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Unlikely $25 Million

May 15, 2014

Calvin College’s latest capital campaign seemed like a tough sell: it had $115 million in debt and for years didn’t have a realistic plan to pay it back.

But it worked, in part because the current President Michael Le Roy convinced donors he had a plan to deal with the debt, which was racked up during the administration of his predecessor, President Gaylen Byker. Within eight months, donors gave the 4,000-student Christian college in Michigan $25 million to pay off debt, a remarkable sum to deal with mistakes of the past.

Now, because of the donations and some real estate sales, Le Roy said Calvin can bring its debt down to a manageable level by 2017. Unlike other capital campaigns, though, there will be no plaques, trees or buildings named after the major donors – they all chose to remain anonymous.

Le Roy, who took office in summer 2012 after Byker’s 17-year tenure as president, said Calvin moved quickly once it realized the size of its problems. While $115 million in debt isn’t entirely out of line for a college of Calvin’s size, there were two complications.

First, before Le Roy arrived, the college had been setting aside less than 1 percent of its roughly $110 million budget to pay debt. But the college’s debt payments were about 6 percent of the budget.

Second, when the college put up new buildings in recent years, it borrowed money to pay for them and invested donations in hopes that investment returns would cover the debt payments. Because of the recession, those returns didn't come.

Only by tackling the debt problems – and admitting to them publicly – could the college get donors’ trust.

“There wasn’t anything magical about it,” Le Roy said. “It was just trying to be honest in a grace-filled way and making sure we were taking care of the problem on our own.”

A task force report last year laid out the problems at Calvin. And Le Roy’s administration began a five-part plan to manage it. The administration cut $9 million from the budget and is working to sell about $15 million in commercial real estate, including an apartment building it owned and managed, that is not core to its academic mission.

But there was a small time bomb around the corner. In 2017, the annual debt repayments were set to shoot up from the current $6.2 million a year to $9.5 million a year.

So Le Roy went to his donors with a pitch. “We know out in the future we have certain needs, physical plant and other kinds of needs,” he recalled telling them, “but we aren’t going to ask you for those until we have really shored up our operating budget and our debt position.”

That pitch is atypical, said Donald Fellows, CEO of fund-raising consultant Marts & Lundy. Generally, donors want their money to go toward things in the future, not things from the past.

“It’s sort of an ultimate test of a donor’s belief in an institution and its direction and probably the leadership,” Fellows said.

With the $25 million from donors -- $7 million of which has been paid, and the rest of which is committed – and the expected $15 million from property sales, Calvin expects its debt will shrink from $115 to $75 million by 2017. If that pans out, the debt payments will rise to just about $7 million a year – an $800,000 increase rather than a $3.3 million increase.

Calvin said its success came despite what advisers said the college could expect. One adviser, Bruce Dreon, is a partner at the fund-raising consulting firm Bentz Whaley Flessner. Dreon said he cautioned Calvin about how challenging it is to raise money to reduce debt and the potential problem of using so much of its donor base for debt.

“They were too smart to take my advice and they went out and did something quite challenging,” Dreon said.

Calvin, though, may prove an exception to the rule, he said, because colleges are going to have to demonstrate their financial house is in order to successfully raise money.

“In my experience, it’s very difficult to raise money for debt; it’s not something that most prospects get excited about," Dreon said. "Obviously, Calvin is an exception to the rule."

The Council for the Advance and Support of Education said there were other examples of institutions raising money for debt payments, including Oral Roberts University and Hollins University.

 

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