How A College With 340 Students Lost $220 Million In 5 Years

How A College With 340 Students Lost $220 Million In 5 Years
**ADVANCE FOR WEEKEND, MAY 20-22 ** Lauren Hafford of Fort Collins, Colo., a materials science major scheduled to graduate in 2007 from the Franklin W. Olin College of Engineering, works on her laptop outside the Olin Center on the school's campus May 8, 2006, in Needham, Mass. On Sunday 66 students will become Olin's first graduates -- bringing to a close four years of not only learning about engineering but spending time building the makings of a school from scratch. (AP Photo/Bizuayehu Tesfaye)
**ADVANCE FOR WEEKEND, MAY 20-22 ** Lauren Hafford of Fort Collins, Colo., a materials science major scheduled to graduate in 2007 from the Franklin W. Olin College of Engineering, works on her laptop outside the Olin Center on the school's campus May 8, 2006, in Needham, Mass. On Sunday 66 students will become Olin's first graduates -- bringing to a close four years of not only learning about engineering but spending time building the makings of a school from scratch. (AP Photo/Bizuayehu Tesfaye)

NEEDHAM, Mass. -- Olin College, with its sleek, glass-walled buildings around a peaceful grass oval, has earned glowing international attention for the successful ways it has pioneered the teaching of undergraduate engineering.

Built from scratch with hundreds of millions of dollars from a private foundation and a commitment to charging no tuition, 12-year-old Olin has attracted standout faculty, even though it does not give tenure. Top companies recruit its high-achieving students, who graduate at enviable rates into jobs with above-average starting salaries.

Behind the accolades, however, Olin has been bleeding red ink.

The tiny college of about 340 students spent nearly $100 million more than it took in between 2008 to 2011, the last year for which the figures are available, according to financial records obtained by the New England Center for Investigative Reporting.

The predicament would have been even more dire if not for Olin’s considerable endowment, which once reached $470 million. But the endowment has lost $120.4 million in value since 2008 in a combination of investment setbacks and cash pulled out to cover operating costs.

“No one envisioned that responsible management of an endowment could ever lead to a situation in which the amount of the endowment precipitously dropped, and that’s exactly what we saw,” said Olin’s president, Richard Miller.

Olin’s overall losses come to $129,412 per student annually, a staggering amount considering that it teaches only one subject, subcontracts maintenance and dining services, and does not offer an athletics program. Yet, it’s losing four and a half times more than what other colleges spend annually for all purposes, per student, based on a report by the Delta Cost Project, which analyzes higher education spending. (When its operating costs are added, Olin is spending nearly $170,000 per year, per student.)

While no one tracks operating losses at universities and colleges, national higher-education specialists said they could not recall an institution similar to Olin’s size that has lost so much.

In many ways, Olin is not typical of higher education institutions. It’s unusually dependent on its endowment, which at one point generated enough interest income to allow the school to charge no tuition. Its teaching model, which the school boasts is a reinvention of the way engineering is usually taught, relies on a high ratio of faculty to students. And it is so new, it hasn’t had a chance to build a large base of contributing alumni.

“Olin is not a representative prism” for analyzing broader issues in higher education, said Miller. “Every school is different.”

But all colleges and universities share certain basic business realities — even one as unusual as Olin. They usually have the same sources of income, such as tuition, fees and alumni contributions, and generally spend it in similar ways.
To higher education observers, the large and rapid losses by a small school offers a case study in the financial challenges facing higher education and the choices leaders make.

Like those at other institutions, Olin’s endowment crashed in the global economic collapse of 2008, and its investment income could no longer cover its expenses. And, like many other colleges, it responded by raising the price it charges to attend rather than by significantly cutting costs. In fact, it continued to add employees and give raises.

Meanwhile, the amount students pay to attend Olin has nearly doubled since 2008, when they had to cover room and board as well as some fees and expenses, though there was no tuition. That’s a pace of increase about 10 times the rate of inflation -- and far faster than the average price increases at colleges and universities nationwide.

Olin’s struggles “really do highlight the larger trends in the industry,” said Karen Kedem, vice president in the higher-education division of the bond-rating agency Moody’s Investors Service, which has been warning that college revenues are not keeping up with expenses, no matter how quickly they raise tuition. “There is a constant battle right now between mission versus margin.”

When Olin’s endowment tanked, school officials at first struggled to make up the difference without breaking their no-tuition pledge.

“There was a lot of talk about cost-cutting, and then, as the months continued, the magnitude of the reduction in revenue became more clear,” said Miller, noting that, at the low point, Olin’s endowment had lost 35 percent of its value, though it later rebounded slightly. “How can you cut 35 percent out of your operating expenses?” Miller asked.
That would have meant reducing the college’s budget from $38 million a year to $25 million, he said, just two years after having pruned it by 10 percent.

