Transcript

Host: Hello, and welcome to Prevention and Protection, the United Educators risk management podcast. Today’s podcast, Planning for Institutional Mergers or Closures: A Case Study, is hosted by Hillary Pettegrew, Senior Risk Management Counsel with United Educators. Hillary is joined by Joshua Grubman with Dartmouth College and Paul Lannon with the law firm Holland & Knight, and they’ll be discussing how higher education institutions can plan for potential combinations or closures resulting from financial pressures.

A reminder to listeners that you can find other UE podcasts, as well as UE risk management resources, on our website, www.ue.org. Our podcasts are also available on Apple Podcasts and Spotify. Please note that this is a risk management podcast and nothing in this podcast should be considered legal advice. Now here’s Hillary.

Hillary Pettegrew: Hello to our audience, and thanks for joining us. I’m Hillary Pettegrew, a Senior Risk Management Counsel at UE, and I’m really pleased to introduce our two guest speakers. First, we have Joshua Grubman, currently Associate General Counsel at Dartmouth College. Josh was previously the General Counsel at Mount Ida College, and what happened there in 2018 is the basis for today’s episode. Josh, thanks so much for agreeing to speak about your experience at Mount Ida and the lessons you’ve drawn from it.

Joshua Grubman: Thank you, Hillary. I look forward to sharing today about our process and lessons that may be helpful to others.

Pettegrew: Our second speaker is Paul Lannon, who’s a Partner and co-chair of the Education Law practice at Holland & Knight in Boston. Paul represents and counsels educational institutions on a broad range of matters, including mergers, acquisitions, and closings. And he’s the editor and co-author of the College and University Law Manual. Paul, thank you for joining us.

Paul Lannon: My pleasure to be here, Hillary, and thanks for the opportunity to share our experiences with UE members.

Pettegrew: Now, to set the stage, in 2018, Mount Ida College, a private nonprofit liberal arts school in a suburb outside Boston, ceased operating as the result of a funding crisis, and the University of Massachusetts at Amherst acquired most of its assets. What no one realized at the time was that this situation would be the first of many, as higher education in the U.S. began a process of dramatic consolidation. Our speakers were both closely involved in the process at Mount Ida, which serves as a case study for us today and will include some important lessons they learned and that we hope will benefit other institutions facing similar difficult choices.

So let’s dive in. In just the last four years, approximately 73 nonprofit and public colleges and universities have closed or combined with other institutions. Josh, Mount Ida had certain characteristics shared with many of those institutions. Could you outline those and describe how the problems first appeared at Mount Ida?

Grubman: So Mount Ida faced many of the same challenges institutions are grappling with right now, including a highly tuition-dependent revenue stream, shrinking non-tuition revenue sources, a lowered endowment, rising deferred maintenance costs, a high acceptance rate. It had several highly specialized programs that drew in a consistent population of students but was otherwise competing in a single geographic region, with many similarly situated institutions for the best discount rate.

We addressed these challenges with strategies used by many other colleges today, including emphasizing our specialized programs and facilities, seeking lines of credit to fill potential gaps, the sale or lease of valuable land holdings that could not easily be utilized for student services or development by the institution, and seeking a partner institution to share services or merge. But eventually, the position wasn’t sustainable and our major strategies to address these challenges all failed within the same time frame. We experienced a cash crunch, increased tuition discounting, deferred maintenance, and increased operating expenses that we needed to consider financial exigency.

Pettegrew: Paul, from a legal perspective, what is financial exigency?

Lannon: Well, Hillary, there is no universal or statutory definition of financial exigency. It’s a term that institutions define, typically in their bylaws or handbooks, to reflect financial emergencies that warrant extraordinary actions, such as laying off tenured faculty members and closing whole programs or departments.

A good starting point is the AAUP definition, which is, “An imminent financial crisis which threatens the survival of the institution as a whole and which cannot be alleviated by less drastic means than to terminate appointments of tenured faculty or those with unexpired terms.” A decision to declare financial exigency usually involves a recommendation by the President and the staff and a formal vote of the Board of Trustees. It’s not something that should be taken lightly, as it will have a major impact on the institution’s relationships with its lenders, regulators, donors, employees, and students, both enrolled and prospective. Consequently, it’s typically invoked only when an abrupt closing is the only realistic alternative.

Pettegrew: Josh, how did Mount Ida approach declaring financial exigency?

Grubman: So financial exigency was a governance decision requiring a board vote. This happened after careful consideration of the financial outlook and possible contingencies, all with legal consultation. Once the decision was made, we worked on communicating with the faculty, staff, and students while implementing a closure plan at the same time.

Pettegrew: What options for moving forward did you consider?

Grubman: So Mount Ida had already explored a merger with another institution, which was not an option for the closure process. Generally, an institution facing a wind-down process can consider a teach-out plan over the course of several years, affiliation or transfer of programs to other institutions, the sale of assets to another entity, acquisition by another educational entity, a complete restructuring, and a shutdown.

