Changing demographics, rising tuition rates, lower enrollment, and a number of other factors translate into continued financial turmoil for many colleges and universities. Thirty percent of smaller private colleges fall below a minimum threshold of financial health, according to Ronald E. Salluzzo—partner, education, nonprofits and commercial services division, Attain LLC—and Phil Tahey—owner, P. Tahey CPA and former controller at Johns Hopkins University, Baltimore—who together authored Bridging the Stewardship Gap: Toward Effective Finance Committees (NACUBO, 2018).
As high school graduation rates continue to fall in some densely populated areas, such as the Northeast, and national student loan debt remains at an all-time high, higher education institutions are likely to see financial pressures persist. While every college or university has access to valuable financial minds on their board finance committees, few take advantage of this expertise to truly develop and implement solutions to their financial dilemmas.
During the last 40 years of working with institution boards, particularly finance committees, Salluzzo and Tahey have found that most boards spend their limited meeting times discussing budget minutiae and other less important items, rather than discussing big-picture financial strategies that would benefit from their expertise. “Your finance committee may be your biggest untapped resource for solving your institution’s financial struggles,” Tahey says. “Finance committee members are very smart in financial matters but are frustrated because their institutions largely fail to utilize their skill sets and knowledge on important matters.”
Having learned that so many finance committee members feel underinformed and underutilized by their institutions, and paired with their understanding of smaller private colleges’ desperate need for revised financial strategies, Salluzzo and Tahey wrote the book Bridging the Stewardship Gap: Toward Effective Finance Committees. In a NACUBO webcast, Salluzzo and Tahey discussed their recommendations for institutions to better communicate with, and benefit from, their finance committees.
Most institutions’ finance committees have only limited time to meet, and much of that time is spent discussing minor budget details. Salluzzo says budgets represent 90 percent of the work done by most finance committees—but developing and approving a budget likely isn’t the most valuable skill committee members can offer. Instead, finance committees “need to focus on whether that spending is moving the institution toward its strategic goals, as well as understanding the affordability of the strategies to get there,” Salluzzo says.
To lay the groundwork for a successful financial future, smaller private colleges in particular should “start engaging the finance committee with talking about strategy,” says Tahey. “This is their wheelhouse. This is what they are accustomed to doing for their own organizations. They can be very helpful if institutions will let them.”
Instead, many institution leaders primarily focus on soliciting approval from the finance committee for the projects they want to accomplish. But with no end in sight to financial difficulties, they should instead focus on accessing the strengths of their finance committees to provide insights and creative solutions to financial struggles—and that may require leaders to be open to the possibility that their plans may not come to fruition.
Going beyond the basics with your finance committee starts with rethinking expectations and uncoupling good feelings from good progress, Salluzzo says. “Just because everyone leaves a meeting feeling good doesn’t mean it was a good meeting,” he says. “Some of the best meetings have dynamic tension that forces you to consider whether you can afford certain activities.”
Because every activity of a college or university has an impact on its finances in some way, finance committees should be involved in discussions about many activities, not just the budget. A number of nonfinancial metrics may be important for finance committees to understand the financial drivers. In many cases, a budget that looks doable on paper actually has problems when considered more carefully.
For instance, many institutions base decisions about growing or decreasing their housing supply solely on budget data, but there are a number of other factors involved, such as “whether you can keep seniors and juniors on campus, or whether you even want to,” Salluzzo says.
Similarly, some institution leaders believe that they don’t need to include information about restricted gifts in their budget reports, but that’s not necessarily true. “For instance, maybe you have a faculty member appointment that is paid for by a restricted gift for three years, but then the gift money is gone and the faculty member has tenure,” Salluzzo says. “That information is important for future financial planning.”
When institution leaders view their finance committees as vital partners in creating solutions for financial progress, they consider and share with the committees the nonfinancial metrics and plans that will ultimately also impact finances. Furthermore, leaders become primed to understand the need for discussion about strategies and plans beyond simply talking about the budget.
“Unless someone asks the relevant questions, it’s hard to be directed to what’s really important in that report,” Salluzzo says. “And more importantly, it’s difficult to determine how the current year’s activities will impact the long-term goals of the institution.”
The most important step in harnessing the valuable expertise and skills of the finance committee may be amending the information your institution provides to its members. In their work with hundreds of institutions’ finance committees, Salluzzo and Tahey have found that most are inundated with too much detailed information—so much that it’s paralyzing.
