This Week In College Viability (TWICV) - Special Edition: The role of bond holders & Lake Erie College

Gary (00:02.846)
Welcome to a special edition podcast of This Week in College Viability. Hi, my name is Gary Stalker coming out with a special edition today because of the importance of the story. And this is from the Chronicle of Higher Education. The headline reads, This Small College was out of options. Will its creditors give it a break?

And this was written exceptionally well written by David Jesse and Dan Bauman from the Chronicle. And of course, I'll include the story link in the show notes. It's not just credit to David Jesse and Dan Bauman for really exceptional reporting, but really to President Jennifer Shuler for opening up with the Lake Erie College story. Trust me, she is one of the few college leaders

brave enough in my experience to share in real time the challenge her college is facing with bondholders. And even though it's almost certainly going to result in some level of self-fulfilling prophecy, she stepped up and shared the story. It's really good story and a timely story about the hidden financial time bomb, not just for Lake Erie College, but for many private colleges as well.

So let's set this up with the history. So the new college president is Jennifer Shuler. She had been with Lake Erie College for two years in the role of vice president for advancement. And she was promoted to president in August of this year. And as the Chronicle reports, it wasn't until April, 2023 of this year, that board members became more and more concerned about what the financial stress was like at the college.

They even hired an outside firm to look under the hood for them. And the findings were shocking. But let me set up the history in some combination of the Chronicle reporting and my own data. So from the Chronicle reporters, in 2019, Lake Erie College issued just under $30 million in revenue bonds. That money was targeted for refinancing existing debt, upgrades to campus facilities, including the school's Equestrian Center.

Gary (02:10.478)
which is a centerpiece program, that was interesting in itself. In my experience, equestrian centers are very expensive to maintain. I'd have to check and see what the actual graduation rate and numbers were for that program. But even let's go beyond that. Let's go to the data, like we always do here at College Viability. And this is from the National Center for Education Statistics from 2014 to 2021. And for Lake Erie College, tuition and fee revenue were flat.

over those eight years, actually was down about 400,000. And let me read to you the FTE enrollment numbers. Starting in 2014, I'm gonna do some rounding of the numbers here. In 2014, 970. 2015, there were 1,000. 2016, back down to 970. Now listen to the pattern after this. 2017 was 947, followed by 912.

followed by 875, followed by 818, followed by 788. And as the chronic reported in 2022, it was around 700 students, down a lot. And as we always do at college viability, we always look at those four and six year graduation rates. And they were at Lake Erie College, 40% over four years and 45% over six years. I'll say it again, why is a college in business if it can't even graduate half of its students?

And Lake Erie College in Ohio can't even graduate half after six years. That's a story that needs to be shared time and time again. We don't go to college to take the courses. We go to college to get the degree. And the good folks at Lake Erie College aren't even getting that done half the time. It's like your iPhones only work half the time. Is that acceptable? Our cars only work half the time. Is that acceptable?

And then finally, their institutional grants, also known as their discounts, were flat. But it was about $14 million each and every year from 2014 to 2021. I don't know if that's a big deal because colleges are facing intense, intense pressure on tuition pricing and Lake Erie College had to compete with other colleges just to get students to enroll.

Gary (04:24.61)
And the endowment in 2021, I believe, was $33 million. And it was effectively flat over eight years. I think it was down a couple of bucks. So.

Gary (04:37.686)
What was the Board of Trustees, what was the Board of Directors doing here? At what point in that year, in that eight year history, I just read to you about enrollment, did somebody not think, hey guys, girls, ladies, gentlemen, there's a pattern here. It's going down every year. At what point during those eight years when the tuition and fee revenue was effectively flat year after year after year, did someone on the Board of Trustees say, hey guys, there's a problem?

Gary (05:07.306)
It's believed, going back to the Chronicle story, it's believed that there was a continued effort to shelter all stakeholders. I presume that includes the Board of Trustees from Lake Erie College's challenges in declining financial position. Funds were somehow located to fill in the gaps. New initiatives were promised, but not enacted, and unachievable projections presented, the college wrote, in a June 30th, I presume 2023, slideshow to its bondholders.

