FTE) enrollment for the Top 25 schools was 7,404, as compared to 2,164 for the Bottom 25. The size differential widened by 2010, as the Top 25 schools increased FTE enrollment, on average, by 2.5 percent per year to 9,450 students, while the Bottom 25 increased at a slower annual rate of 1.3 percent per year to 2,463.
  • Marginally higher tuition and fee revenue per FTE student. In 2000, the average tuition and fee revenue per FTE (graduate and undergraduate) for the Top 25 schools was $18,922 versus $17,025 for the Bottom 25. That differential widened by 2010 to average tuition of $32,415 for the Top 25 compared with $29,376 for the Bottom 25, a differential of about 10 percent.
  • Lower percentage of unfunded financial aid per FTE student.  The Top 25 gave students, on average, an unfunded discount of 15.5 percent in 2000 and 20.6 percent in 2010. The Bottom 25's average unfunded discount rate was 23.6 percent in 2000, growing to 31.7 percent by 2010. It should be noted that including both graduate/professional and undergraduates in the FTE student total reduces the percentage of unfunded aid from what it would be for undergraduate students only.
  • Higher net tuition per FTE student. Calculating net average tuition for the Bottom 25 institutions by deducting the unfunded financial aid from their average tuition figure reveals a wider net tuition difference than that of the Top 25 schools. By 2010, net tuition per FTE student was $25,727 at the Top 25 versus $20,059 at the Bottom 25.
  • Lower educational expenditures per FTE student. In 2000, the Top 25 schools had average educational costs per FTE student of $20,718, compared with $26,264 per student for the Bottom 25. By 2010, the differential remained about the same, with the Top 25 at $32,840 per student as compared to $37,095 for the Bottom 25.

Even though average educational costs per FTE are lower at the Top 25 schools, higher total expenditures are supported by the institutions' greater size. For example, because the Top 25 schools reported an average of 9,450 FTE students in 2010—compared with 2,463 at the Bottom 25—their $32,840 average expenditures per student convert to total educational expenditures of about $310 million, compared with $91 million for the Bottom 25. This significantly higher amount can fund higher fixed costs, such as a larger campus infrastructure. It also makes it possible for the Top 25 to spend more on library, IT, laboratory, recreational facilities, and other resources and services.

  • Lower net tuition losses per FTE student. In terms of net tuition (tuition and fees less financial aid and educational expenditures), almost all schools lose money, including the Top 25. But, as might be expected given their higher average tuition, lower average financial aid discounts, and lower average educational costs, the Top 25 lose significantly less per FTE student. 

As shown in Figure 4, the loss in average net tuition after educational expenditures per FTE for the Top 25 schools was $5,400 in 2000 and $7,800 in 2010, lower than the steeper losses of $15,000 in 2000 and $18,800 experienced by the Bottom 25 schools.

  • More gifts. Obviously, losses in net tuition must be offset by other means. A significant generator of "other revenue" comes from private gifts, grants, and contracts.

Figure 4: Net Tuition After Educational Expenditures per FTE Student

As shown in Figure 5, the Top 25 schools generated, on average, more in total gifts ($30.7 million) than the Bottom 25 ($19.2 million) in 2000. By 2010, the Top 25 schools increased average gift revenue to $39.6 million, an average annual increase of 2.6 percent. Rather than climbing, the Bottom 25 experienced a decline, from $19.2 million in 2000 to $13.1 million by 2010, an average annual decrease of 3.8 percent.

Figure 5: Average Total Gift Revenue per School (Millions of dollars)

Because gift revenue by year between 2000 and 2010 is more erratic than those variables that comprise net tuition, it is useful to look at it on an annual basis, as shown in Figure 6.

Figure 6: Average Total Gift Revenue per School (Millions of dollars)

Over the entire 10-year period, the Top 25 schools raised $386.0 million on average, versus $164.4 million raised by the Bottom 25. This difference goes a long way toward explaining the differences in net asset growth between the top- and bottom-ranked schools.

  • Higher investment returns. While endowment is a balance sheet item, the returns on endowment appear on the income statement. Those returns include realized and unrealized gains (losses) on endowment in the investment portfolio.

Similar to the trends presented earlier in the analysis of gift revenue, the Top 25 increased investment returns between 2000 and 2010, while those of the Bottom 25 declined.

Figure 7 shows that annual investment returns between 2000 and 2010 were highly erratic, subject as they are to the vicissitudes of financial markets. Generally, though, the Top 25 outperformed the Bottom 25 during most years.

Figure 7: Average Total Investment Returns per School (Millions of dollars)

Realized and unrealized investment returns over the 10-year period total $173.8 million, on average, per institution in the Top 25, as compared with $93.3 million for the Bottom 25—a difference of $80.5 million per school between the Top 25 and Bottom 25.