With the available timetable we faced, the best option was a combination. We sold a significant portion of our assets to another institution and entered into transfer arrangements with many other institutions to ensure that our programs continued elsewhere. We created public and private pathways for each of our programs, and we had multiple institutions fully absorb our specialized programs and facilities. This gave our students several opportunities based on their major fields of study and also provided continued employment opportunities for our faculty and staff.

Financial circumstances and timetables will vary for all institutions facing these challenges. It’s best to consider what options make the most sense for the given situation. Employing multiple pathways and plans allows the benefit of options for your community members and reduces the risk of a closure plan collapsing.

Pettegrew: Josh, you mentioned communication a few moments ago. As the situation at Mount Ida unfolded, how did you communicate with the members of the campus community?

Grubman: A good communications plan needs to understand the concept of transition. While closure appears to be an end of things, it’s also a pathway to something new. Your attention needs to focus on what the transition means for your community, reflecting on what your community has accomplished, what can be accomplished in the transitional phase, and what opportunities can be offered to the people in your institutional community.

We explained the situation clearly and directly to the members of our Mount Ida community, acknowledging the impact on all of us who loved being a part of the college. We described our vision of the future — including for students, faculty, and staff and alumni — all of which would be implemented through our closure plan.

To establish trust in the process, it had to be tied to clear deliverables, and we had to execute on those deliverables and do it on time. These need to be practical and attainable, and the community supporting the students needs to understand how they can help make the transition happen successfully for everyone.

I’m very proud of the Mount Ida community and what we were able to accomplish with our time frame. We saw over 90% of the students transition to new programs by the subsequent semester, which is an incredible accomplishment in retaining students in higher education.

Pettegrew: Now, Paul, I understand that effective governance is critically important to steering an institution through a combination or closing. Could you explain to us some of the important features of good governance in these extraordinary situations?

Lannon: Happy to, Hillary. I’ll highlight three important features.

The first step is creating a transition team among the staff and trustees, people who will be responsible for gathering relevant data, obtaining expert advice and counsel, and making well-informed strategic decisions in an expedited time frame. Accordingly, you’ll want to have people who are readily available, responsible, and discreet, and have skills or experience with the issues at hand. In many instances, it may be necessary or helpful to amend your bylaws, reduce the size of the board, and simplify some of the governance processes.

Second, your transition team needs to understand its fiduciary duties to the institution and how to fulfill them in times of financial distress. There are three fiduciary duties to focus on. First is the duty to mission. This is the obligation of officers and trustees to advance the institution’s charitable educational mission. The mission should always be the pole star guiding each decision. The second duty is the duty of loyalty. This obligation requires officers and trustees to put the interest of the institution above their own personal interests and to disclose any conflicts of interest. And lastly, but perhaps most importantly, is the duty of care. It requires the institution’s leaders to act with reasonable prudence under the circumstances. To fulfill that duty, they need to stay well-informed, weigh options, and deliberate, and they need to vote and take action. Fortunately, leaders need not act alone. To meet their duty of care and make well-informed decisions, leaders should seek out and rely on experts. Of particular importance in these situations are those with financial, legal, or communications expertise, and especially those experts with specific experience in higher education, which has a very different regulatory environment than the commercial world.

Third, the leadership team must reach a consensus on a realistic vision of the future of the institution, a vision that will advance its charitable educational mission. That future may be closing in an orderly manner and transferring its assets to other institutions with similar missions, or it may be some form of combination with another institution, whether a merger, acquisition of assets, or an affiliation that reduces expenses and/or generates greater revenue. Leaders must be realistic in light of financial realities and regulatory requirements, while also considering how various options will impact their students, employees, and the larger community.

Pettegrew: Josh, how did Mount Ida ultimately decide on closure and an asset sale as opposed to its other options?

Grubman: This is largely dependent upon the timetable and assets most readily available to the institution. So some may have longer timetables of years, in which additional opportunities may present themselves, and many others will have much shorter timetables of weeks or months. An asset sale covering the majority of an institution’s assets provides the quickest and most manageable option, as the sale of assets can support the transition of programs, students, faculty, and staff.

Mergers and acquisitions are also good options to provide continuity to members of your community, but these take significant time and investment to identify potential partners, consider the finances and due diligence, and execute on the terms, a significant concern of which would be the institutional debt. An asset sale, however, also requires identifying potential purchasers and significant due diligence, but it can be accomplished in a shorter time frame and leaves the selling institution to consider the institutional debts. This guarantee of financial support in an asset sale provides a good opportunity to fund a successful closure plan.

Pettegrew: Paul, what about the role of regulators in these situations?

Lannon: Well, decisions about whether to close or combine need to incorporate applicable state and federal regulations, and there are a lot of them. After the Mount Ida closing, Massachusetts and several other states have adopted financial screening laws that require advanced notice and disclosure of financial exigency. It’s important to check your own state law for details about those requirements.

State attorneys general may need to approve the transfer of any of your charitable assets. And state licensing bodies, as well as federal accreditors, may have notice and approval requirements as well. The U.S. Department of Education, importantly, imposes substantial liability on schools that close without teaching out their students receiving federal financial aid or finding teach-out partners for those students to complete their degree programs at other campuses.

