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Business and Policy Areas
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ED Releases 2011 Financial Responsibility Scores

July 25, 2013

On July 22, the Department of Education released its list of composite scores related to financial responsibility for fiscal years ending between July 2010 and June 2011. For FY 2011, only 54 nonprofit degree-granting institutions had composite scores below 1.0, the point at which ED considers institutions to have failed its financial responsibility standard. ED required those institutions to provide a letter of credit covering a portion of the Title IV aid received by their students in order to continue participating in the Title IV financial aid programs. Scores of another 62 institutions fell into the "zone" between 1.0 and 1.4, subjecting them to additional monitoring by ED.

This is the fifth year for which ED has released individual institutions' composite scores. The results for nonprofit, degree-granting institutions for 2011 are the best since the beginning of the economic downturn in 2008 and are considerably better than the previous year. Numbers of institutions are difficult to compare across years, however, as some institutions don't appear on the list for various reasons, such as pending appeals of the calculations.

ED Refuses to Mend Its Ways

ED's financial responsibility standards (34 CFR 668.171), promulgated in 1997 and applicable to non-profit independent institutions, relies on three ratios to measure the financial health of an institution. These ratios—primary reserve, equity, and net income—are weighted and combined into a single composite score. The composite score can, by definition, be no lower than -1 and no higher than 3.

An institution with a composite score of 1.5 or above is considered fully financially responsible. One with a score between 1.0 and 1.4 is placed in the "zone alternative" and subject to heightened scrutiny. A score below 1.0 means that a school has failed the test and must either provide a letter of credit—equal to half of the institution's previous year's Title IV expenditures—or provide a letter of credit for 10 percent of its previous year's funds and accept provisional certification.

For several years, NACUBO, joined by the National Association of Independent Colleges and Universities and other associations representing nonprofit institutions, have argued that ED does not calculate the ratios that make up the composite score correctly in accordance with its own regulations and generally accepted accounting principles. For instance, ED routinely adds endowment losses to total expenses in the denominator of the primary reserve ratio and fails to include pensions as "postemployment and retirement liabilities." NACUBO members and staff participated in a NAICU task force last year that recommended numerous improvements to ED's process. A recent response from the Under Secretary of Education was dismissive of the associations' concerns and failed to address the issues raised or consider any of the suggestions, such as convening a panel of nonprofit accounting experts to offer advice to the agency.

Understand How ED Derives Your Score

NACUBO encourages business officers to calculate their institution's composite score and compare the result against ED's published score. If there are discrepancies, ask the appropriate regional office to provide their calculation. Analyzing calculations helps identify how ED interprets generally accepted accounting principles and definitions in the financial responsibility ratio. For example, through analyzing recent ED calculations, NACUBO discovered that several regional offices had excluded donor-restricted endowment appreciation and earnings reported in the temporarily restricted net asset class when calculating expendable net assets; this runs contrary to the regulations, which specifically include temporarily restricted net assets.

NACUBO would appreciate learning about significant discrepancies in the ED calculations. Please email information to Sue Menditto.

Contact

Anne Gross
Vice President, Regulatory Affairs
202.861.2544
E-mail

Sue Menditto
Director, Accounting Policy
202.861.2542
E-mail