“We concluded that it would create a complete abandonment of the academic model we’d created,” Miller said. “If you’re going to choose cuts, you’re going to abandon the mission.”

So, the free tuition ideal was dropped in 2010. Olin’s advertised tuition and fees, not including room and board, now come to $45,156. After discounts and other financial aid, the net price students paid last year was $30,947, almost double the amount they paid in 2008, $15,633.

“I can’t tell you how much emotion there was” about raising these charges, Miller said.

“It’s real money and it makes an impact on families that have to pay,” added Stephen Hannabury, Olin’s executive vice president and treasurer.

As costs to attend Olin soared, administrators kept spending relatively constant, though payroll costs rose by 16 percent between 2009 and 2011, according to documents the college is required to file with the Internal Revenue Service. In all, the documents show, the staff of instructors and other personnel grew from 101 to 118, though Olin officials point out that enrollment expanded at about the same rate.

Despite Olin’s small size, several top administrators at the college are paid significantly more than the median salaries of executives in comparable positions at other private colleges nationwide, according to the College and University Professional Association for Human Resources.

Hannabury, as executive vice president and treasurer, made $257,802 in 2011, compared to a median salary of $160,000 for chief business officers at bachelor’s degree-granting colleges in the United States. Similarly, Olin’s vice president for development and its vice president for external affairs each make more than $100,000 above the median salaries of their nationwide counterparts. Olin officials say the salaries are meant to attract top people to a school with high expectations.

“Olin is a place where people put their hearts and souls into what they’re doing because they believe in it. They don’t feel used,” said Miller, who made $483,995 in 2011, according to Olin’s IRS filings. “They don’t feel like a tool that someone else is dealing with on a cold dollars-and-sense basis.”

Miller said the Olin system only works “if people who are involved in the college are emotionally committed to the cause that Olin stands for and dedicated to what Olin is doing.”

Some critics say colleges are failing to cut as much as they can, though most declined to give an opinion about how Olin in particular has responded to its losses.

Universities and colleges generally “have to look at the spending side and not just to the revenue side. And, no, I don’t think they have,” said Rita Kirshstein, director of the Delta Cost Project.

Financial problems scarcely seemed a possibility in 1997 when the trustees of the F.W. Olin Foundation, established by industrialist Franklin W. Olin, decided to create a whole new engineering college. The college was given the foundation’s entire remaining bank balance as an endowment on the assumption that returns from investing the money would pay for almost everything. There wasn’t even space in the administration building for a fund-raising office, Miller said.

When Olin’s endowment began dropping precipitously, officials were poorly prepared to start raising money from alumni and other sources as most other schools can. Though the college eventually found room for a development department and is now starting to raise money, it has few alumni to contribute, and its endowment remains 25 percent behind where it was before the downturn. And Moody’s has downgraded its bond rating because of its “deteriorating” endowment, although the rating remains investment grade.

“It felt like the world was changing under our feet,” Miller recalled.

Olin fired and replaced its investment manager, though in fact, Olin’s endowment loss was proportionally only slightly higher than what other colleges and universities experienced. But most colleges and universities recovered much more quickly, in part because of their fund-raising ability. Endowments nationwide last year were 11 percent higher than they had been during the pre-economic downturn levels, according to Moody’s Investor Services.

Making Olin’s problems worse, the school’s only subject, engineering, is very expensive to teach. Unlike other schools with a broader array of programs, Olin cannot subsidize engineering students by charging their classmates the same tuition for cheaper majors such as English and sociology. At many schools — although they may not know it — liberal arts majors are in effect helping to underwrite the high cost of science and technical education.

“Engineering is a very, very expensive major, and there’s nothing at Olin to offset it financially,” said Kirshstein.
But Olin is actually better off than many schools in one respect: because its buildings are so new, they require far less maintenance.

Paradoxically, the shiny new buildings — valued at more than $129 million in Olin’s most recent IRS filing — actually make the financial shortfall look worse. Under commonly accepted accounting practices, universities are supposed to set aside at least 3 percent of the value of their buildings and equipment annually to make sure there’s enough saved for when they need to be repaired or replaced. Those millions show up on Olin’s books as costs even though the money has not been spent yet.

For all of Olin’s troubles, students continue to apply in large numbers. After a dip from to 874 to 567 in 2010, the year tuition was imposed, the number of students who enrolled at Olin unexpectedly spiked. And the flow of applications has rebounded to 998 for the class that will enter in the fall.

That does not mean colleges like Olin don’t need to find answers to their financial problems.
“What we’re facing now could result in a need for a more fundamental change in the business model” of higher education, said Kedem of Moody’s. “Something like that is very hard to achieve in any business. And higher education is very slow to change.”

The New England Center for Investigative Reporting is a nonprofit investigative reporting newsroom based at Boston University and WGBH TV/radio and supported in part by New England news outlets.

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