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Philanthropists | Costs

Capital Risks: Is There a Limit to Alumni Support for Tuition-Busting Construction Projects?

INSIDE PHILANTHROPY   |  December 9, 2019 by Mike Scutari

News out of Cedar Falls, Iowa underscores the complex dilemma facing fundraisers and administrators at schools grappling with dwindling enrollment, tepid public funding, and escalating tuition.

In July, the University of Northern Iowa (UNI), facing its lowest enrollment since at least 1976, announced it would cut course sections, increase class sizes, reduce the overall number of faculty, and trim its student financial aid budget by $1.2 million. Four months later, alumni David and Karen Takes announced a $10 million gift to, among other things, “identify the next capital projects that are critical to UNI” and its identity, said UNI president Mark Nook.

This is a perfectly logical development. Universities frequently turn to flashy capital projects to attract a shrinking pool of college-age students and engage alumni donors. The Takes gift comes as the other two public universities overseen by the Iowa Board of Regents, Iowa State University (ISU) and the flagship University of Iowa (UI), have also committed to a bold array of construction projects.

UNI fundraisers may want to tread carefully, however. First, almost two years after the UI wrapped a $2 billion fundraising campaign, giving has stalled system-wide and donors have yet to fund many in-progress or completed projects at IU and ISU. Second, these projects—funded or otherwise—often help drive up tuition and make college increasingly unaffordable for the very same students the university is trying to attract.

Ominous Trends

We can attribute UNI’s drop in enrollment to two demographic realities. The first is the hot economy. With a majority of UNI students coming from Iowa, a state with a 2.4 percent unemployment rate, many high school students are tabling college education in exchange for a good-paying job. “I love the hot economy for our graduates,” said UNI president Nook back in June. “But I hate it for our enrollment.”

The second is falling U.S. fertility rates that have generated a smaller pool of college-ready children for the next two decades. In response, universities roll out gaudy amenities and shiny new buildings to attract students, while affluent private schools, writes the Wall Street Journal’s Douglas Belkin, ramp up financial aid “as they compete harder to attract students from a diminishing pool of high school graduates.”

Faced with the urgent need to hit enrollment benchmarks, many regional public universities, encouraged by the likelihood of robust donor support, typically prioritize the former strategy over the latter.

Compounding these trends is the steady decline in public funding for state university systems. Consider the state of affairs in Iowa. In 1981, the state provided 77 percent of the universities’ general education funding and tuition provided 21 percent. Today, the state funds about 30 percent and tuition revenue covers 65 percent. In recent years, the state’s universities froze faculty pay, ended programs, delayed construction, and dropped scholarships in response to cuts in state aid.

These trends have forced UNI to get creative. In early November, the school announced a new partnership with the Des Moines Area Community College and China’s Shanghai University of Engineering and Science to boost enrollment and raise additional revenue.

The system has also turned to philanthropy in a big way. In March of 2016, UI announced it reached its $1.7 billion fundraising goal nine months earlier as part of a campaign dubbed “For Iowa. Forever More: The Campaign for the University of Iowa.” In February of 2017, the campaign officially wrapped up. More than 272,000 donors contributed more than $1.975 billion.

As UI was winding down “For Iowa. Forever More,” ISU launched the public phase of its $1.1 billion “Forever True, For Iowa State” campaign. In 2018, it hit its goal two years ahead of schedule. The school upped the target to $1.5 billion; it’s scheduled to wrap up in June of 2021. And in 2017, UNI established the UNI Foundation and initiated the “quiet phase” of an upcoming comprehensive campaign.

Mixed Signals on the Fundraising Front

Earlier this year, Iowa lawmakers increased regent appropriations for the next budget year by $12 million, although the figure was below the $18 million the board had requested. The legislature also fully funded UNI’s request for an additional $4 million, thereby enabling it to freeze its tuition rates this fall in hopes of remaining competitive with other regional universities. (Of Iowa’s three public universities, UNI relies the most on state aid, with appropriations funding 56 percent of its fiscal 2020 budget.)

