‘This Isn’t Just a Financial Problem’

CFOs need board and presidential support to put turnaround plans in place, presenters at the annual business officers' meeting say.

July 25, 2018
 
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LONG BEACH, Calif. -- It's not particularly hard to find a chief financial officer who can tell a story about being hired, running the numbers and then watching the chair of the board's jaw drop when he or she learns for the first time how far the institution is in debt.

What is harder is finding someone offering firm recommendations on the role CFOs should play in delivering the bad news, making sure administrators, faculty members and other leaders take it seriously, and then plotting a course to turn around a college.

But at least one session addressed the issue Monday at the National Association of College and University Business Officers’ annual meeting.

In short, if a college or university really wants to change its ways and find stronger financial footing, the CFO can't be sequestered in his or her office, filling out spreadsheets and running projections. He or she needs to be engaged with the institution's various constituencies -- and backed up by the college's president and its board.

“This isn't just a financial problem for the CFO to solve,” said Nick Wallace, director at BKD CPAs & Advisors and a trustee at Taylor University, in Indiana. “It's not just your problem. It's a problem that the whole institution has to solve together.”

That may sound like a truism in the world of higher education, where shared governance means multiple parties are supposed to have a say in any major university decisions. Yet in many situations where colleges have failed, it's been clear the lines of communication broke down somewhere between the senior financial officer, the rest of the administration and the campus at large.

Think of Saint Joseph’s College, in Indiana, which last year surprised many of its students, faculty members and alumni when it announced it had to suspend operations because of a financial crisis. Or Mount Ida College, in Massachusetts, which broke off merger talks with one college and then weeks later announced it was closing and selling its campus -- a plan B that few knew existed coming at a time when most were unaware the budget had reached a breaking point.

The CFO, president, provost and other cabinet members have to be in agreement about financial conditions and discuss those conditions with the board, Wallace said. Then the board has to agree as well.

“That is an issue at times,” Wallace said. “Does the president really believe you have a problem, and do they have faith in this plan to turn things around? Getting a president to that point is sometimes a very difficult thing to do.”

Identifying the characteristics of stress can help. Wallace listed 14 characteristics of financial and operational stress, like running deficits in three of the past five years, new student enrollment dropping by more than 10 percent, more than one cycle of midyear budget cuts, freshman tuition discount rates of more than 50 percent and declining cash reserves. He also listed signs of academic and leadership stress, like no new degree programs developed for at least two years, an institution on probation or warning with its accreditor, and a faculty with an average age of 58 or older.

“Being in a turnaround situation is a little bit like starting a 12-step program, because you have to recognize that there is a problem,” Wallace said. “That's not the easiest thing to do.”

The question of turning around a college isn't far-fetched in today's environment, of course. In a recent Inside Higher Ed survey, only 44 percent of chief business officers at four-year baccalaureate colleges said they were confident their colleges would be financially stable over the next 10 years, meaning confidence is down substantially from previous years. That same group of business officers was likely heavily represented in Monday's session, if a show of hands is to be believed. Most attendees in the room raised their hands when asked if they were at small to midsize institutions.

This year's NACUBO annual meeting slate was full of information about financial forecasting and modeling. A question that always follows is how the CFO can go from cooking up the forecasts to helping a college actually put changes in place.

For on-the-ground experience, Brandon Parker, the CFO of one college consulting with BKD, shared his experience. Parker is the CFO at Pacific Union College, a Seventh-day Adventist institution in the Napa Valley that enrolls about 1,200 students.

Enrollment has dropped by about one-third in three years, Parker said. The college was facing annual deficits of $5 million or more if it didn't make a changes. It's facing pressure from a declining number of graduates from the Adventist high schools it traditionally drew upon.

So it put in place a turnaround plan that included reductions in the number of full-time employees, operational improvements and some creative, if often incremental, new revenue sources.

Among the changes, it cut about 46 full-time-equivalent positions from its 2017-18 budget through retirements, attrition and involuntary separations to save close to $3 million. It made changes to its health-care benefits for employees, outsourced security and some property management, and decided to pursue a business running a commercial storage park. Storage is in heavy demand in the area, start-up costs are low, and the college thinks it can earn about $70,000 per year on the business before taxes.

Some of those moves might not fix the financial picture for the long term, but they can help bridge the gap.

“You've got to think outside the box,” Parker said. “Finance, let's be honest, sometimes moves faster than enrollment. What can we do in finance to make a difference as quickly as possible?”

The college also made decisions related to its long-term outlook, deciding not to sell parcels of valuable land. Leaders said the land was the college's endowment, and Parker indicated it can be utilized and monetized without selling it.

Pacific Union's leadership wants its CFO to give presentations to groups like the faculty about the financial situation. So he's sometimes been the face of bad news.

“You can't constantly be feeding people bad news or else you're going to kill morale,” Parker said. “So how do you juggle, ‘This is … the reason for the turnaround plan’ with, ‘OK, guys, here are the good things that are happening’?”

Giving the right information to the right groups is key, Parker added. So is providing enough context.

That was another point echoed by Inside Higher Ed's survey of business officers. Business officers who were not confident in their institution's future financial stability were less likely to say constituencies like students, faculty, staff and alumni were well informed about the situation. While 94 percent of business officers who were confident in their campus's 10-year outlook said constituents were given "accurate and sufficient" information, only 77 percent who were not confident said the same.

Parker recognizes that some believe he is moving too quickly at Pacific Union. Although some have been devastated by the changes, others are excited, he said.

“Some people have self-selected out and are not going to be coming back for this next school year because they just can't handle the change anymore,” Parker said. “Some are really energized by it.”

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