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"Secret" Meeting Between Scott Shank and SBC Faculty

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  1. TRANSCRIPT OF MEETING BETWEEN
  2. FACULTY AND SCOTT SHANK/PRESIDENT JONES
  3.  
  4. JONES: Alright we will move on to this, um, incredibly, ah, sensitive presentation. And, I'm just going to ask all of you to let Scott get all the way through before you ask questions and we will stay as long as we need to answer questions about what you're getting ready to see. Scott.
  5.  
  6. SHANK: This is the same exact presentation that I have shared with the FEC and that I have shared with the FEC there is a slight difference in what was shared with the actual board and that involves around what severance was considered as ranges of options. I'm not sharing any details of that at this time. But that's the difference between what the board saw and what we're sharing here.
  7.  
  8. FACULTY MEMBER REQUESTS HE SPEAK UP SO SHE CAN HEAR HIM.
  9.  
  10. SHANK: I'll do my best. Do I need to repeat that?<pause>
  11.  
  12. As a reminder the Board in April 2011, uh, passed the or adopted a Plan for Sustainable Excellence...the uh, underlying factor in that, was to achieve financial sustainability by 2016-17. And, growth and net revenue was the primary driver within this plan.
  13.  
  14. The way this graph is set up is the top line each of those three cases is what was in the plan at the time we adopted the Plan for Sustainable Excellence. The lower line is actual along with some projected currently. So you'll see we started the very first Fall that, um, after the plan was adopted that overall headcount and I will note that headcount is a proxy for revenue but it's not ACTUAL revenue and we'll get to that in a moment. But overall headcount, we did come in close to what was on the plan and we had expected growth each year to get up to 750-800 students within that plan over that timeframe. And it was supposed to be at this point where we had made adjustments in some of the staffing the faculty models with increase in uh revenue that is supposed to come from this uh was the point that we would get to a sustainable budget or a balanced budget without drawing more than 5% out of the endowment. We missed the incoming class by 10 students and then we have missed it from what the plan was at the time we have missed it repeatedly.
  15.  
  16. This year, we brought in with uh first time freshman and transfers a total of 169. And, this model we're using is holding that flat as a projection. And, I know many have said that our marketing has been terrible and our admissions has been terrible and YOU MAY BE RIGHT. I'm not going to second guess whether everything we did was perfect or not. However, arguably one of the things that we have seen since the adoption of this plan and the marketing efforts that have been going on is an increase in the applications year over year to the point that from the time they adopted the plan to now, we've seen almost a 66% increase or 2/3 percent increase in the number of applicants per year. At the same time, we've had a drop in yield which is the percentage of accepted students that actually choose to enroll. And it's been pretty dramatic and substantial over the last few years. You can argue 1) that we were not being effective in admissions in actually having students come that we had attracted to at least apply. You can also think about whether or not there are market forces in play beyond whether or not we executed successfully on our plan. But clearly, history will show that whatever those components are, that we have NOT been able to attract significantly more students than we have through this timeframe.
  17.  
  18. So, net revenue: this is the component once you take headcount and combine it with the amount of financial aid that we've had to offer to attract students, in the first year of the plan we were anticipating the rate of about $10MM and we brought in about $9.4MM. You can see in the last 2 years and this year's projections that what the plan attempted to accomplish vs what we have been actually able to accomplish, we've had a decrease in each of the last 5 years in net tuition revenue. This year, in tuition revenue alone, we're about $5MM off the plan and next year we are projected to be probably closer to $7MM in tuition. There's room and boarding tacked on top of that.
  19.  
  20. So, how long has the college been challenged? Um, over 20 plus years. I didn't go back prior to 1993-94 um but, this purple line would be what some would consider and appropriate source, other would say 4% is perhaps more appropriate of what a sustainable endowment draw is. But if you assume 5% of a moving average 12 quarters, as a sustainable level, this green line would be the apples to apples comparison. What was the draw in the year as compared to the 12-quarter average? The red line would be what would be the draw for the year as a percentage of beginning of the year market value. So at a single point in time. But, in no case, did we ever get below 6% in the last TWENTY SOME ODD YEARS. The college has been relying on the endowment for a very long time to underwrite the operations because we have not been at a balanced budget without utilizing the endowment to do so.
  21.  