“If you want to make sure that people don’t know much about your organization, either tell them nothing or tell them everything you know,” Salluzzo says. “Either way, you’ll get the same absorption rate.”
Instead of simply forwarding loads of information without analysis or commentary to the finance committee, Salluzzo and Tahey recommend a “radical departure” from the status quo. “The finance committee requires concise information and analysis instead of data dumps, as well as a focus on immaterial budget variances,” Tahey says. “If you haven’t changed what you present to your finance committee over the years, and the institution has changed, it’s time to reconsider [your methods].”
Culling reams of financial information from your reports can seem daunting, but chances are the institution already has some prepared financial analysis to start you off in an improved direction. For instance, most institutions create reports each year for their ratings agencies. “You probably develop great information for Moody’s, and then put it on a shelf,” Tahey says. “But look at what you provide for your ratings agency and maybe you can transfer that into your finance committee materials. Come from the perspective of trying to present the committee with information that is clear, concise, and understandable.”
In addition to maximizing your ratings reports, Tahey recommends talking to finance committee members about what metrics they like to use in their own organizations. He strongly suggests reading through 10-K and 10-Q reports from finance committee members’ organizations to get a better sense of the types of information they review and use.
Also, study the management discussion and analysis (MD&A) portion of a public company’s annual report, which includes the company officer’s analysis of the company’s performance over the previous year. A well-executed MD&A can serve as a good model for how to explain an organization’s story using qualitative and quantitative performance measures. “Start doing trend analysis, which is the sweet spot for finance folks,” Tahey says. “Instead of providing the committee with many pages of text, work toward providing a few pages of charts and graphics.”
In addition to big-picture financial information, finance committees also need specific information about major drivers of costs and revenues. For instance, on most campuses, net tuition revenues are crucial for fulfilling financial plans—and finance committees should be informed concisely about your institution’s strategies for recruiting and retaining students. Tahey recommends creating a one-page document to explain each strategy: discounting, recruiting, retention, and so on. “If you can’t clearly articulate the strategies in four or five paragraphs, you may not have a strategy,” he says.
Once articulated, you and your finance committee can look at how strategies align with long-term trend indicators and then make recommendations and decisions about moving forward. “Unless you share this information with your finance committee and have members digest it, understand it, and challenge you on it, you’re not going to move the ball forward very quickly.”
In addition to net tuition revenues, intercollegiate athletics is another area that has great significance to an institution’s bottom line—but is rarely discussed with finance committees. “Institutions rarely report athletics information to the finance committee, but even if you’re a Division II or Division III school, the costs are significant,” Tahey says. “And athletic compliance costs are increasing at an alarming rate.”
Because increasingly more budget resources are consumed by athletics, it’s important to keep the finance committee informed and employ its expertise in making smart decisions. Rather than burying athletics costs in a “student services” line item, Tahey urges institutions to be transparent. “Talk about how important athletics are to your institution and what controls should be in place over expenses such as athletic travel and coaches’ compensation,” he says. Since athletic activities produce and consume resources, the finance committee has no different level of responsibility for the activity than it does for any other activity in the institution.
Whether it’s athletics, auxiliary services, tuition revenues, or other areas important to the operating performance, finance committee members should be informed and allowed to weigh in on important decisions. “A lot of finance committee members do this in their day jobs, so tap into their expertise,” Tahey says. “You may get good ideas about how to increase your revenues and avoid financial difficulties.”
In some cases, business officers may worry that efforts to provide complete information to the finance committee will be quashed by higher-ups, Tahey says. But if that’s the case, it’s even more important to work to establish a strong relationship with finance committee members and provide them with both the information they need and the guidance to ask the right questions of higher leadership.
“As a senior leader at your organization, you don’t have the authority to withhold information from your board,” Salluzzo says. “If it’s really important information, it will come out somewhere else, such as an audit. And if you explain to your president that certain information really needs to be shared with the board, most presidents will agree.”
If resistance persists, business leaders should take a stance and do the right thing. “If I was a board member and a CFO did not present to me the reality of the data and the truth as [he] understood it, I would press to have [him] relieved,” Salluzzo says. “Institutions can’t afford to have CFOs who are not independent in their thoughts and actions.” Communicating cogent, relevant, and real information to your finance committee is the first, best step toward accessing its expertise and ultimately addressing some of the issues currently impacting higher education.
NANCY MANN JACKSON, Birmingham, Ala., covers higher education business issues for Business Officer.