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Solving the Financial Planning Puzzle

Getting all the planning pieces together helps position institutions for a future that's fiscally fit.
University Business, Jan 2006

In 2004, Rollins College in Winter Park, Fla., received an amazing gift. George Cornell--who is a university alumnus and philanthropist, a relative of the founder of Cornell University, and the son of one of the first employees at IBM--left the liberal arts college $93 million in his will when he passed away the prior year. The gift nearly doubled the college's $113 million endowment.

Would Cornell's generosity help Rollins achieve its institutional goals, or would it ruin the school by creating divisions over future strategic direction?

Treasurer George Herbst's prior experience handling a windfall donation at another institution meant he knew to be grateful for one particular fact: Cornell had given his alma mater some advance notice on the gift. "We knew it was coming. We knew the bequest was in the estate and that the estate was large," Herbst says. He also knew that he had to help the campus create a financial plan.

Long before Rollins College actually received George Cornell's bequest, leaders there began planning for it. An outside financial advisor, St. Louis-based Hammond Associates, helped with the institution-changing donation. Rollins administrators and trustees set new investment and spending targets for the endowment that would ensure intergenerational equity. The goal was to put the fund to use in such as way as to make the institution stronger while respecting the heritage that gave George Cornell so much respect for the place.

"You've got to plan ahead, and you've got to get your board educated," Herbst says. Without that step, the bequest might have led to infighting, rash decisions, and the foolish spending of a spoiled heiress. Instead, Rollins officials were able to think about the matter and explain the potential--and the limitations--of the bequest to students, faculty, and alumni. Some of the money was set up for faculty awards, some for initiative funding, but most of it went to the endowment to support the college into the future.

With or without a windfall, giving thought to financial planning is crucial for higher ed leaders today. Finances are indeed top of mind. A recent study reported on in the higher education press found that financial matters take precedence over academic and student's affairs, with 53 percent of university presidents having fundraising on each day's agenda and 44 percent attending to budget and finance matters every day.

College financial officers have to pay this year's bills and manage an endowment for posterity. The Rollins case shows that even influxes of cash are stressful to the institution's character. By using financial planning strategies and outside financial planners, colleges are preparing to meet the future head-on.

The list is a long one, but it's not all that precise. Tuition, donations, investment income, research grants, financial aid, and state aid are major funding sources for institutions of higher ed. Still, not all of this revenue arrives on demand; donors don't appreciate past-due notices, and George Cornell was 94 when he left his estate to Rollins. State-supported universities sometimes see their funding delayed when the state budget is held up for reasons unrelated to higher education.

Donors, who may have made offbeat investments over the years, are giving to their beloved alma maters, whether or not anyone on the endowment staff knows how to make sense of it. "It's really a jigsaw puzzle that's put together each year," says Pierre Allaire, vice president of Institutional Advancement at the University of North Florida in Jacksonville. And it's a puzzle that grows in complexity as the institution changes.

That means the job changes, too. University treasurers make financial plans for a living, and they sometimes need help in the form of outside advisors who can give an independent view on special projects; develop policies for gifts, income, and endowments; and assist in communicating with institutional stakeholders. Although outsiders are beginning to bring their expertise to IHEs, it's a slow process, says Paul Gydosh, a certified financial planner and managing director of Kensington Wealth Partners in Columbus, Ohio. After all, universities are in the business of brainpower, so there's sometimes an unfortunate bias against expertise that comes from outside of the academy.

Academics may also bring biases to the discussion. Gydosh, who has a few campus clients, says that biases are sometimes related to academic theory, but more often related to individuals' views of what is right for the institution. A hired hand may have a deep perspective on a particular area of valuation or planning with no preconceived notions about what is best for the university.

But just as a university's staff can be blinded by internal biases, outside experts bring their own perspectives, for good or for bad. These financial advisors may be used to dealing with businesses, which operate under a different set of strategic imperatives than the average educational institution.

Consultants need to understand where the institution gets its money and who has a stake in the outcome.

Before hiring an outsider or charging an employee with financial planning responsibilities, the institution should determine the person's role: An unbiased expert? An advocate for a particular position? A referee?

The number crunching will be the same in any case, but the approach to gathering information and selling the plan will be different. Here, several university leaders share the challenges they face in financial planning and how they handle them.

The University of North Florida does most financial planning in-house, but it uses outside advisors to help with big fundraising and construction projects that aren't in the realm of the institution's everyday life. For example, outside advisors are helping with the planning of a new student union, with an estimated cost of $30 million to $35 million. The fundraising for that and other buildings runs alongside a campaign to grow the endowment.

"One of our objectives is to get our endowment to $100 million by 2010," says Allaire. Reaching that amount would increase predictable annual income to fund operations, improve the campus' standing in the academic world, and reduce its dependence on the state legislature, three of UNF's goals.

