Finances another obstacle for Rose: University’s money problems predate controversial leader

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In Terre Haute, his management style has come across like a bull in a china shop. Rose-Hulman Institute of Technology’s faculty and students voted “no confidence” in his abilities. The university’s staff will soon take a vote of its own, and an upcoming trustee meeting will likely address the matter.

But as the tide of opinion turned against Rose-Hulman President Jack Midgley, detractors stopped asking a fundamentally important question:

Could Midgley be right about the need for change?

Last September, just two months after he became president, Midgley initiated “Rose-Hulman 2015: A Conversation About Our Future.” It was billed as a forum for wide and open discussion about the university’s long-term objectives and how best to achieve them. Implicit was the desire to retain, or perhaps augment, Rose-Hulman’s reputation as a leading undergraduate engineering school.

That conversation is just as necessary now as it was then.

Rose-Hulman is wrestling with rapidly escalating costs, particularly for the pay and benefits of its top-notch faculty. Meanwhile, to continue attracting high-caliber students, Rose-Hulman has had to dramatically boost its spending on financial aid.

Yet the school’s revenue has proved inconsistent. Tuition receipts have risen steadily, thanks partly to increased enrollment. But Rose-Hulman is approaching its board-mandated, 2,000-student cap, which will restrict growth. At the same time, the school has suffered investment losses and subpar market returns. And it can’t rely on repeats of the enormous Lilly Endowment grants that enhanced its gift income.

In two of the last three years, Rose-Hulman posted an overall loss.

When trustees meet May 26 in the wake of votes recommending Midgley’s ouster, they won’t forget that any new president would have to grapple with these issues. Or that any new president would have a tough time measuring up to the 28-year performance of the retired chief, Samuel Hulbert.

“Every private college faces the challenge of maximizing the effectiveness of limited financial resources, and Rose-Hulman is no exception,” Midgley said in a written response to IBJ questions. “We are optimistic about the future of Rose-Hulman because of the high value of a Rose-Hulman education, and because we are systematically addressing affordability, accessibility and academic quality.”

But at this point, trustees must also consider whether Midgley is the man who can make Rose-Hulman consistently profitable without sacrificing the school’s academic luster.

No confidence

Particularly since his cost-cutting reorganization plan for popular business incubator Rose-Hulman Ventures sparked controversy in January, few specifics have been publicly available about Midgley’s ideas for a new direction. But whatever they might be, it’s clear his own support has eroded.

On May 3, Rose-Hulman’s faculty passed a no-confidence measure 87-42 against Midgley. A week later, the Student Government Association’s 35 senators unanimously passed a no-confidence motion of their own.

For the most part, it’s not Rose-Hulman’s bottom line that’s riled up the students. They’re upset about Midgley himself. The student-administered Web site www.aboutmidgley.comis chock full of stories about personal encounters with Midgley that went poorly. Justin Milks, a senior with an electrical engineering concentration, designed the Internet forum and organized the April 29 “Hit the Road, Jack!” student rally.

“As a student, it’s really hard for me to talk about university finances,” Milks said. “[But] at this point, he has been here almost a full year and things continue to get worse and worse.”

Rose-Hulman’s Director of Publications Bryan Taylor is also the staff’s representative to the board of trustees. Last week, he presided over a staff meeting where a third no-confidence measure was called. Sources said the Rose-Hulman staff members in attendance voted 110-4 in favor of staging a formal no-confidence vote. Taylor said he’s now trying to work out how to assemble the university’s 300 staff members at the same time for the vote.

Income and expenses

Rose-Hulman’s financial challenges predate Midgley. In recent years, IRS filings show Rose-Hulman’s revenue has varied from a high of $105 million in 2000 to a low of $55.8 million in 2002. That kind of roller-coaster ride would shock any organization.

In most years, tuition is the university’s largest revenue source. Since 1999, it has risen from an annual total of $28.5 million to $42.6 million. During that period, Rose-Hulman has increased its enrollment from 1,700 to 1,900. But the 2,000-student cap will soon halt the growth.

It’s a common challenge for private colleges that want to remain small, said Moody’s Investors Service Assistant Vice President and Analyst Beth Veasey.

“[Trustees] can’t add revenue by adding volume,” she said. “They have to effectively compete in the market and express that education at Rose-Hulman is worth the increases in tuition they’d push through.”

For four of the last six years, Rose-Hulman’s gift income has ranged from $9.5 million to $12.2 million. There were two major exceptions. In 2000, Rose-Hulman reported a $29.7 million grant Lilly Endowment Inc. gave to underwrite Rose-Hulman Ventures. In 2003, Rose-Hulman enjoyed a $24.9 million grant for the same purpose.

Take the Lilly Endowment gifts away and Rose-Hulman’s six-year gift total drops from $129.1 million to just $74.4 million. The school’s last capital campaign concluded in 2004; it’s in the early planning stages for the next one, Veasey said.

Investment returns are Rose-Hulman’s third primary income source. But the university’s fortunes have rolled with the markets’-and sometimes underperformed them. In both 2000 and 2001, Rose-Hulman earned about $12 million from the sale of securities. In 2002, it lost $1.6 million. In 2003, it lost another $9.3 million, before returning to $6.2 million in profit in 2004.

Last year, Veasey said, peer institutions earned an average of 15 percent to 20 percent on their investments, compared with Rose-Hulman’s 10.8 percent.

Even as its revenue has fluctuated, Rose-Hulman’s expenses have increased regularly, from $46.2 million in 1999 to $73.1 million in 2004. The single-largest area of line-item expense growth has been student aid, which nearly doubled from $7.6 million in 1999 to $12.3 million in 2004. Increased salaries and benefits also added to the load.

Bottom line

In two of the last three years, according to its IRS filings, Rose-Hulman has shown a loss. In 2002, it lost $9.7 million. It returned to profitability in 2003, with $8.8 million, before slipping back into the red with a $1.4 million loss in 2004.

Midgley calls Rose-Hulman’s financial condition “sound.” Moody’s agrees. It has rated Rose-Hulman’s financial status A1 with a stable outlook. That’s Moody’s fifthhighest rating, squarely in the middle of investment grade.

When compared with private institutions that vie with Rose-Hulman for the top slot on U.S. News and World Report’s list of leading undergraduate engineering schools, Rose-Hulman has an average financial performance. Only Claremont, Calif.-based Harvey Mudd College managed to post a profit every year since 1999.

“The Rose-Hulman model-providing undergraduate engineering, science and mathematics education in small classes taught by full-time PhD-level faculty-is inherently expensive,” Midgley wrote. “For over 120 years, this model has produced great value for our alumni.”

But to continue along that path, Rose-Hulman will need to grow. Its plans call for residence and classroom construction, as well as a new life sciences building.

It will be up to the trustees to decide whether Midgley, with his damaged reputation, can attract enough affluent students to offset those underwritten with student aid; improve Rose-Hulman’s investment performance; check costs without diluting Rose-Hulman’s academic product; and convince alumni to open their checkbooks.

“At this point, they’ve indicated they would expect to fund new projects through gifts,” Veasey said. “If the institution were to consider additional debt, we feel that with their balance sheet in the position it is right now, additional borrowing without offsetting increases in resources could put pressure on their rating.”

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