Higher Education Institutions: Department of Education Score
Higher education institutions can expect a major change to what is required in their audited financial statement package to submit to the Department of Education (DOE) beginning in fiscal year 2020. Prior to fiscal year 2020, the DOE required for-profit and nonprofit higher education institutions to annually submit audited financial statements pursuant to Section 498(c) of the Higher Education Act of 1965, as amended. The DOE utilized these audited financial statements to independently calculate a composite score of ratios to gauge the financial health of an institution and published the scores on their website on a two-year lag.
So, what is the major change? The DOE is now requiring the inclusion of a supplemental schedule in the institution’s audited financial statement package that contains all financial elements needed to calculate the composite score ratios with a cross-reference to the financial statement line or note disclosure. This means that since the DOE score is now a required element of the audited financial statements, a supplementary auditor opinion is required to accompany the DOE score supplemental schedule. This also means that an institution’s score will be available in real time via the federal audit clearinghouse website as opposed to the two-year lag on the DOE website.
How is an institution’s composite score calculated? There are three ratio components of the DOE score: the Primary Reserve Ratio represents a measure of an institution’s viability and liquidity; the Equity Ratio represents a measure of an institution’s capital resources and ability to borrow; and the Net Income Ratio represents a measure of an institution’s profitability. A weighting percentage is applied to each strength factor score to obtain a weighted score for each ratio. The strength factor score reflects the institution’s relative strength or weakness in a fundamental element of financial health, as measured by the ratios, to show the extent to which an institution has the financial resources to update technology, replace physical capital, maintain human capital, and to develop new programs. The sum of the weighted scores equals the institution’s composite score; however, there may be some items from an institution’s audited financial statement that may be excluded from the calculation of the ratios.
What does the composite score mean? As mentioned above, the DOE composite score reflects the overall financial health of an institution. The score can be anywhere along the scale from negative 1.0 to positive 3.0. If an institution receives a score greater than or equal to 1.5, the institution is considered financially responsible. If the score is greater than 1.0 but less than 1.5, the institution may be considered financially responsible but will require additional oversight such as cash monitoring and other reporting requirements. If an institution receives a score of less than 1.0, the institution is not considered financially responsible. These institutions must post a letter of credit (LOC) equal to at least 50% of the Title IV aid used in the most recent year. However, an institution with a composite score less than 1.0 may be permitted to participate under the provisional certification and may be subject to cash monitoring requirements by posting a smaller LOC equal to a minimum of 10% of the Title IV aid it used in the most recent year.