Back to Basics: Nonprofit Composite Score

Please note: This blog is current to the date of its publication, Nov. 2, 2021. For additional updates or guidance navigating your organization’s composite score, please contact SST.

A ‘Composite Score’ is the U.S. Department of Education’s metric for assessing financial responsibility for institutions.  A nonprofit institution can fall into one of three categories based off their score:

• Financially responsible (scores equal to or greater than 1.5)
• In the “Zone” (scores between 1.0 and 1.5)
• Failing the financial responsibility standard (scores below 1.0)

For institutions that receive a composite score below a 1.5, the following actions are required:

Composite Score in the “Zone” (1.0 – 1.5)

• May choose the “Zone alternative” for up to three years, including the following:
  • Placed on heighted cash monitoring 1;
  • May be required to submit financial and compliance audits earlier than normal;
  • May be required to provide information about its current operations and future plans;
  • Require the compliance auditor to express an opinion on the school’s compliance with the Zone alternative requirements; and
  • Must provide timely information within 10 days off occurrence of any of the following events:
    • Any event that causes the school or related entity, to realize any liability that is noted as a contingent liability in the school’s or related entity’s most recent audited financial statement; or
    • Any losses that are unusual in nature or infrequently occur, or both.

Note – the Zone alternative does not require the school to be placed on provisional certification or to post a letter of credit.

Failing Composite Score (less than 1.0)

• Will be placed on provisional certification for up to 3 years;
• May submit a letter of credit equal to 10% of the prior year Title IV funds received;
• Demonstrate that it has met all other financial obligations and is current on debt payments for its two most recent fiscal years; and
• Comply with the provisions of the Zone alternative.

Any time an institution’s composite score falls below 1.50, the institution has the option of submitting a letter of credit equal to 50% of the prior year Title IV funds received to be considered financially responsible.

There are three ratios that go into calculating a composite score: Primary Reserve, Equity, and Net Income. Below, you will find a breakdown of each of these ratios.

Primary Reserve Ratio

• Measures the viability and liquidity of an institution
• Based on the ratio of expendable net assets to total expenses
  • Expendable net assets is calculated by adjusting net assets by the following:
    • Subtracting intangible assets, net of amortization
    • Subtracting unsecured related party receivables
    • Subtracting fixed assets, net of accumulated depreciation and amortization
    • Adding qualified long-term debt
  • This component is weighted at 40% of the composite score
  • The maximum score for this component is 1.2
  • To achieve the maximum score for this component, an institution’s expendable net assets must equal or exceed 30% of total expenses

Equity Ratio

• Measures an institution’s capital resources and ability to borrow
• Based on the ratio of modified net assets to modified assets
  • Modified assets and modified net assets are calculated by adjusting both by the following:
    • Subtracting intangible assets, net of amortization
    • Subtracting unsecured related party receivables
  • This component is weighted at 40% of the composite score
  • Maximum score for this component is 1.2
  • To achieve the maximum score for this component, an institution’s modified net assets must equal or exceed 50% of modified assets

Net Income Ratio

• Measures profitability
• Based on the ratio of the change in net assets to total revenue
• This component is weighted at 20% of the composite score
• Maximum score for this component is 0.60
• To achieve a maximum score for this component, an institution’s increase in net assets must equal or exceed 4% of total revenue

Note: This summary does not include other requirements to achieve financial responsibility.  Please refer to the FSA Handbook for other requirements.

Calculating your nonprofit’s composite score can be complicated and time consuming. The experts at SST are experienced in the unique nuances around the ratios that contribute to your composite score. Learn more about our service areas, or contact us today for immediate assistance.