  22. That's on a percentage basis. This is an actual dollar basis. The green is what 5% of the 12 quarter average would be in dollars that we should have pulled. The red is the actual dollars we have pulled each year. So, those who were on the budget, um, budget representatives, uh, have met with us previously, probably remember that we attempted to hold the dollar draw at $6.4MM and you can see for three years they did that and then in 2011, when we renegotiated the, the debt, we had to draw an additional $1.1MM out to help with the debt that traveled until last year we started pulling out some more for strategic initiatives and then this year, as the reserves basically ran out, we had to go to the endowment, to balance it, the budget. Even more so. Even more so to the endowment to balance the budget.
  23.  
  24. So, I have reflected in the past, the uh budgeted revenue and budgeted expenses in the form of a pie chart, I decided to recast it a little bit, to help get a better sense of some of what funds, uh, the operating budget.
  25.  
  26. So, what I did here is I went to a couple of primary sources. I went to uh room and board. And room and board has been cast in the past as growth revenue as part of auxiliary revenue, so it's been a separate slice. I pulled it out of the auxiliary revenue and I deducted from it the expenses it costs to drive that revenue. Let's so okay, what is net tuition and fee revenue, so that would be tuition and fees minus financial aid and net room and board revenue and combined that as a slice. Let's say, this is predominantly how much of our operating budget comes from student revenues. This slice is what the 5% of 12 quarter average should look like on budget. That would be about $4.4MM. All the other auxiliary areas like the Inn and Conference center, summer programs, the book shop, the faculty/staff housing, they all net to about $300,000.
  27.  
  28. HE GETS INTERRUPTED AT THIS POINT.
  29.  
  30. SHANK: We have a couple of people joining us, I'm not sure if they are...
  31.  
  32. JONES: I'm, I'm sorry, are you members of the faculty?
  33.  
  34. FACULTY MEMBER: Yes.
  35.  
  36. JONES: Thank you.
  37.  
  38. SHANK: Are you familiar with the ground rules?
  39.  
  40. JONES: Ah, did you, yeah, I keep forgetting…
  41.  
  42. SHANK: Are you all familiar with the ground rules?
  43.  
  44. JONES: You got the email from me about the rules of engagement?
  45.  
  46. FACULTY MEMBER: Yes.
  47.  
  48. JONES: Thank you very much.
  49.  
  50. SHANK: Another area that I netted down was in the JR year programs for this year. We backed out all the expenses instead of showing gross revenue we're saying what is the net contribution by the Jr year programs that help support the VA based campus? So, that slice is about $400,000 in the budget this year. Or 1.4%. All the other sources of income are very small altogether, it's about $100,000. The annual fund's budget was 2.060 this year $2.1MM. The balance of what it takes to balance the budget, approximately $8MM this year, have come from bequests so people have to die and leave that money and to date we only have in this current budget year, we've been able to utilize bequests we have received in prior years. We have run out as of this year. We only have $38,000 that we've received so far for this year to use toward next year's budget. We utilized all the remaining reserves that we had available and then all the additional draws out of the endowment that we needed to balance the budget are what make up this red slice. So, this is through the unsustainable portion in this year's budget.
  51.  
  52. FACULTY MEMBER: Scott is that uh the annual fund also net across or is that the gross number?
  53.  
  54. SHANK: That is the gross number.
  55.  
  56. FACULTY MEMBER: Do we know what the costs are associated with that?
  57.  
  58. SHANK: No, no. Not in my head. I'm sorry. I would share that we are obviously well, prior to the decision, as of January, we had raised about $1.1MM in cash in the annual fund um, there are commitments that are there yet we don't know whether those commitments will be followed through with or not so there's a very strong likelihood that we will not raise the entire $2MM this year. So, that differential will come out of the endowment to be able to balance the budget.
  59.  
  60. At the same time that we were that we had adopted the Plan for Sustainable Excellence, one of the components of that plan was to do a feasibility study on the condition of the campus. So we hired the __?__ Group to come out and assess um, the campus infrastructure. And, at that time, they had told us that they had identified, need of  approximately $29MM of maintenance that should occur on the campus over the upcoming 10 year timeframe. That figure was not accounted in the Plan for Sustainable Excellence. So, this will be on top of what we had accounted for. We had accounted for some, but not nearly to this degree.
  61.  
  62. So, I'm sorry...sip of water.
  63.  