Institutions of higher ed have many bodies providing oversight, but not all of them are financially savvy. Students, faculty, alumni, parents, and community members have a stake in the education, development, and research prospects of the institution. "The stakeholders don't have a complete picture, and that's fair," says Margaret Plympton, vice president for Finance and Administration at Lehigh University (Pa.). After all, they bring strong but non-financial perspectives to the table. "People ought to be asking the questions, and they ought to be answered clearly," she says. A professor specializing in 19th-century Irish literature instead of modern portfolio theory should not have less of a say than his business school colleagues in the future of the institution. As befits an educational institution, the key is education.

Most institutions have investment policies that guide their money managers. While they are often available to the public, they are "largely boring and internal," says Dick Anderson, director of the higher education practice at Hammond Associates. He sees a greater problem in the disconnect in the return expectations held by professional investors and the general public, which may cause a university's stakeholders to push for endowment spending rules that are not responsible in the long run.

Along with faculty, students, parents, and alumni, higher ed leaders should think about how outsiders can become partners who support the institution. "We have more non-alumni support than alumni," says Allaire. "This community has really adopted the university." University of North Florida's strategic plan is easy to find on its website; a calendar of events and job opportunities that would also be of interest to community members are also posted.

Institutions typically have strategic plans, investment policies, and gift policies, but many keep them hidden. These documents should have been drawn up with some input from the many campus constituents, and they should be guiding decisions about how to spend money, how to invest long-term funds, and what donations to encourage and accept. Is the institution seeking funds for research to enhance its reputation? Dorms and faculty to accommodate more students? Lower tuition? Higher salaries? Bigger football teams? These policies can help manage expectations along the way to reaching goals.

"Alma maters are such that they'll take anything," says Gydosh, adding that this lack of guidelines can be a problem. Institutions can be stuck with assets that are not generating income and are expensive to sell. His firm performed a valuation analysis of life insurance held by two universities, in part to give development officers information needed to discuss these donations with benefactors.

A discussion of suggested donations should not be a negative one, Gydosh notes. In many cases, donors want to give a substantial amount to a college. If, for example, an alumna understands that her life insurance policy isn't a significant gift, she may be willing to give additional money. Other donors will be content with the insurance donation, even if the present value is small. "Coach donors on what you want to receive," he advises. Gydosh has some experience with this, as his regular practice includes high-net-worth individuals who are planning significant bequests to charities.

Gift policies, which lay out what an institution will and will not accept, often come as a surprise to those making a donation. But they can be positive. Lehigh views its policy as a guide for brainstorming conversations with donors rather than close the door on future donations. The idea is to be flexible, Plympton says. Because donors want Lehigh to do well, they are open to discussions about what types of assets will help the university with its strategic plan.

Stuart Speer, a certified financial planner who serves as an adjunct professor at Park University (Mo.) and has worked with some university clients, says that IHEs contemplating changes in their strategies must be prepared for negotiation with stakeholders. In some of his engagements, he has had to approach endowments to release funds to support new cash-flow management strategies.

Higher education may be one of the few consumer goods of which the true price is revealed after one makes the purchase decision, said Richard Vedder, an economist at Ohio University and a fellow at the American Enterprise Institute, speaking at a recent conference on higher ed sponsored by the Federal Reserve Bank of Chicago. Families struggle with planning for the cost of a college education, in part because they don't know how much financial aid they will receive and how much faster than inflation their costs will rise.

Folks on the university side aren't brimming with confidence in their ability to manage their revenue, either, despite their power to increase tuition. The costs of health care benefits are skyrocketing, the technology needed to maintain research programs is expensive and evolving, and state appropriations have been sliding downhill.

One reason families don't know their future tuition bill is that parents don't know what schools their children will decide to attend. Prospective students value the variety among institutions of higher learning, but they also expect that colleges will continue to invest in long-term initiatives that keep them competitive.

The revenue matters facing universities will become more complicated rather than less, as the puzzle pieces move and change. Financial aid and government outlays are being revised. Inflation may become an issue for the first time in decades, not only for health care costs and tuition revenues, but also for energy, supplies, salaries, and other operational expenses. Donors may give more complicated financial instruments as they age and become less in need of the modern investment products that they have acquired over a lifetime. And all of this happens in an environment where institutions are trying to deliver better educational opportunities to more students.

Vedder believes that part of the problem is the isolation of universities from modern life, which allows scholars to do research but which also creates operational and financial inefficiencies. That's why outside advice can be so helpful, and why communication with outside stakeholders is a key part of achieving educational excellence.

Ann C. Logue is a freelance investment services writer based in Chicago. She can be reached at

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