Pettegrew: Josh, I know there are multiple considerations involved in any institution’s wind-down process, but could you discuss how Mount Ida in particular addressed the needs of the people who were directly impacted?

Grubman: Yes. First and foremost are addressing the interests of the students and then faculty and staff. Alumni should also be considered, having been former students, and they rely on the college even after graduation, as we all know.

Once again, a closure is a transition — and transitioning presents challenges to your community members, especially to your students. In a closure plan, your goal is to identify these challenges and help remove barriers for your students. Teach-out plans and transfer agreements, including identifying appropriate partners, are critical not only to providing pathways to your students, but also to removing barriers to your students’ pathways.

Transfer agreements are arrangements with other institutions to provide continued education in the same field of study. Transfer agreements can be made with similarly situated institutions that offer comparable programs, so as to avoid interruption in your students’ education. However, there are many other considerations to address besides identifying similar programs, such as residency requirements, credit requirements, the net cost of attendance, and graduating on the same timetable. Consider what your institution can do to reduce those concerns.

Program adoption is another arrangement that can be made with other institutions. Perhaps you have a unique program that is already set up with students, faculty, staff, equipment, and facilities. Other institutions may be interested in obtaining a fully established program, and this is also an opportunity for your community members to continue their education and employment uninterrupted.

Also consider post-transfer support. Orienting students to a new institution is important to maintaining a successful transition, by encouraging continued affinity and acknowledging their shared experiences. You’ll also need to arrange for maintenance of important student records, such as transcripts, catalogs, graduation lists, athletic eligibility, earned credentials, and conduct records. Try and reduce the points of contact students need to reach these records.

For faculty and staff, continuity of educational programs is also important to them, preserving opportunities for both when you create program transfers or program adoptions. There are several requirements to address the employment relationship with these groups, including retirement funding, unemployment benefits, notice under contractual obligations, and the WARN Act, as it may apply. Similarly, consider what the transfer opportunities hold for preserving faculty rank and benefits — and the records employees need to support their transitions for employment verification, certifications, awards, restricted funds, and grants.

And finally, alumni. They will always be tied to your institution and many of the student considerations regarding records will also apply to alumni. Consider what else you can do to preserve alumni affinity with your institution after closure. Are there restricted funds or awards that can be used to support similar purposes? Can alumni use the institutional facilities after closure? What traditions and material history can be preserved from your institution? And where can you direct alumni support for transferred programs?

Pettegrew: Thank you, that’s really helpful. Well, let’s turn now to specific advice you would give other institutions based on your experience with Mount Ida’s closing. What are some of the most important lessons learned that you’d like to share with our audience? Paul, let’s start with you.

Lannon: First, it’s critical to monitor the institution’s financial health, especially cash flow, and to develop reliable projections of cash flow. College closings have prompted new regulations and stricter scrutiny by accreditors and government agencies, so you really need to carefully review financial responsibility requirements for accreditation, state authorization, and Title IV participation.

Next, as we emphasized, it’s very important not to make any misrepresentations about the institution’s financial condition, especially to lenders, enrolled students, and prospective students.

Third, the worst-case scenario for all involved is ceasing operations before the end of an academic year. So we recommend never beginning a new academic year if there’s a material risk that the institution won’t be able to complete it.

And lastly, consider pursuing combinations, mergers, and affiliations with other institutions before a declaration of financial exigency becomes necessary. Institutions generally have more options outside of emergency conditions.

Josh, do you want to take the rest of the lessons?

Grubman: Sure. Begin preparing comprehensive closure and teach-out plans if your institution is facing a reasonable risk of closure. They take longer than you might expect. It may be required by state or federal regulators. Leaders at your institution are likely familiar with the programs at other institutions in your region, and competition with these programs may turn into transitional pathways.

Although leadership must consider how a combination or closing will impact students and employees, directors and officers owe their fiduciary duties to the institution and its mission, not to students and employees. Prepare your governance with the fiduciary duties in mind, ensuring that they are consistent with legal obligations. Closure plans need to address the concerns of students, employees, and the institution itself.

For protection from legal liability, institutions should review their insurance coverage and the applicability of federal and state laws providing immunity to nonprofits and uncompensated directors, officers, and volunteers. Check with your legal counsel on this.

And finally, consumer protection laws may not apply to nonprofit institutions engaged in traditional academic programs and activities. Your counsel can advise you on this too.

Pettegrew: Thank you both very much. That is all the time we have today. And before closing, I just want to note that UE previously worked with the law firm Husch Blackwell to create a collection of resources relevant to the issues we’ve been discussing today. Those include checklists focusing on changes in institutional control and also on institutional closures. You can find those publications at the link on the landing page for this podcast episode. And like all our resources, they’re free to UE members.

Many thanks to Josh and Paul for sharing their hard-earned expertise on this topic. And thank you again to everyone listening.

Host: From United Educators insurance, this is the Prevention and Protection Podcast. For additional episodes and other risk management resources, please visit our website at www.ue.org.