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Long-Term Planning Necessary for Financial Stability


stableStories about the financial challenges faced by higher education institutions are common and point to the need for boards and administration to adopt an approach to financial planning that ensures long-term stability. In the March 24 edition of The Chronicle of Higher Education, Mark Keierleber writes about a number of smaller colleges that are adjusting to lower enrollments and the lagging economic recovery in “Financially Strapped Colleges Grow More Vulnerable.”

The article features a story about Ashland University, which borrowed money to build a recreation center, an education building, and an addition to its science center. After three years of declining enrollment, Moody’s downgraded the university’s bond rating due to its decreased liquidity. Keierleber also writes about Calvin College, another institution that borrowed money up front to construct projects while pledged gifts for the projects were paid over several years, and the cash received was invested for debt repayment. Lower investment returns on the pledged receipts pool, and the fact that gifts received and pledged did not meet the construction costs, created an operating deficit that will increase over the next few years without cost and expense adjustments.

Reading stories like these reminds me of the years I spent as a finance committee member and then treasurer on a nonprofit board. Early on, the institution had some operating challenges due to declining enrollment. Per customary practice, the CFO deferred maintenance expenditures wherever possible to defray the operating cash deficit and avoid spending cash reserves or borrowing from the endowment. Fortunately, the institution did not have any current debt, and our finance committee was able to work with the CFO and president to develop an operating model and budget that aligned annually with conservative enrollment projections. The deficits were ultimately eliminated, and maintenance deferrals were restored.

As I subsequently learned, institutions’ finances are more complex than simply managing the operating budget. Private nonprofits’ cash flows revolve around three components that I dub “the trinity”: institutional operations, the endowment, and fundraising/development.

Shortly after we stabilized our operations, the institution received a major bequest from an alumnus and—with that bequest in hand—the administration requested that the board approve the construction of two new buildings. Fortunately, our board chair requested that the finance committee develop a multi-year cash flow model showing all the sources and uses of cash before the board would approve the construction. The model indicated a need to raise an additional $2 million for the building funded by the alumnus’ bequest and a need to raise the entire sum for the other building.

Working with the institution’s development staff, the board was able to quickly obtain gifts and pledges exceeding the construction cost for the first building. The second building was more problematic as no major donors stepped forward to support the project. The administration insisted that both buildings should be built at the same time in order to satisfy student and faculty demands.

Since the campaign for the first building was oversubscribed, the development department was able to convince some of the donors to move their pledge to cover the cost of the second building. However, a substantial shortfall (70 percent of the construction costs) still existed.

Despite the mounting pressure from the administration to build both buildings, the board chair insisted that the institution first adopt guidelines for new building construction. We ultimately developed a 20/40/40 rule for constructing new buildings: of the total cost, 20 percent cash had to be on hand, 40 percent had to be received in binding pledges, and the remaining 40 percent of the project cost could be raised in a capital campaign. Included in the project cost requirements was the establishment and funding of an endowment for estimated building maintenance over the first 20 years and a requirement that the projected operating budget for the institution increase by the building’s expected operating costs (electricity, heating, cooling, cleaning, etc.).

The rule was a compromise. There were board members who wanted 60 percent of the costs to be cash on hand, some wanted 100 percent in cash and pledges, and others didn’t want any cash on hand requirement if pledges were available along with the development department’s promise to raise the remaining funds. Using this example, you can see the relationship between the “trinity” of operating budget, endowment, and fundraising.

Similar to the two schools mentioned in the Chronicle article, our institution borrowed the money to fund construction using a tax-exempt bond. The cash received from pledges was invested as received up to the date of the allowable pre-payment and, thanks to the non-profit tax exemptions, a higher rate of yield from the investments was achieved versus the interest rate on the tax exempt debt; this is not always the case because of market fluctuations. Thanks to prudent planning, establishment of construction guidelines, and successful fundraising to collect the cash to pay for the facilities, the debt was repaid and the impact on the operating budget was minimal. However, if the capital campaign had been unsuccessful, ultimately the repayment of the debt principal would have required a reduction of unrestricted funds from the endowment (if available) and would have reduced the annual draw from the endowment that was contributed to the operating budget. Imagine if these negative things occurred at the same time that enrollments were declining and the budget had to be adjusted for both items.

Clayton Christensen and Henry Eyring wrote about the high fixed-cost model utilized by traditional higher education institutions in their book, Innovative Universities. Institutions with large endowments and enrollments are generally able to weather a short-term disruption. Institutions with meager endowments, outstanding debt, and smaller enrollments are less able to weather disruptions, particularly if the decline in enrollments or endowment earnings extends over a number of years. Institutions’ boards and administrations should consider the potential for continued disruption and re-establish conservative planning that ensures longer-term financial stability rather than managing the process through a year-to-year approach.



Wally Boston Dr. Wallace E. Boston was appointed President and Chief Executive Officer of American Public University System (APUS) and its parent company, American Public Education, Inc. (APEI) in July 2004. He joined APUS as its Executive Vice President and Chief Financial Officer in 2002. In September 2019, Dr. Boston retired as CEO of APEI and retired as APUS President in August 2020. Dr. Boston guided APUS through its successful initial accreditation with the Higher Learning Commission of the North Central Association in 2006 and ten-year reaccreditation in 2011. In November 2007, he led APEI to an initial public offering on the NASDAQ Exchange. For four years from 2009 through 2012, APEI was ranked in Forbes' Top 10 list of America's Best Small Public Companies. During his tenure as president, APUS grew to over 85,000 students, 200 degree and certificate programs, and approximately 100,000 alumni. While serving as APEI CEO and APUS President, Dr. Boston was a board member of APEI, APUS, Hondros College of Nursing, and Fidelis, Inc. Dr. Boston continues to serve as a member of the Board of Advisors of the National Institute for Learning Outcomes Assessment (NILOA), a member of the Board of Overseers of the University of Pennsylvania’s Graduate School of Education, and as a member of the board of New Horizons Worldwide. He has authored and co-authored papers on the topic of online post-secondary student retention, and is a frequent speaker on the impact of technology on higher education. Dr. Boston is a past Treasurer of the Board of Trustees of the McDonogh School, a private K-12 school in Baltimore. In his career prior to APEI and APUS, Dr. Boston served as either CFO, COO, or CEO of Meridian Healthcare, Manor Healthcare, Neighborcare Pharmacies, and Sun Healthcare Group. Dr. Boston is a Certified Public Accountant, Certified Management Accountant, and Chartered Global Management Accountant. He earned an A.B. degree in History from Duke University, an MBA in Marketing and Accounting from Tulane University’s Freeman School of Business Administration, and a Doctorate in Higher Education Management from the University of Pennsylvania’s Graduate School of Education. In 2008, the Board of Trustees of APUS awarded him a Doctorate in Business Administration, honoris causa, and, in April 2017, also bestowed him with the title President Emeritus. In August 2020, the Board of Trustees of APUS appointed him Trustee Emeritus. In November 2020, the Board of Trustees announced that the APUS School of Business would be renamed the Dr. Wallace E Boston School of Business in recognition of Dr. Boston's service to the university. Dr. Boston lives with his family in Austin, Texas.


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