What can seminaries learn from efforts to save an all-female Virginia college renowned for its 3,250-acre campus, equestrian program, and summer sessions in Paris and Nice? 

As it turns out, a lot.

When trustees voted unanimously to close Sweet Briar College this year and then resigned after a coalition formed and halted the action, the story generated widespread interest. Regardless of what ultimately happens at the institution — the school welcomed a diminished student body of 300 in August — the situation can be instructive for all segments of the higher education community. Rather than focusing on what got the school into the briar patch of legal entanglements, let’s look at what might bail it out. 

Typically, institutions in financial distress look for ways to increase revenue over the medium and long range while decreasing expenses immediately. Over time a school looks to build enrollment and giving. But expenses must be cut at once, so many schools look for obvious though painful ways, like reductions in force, and at more creative efforts like restructuring institutional debt. Ultimately, for an institution to get out of the briar patch, it needs a board tough enough to withstand scrutiny, criticism, and possible litigation. 

Restructuring debt

Sweet Briar’s indebtedness wasn’t disproportionately large, but the annual interest on the debt was nevertheless a major contributor to the cash flow problem. For years, the school attempted to restructure its debt but had limited success. Unlike most debtors, institutions of higher education that rely on federal student aid have substantial constraints on their ability to negotiate with creditors. There is no real opportunity to restructure through bankruptcy, because a bankruptcy filing results in the institution no longer being eligible for federal student aid. Thus, schools must rely on more creative approaches to reduce their debt service.

One size doesn’t fit all. Different creditors respond favorably to different approaches. For example, the local plumbing contractor with an account payable won’t be approached in the same way as the Wall Street trustee for the bondholders. But all creditors need a legitimate reason to believe they will be repaid. Before negotiating with creditors for modification of the debt structure, the trustees, president, and chief financial officer need to develop a plan to put the college on solid financial footing in reasonably short order. To be credible, this plan should include financial projections that show the elimination of operating deficits over a three- to five-year period, at least from a cash perspective and preferably from an accrual perspective. Detailed revenue and expense projections for the next 12 to 18 months are other key components of any proposal to restructure indebtedness. 

Making serious cuts

Frequently, institutions base their financial projections on substantial increases in enrollment. Yet in the absence of a new academic program that is in high demand or some similar extraordinary event, creditors look askance at revenue projections that deviate from historical trends. In most cases, increasing revenue means modifying academic programs, changing student recruitment strategies, and enhancing development efforts — all of which take substantial time. Thus, lenders often focus more attention on the institutional effort to reduce the expense side of the budget.

Expense reductions almost always require staffing reductions since the majority of expenses are related to personnel. Lenders understand the pain associated with staffing reductions and, in candid moments, they acknowledge that an institution’s willingness to make painful cuts is the best bellwether of its ability to carry out the operational plans reflected in the financial projections.

At the time its closure was announced, Sweet Briar board members indicated they were unable to develop a plausible financial scenario for the institution. Their judgment may well have been accurate, but it is that judgment that will be examined repeatedly as the new board and administration guide the college forward. 

Being strong and prudent

Staffing cuts and other expense reductions are never pleasant. When an institution is at risk, the decisions of its trustees are subject to intense study and debate by campus stakeholders, alumni, state licensing agencies, accrediting agencies, and the courts. As an example, trustees walk a fine line between the need to raise money and the need to be candid with prospective donors. Just weeks before Sweet Briar announced its intent to close, this year’s commencement speaker had signed a letter of intent to leave a $1 million bequest to the college. And at about the same time, the college initiated a broad-based solicitation of its alumnae for unrestricted gifts. Transparency about precarious financial conditions would likely have caused some donors to withhold gifts, but a lack of transparency left the college open to charges of fraud. 

Trustees in today’s higher education environment must recognize that their decisions are being, and will be, scrutinized more extensively than ever before. Sweet Briar’s new board, elected as part of a settlement agreement and approved by court order to carry on the mission of the school, is extremely active and determined to save the institution. However, the engagement level of each former board member has been and will continue to be under scrutiny, as is every decision they made in the past decade. All trustees must ensure that they act prudently in making decisions for their institutions and that their deliberations are recorded in the minutes and elsewhere so that their prudent efforts will be evident to all who inquire.

The takeaway

The future for Sweet Briar — or for any institution — is unpredictable, and few trustees want to have their decisions evaluated by individuals who have the benefit of 10 years of hindsight. But if that evaluation does occur, trustees will be in the best position to defend their actions if, during their terms of service, they stayed abreast of trends in higher education, attended meetings and campus events on a regular basis, and monitored key indicators of the institution’s financial health.     

This article was adapted from a longer white paper. The full text is available at www.steptoe-johnson.com/content/download-whitepaper-lessons-sweet-briar-patch.

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