Future of Division III

[Gray Fox]

http://www.d3boards.com/index.php?topic=4409.18405#msg2100410

Fontbonne in serious trouble.

[Kuiper]

New NCAA proposal to allow high revenue schools to split off into a separate subdivision that allows them to pay players through a trust fund as long as they comply with Title IX and pay women too.

https://sports.yahoo.com/ncaa-proposing-new-college-athletics-subdivision-rooted-in-direct-athlete-compensation-145051537.html

Given the magnitude of payments required to pay half of athletes $30K minimum, those schools could insist on higher shares of revenue that might normally be available for DIII

[Ralph Turner]

New NCAA proposal to allow high revenue schools to split off into a separate subdivision that allows them to pay players through a trust fund as long as they comply with Title IX and pay women too.

https://sports.yahoo.com/ncaa-proposing-new-college-athletics-subdivision-rooted-in-direct-athlete-compensation-145051537.html

Given the magnitude of payments required to pay half of athletes $30K minimum, those schools could insist on higher shares of revenue that might normally be available for DIII

FTA...

• 98 percent of DII and DIII schools spend less than $20 million annually on their athletic programs.

Why doesn't D-III just go with pure amateur athletics?

What are the legal constraints on no NILs for D-3 athletes across the division? If a player wanted NILs why not go D-2?

The resources for a Trinity or Southwestern or Colorado College are different from the rest of the SCAC and ASC schools.

[jknezek]

Here is a very good article about the economics of small colleges. It's very balanced, with lots of input from various colleges and universities that show up on the matrix. And there are a lot of D3 schools on that matrix. I do think it's a high level look that limited itself to 5 important but not all-important factors, so there are some factors that I believe should be a part of the debate, but it's still a good look at the challenges ahead for a very large part of the D3 universe.

https://www.bloomberg.com/graphics/2023-us-higher-education-analysis/#:~:text=Bloomberg%20News%20consulted%20six%20experts,aid%20and%20persistent%20operating%20losses.

https://www.bloomberg.com/graphics/2023-us-higher-education-analysis/?utm_source=website&utm_medium=share&utm_campaign=copy

[Ralph Turner]

Here is a very good article about the economics of small colleges. It's very balanced, with lots of input from various colleges and universities that show up on the matrix. And there are a lot of D3 schools on that matrix. I do think it's a high level look that limited itself to 5 important but not all-important factors, so there are some factors that I believe should be a part of the debate, but it's still a good look at the challenges ahead for a very large part of the D3 universe.

https://www.bloomberg.com/graphics/2023-us-higher-education-analysis/#:~:text=Bloomberg%20News%20consulted%20six%20experts,aid%20and%20persistent%20operating%20losses.

https://www.bloomberg.com/graphics/2023-us-higher-education-analysis/?utm_source=website&utm_medium=share&utm_campaign=copy

Great article, jknezek.

You will be amazed at the D-3 universities that have at least 3 of the 5 stressors to which the author refers.

Scroll down in the article to find the schools which have the most stressors!

[Ron Boerger]

One thing about the "stressors" this study employs is that they ignore "stress relievers" like endowment growth and investment earnings, or increased numbers of applicants or students enrolled.  Magnitude of "operating losses" are also not factored in; a school with annual losses of a few tens of thousand dollars that has growth in other areas and/or substantial endowment/investment gains shouldn't be dinged.  Same goes for rising aid as a data point taken in a vacuum.   Then there's the matter of timing of this study, which includes the impact of COVID but not the potential recovery since. 

And it would have been helpful for this to list which of the stressors schools had. 

