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With the growth in McDonogh’s student enrollment initially stimulated by the addition of a kindergarten in 1992, the Finance Committee continued to refine its operating model. The Committee also continued communications to the Board about the school’s finances and how some of the strategic needs should be funded.
A diagram like this graphic was presented and discussed at several meetings. In this article, I’ll discuss the capital campaign, land, and endowment.
Capital Campaign
As mentioned in part 1, the McDonogh School began a strategic planning process in the late 1980s and completed the first plan sometime in 1992. The plan identified areas that the school wanted to improve.
Among the school’s strengths was the size of its campus and its physical plant. Interestingly, the age of the physical plant was a concern as was its ability to meet all the needs of students.
Two areas of concern were the lack of a theater, concert hall, and assembly area. Such a space would allow the school’s vibrant acting club to perform plays, the students to hold concerts, and Upper School students and faculty to meet in a single area.
While the 1,000-acre campus was known for its beautiful athletic fields, indoor athletic events were restricted to the school’s Memorial Field House, constructed in 1957 when the student enrollment was lower and only boys attended McDonogh. A multi-purpose athletic facility was proposed.
Before a formal capital campaign had been established, McDonogh hired a new Headmaster. Shortly after his tenure started, a long-time Board member agreed to make a major gift for the athletic facility.
The gift was to be paid over a five-year period. The Finance Committee proposed a policy that would not allow the construction of a building to start until at least 60% of the building’s cost had been received. The remainder of the cost was covered by pledges.
With the operating model as a guide, the CFO and Finance Committee recommended a policy that a maintenance reserve of 10% of the cost of a new building be included in the projected cost that a donor or capital campaign would cover. The Board approved this policy.
The wait for the contributions to accumulate was a good thing, because it provided time for planning and design. The wait also gave the Development Director time to plan and announce the capital campaign.
Because it had been a while since McDonogh had conducted a capital campaign, the campaign was not as large as the cost of the list of needs in the strategic plan. The two largest components of the capital campaign were the athletic facility and arts center and a renovation of the Lower School to accommodate the kindergarten.
The renovation of Elderkin Hall was conducted in two phases in order to minimize campus construction disruption. Phase 1 converted the building’s auditorium to classrooms. Phase 2 was a two-story addition that opened in 2001.
McDonogh’s Headmaster informed the Board that it was his preference to have both facilities built at the same time. Pledges and gifts had already covered the estimated cost of the Athletic Center. Pledges and gifts for the Arts Center were behind target, even though a sizable gift for a theater had been received from the parents of an alumna.
By the time that the gifts in hand for the Athletic Center exceeded 60%, the school was ready to start construction. During the planning process, it was noted that the best site for the Arts Center was a gymnasium used for some of the school’s physical education classes. The gym also included the school’s largest stage, and the gym floor doubled as an auditorium when portable chairs were set up on the floor.
The Athletic Facility would negate the need for this gym, so it was decided that its construction should proceed first. The Rollins-Luetkemeyer Athletic Center opened in 1996.
Fortuitously, McDonogh received a very generous bequest from an alum. With the bequest applied to the Arts Center, planning and design was able to begin. The Clarence A. Burck Center for the Arts opened in 1998.
A professional fundraising consulting firm had advised the school and the Board that successful capital campaigns should be followed by another capital campaign if there were additional unmet needs.
Over the next two decades, at least three additional campaigns successfully raised funds for:
- A new aquatic center that opened in 2006
- An indoor equestrian center that opened in 2010
- An Upper School STEM center that opened in 2013
- A Student Center that opened in 2014
- An Innovation Center that opened in 2018
- A new Middle School facility that opened in 2021
Those campaigns also raised money for scholarships, faculty salaries, campus infrastructure items, athletic fields, and many other strategic needs of the school.
In all cases, the policies developed by the Finance Committee and adopted by the Board provided for a stable operating budget.
We built a section of our financial model to cover the capital campaign(s). The idea was to use data from the school’s donor tracking system to report when campaign pledges were received and when future pledge payments would be received.
Unfortunately, this area was the most difficult to update and model. The school didn’t want copies of a model showing pledge payments from major donors. Also, tracking smaller donations and payments was impossible to do without an automated system.
The Development Department did not always update their tracking system whenever a model update was presented to the Board. Matching their system with the financial reporting system was difficult, even for the auditors at the year’s end.
The arrows from the capital campaign bubble indicate that funds raised went directly to land and buildings that benefited the operations of the school. Campaign funds for scholarships and teachers’ salaries were added to the endowment.
Land
McDonogh’s origins as a farm school provided it with more than 800 acres of fields, forest, and pastures. Although there may have been overtures over the years for McDonogh to sell some of its land, the Board did not seriously consider them.
