Fiscal Reality

Trustees worry about colleges' financial health but do not have the tools to diagnose it

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By AUDREY WILLIAMS JUNE

Many college and university trustees say money matters are the biggest challenge their boards face. According to The Chronicle's survey, board members of four-year institutions are grappling with how to pay for new buildings and how to repair old ones. They are worried about fast-growing expenses and slow-growing endowments. And in some cases, they focus on annual deficits that threaten the very life of the institution.

About two-thirds of trustees at both public and private colleges described their fiscal condition as "somewhat healthy" but facing possible financial ills in the future. Among all trustees, those at private nondenominational colleges were most likely to diagnose their institutions as not healthy.

The results of the survey underscore the precarious financial status of the country's smallest colleges, those with enrollments of fewer than 1,000 students. Only 4 percent of trustees at those institutions labeled their colleges as "very healthy" financially. By comparison, nearly one-third of trustees at colleges with enrollments between 1,001 and 5,000 students called their colleges' budgets "very healthy."

Trustees at the biggest institutions, those with enrollments of more than 15,000, seem to hold the most positive view of their colleges' financial health. More than 40 percent of them described their institutions' fiscal condition as "very healthy." Board members at public institutions and private religious colleges are also confident. Thirty percent consider the financial condition of their institutions "very healthy," compared with 24 percent of trustees at private nondenominational institutions.

The variety of responses may signal that some boards are more optimistic than others. But a comment by one trustee in the confidential survey suggests that some trustees know more about fiscal matters than others.

"Very few board members have the knowledge needed to understand the financial status of an institution," wrote a female trustee at a private nondenominational college in response to an open-ended question. "They must rely on the honesty of the president and any expertise of other board members."

'Not Their Day Job'

William A. Weary, president of Fieldstone Consulting Inc., which helps boards of trustees and administrators at colleges and other nonprofit organizations with strategic planning, agrees. "Unfortunately, any number of trustees don't know their institutions in significant ways at all," Mr. Weary says. "And I think this is particularly regrettable today when we have more data at our disposal than ever before. I encourage trustees to use the expertise that they have to at least ask questions about why they don't have more information."

A good practice, says Mr. Weary, is for college administrators to put together a set of standard statistics for board members to watch, such as the institution's tuition discount; its acceptance, retention, and graduation rates; its debt load; its amount of annual giving; and the cost of covering deferred maintenance. In addition, colleges could use a "good education" in presenting financial data in a way that is easy for anyone — not just those with financial savvy — to understand, he says.

About one out of four trustees who participated in the survey said their area of primary expertise on the board was related to budget issues and management. Richard D. Legon, president of the Association of Governing Boards of Universities and Colleges, says financial literacy is key for members of a board's finance committee, but "it's tough to expect that kind of literacy across the board."

Trustees typically don't have "the depth of understanding and the depth of knowledge" needed to digest large amounts of financial information, Mr. Legon says. "Not that they don't have the capacity to do so, but it's not their day job," he says.

"To think boards are going to get in there and help the administration manage the finances of an institution is neither appropriate nor realistic," Mr. Legon says.

However, board members should at least be educated enough about fiscal matters to link financial issues to an institution's long-term strategic goals, Mr. Legon says.

According to the survey, the longer trustees serve on a board the more optimistic they are about the college's finances. Thirty-five percent of trustees who had served more than 11 years called their institution's budgets "very healthy." Of those who had served for less than a year, only 25 percent saw their colleges that way.

Mr. Weary says new trustees are often anxious about financial matters in light of the Sarbanes-Oxley Act, which mandates tougher governance and financial reporting rules for corporations that some nonprofits have decided to follow, in part. That anxiety can trigger hasty assessments of an institution's financial health.

"They are frightened about being shown up," Mr. Weary says about some new trustees. "They also feel a great pressure to make their mark as fast as possible. Sometimes they can overreact to some situations."

Trustees "really break into their stride" after a decade or so on a board, Mr. Weary says, though the longer they stay the "less willing they are to become reactive about the institution."

"It can be hard to maintain the same edge after eight or 10 years," he says.

For some trustees, long stints on a board make them more willing to push for greater access to reliable financial information for the entire board. Candace de Russy, a 12-year member of the Board of Trustees for the State University of New York, calls the pipeline for financial information about the 64-campus system "deplorable."

"I have often abstained or voted no on the basis of my belief that I have been insufficiently briefed," she says.

Over time, Ms. de Russy says, she has asked for more-detailed information on areas like faculty productivity, research grants, and executive compensation from all sources — but to no avail. College trustees, she says, "are not rigorously demanding data" and are "sometimes intimidated into rubber-stamping financial decisions."

"We have a real crisis of a lack of accountability in higher education," she says. "The status quo is so successful in stymieing the transmission of really transparent data. Many more parties, including some of us lone trustees, are asking these questions now and demanding more data."

More and Better Data

For trustees at Occidental College, more and better data were instrumental in helping them make sense of fiscal matters. In the early 1990s, the private liberal-arts college in California repeatedly ran a deficit. The administration and the chief financial officer at the time "had a hard time figuring out where we were financially," says Catherine Y. Selleck, chairwoman of the board, "and so we couldn't figure it out either. It was always a surprise at the end of the year."

A new chief financial officer and new financial controls that allow expenditures to be tracked more frequently made the difference. "We could look at all expenditures every quarter so we could correct what we needed to before the end of the year," Ms. Selleck says. Occidental has had eight consecutive years of budget surpluses.

The finance committee of the board reviews the budget three times a year, once to approve it, once to "see where we are," and again to begin planning the next year's budget, Ms. Selleck says. That information is then reported to the full board. Every trustee also receives a spreadsheet annually that outlines various factors — like student aid, salaries, tuition, and the spending rate and size of the endowment — and their impact on the college's finances over the next five years.

"You really have to be serious about knowing where you are financially from month to month," Ms. Selleck says.

Some presidents may be skittish about releasing too much financial information to trustees for fear of revealing money problems that appear to be insurmountable, even when they are not. But painting a rosy picture for the governing board is a bad move, Mr. Weary says.

"Eventually, they'll discover a different perspective, and it's usually bad news for you when they find out," he says.