Despite the encouraging signs, enrollment didn’t pick up. Moreover, UNI’s tuition revenue dropped by $6.6 million thanks to the tuition freeze. In July, the university announced draconian cost-cutting measures.

A month later, The Gazette’s Vanessa Miller reported that giving to Iowa’s three public universities dropped nearly 18 percent from fiscal 2018 to 2019, to a total of $452.3 million. It’s worth remembering, however, that donors gave close to $2 billion to IU’s campaign, which wrapped less than two years ago, and ISU met its $1.1 billion goal last year. While fundraisers understandably want to keep the machine humming for perpetuity, this tepid windfall across the past year underscores the very real risk of donor fatigue.

On the bright side, despite a slight dip in total donors, UNI saw its fundraising total climb from $22.9 million to $28.5 million during this period. And with UNI’s fundraising campaign still in its “quiet phase,” the university should expect more gifts along the lines of the Takes’ commitment in the near future. “As we develop and finalize the runway for the university’s next comprehensive campaign, I would see those amounts seeing even more of a yield bump year over year,” said UNI Foundation president Jim Jermier.

Identifying the “Next Capital Projects”

David Takes is a current member and past chair of the UNI Foundation’s board of trustees, and president and chief executive of Doerfer Companies, a large-scale manufacturer based in nearby Waverly. “As long-time residents of Cedar Falls and as a proud alum, we are extremely grateful for everything the University of Northern Iowa and Panther Nation have brought to our family and our community at large,” said Takes. “The benefits we enjoy are truly priceless, and it is with this sense of gratitude that Karen and I make this commitment.”

The Takes’ gift will go to the Takes Endowment, which the couple established in 2015 to support business students gaining international experiences and increase cultural intelligence; the UNI Mascot Outreach Endowed Fund, which supports TC and TK, the university’s mascots, and the students who lead the mascot program; and future capital projects, which may include the university’s landmark known as the Campanile, the Gallagher Bluedorn Performing Arts Center, the UNI-Dome, and the Industrial Technology Center.

The latter project will expand the university’s capacity to provide qualified applicants to industries struggling to meet Iowa’s employment needs in high-demand fields. Should a portion of the Tates’ donation find its way to the center, the couple would join a growing number of donors supporting cutting-edge research as a way to attract students, create jobs, and boost economic development in a Midwest city located far from the usual coastal hubs.

“Knowing we have the support to explore projects that are central to UNI’s identity, Panther Athletics and the cultural vitality of the Cedar Valley and state of Iowa gives us momentum as we think about what our campus can look like for the future,” said president Nook.

“Unwritten Checks”

Data from the Council for Advancement and Support Education (CASE) implies that other UNI donors share the Tates’ support for the school’s investments in capital projects as a way to attract students. CASE found that American universities raised over $19 billion for capital purposes in 2018, an 8.6 percent increase over the previous year. “Much of the growth in alumni giving,” the report concluded, “has been in the form of capital-purpose gifts.”

But the University of Iowa system’s larger building boom suggests there may be a limit to donor beneficence.

In a November piece in The Gazette entitled “Unwritten Checks,” Miller reeled off a laundry list of proposed, in-progress, or completed capital projects across the university system. UI projects include a $37.1 million annex onto its Seamans Center for the Engineering Arts and Sciences, a $11.8 revitalization of the UI College of Nursing Building, a $89 million renovation of the Kinnick Stadium, a $96.3 million UI College of Pharmacy building, and a new $50 million UI Museum of Art building. Miller also listed an equally impressive number of ISU projects that have started or finished.

The problem? Both schools constructed many of these buildings before reaching their fundraising goals. For example, UI planned on paying for roughly half of the Seamans Center for Engineering Arts and Sciences building with donations. However, two years since its completion, the school raised less than a quarter of that goal—$4.2 million. Similarly, the Board of Regents stipulated that the $11.8 million revitalization of the nursing building be funded entirely through gifts and earnings. The project is finished, but the school has only raised $2.3 million so far.