  • Auxiliary operations that count only a little. The Top 25 schools, on average, lost $160 per FTE in auxiliary enterprises in 2000 and broke even in 2010. In contrast, the Bottom 25 schools broke even in 2000, but by 2010 they were losing about $200 per FTE. While not a significant loss, this shortfall represents yet another income statement item that deteriorated over time for the Bottom 25 institutions. With an average 2010 FTE of 2,463, the $200 loss per student translates to a total loss from auxiliary enterprises of roughly $500,000 per institution.
  • More government grants. Given the Top 25 institutions' larger size in terms of FTEs, government appropriations and grants were in 2000, on average, about $8 million higher per university ($18.8 million versus $10.8 million) than at the Bottom 25. That differential widened slightly by 2010 to $30.6 million for the Top 25, compared with $19.6 million for the Bottom 25.

It is interesting to note, however, that on a per-FTE basis, government grants were high for the Bottom 25. In 2010, for example, the Top 25 schools generated $3,238 per FTE as compared with a significantly higher $7,952 for the Bottom 25.

Bottom Lines and Balance Sheets

The collective impact of all the factors described here has had a devastating effect on the bottom-line net surplus (total revenues less total expenditures) for the Bottom 25 colleges and universities. While the Top 25 institutions generated an average surplus of $39.7 million in 2000 and $55.5 million in 2010, the Bottom 25 average surplus fell sharply (see Figure 8).

Figure 8: Average Revenues Less Expenditures per School (Millions of dollars)

In 2000, the latter generated an average surplus of $26.8 million, $12.9 million less than that of the Top 25. By 2010, however, the Bottom 25 surplus nose-dived to $9.8 million per school, about $46 million lower than that of the Top 25. Although the average surplus for the Bottom 25 was $9.8 million, three of the schools (12 percent) reported negative net revenue.

Bottom-line results count in significant ways. Institutions that financially outperform others have the wherewithal to increase assets like endowment—and land, land improvements, buildings, and equipment, collectively referred to as "campus facilities."

Not surprisingly, the Top 25 schools in asset growth increased their average endowment from $185 million in 2002 (the first year that endowment data are available from IPEDS) to $349 million in 2010, an average annual rate of increase of 8.3 percent over that eight-year period. The average endowment of the Bottom 25, however, remained relatively unchanged over that period, growing only from $211.2 million to $216.5 million, an average annual increase of 0.3 percent.

Similarly, the Top 25 increased net average asset value for campus facilities from $240.7 million in 2000 to $692 million in 2010, an average annual increase of 11.1 percent over the 10-year period. The Bottom 25 also increased the value of campus facilities, but it was at a slower annual average rate of 7.6 percent, increasing from $115.2 million in 2000 to $239.3 million in 2010 (see Figure 9).

Figure 9: Average Asset Value for Campus Facilities (Millions of dollars)

Despite the significantly greater comparative growth in both endowment and campus facilities for the Top 25, the lower-ranked institutions actually have higher dollar-value endowments and campus facilities on a per-FTE basis. Figure 10 shows, for example, that average endowment per FTE in 2010 for the Top 25 schools is $36,900, compared with $87,900 for the Bottom 25.

Figure 10: Average Endowment per FTE Student (Thousands of dollars)

Similarly, in Figure 11 the Bottom 25 report higher average campus facilities asset values on a per-FTE basis than the Top 25. The fact that the larger, Top 25 schools have a higher average value of campus assets on a total basis as compared to the Bottom 25—but lower in terms of FTEs—points to scale economies that give the larger schools a competitive advantage.

Figure 11: Average Asset Value for Campus Facilities per FTE Student (Thousands of dollars)

Explanatory Factors for Financial Strength

The findings presented here provide strong evidence that higher education institutions exhibiting characteristics associated with strong financial operations, as measured in the income statement, have growing total asset values, as measured in the balance sheet. This analysis, however, does not address the various factors that explain why some schools are able to manage their operations in a way that leads to greater financial strength. Most, if not all, colleges and universities seek stronger endowments and campus resources. Clearly, though, some, like the Top 25 identified here, have been much more successful in accomplishing those goals.

One explanatory factor may be related to location. For example, being located on the East or West Coast appears to help, while being located in the Midwest or noncoastal South may hurt. Figure 12 shows that 19 of the Bottom 25 schools are located in the Midwest or the Southern Gulf states. Only four of the Top 25 are located in the central region of the nation.

Figure 12: Locations of Top 25 and Bottom 25 Schools

Another reason bolstering performance is enrollment size. Larger schools in terms of FTEs generate faster net asset growth than smaller schools. Twenty-one of the Top 25 schools, for example, are national or regional universities. In sharp contrast, 18 of the Bottom 25 are national or regional colleges.

Certainly, many other factors influence an institution's financial performance. Among the more important considerations may be the quality of a school's institutional leadership, the coherence and relevance of its strategic plan, the quality of its financial controls, the support and stewardship of its governing board, the depth and breadth of its curriculum, and—perhaps most important—the degree to which a college or university serves its mission.

This study has helped identify institutions that are succeeding or failing in generating financial resources that can be allocated to accomplish institutional objectives. Analyzing in greater detail the strategies used by these institutions, as well as the particular external forces that had a more significant influence on them, is likely to further reveal the reasons most strongly associated with their net asset growth.

JAMES L. DOTI is president and Donald Bren Distinguished Chair of Business and Economics at Chapman University, Orange, California. ANN CAMERON, associate to the president, and ROBERT PANKEY, assistant director of Chapman's office of institutional research, contributed to the article.