The D3 schools with all stressors:  W&J, Wittenberg, John Carroll.   W&J's response:

The Bloomberg analysis is based on a period when operations at Washington & Jefferson College and other institutions were impacted by the Covid-19 pandemic. During this time, the college invested substantially in the health and safety of the campus community, voluntarily reducing revenue by limiting the number of students in residence and incurring significant expenses for rigorous safety protocols. Our financial strength, based on donor support and ample cash reserves, allowed us to make these investments while continuing to pay all employees. We are proud to offer a high-quality yet affordable education thanks largely to the exceptional generosity of alumni and friends, such as one who this fall provided a record $50 million gift to support student scholarships. W&J's enrollment has rebounded since 2021 and is at the highest level since 2019. The outlook for the coming year is quite positive as well, in part due to two dozen new programs, including a Bachelor of Science in Nursing. Our acceptance rate reflects our longstanding mission of providing college access to students who meet our high academic standards and are well qualified to succeed, as proven by retention and graduation rates well above national averages. We are pleased that W&J is fiscally sound, as confirmed within the last year by Standard & Poor's rating of BBB+ with a "stable outlook" (better than the industry as a whole). In addition, W&J received a financial grade of A- in the Forbes 2023 rating of the strongest and weakest colleges in the country.

UPS had four stressors; their response:

It appears you have overlooked balance sheet indicators in your analysis. This is a significant omission, as schools with a robust balance sheet have a better capacity to withstand financial challenges. The University of Puget Sound, like most colleges and universities, has faced challenges, especially due to the pandemic and demographic shifts resulting in fewer college-aged students. However, we are confident in our financial stability, thanks to a growing endowment, healthy liquidity, and manageable debt. Our discount rate means that we can offer our students a higher level of financial aid without compromising our financial health.

[jknezek]

Yes. I noticed the same thing. W&L appears with 3 stressors, I think, I haven't looked at this article since I posted it. Of course, it is unknown which 3, but with 2.5B+ in assets as of 6/30/23 on the audited financials, and almost $1.98B endowment (78% of assets), I suspect the "stressors" are of the University's own making. Namely an increase in financial aid and a slight decrease in the number of students. Not sure what the third one would be, maybe operating loss in the short-term, but I think the analysis definitely applies to schools without a nest egg much better than to those with the ability to easily cover these "stress factors", especially over the short-term issue of the covid years.

Now, that does not mean that even W&L's endowment, and schools like it, will be able to cover the demographic issues indefinitely. But I suspect schools with $300MM or more in endowments are ok in the short-term and, I suspect, once you push over that $500MM, given active alumni support, you are probably ok in the longer term.

If you are looking at a school with $100MM and 3 or more of these stress factors, I'd be much more concerned. And under $50MM my kid is simply not going. Pick another college. It costs too much to gamble over a 4 year period that way. Even on a full-ride, the risk of disruption is massive and, in my opinion, very hard to call it worthwhile. The logistics of what do you do if the school goes under, even after graduation, and you need a transcript or a rec or something is just a massive pain.

Checking W&L's financials will help show why I think schools without massive endowments are in trouble. W&L's endowment high point was $2.09B reported June 2020, which included a massive 36% gain that year. So the value of the investments has drifted down over the following 2 years, despite steady increases in donations, and that may be one of the stress points.

I should point out that of W&L's 2BB or so, only about 400MM is unrestricted. So they can't do whatever they want with the vast majority of the endowment funds. The University is essentially an investment corporation, as ONLY $72MM in revenue comes from tuition and fees (that includes the law school, so 72/1850 undergrads does NOT give you the average cost of undergrad attendance).

What is interesting to note is that the University spends $90MM on instructional expense, so the revenue from tuition does not even cover the cost of instruction, let alone student services and plant. Total costs of almost $200MM dwarf the tuition revenue, so without being an investment corporation, W&L would run almost $150% in the red every year, though it wouldn't be so bad if they weren't handing out almost $60MM in student aid. Then it would only be about 50% in the red annually. But that should tell you why I'm skeptical of schools with smaller endowments.

Is W&L overpaying for instruction and services? Maybe versus a school with a smaller endowment. I'm sure W&L is not the cheapest run school, nor should it be with the financial backing available. However, it is important to note that without significant endowment assistance, W&L would have to seriously cut costs or student aid just to get even close to breaking even.

