By Afshin Khan (CE ’19)
Following the FEC plan to return to a full-tuition scholarship model, the Financial Monitor’s second annual report, released in February of 2018, evaluated the viability of returning to a full-tuition scholarship model within 10 years. The final consensus reached by Kroll Associates, Inc. is that the plan, though aggressive, is responsible.
To fulfill one of its duties outlined by the Supreme Court of the State of New York, the Financial Monitor evaluated the FEC plan to return to a full-tuition scholarship model. The Financial Monitor states that the FEC has “already accomplished several critical milestones” which include re-examining and correcting matters from the 2017 FEC plan, confirming the level of financial challenges Cooper Union faces, and designing changes in operations to meet the required level of financial sustainability to support full-time tuition scholarships.
The Financial Monitor categorizes the risks to achieving the FEC plan as either external or internal. The external risks are economic downturns, inflation, volatility in investment markets, and federal/state tax/student aid policy. The most significant internal risk identified by the Financial monitor is the high expectation mentioned in the FEC plan for philanthropy.
The Financial Monitor strongly endorses “stopping or limiting planned scholarship increases”, even “reversing scholarship levels for future students” in the case that Cooper Union does not meet the guardrails outlined in the FEC plan. However, the financial monitor did not comment on the viability of the specific plans, e.g. increasing graduate tuition, dorms costs, etc.
The Supreme Court of the State of New York outlined the necessity of a “Financial Monitor” in the Amended Consent Decree from December of 2015. The duties of the Financial Monitor were outlined in the following manner:
1) To summarize the financial condition of the Cooper Union.
2) To report on the plans proposed by the Cooper Union Board of Trustees and determine whether these plans act in good faith for Cooper Union
3) To identify non-budgeted expenditures greater than $100,000 and non-budgeted contractual obligations greater than $125,000.
4) To analyze the Free Education Committee (FEC) progress report and its feasibility.
In July of 2016, the Attorney General’s Office of the State of New York selected Kroll Associates, Inc., a corporate investigations and risk consulting firm, to serve as Financial Monitor. The first annual report released by the Financial Monitor in February of 2017 mentioned that the school was under severe financial stress due to operating losses incurred each year for over a decade. The debt manifested from the spending of future lease revenue and the accumulation of obligations for post-retirement health benefits. The operating deficit for Cooper Union was $11.9 million in the 2009 fiscal year, but rose to $21.9 million in the 2017 fiscal year, while the net tuition and fees rose from $3 million to $10.6 million in the same time. This information was repeated from the first annual report to “reiterate that the size of Cooper Union’s deficits cannot be cured through expense reduction alone.”
The report states that the positive margin of 2% per year suggested in the FEC report may represent a sustainable operating performance, but only “after restoring resources to a level appropriate for Cooper Union.” However, the school will see an increase in contractual rent in the future, which will help restore financial resources to an appropriate level. For example, the rent from the Chrysler Building was $7.8 million in 2017, but will increase to $20.1 million by 2018, which will then increase to $32.5 million by 2019 to 2027. This increase will help relieve the institution of some financial stress.
Even after Cooper Union reduces deficits and revenue surpasses the cost of operation, the school will still need to account for the resources that were consumed to finance past losses with available assets and front-loaded revenue. The FEC plan recommended creating a “debt retirement reserve” to ensure that Cooper Union can pay off a short-term loan it secured in 2014 when the final payment date of this loan arrives. The Financial Monitor states that there was significant “borrowing from [the] future” when the school tried to finance its past losses.
To fulfill its duties, Kroll Associates, Inc. and the Cooper Union analyzed more than 1,200 departmental operating expenditure subaccounts and its corresponding budgeted subaccount expense deficits. They found that 10 subaccounts exceeded the budgeted amounts by more than $100,000. The largest of these subaccounts was for employee benefits, such as medical costs, with a deficit $1,332,811.
The Cooper Union explains that in some instances, the budgeted amounts were exceeded due to unusual activity. For instance, there was an irregular number of claims from the school’s self-insured medical plan. Similarly, the budgeted amount for faculty expenses underestimated the required budget for faculty stipends. The Financial Monitor also identified 22 non-budgeted contractual obligations that exceeded $125,000. In total, these 22 obligations amounted to $6,589,910.
The Financial Monitor concludes the report with a concern that the Board of Trustees has the “occasional propensity to endlessly debate issues, or to re-open issues that have already been debated thoroughly”. The report mentions the need to unanimously agree on a plan and move expeditiously forward. Though the FEC plan is responsible and tenable, it is also aggressive in timing; time is money that Cooper Union does not have.