  64. So, I'll talk more about the endowment in a minute but truly the endowment, what's in the endowment, that the Board has full authority to expend in any way they want to, and what we've been drawing on to balance the budget is what I'll typically refer to as "the unrestricted endowment." Other names for it are quasi-endowment, or board-designated unrestricted endowment. What that is are funds that we've received in the past that do not have restrictions on how they're to be utilized, that the Board decided in the past, instead of expending them currently, that they would place in the endowment and try to treat it as if it was an endowment and utilize the, uh, the returns from it to support the operating budget.  Which is a very conservative and fantastic approach if you can build up your board-designated endowment and still continue to balance your budget. That's what you should try to do. And, some might consider this the rainy day fund. Well, we've been using it as the rainy day fund for a VERY LONG TIME. If you followed this year's current budget, and the expectations of what would happen within the unrestricted endowment, the budget would have said that we could project with some slight market changes that had occurred through Dec 31 that we could project that we might end the year around $18.3MM. Again, we don't know how we're gonna end the year in gifts, we don't know how we're gonna end the year with additional costs, so this is just a model at this point. This is based on the budget.
  65.  
  66. Be mindful at the time that we were having this part of the conversation, we had already been discussing the results of the marketing study, the results of the campaign feasibility study, um, the fact that we did not have any other uh, partners that appeared to be viable for um, merger, acquisition, um, collaboration to an extreme sense, partners and so...clearly we had to talk about if we did not see a path forward, what might have been our thoughts along the cost of what it means to close? And, so, as I mentioned earlier, I'm not sharing what some of the the potential models of the costs of severance are. But, I would say that we are aware that AAUP guidelines do give guidance in that area in relationship to um, elimination of faculty. We are very aware that um, we at this point, obviously cannot promise anything because we're still working through the process of accumulating the resources but that was in the conversation as we were discussing this.
  67.  
  68. We also believe we have an obligation um, we have contractual obligations, we are aware of them, with the homeowners on campus. And, with our 19 homes currently owned by faculty, staff, and retirees, that should the process come to where the college is repurchasing each of these homes, uh, I would estimate that it's somewhere in the $4-5MM range probably to be able to buy them all back. I do not have firm amounts because we have not done appraisals on all the homes to be able to determine that yet. So, this is just a placeholder and approximate size.
  69.  
  70. We also had run a very initial um, model, to say, "Who are the people in the college that we think we need to employ one month, three months, six months, a year, beyond the closure date to be able to help wind down the operation? To build a plan out of what it would take to transition what I refer to as "second life." Which would be what happens after the college closes. That initial model gave me an approximation of about $6MM that we think it would take in salary and benefits of some kind to continue uh, the wind down, process after closure. Also, to what I'm pointing as a guesstimate, what are the other costs that it will take to operate while we're trying to wind down? Um, what are going to be the utility costs as we try and take some buildings offline? What are going to be the insurance costs? What are going to be the costs for um, you know, maintenance needs if you have something that breaks in the process? The paper clips that we might need? Anything, legal costs, in working through this process. Throw it all together. I really don't know whether that number is $2MM, $5MM, $10MM, placeholder. It's probably something fairly substantial. Also, the assumption, well not assumption, but what would be the amounts that would be due still on the two bond issues at June 30th? Those are those two amounts. Currently it's about $24.9, it would be at about $24.8 by June 30th. So, before you talk about severance packages one might estimate in an orderly wind down process if we could be in an orderly process, that we would need $40MM plus an amount for severance for faculty and staff.
  71.  
  72. So, when the board's looking at how haven't been meeting the plan and we didn't think that their was evidence to support that the donor base could support a significant campaign to to alter the financial condition of the college, uh, it then was looking at the potential ending value of the money that's available to them to expend without going through any other process. And the potential costs before them if they didn't see a path forward sorry, I poised that as if I had something else to say. Bringing those two together so you can see them, you know, the the magnitude of the potential costs of an orderly wind down vs the available resources.
  73.  
  74. So what are the other resources? The endowment is one of them. And, I'm breaking down some of the composition of the endowment here because it's important to understand legally how do we go about getting restrictions released from the endowment so that they could be made available for costs related to the orderly wind down.
  75.  
  76. There's an acronym called UPMIFA. The Uniform Prudent Management of Institutional Funds Act. It was adopted by Virginia in it's own way um, and the way Virginia law has adopted it says, "If you get donor consent, to release the restriction, you're golden." Absent donor consent for restriction, you then need to look at three different buckets of how you address the endowment.