They rationalized finally from going back to the Chronicle story, they rationalized this with these combined efforts made it difficult to discern the financial stress and the financial challenges until they became so great that they could no longer be hidden. I guess that happened in April of this year. And the issue here may or may not be the college itself. The evidence suggests there is certainly some culpability there, but it is certainly.

It is certainly about a board of trustees that was, as the evidence suggests, absolutely clueless about an organization for which they accepted fiduciary responsibility. And in my experience, in my understanding, in my conversations, this continues to happen and not just at Lake Erie College, but across the country and will continue to happen.

even more without changes to what I perceive as the mostly casual relationships too many boards of trustees have with the colleges that they in theory oversee.

The Chronicle reported that Lake Erie College was paying vendors out to as much as 178 days. Let me get out my college viability calculator. That's six months. Was there not someone in a leadership role that raised their hand and says, guys, that's evidence, symptoms of a disease? And so the president...

Gary (07:13.694)
had to go to the bondholders and ask for the bondholders to cut the college a break on payments just so the college could make it. I think the Chronicle story said the college needed a break from the bondholders to be able to stay open in January of 2024. All right. Interesting. So, you know, let's talk briefly about bondholders and bondholders in any kind of loan situation typically get first dibs when an organization like a college closes or goes out of business in some form or fashion.

So Lake Erie College is asking their bond holders, their banks, probably a combination of both, to take a backseat to other financial stakeholders. I'd never seen this before. Now remember that the banks and the companies holding these loans and bonds also have a fiduciary responsibility to their customers, the people that gave them money to loan to colleges like Lake Erie College.

and they have a fiduciary responsibility, just as the college leaders at Lake Erie and elsewhere have their own fiduciary responsibilities to their colleges. And again, with some exceptional reporting, David Jesse and Dan Balman describe the business challenge that the bond holders for Lake Erie College face. And again, I quote, in the end, debt financing bonds,

is ultimately meant to generate a return on investment for creditors, the people that loan money to these agencies. The dilemma for creditors is would a payment pause for Lake Erie actually allow Lake Erie College to eventually make good on all the principal and interest it would owe across the next 30 or so years? Or

Jesse and Bauman, right? Or will creditors in effect be allowing Lake Erie to just forego paying down its debt right up until the restart of repayment forces the institution to close, thereby leaving the bondholders to duke it out with other creditors and bankruptcy court for the bondholders share of the college assets. You and I borrow money for stuff, cars, houses, who knows what else?

Gary (09:25.502)
You know, the dog ate my checkbook and other rationalizations are not likely to be successful with our bondholders, our debt holders. And the same is true for any business organization, like colleges. And in the end, the representative for the bondholders said, no, not going to do it. And then disturbingly, President Schuler shared with the Chronicle, I can say with confidence, President Schuler saying this, I can say with confidence, we're going to make it. All right.

against all evidence, but you've heard me say this before. She has to say that. Again, I'm going back to that fiduciary. She has a responsibility to look out for the college's best interests. That she chose to spill the story to the crime and call is interesting, although valuable, but she has to say that. So I don't fault her, but that's one of the reasons I'm here. I'd like to think that college viability and the work that we do here.

is the fiduciary for students and families and even faculty and staff. So we can look out for your best interests. Now I don't know how many students and their families in the Lake Erie College region read the Chronicle of Higher Education. Probably not very many, probably not enough. But bad news does tend to percolate out. This kind of news will most likely, in my experience, result in a self-fulfilling prophecy.

And so it begs the question how many families, when most college decisions, this is most finance decisions are made on the margins, those small things on the edge of the decision, will say not Lake Erie College come April of 2024. And how many will also say not Lake Erie College in subsequent April's if these challenges continue, even if the college is still around. But that's not even the big picture point.

the setup for the fabulous writing in the Chronicle comes to one final scary thought. What happens if bondholders across the country become even more concerned with the financial plight of colleges, mostly private colleges, and start to call their bonds in immediately when colleges don't meet the covenants that are part of those bonds?

Gary (11:47.766)
That's the story. Even though the chronic reporting was exceptional, this is going on other places, folks. And what happens when we read more and more stories about the Lake Erie's of the world? It's not good. This is Gary Stocker with a special episode of This Week in College Viability. We'll see you again next Monday.