The Deficit, the Endowment, and the Importance of Context: The Sweet Briar Story, Part 4

This whole story seems like it’s just a bit too complex for most media sources. I think only the Roanoke Times has both delved deeply into it and come out with a reasonable perspective. This is a short blog post to give a representative example why this story is so difficult.

Figure 1 is a graph that is basically Sweet Briar’s real deficit over almost twenty years. It averages a little less than $3 million/year. When I see this graph, I don’t see hopeless, but absent any context, I can see why it could convince others of some of what the Sweet Briar board is saying.

Sweet Briar Colleges deficit since the 1996-1997 school year. This value is obtained by subtracting the sum of the operating revenue and $4.5 million from the operating expenses. The $4.5 million represents a 5% draw off a $90 million endowment. A balanced budget for Sweet Briar would involve not having a deficit after a 5% endowment draw. Since 1996-1997, the average deficit is a little under $3 million/year

But context is everything, and there are a lot of little pieces that have to be taken into account. The huge deficits in the early 2000s reflect a lot of spending on infrastructure meant to serve as a foundation for decades to come, but it appears now that some of that spending may have been excessive.

It is true that under President Jo Ellen Parker, the march towards a balanced budget stalled, but this was mostly due to President Parker implementing a revenue-draining recruiting/financial aid strategy and a choice not to hire a Dean of Enrollment, choices that cost around $5 million/year. Things wouldn’t look so bad right now with an additional $5 million/year.

Figures 2 and 3 show that even though Sweet Briar has mismanaged its way into getting about as little in tuition revenue as is possible – and I think anyone comfortable with noise trends, regression to the mean, or modeling of probabilistic processes would see that things were at a temporary low point – the situation did not deteriorate. The endowment – unrestricted, temporarily restricted, and permanently restricted – has not gone down in the last 6 years. It’s true that Sweet Briar did not take advantage of a stock market rise during that time, but it’s in no worse shape for it, financially. At the same time, Sweet Briar has cut expenses, and it’s learned that a particular recruiting/financial aid strategy is a revenue disaster.

Sweet Briar College endowment compared to (almost) all women’s colleges (42) and a group of 14 small women’s college close to the size of Sweet Briar. Each data point represents the endowment at the end of the fiscal year, so the last data point represents the endowment at the end of June, 2013 (sorry for the labeling confusion).

Sweet Briar College’s inflation-adjusted endowment at the beginning of the fiscal year, broken down by level of restriction. Last data point is on 6/30/2014. Sweet Briar did not take advantage of a favorable stock market, but it’s position did not deteriorate, either.

With all that as context, and knowing that Sweet Briar had $28 million in unrestricted funds as of 6/30/2014 and several more million in temporarily restricted funds that could easily have been converted, would anyone really say that it was clear Sweet Briar had a hopelessly failing business model and so had to close? I’m not an optimist, but that doesn’t seem anywhere near hopeless.

But, for that conclusion, much context is needed. It is true that Sweet Briar has been running a deficit and spending more in the endowment than it should. It is also true that Sweet Briar has a viable business model. Understanding both of those simultaneously is what is difficult.