  77.  
  78. The first I'll call small and old. It's funds that were established more than 20 years ago that have a current value of less than $50,000. And, those you have to provide notification to the attorney general that you meet the provisions within the law that allow you to do this. Which is in essence and I won't get it totally right but that you have to state that it is impractical, wasteful, impossible, to achieve the donor's restriction. But, it still has to be consistent with the charitable nature  of the gift. And the charitable nature would to support Sweet Briar, a higher education not-for-profit institution. So, with that argument, if we can make that argument, on each of these funds, we can submit a notice to the attorney general and within 60 days, we then are able to release those restrictions. One might imagine although we don't see it directly in the code, one might imagine that if the attorney general wished to, it could possibly go to the courts, and attempt to enjoin us from doing it. But, there's nothing in the law that says they actually have that ability to. This is kind of an untested area. There's about 142 funds totaling $2.9MM in that bucket.
  79.  
  80. The second bucket is everything __?__ in which I just described yet has a value of less than $250,000. Within that bucket you have to satisfy all the same laws but the attorney general when you submit that to the attorney general, the attorney general has the ability to approve or not whether or not you can release the restrictions. So, they have the full power to agree to that release. We have 150 funds totaling $14.5MM. These are as of December 31 value by the way. Totaling about $14.5MM in that second bucket.
  81.  
  82. The third bucket is all our funds that have a current value of more than $250,000. And for all the same legal reasons, if you can show that, the attorney general has the right to be heard in the process but you have to go to the courts. And, the courts decide on that component. So, in total, the current restricted portion of our endowment as of December 31, was about $53.6 million.
  83.  
  84. We also have some funds in the endowment that are temporally restricted. And what that means is that they are not like the unrestricted board-designated silo where the board can utilize the funds. These were designated by the board to be in the endowment also but they had a restriction on them. A purpose restriction not a time restriction. So, let's say that um, somebody gave the college a gift of a million dollars for scholarships and that's all they said was "scholarships." The board could've decided to use all that money in one year to meet scholarships but what they did was put it in the endowment and said let's use the earning off it to provide scholarships. And so technically we can still pull that money out as long as we can meet the purpose of the gift or show that we have met the purpose of the gift...we can then release those restrictions and then be able to utilize the resources.
  85.  
  86. So, what are all the potential sources of funding that the college could look at? I talked about the estimated according to the budget what could be the year end balance in the unrestricted endowment or the quasi-endowment that the board has access to. Based on our initial review of the $3.8 or $3.9 million in the temporally restricted part that's in the endowment we think we can probably release $3.7 of that. Of the, old and small endowments, $2.9MM, the less than $250,000 at $14.5MM, the permanent restricted funds at $36MM, and then physical assets. I don't know how to estimate that. That's going to be equipment, that's going to be potentially collections that are going to be...potentially the property...um, there's no telling what that amount will be. And that will obviously take a lot longer to ascertain. You have to find a willing buyer in each of those cases, so...absent disposition of assets included in this, we have $75.6MM potentially available to us to support the orderly wind down.
  87.  
  88. So, this is my last slide. This is trying to bring it all together. It's trying to show once again that potentially $18MM in the unrestricted endowment with costs of little over $40MM potentially for the full orderly wind down plus severance and that IF the attorney general works with us and the courts work with us, we potentially could get to $75MM. If the attorney general tries to stand in the way, to prevent us from accessing the second two buckets, that we would have about $25MM now. Which is approximately what we would owe on our bonds at the moment.
  89.  
  90. JONES: Alright, let's stop there. Ah, the question that many of you have asked me repeatedly is "Wherein lies the sensitivity of these incredibly sobering figures?" It's really quite simple. Those bonds get triggered. You've seen these figures. If we have to repay $25 million dollars worth of bonds on Monday, right now, there's no way we could do that. Because of the restrictions on the endowment, what it takes to get the attorney general to at least talk to us about the $17MM to say nothing about the third traunch. Which requires a court. And, no one knows because there is no primer on this as to how long a Virginia court might take in order to give us a ruling even if we have the attorney general on our side.
  91.  
  92. John, we're going to try to take one question at a time and Scott who knows more than anything is going to, more than anybody, will respond to them and I'll try to do this in an orderly fashion.
  93.  
