Paul L. Caron

Saturday, April 17, 2021

COVID-19 Has Accelerated College Closings

Patrick R. Baker (Tennessee; Google Scholar), Paula Hearn Moore (Tennessee), Kaleb Paul Byars (J.D. 2021, Tennessee) & Christie Aden, Covid Closing Down Colleges: How the Covid-19 Pandemic Has Accelerated Nonprofit College Closings, 2020 BYU Educ. & L.J. 1:

The United States has experienced a frightening trend in college closures. Indeed, in 2016, thirty-three colleges closed. Likewise, in 2018, thirty-five colleges closed, and over 90% of these colleges were private institutions.

This trend continues. A recent Edmit model projected over one third of all private four-year colleges are in financial distress. While some private colleges may adjust their tuition or cut expenditures to endure the crisis, others will undoubtedly close. What is more, the recent shift to online learning sparked by COVID-19 has further decreased revenue for small, private colleges. In fact, COVID-19 has accelerated the rate of private college closures. In the last few months, MacMurray College, Holy Family College, and Urbana University have permanently closed their doors. In addition, NYU professor Scott Galloway predicts at least ninety more colleges will perish, including Dickinson College, Bard College, and Sarah Lawrence College.

Several variables led to these closures. Private colleges cannot compete with their public counterparts for numerous reasons, such as geographical challenges, lack of economies of scale, and mismanagement. Furthermore, unchecked board mismanagement, at least in part, led to many of these closures. For example, the current regulatory framework––pertinently, insufficient disclosure requirements on Form 990––permits nonprofit college board members to engage in malfeasance behind closed doors. And on the back end, courts’ improper application of the business judgement rule as well as capricious standing doctrines shield directors from liability after breaches of fiduciary duties occur.

While these conditions alone have resulted in numerous closures, one major event is rapidly accelerating the financial pressure on private higher education institutions: COVID-19. A recent study shows nearly five hundred colleges faced little financial risk before the pandemic; however, over 20% of those colleges now face a high level of financial pressure. Even more, COVID-19 has exacerbated the negative effects of mismanagement on these colleges, as well as the colleges that struggled for survival even before COVID-19. One may ask: If those private colleges struggled to survive during the best of times, how can their (malfeasant) directors possibly save them during a global pandemic with no foreseeable end? The answer is simple: They cannot.

This introduction has identified the impact COVID-19 has left on the financial health of already struggling nonprofit private colleges. Part II details more specific hardships these schools face and dis- cusses the difficult decisions they must make. Part III provides areas in which and reasons why these colleges will incur additional losses in the future. Part IV details the responses some colleges took to com- bat the negative financial effects of COVID-19. Part V provides this Es- say’s thesis: it calls for amendments to IRS Form 990 that would re- quire colleges to provide better, more complete disclosures. These disclosures would safeguard colleges’ stakeholders from malfeasant directors and future unforeseeable crises such as COVID-19. Finally, Part VI briefly concludes. ...

Private nonprofit colleges consistently experience financial strain due to various internal and external factors, and COVID-19 is exacerbating the effects of these factors. Colleges will experience rapid diminished enrollment and face increasingly volatile endowments. Further, many staple, revenue-producing programs––such as college athletics––will be inoperable and thus these colleges will incur even greater financial strain. In response, preventative measures should exist to mitigate the risks of future unforeseeable catastrophes. Harsher penalties and additional, more complete Form 990 disclosures will protect stakehold- ers from general board member malfeasance and future unforeseeable catastrophes. Quicker, more accurate, and more detailed Forms 990 will assist stakeholders in making their important investment decisions.

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