On the other hand, it's hard not going to comment on the fact that W&L's operating budget received $63MM from the internal endowment and $19MM from external trusts component of the endowment. 81MM from 2B... 4%. The school costs, on average, 27K per year for 1850 students. I mean, dropping that down to, say, 10K, would cost another 31.5M, or roughly less than 2% per year of the endowment. So spending 6% of the endowment annually would drop the cost of the school, on average, to one of the cheapest in the country. On the other hand, only $400MM of the endowment is unrestricted, so if that $31.5MM had to come from the unrestricted portion, that's almost 8% per year. A relatively large percentage, that a couple years of flat returns, like we've seen, would cut pretty drastically into the available funds.

So is that 6% ruinous? Hard to say. It would be very difficult to pull from the unrestricted account. And, to fund that $31.5MM on the same level as the current endowment contribution would require another $787MM in endowment devoted to tuition and fee reduction or unrestricted.

Figuring out the average return on endowment is over a long-term is a bit tricky. Certainly in the years since the high point hit, it would have made the endowment look very bad. But the 36% return in 2020 would mask a lot of basically flat to 1-2% negative returns over the last 2 or 3 years.

However, to put it in perspective, in the year 2000, when I graduated, NACUBA said W&L had a $400MM endowment. So that's a 425% increase over 23 years, which works out to a Compound Annual Growth Rate of 7.47%. Providing 4% per year to operating expenses all of a sudden doesn't seem so bad. Inflation over the last 20 years has averaged about 2.61% according to the Federal Reserve.

So despite paying 4% per year (using this year for all years over the 23 year period and assuming the 20 year inflation average is essentially the same as the 23 year), the endowment has grown around 4.75% per year post inflation. What does that work out to? Roughly $700MM over the period added to the endowment in post inflation dollars. If that had been cut to 2.75%, providing the extra 2% of the endowment needed to drop tuition significantly, it would still have been a $350MM increase post inflation.

So no, not ruinous, but definitely expensive, cutting the post inflation gains by half or $350MM. Plus, using averages is not strictly correct. Years where the base drops in the beginning have a much greater impact than the 36% gain toward the end thanks to the time value of money. So I suspect the effect would actually be a larger penalty, but I'm not going any deeper.

So if you've gotten this far, you are probably wondering what is the point? There are several.

1) Endowments are massively important. If you are looking at colleges to invest in for your kids' education, it's definitely a factor you need to take into account, especially with a private school. Probably the most important factor in the school's possible survival over the suspected demographic cliff we are about to hit.

2) Well-managed schools spend only a pittance of their endowment every year, but that is due to several good reasons. a) inflation is a bear b) unrestricted funds are not generally a large part of the endowment c) investment returns are not steady year over year

3) If you want to know how much trouble a school is in with possible declining enrollment, check to see how much of their operating budget tuition covers. If the ratio of tuition and fees to expenses is anywhere close to 1:1, declining enrollment could be a massive problem.

4) Is higher-education busted in this country? To some degree, yes. W&L basically has posted a roughly $700MM profit net of expenses and inflation over the last 23 years. Some of that is donations, some of that is investment profit. But a "non-profit" is absolutely profiting, it's just not distributing those profits and is holding them, "in trust" for future generations. However, over the same period, tuition and fees have steadily increased as well, so as the school has profited, the "customers" have paid more. I suspect this is true at most colleges with large endowments. They will say they are saving for a rainy day, and to some degree they are and that rainy day is just about on us, but the net result is a "non-profit" has essentially profited while continuously charging more to those it is supposed to serve.

Call me skeptical of our current model of higher education and it's "non-profit" status. Also call me skeptical of schools that have not done this successfully, as their tuition vs expenses pay model is going to be severely tested in the next 10-15 years.

What would I suggest? Here's where it gets a bit technical.

