UArts’ sudden closure was a shock, but not a big surprise in the turbulent higher-ed landscape

The suddenness of the University of the Arts’ closure shocked Philadelphia this week, but its board’s decision to pull the plug on the nearly 150-year-old institution tracks with the troubled financial landscape of higher education.

College and small university closures or mergers are happening about once a week this year, mostly in the Northeast and the Midwest, as many schools still have sharply lower enrollment and higher expenses than before the pandemic. There’s no relief in sight.

It’s not an oversimplification to describe what’s happening as a matter of supply and demand, said Gary Stocker, a former college administrator in Missouri who created an app called College Viability to help parents and prospective students evaluate schools’ financial prospects.

“There are way, way too many seats and not nearly enough students willing to pay for those seats at whatever discounted price colleges give them. That’s not going to change any time soon,” Stocker said.

In fact, business conditions are expected to worsen for colleges, as the number of high school graduates begins to shrink for a decade starting in 2026, according to demographics experts.

Still, the abruptness of the UArts closure ― with just one week’s notice, compared to a year’s notice at Cabrini University, in Radnor — and the lack of specifics from university officials has some observers looking for a red flag and questioning whether the board was doing an adequate job of managing the institution.

The closest that board chair Judson Aaron and now former president Kerry Walk came to an explanation was in a May 31 statement: “With a cash position that has steadily weakened, we could not cover significant, unanticipated expenses. The situation came to light very suddenly.”

Experts say nonprofit boards should not be surprised by their organization’s financial condition.

“If they are, it could suggest that they were not receiving accurate financial information from their executive team or instead were disengaged and not reviewing that information properly to guide their decisions,” said Laura Solomon, an Ardmore lawyer who specializes in nonprofit law.

Like many small colleges and universities, UArts has struggled financially for years. Through last June, the school had lost money in nine of the last 10 years. The exception was fiscal 2022, when federal COVID-19 aid boosted UArts’ bottom line.

Last year, the final year of David Yager’s 7½-year tenure as president, UArts’ operating loss ballooned to $11.8 million, its biggest by far in the past decade. The school would have violated its loan agreement for $45 million in bond debt had it not raised cash by selling an old dormitory at 1500 Pine St. for $10.7 million.

That meant Walk started her short tenure on Aug. 1 under difficult financial circumstances. The school’s longtime chief financial officer Stephen J. Lightcap had departed in April, leaving an interim CFO, Bryant Morgan, in charge of the finances.

Five months after Walk took office and a month before a permanent chief financial officer arrived in February, Fitch downgraded UArts’ credit rating to a highly speculative B+, which meant that Fitch was worried even then that UArts was a default risk.

Fitch has 120 ratings in the higher education sector, and only two were lower than the B+ assigned to UArts. Fitch was worried that “the university’s very slim margin of liquidity could erode to untenable levels absent significant operating improvements in fiscal year 2024 and beyond,” Fitch analyst Akiko Mitsui said in an email Thursday.

The January downgrade was the third in the last four years. Then on Tuesday Fitch dropped the rating to a rock-bottom C. That is the last stop before a default, which Fitch considers inevitable. The next payment on the bonds is due on Sept. 15.

In a May 31 interview after the news of the pending closure broke, Walk said the school was on track to have a smaller loss in the fiscal year that ends June 30. “We were on course despite an already weak cash position, but we were on course to get through the end of this fiscal year,” she said.

UArts’ financial and enrollment trends over the last decade were similar to those at Cabrini University, a Catholic school in Radnor that graduated its last class in May. Villanova University is acquiring the campus but not the educational programs.

Total enrollment at Cabrini dropped 42% to 1,616 students in the 2022-23 school year from 2,809 in the 2012-13 school year. Over the same period, UArts’ total enrollment fell 39% to 1,170 from 1,909. UArts’ incoming class size increased last year and was expected to increase again this year, but that was likely too late to solve the institution’s financial problems.

Cabrini had even more significant financial losses over the last 10 years than UArts, but handled its closure in a far more orderly fashion. It announced last June it would close in a year, giving students and faculty time to look for new schools and new jobs.

The decision to close came after attempting to save money by restructuring and being unable to find another institution willing to take over.

UArts officials haven’t said whether they looked at merger possibilities. After the closure was announced, Temple University expressed interest in a merger with UArts. How a Temple takeover would work is unclear, given that UArts is closing Friday and it typically takes a year for higher education mergers to get necessary approvals.

The Philadelphia region has seen several higher-education mergers in recent years, but they typically involve schools that specialize in health care or other high-demand fields.

Thomas Jefferson University in 2017 acquired Philadelphia University, which had a heavy emphasis on science, engineering, and design. St. Joseph’s University completed its acquisition of the University of the Sciences in West Philadelphia two years ago. This year, St. Joe’s acquired the Pennsylvania College of Health Sciences in Lancaster. Drexel University has a definitive agreement to acquire Elkins Park’s Salus University, which specializes in health sciences fields.

UArts has hired Alvarez & Marsal, a crisis management and restructuring firm that also helps facilitate mergers, to oversee the school’s wind down, which must include the payments to bondholders who are owed $46 million. Whether UArts turns to bankruptcy court for help settling its affairs remains to be seen. UArts’ endowment must be preserved to be used for the charitable purposes of donors.

Alvarez & Marsal sent a note to UArts faculty and staff Friday that left no hope for a different outcome than closure: “Unfortunately, because of the financial state of the University, we are unable to retain most employees after today.”

Four years ago, University of Pennsylvania professor Robert M. Zemsky and colleagues published The College Stress Test, a book that included tips on evaluating the financial health of institutions.

“What we concluded then is the rich are going to get richer, the big are going to get bigger, and the small and vulnerable are going to go out of business,” Zemsky said in an interview Thursday. “And that’s exactly what’s happening. This should not come as a surprise.”