  94. SHANK: Before you do, can I say one more thing? Because you reminded of one piece we hadn't shared. Um, it is about the bonds. What is necessitating some of this timing is you could say that we have $18MM at the end of the year um, our operating model looking forward showed that without a bond default, we could have made one more year, with a bond default, we would have not been able to make one more year. I know that last summer I renegotiated the the the covenants within the 2011 bond to try and add a second trigger. That second trigger was regarding liquidity. That was done because at the time, the Fall of 2013 occurred when we received our rating from Standard and Poor's, um, we were shocked that they had NOT downgraded us at that point. Because every bit of language that they had shared with us in the conversation was extreme concern over us uh, and our financial the eroding of our financial position given how we've been utilizing the endowment. So, when we were in the Summer of 14, uh, trying to figure out how do we position ourselves so that we, if we get downgraded, this fall which surely we thought we were going to be, um, how could we protect ourselves so we got a liquidity trigger added to it and the bank agreed to, to make both of those triggers have to be simultaneous. And, we knew based on what we had negotiated, that we had already passed the liquidity trigger for that year.
  95.  
  96. So we definitely bought ourselves a year of time no matter what happened with the, uh, rating. Our projections as trying to continue as a school through the end of this year would have had us fail the liquidity trigger. And by no small margin. That very liquidity trigger is related to the resources that we have available in the endowment and how it compares to the rest of the financial picture. Um, this past fall when sorry I'm jumping around a little bit, I apologize. I'm trying to place my thoughts. This past Fall when Standard and Poor's was doing the rating indication or the rating, um, they had clearly stated to us that they had seen further erosion in our net assets, that they had given us, that they had changed from being a stable outlook to a negative outlook. Which, if you recall, means that they expect if you don't turn the tide within the next twelve or 18 months, maybe 24. They they were very likely to see a downgrade. But, what we didn't see was...I mean what we saw was not a change in tide but a significant further erosion with the class that came in at 154 first year students this year and at this average, 62%. So, there was strong belief that we would have been downgraded by S&P in the Fall causing the second trigger to go, which would not have allowed us to complete the fiscal year or the academic year, while we already have students on campus. So, the Board in looking at that, started asking the question, of what was the obligation to students that we were trying to recruit currently. Is it fair to recruit a class currently when you don't think you can graduate them? There was no four-year model that was out there. This was about "Could we possibly get through one year or not?" And, if there was a high likelihood that we would not have been able to make it through a full year but maybe to December and suddenly you're closing the doors...Is that appropriate to recruit that class? And they did not feel that it was. Well, once you remove that incoming class from the model, the millions of dollars of impact on the operating model, draws us to close even faster. So, the ability to say could we at least try to teach another year for our current students was not deemed to be something we can do. Because to operate and teach, you're still supposed to provide all the services and support that you provide. So, we couldn't have just slashed everything and done a baseline model of teaching to our understanding of what was required of us.
  97.  
  98. So they were faced with the very strong likelihood that they would not be able to finish the fiscal year. They would not be able to do it without recruiting an incoming class that they knew they would not be able to graduate, so it was kind of a cascading, uh, set of moral obligations, you might say of what you do for the current students. And, so, looking at the financial picture in that regard, knowing that now is not a great time to close, but it would at least allow some time for us to work with students to finish an academic year, to work toward transferring to new institutions...We KNOW that this is a bad time for faculty to try and find a new job. It's clearly outside of cycle. Um, we are talking and have been talking about trying to provide severance packages. It is the absolute desire of the college, the Board, to provide severance packages, if we can get to the resources to do so. Um, to try and bridge this process for you all so that the impact financially is minimized as best as the college can do within reason. So, that's what they were faced with. They were faced with this is clearly not great timing, but to do it now, to announce it now, and not recruit the incoming freshman class that we were trying to recruit, to try and help the current students move on in their educational experience as best we can help them, and to try and maintain as many resources as we can...to help build the plan to be able to satisfy our obligations to our creditors, to our homeowners, and build a pool for severance, they felt that that was the most ethical and moral choice they could make.
  99.  
  100. JONES: Many of  you heard the NPR interview. What no one told me before I was on the air was what the President of a school in the midwest had said to the reporters, about ...he was going to run the school until every single dime was spent. And, send out a message saying the school has closed because we not been able to pay the electric bill. I've locked all the buildings. I don't know how in the world anybody could do that.
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