The construction of the long delayed I-795 extension from I-695 to Reisterstown changed the Board’s perspective. The proposed highway would skirt the campus on the north and northeastern edges. It would also lead people to the proposed Owings Mills township development, a community targeted by Baltimore County as one of its future growth centers.
There was a sentiment on the Board that if the school did not consider developing some of its land closest to the town center and highway, that Baltimore County or the state of Maryland could acquire some of the school’s property for purposes that might not be in the best interest of the school.
A Land Use Committee was formed to study the issues. They visited a corporate campus developed by Princeton University that utilized land leases for office buildings.
Ultimately, they recommended that McDonogh develop a Class A corporate office park utilizing the same land lease strategy. By selling land leases, the land and the buildings could theoretically return to the school after 25, 50, or 99 years.
One of the Committee members, an alumnus and commercial real estate developer, was hired by the Committee to manage the development of the Corporate Campus. That work included representing McDonogh’s position as a participant and interested party in the Owings Mills Town Center development.
The Treasurer of the Board was chair of the Board’s Finance Committee. He was an alum, friend, and Board mentor. He was a member of the Land Use Committee, while I was not. We found that it helped to have the impartial financial perspective that I had by not participating in Land Use Committee meetings.
The Committee succeeded in developing a corporate office park that continues to operate on the northern border of the campus. During my years on the Board, the Committee also acquired and developed a farm on the western side of campus. The farmland was sold to T. Rowe Price, a land lease tenant in the original corporate campus.
The Committee also handled the development of a farm owned by an alumnus in Howard County. The alumnus and his wife donated an interest in the farm to McDonogh, and the Board agreed to act as developer.
With the collaboration of several others, I am certain that a book could be written about the land development activities of McDonogh. A section of our strategic plan model was dedicated to McDonogh’s land, since funds from the endowment were used to build the infrastructure required for the office park.
The swing from a deep investment to a positive return took years. The land leases signed by the original tenants ranged from 25 years to 50 years. Based on the dates of the land leases outstanding, the investment should return more cash as those leases are renegotiated.
Selling land to a developer is easy, but the return is not as high since the developer takes all the risk. Acting as the developer, making the investment, and taking the financial risk is a move that not many institutions would take. Tensions were periodically high when additional funds were required to develop the land, and no funds had been returned.
The investment ultimately provided an excellent return to the endowment, thanks to the tireless work of the members of the Land Use Committee as well as the engagement and communication with the Finance Committee.
Endowment
Since the initial bequest from John McDonogh was received by the City of Baltimore, McDonogh’s Trustees have held responsibility for managing an endowment. Funds received from donors may be restricted or unrestricted.
Restricted funds are applied to the designated purposes agreed to by the school and the donor. Unrestricted funds are available at McDonogh’s discretion.
When I began my tenure on the Board of Trustees, the endowment was approximately $10,000,000 and managed by a single investment company. The account manager, a principal of the investment firm, provided reports to the Finance Committee annually, but occasionally more frequently.
Some of the Finance Committee members served on other non-profit boards. Based on their recommendations, the school hired Cambridge Associates to advise us on the targeted investment mix as well as diversifying the number of investment firms.
Over time, the body of the endowment increased due to the investments’ appreciation, gifts, and proceeds from land sales. Draws from the endowment to cover the land development costs were tracked in our financial model. It was difficult to predict when developed parcels would be leased or sold and the estimated values of that land.
As the endowment grew, we tried to keep our annual draw for operating purposes at or below 5%. We also tried to minimize draws for other purposes like land or building construction.
During the construction of the Athletic Center and Arts Center, the CFO recommended that we utilize a tax-exempt bond funding structure to cover the upfront cost of construction when 100% of the pledges had not been paid. Because of the very low interest rates for that financing, I believe the school has continued to utilize that structure for construction funding.
Although the accounting treatment is very specific about how liabilities should be reported, I believe that an accurate financial model used for strategic planning purposes should show the tax-exempt bond debt used for construction as an offset to the endowment balance. The money must be repaid at some point. If the balance due exceeds the pledges receivable, the money will have to come from the endowment. Board members should be extremely concerned when tax-exempt bond debt balances exceed pledges receivable. If and when that occurs, the outstanding balance should be subtracted from the endowment balance since that is the likely source for repayment.
Some readers may remember that more than a few private university endowments including Harvard “arbitraged” their investment portfolio by using tax-exempt debt, which cost them less than what the yield was on their investment portfolio. That strategy backfired when the stock market adjusted in 2008. Boards that consider this finance tactic as a permanent strategy need to understand the risks.
Managing an endowment is easier when it is not used as a funding source for anything other than the annual draw. Receiving donations that are designated to be permanent additions to the body of the endowment is welcomed.
In Part 5, I provide my conclusion and recommendations for this private school finance primer.