In order to keep "non-profit" status, I think the endowment should pay out roughly equal to the endowment gain vs a ratio like 2x inflation on a 5 year average 5 year trailing basis but collared at 4x inflation and limited to endowments of $500MM or above, adjusted every year for inflation. So, for 2020, schools should have budgeted to pay out any endowment gain they had, on average, over the period 2010-2015, that was more than 2x inflation but capped at 4x inflation. So if inflation was 2.5%, and the school's investment average was 7%, they would budged to pay 2% of the endowment to the operating budget. If they had an excellent period, with a 20% gain vs a 2.5% inflation rate, they would budget to pay out at least 10%, the remaining 10% could be reinvested.

If the school has a less than 2x inflation return, or a negative return average over the 5 years, it would not be required to draw down the endowment except that it still needs to pay bills and would likely do so regardless. Sub $500MM endowments would be exempt, or possibly have a graduated ratio (3x inflation or more as the lower limit), but the goal would be to ensure these schools can build to a healthy endowment. In fact, a straight endowment figure might not be a great idea, but rather endowment per student might be more effective.

This rolling time period/delayed rolling average, would allow schools to budget properly and also use investment returns while still allowing endowments to grow, even against the inflation rate. But it would limit the growth rate in most average years and, hopefully, benefit the consumers by putting more money to use.

Anyone who got this far... I'm impressed. You must really be interested in this topic. I'm a numbers guy, so I enjoyed playing with it, but I can't imagine reading it...

[Ralph Turner]

Yes, jknezek, I enjoyed your post.   

[Ryan Scott (Hoops Fan)]

I recently had one school official tell me that their selective liberal arts institution with a $600m+ endowment was tuition dependent and actively cutting non-need-based financial aid.  Crazy times.

[Ron Boerger]

I recently had one school official tell me that their selective liberal arts institution with a $600m+ endowment was tuition dependent and actively cutting non-need-based financial aid.  Crazy times.

A lot depends on the restrictions placed on endowment funds by their respective donors, and a lot depends on how successful the schools are at investing the funds.  It's hard to touch principal to begin with, and if you are overly conservative (or overly risky) in your investment strategy and have a couple of bad years I could see being in that position.

EDIT:  I see jknezek made this point in much superior detail.

[Kuiper]

http://www.d3boards.com/index.php?topic=4409.18405#msg2100410

 Fontbonne in serious trouble.

Fontbonne announced it is closing in summer 2025.  Wash U is acquiring the campus as a land purchase, not a merger as I read this

https://www.ksdk.com/article/news/local/business-journal/fontbonne-university-to-close-in-2025/63-e2c3f429-ea00-4136-a616-b0a5107b6c40

https://source.wustl.edu/2024/03/statement-regarding-fontbonne-university-campus/

[Ron Boerger]

A little more in-depth take (and which agrees WashU is buying the campus but has no plans for its use):  https://www.bizjournals.com/stlouis/news/2024/03/11/fontbonne-closing-washu-sale.html

[Kuiper]

Here's a little more insight on how the Fontbonne announcement affects the athletic teams for next year (since they don't plan to close until after the 2024-2025 academic year):

https://x.com/d3hoops/status/1767235981772525800?s=20

Word from Fontbonne is they expect to field their athletics teams next year, but they are not allowed to bring in any new student-athletes. Based on how the year went at Cabrini this year, it seems unlikely that they will field all of their teams.

That will produce a Cabrini-like last season effect for these teams, while also creating some short rosters.  I'm guessing that part of their teach-out plan is to revoke admissions for freshman for next year/

[Ron Boerger]

The school's announcement (https://www.fontbonne.edu/fontbonne-university-to-close-after-summer-2025/) says they will not admit a class in the fall. 

[Captain_Joe08]

Northland College in Ashland, WI is in trouble and needs $12 million by 4/3 to avoid closure: https://www.northland.edu/fund-a-new-northland/