Last September, the university’s UI Facilities Corporation issued $30.2 million in bonds to pay for the completion of the Stanley Museum of Art after fundraising stalled, bringing its total outstanding debt to $140.4 million. Since fundraising for capital projects continues even after buildings are completed and open, Miller wrote, the university will pay down debt with building-specific donations.

Of course, universities make big financial bets on buildings all the time. “If a university is committed to building something like an engineering building, it’s because they know or anticipate it’s going to be a program in demand,” said Ann Forman Lippens of EAB, a technology, services, and research firm. Lippens’ analysis is correct in theory, but off the mark in practice. The fact that many of UI’s buildings remain unfunded, coupled with the 18 percent drop in system-wide giving across from 2018 to 2019, suggests that administrators have, at least partially, misread the donor community’s definition of “demand.”

A 2019 Forbes piece entitled “Why The Campus Building Boom May Turn Out To Be A Bust,” Michael Poliakoff of the American Council of Trustees and Alumni, an organization that has consistently called attention to skyrocketing tuition, presents an even more fundamental argument as to why some donors may pass on capital projects: Expensive new buildings generate a dismal return on investment. Classrooms, museums, and labs are utilized at best, only 50 percent of the time.

“Is the need for more space real,” Poliakoff writes, “or are we experiencing an ‘academic building boom’ as a result of what Alan Greenspan would call ‘irrational exuberance’ on the part of too many giddy or inattentive college presidents, chancellors, trustees, and donors? As irrational exuberance led to the stock market bubble bursting in 2001, a disaster just as painful could be in store for our nation’s colleges and universities.”

Open Questions

UI administrators understand that they’re skating on thin ice here. Commenting on the university’s building boom, spokeswoman Jeneane Beck told Miller, “Fundraising is intended to help offset the cost but is not typically a requirement of proceeding,” she said. “Projects submitted to the board for approval are important and worthy of general education funding or other institutional investments, regardless of donor support. We need to be very, very, very careful.”

While I appreciate Beck’s vigilance, part of me can’t help but think that the train has already left the station. While none of the university representatives interviewed in Miller’s piece addressed the student debt crisis, administrators know that an institution can expect to pay twice the initial cost of a new building to maintain it. They also know that when state funding is flat and fundraisers fail to secure support to pay for expensive capital projects and their perpetual maintenance, students end up paying the tab.

While UNI froze tuition for the 2019-2020 school year thanks to an infusion of state support, in June, both UI and ISU increased tuition by 3.9 percent for Iowa residents.

In the absence of a multi-billion-dollar endowment or a deep bench of mega-donors to bankroll a strategy designed, to quote Miller, to accelerate “recruitment efforts in the face of dropping enrollment and increased competition,” UNI can implore its alumni to ramp up support for financial aid to offset inevitable tuition increases so students aren’t on the hook for the system’s imminent construction binge.

The total cost of attendance for an Iowa resident at UNI for the 2019-20 academic year is, by today’s standards, a reasonable $21,294. However, as as you’ll recall, as of this summer, the school announced it would cut its student financial aid budget by $1.2 million. Over at UI, in 2017—the same year fundraisers wrapped its $1.975 billion For Iowa. Forever More campaign—administrators, citing cuts from the state, eliminated its popular UI Summer Hawk Tuition Grant. (“Supporters wanting to help students cope with the rising cost of education,” writes Miller, “can give to the University of Iowa’s Forevermore Scholarship program.)

With UNI revving up its fundraising engines, the next twelve months should be pretty interesting. Fundraisers will surely implore alumni to dig deep for financial aid and scholarships, and many will happily oblige. But the three bigger questions are as follows. One, will administrators still commit to a capital-intensive strategy even though ISU and IU haven’t raised the requisite funds to pay for its own projects? Two, assuming ISU moves forward this plan, will donors support these projects? And three, once the buildings are constructed or renovated, will it lead to a jump in applicants and enrollments?

Stay tuned.

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