Financial missteps, debt led to sale of university

May 04--Urbana University has struggled financially throughout much of its 164-year history, but years of lean enrollment and a series of failed business decisions in the past decade, combined with a crippling recession, meant the university was unable to take on more debt to survive into the next year.

As Urbana officials began negotiations with Franklin University on a buy out, five banks agreed to take millions of dollars in losses to eliminate mounting debt and allow the transaction to occur.

Despite the financial hit, bank leaders and elected officials in Champaign County said closing the university would have done far more damage to a community that is slowly recovering from the Great Recession. Local officials have estimated the university, which employs about 400, has a $31 million economic impact on the region.

Numerous issues in the past decade led to the financial crisis, said Kirk Peterson, Urbana University president.

Those included inconsistent fundraising, student recruitment efforts that never paid dividends, and capital construction projects that led to higher debt, he said. Many of those decisions likely made sense at the time, he said, and are easy to scrutinize in hindsight.

But Urbana's financial problems became insurmountable when coupled with a recession that damaged small colleges and universities across the country, he said.

If the school closed, the city would have lost more than a significant employer, said Bill Bean, Urbana's mayor. It would have lost about 1,800 students who often volunteer in the community, work at local companies and support small businesses.

The city also would have been faced with a vacant 128-acre campus that could have easily deteriorated and become a significant problem for the county.

"We don't have to look at that," Bean said. "We can look to the future to what Franklin University will bring to the city ... I can't say enough how important this is."

Urbana will become a division of Franklin, a private institution based in downtown Columbus. Urbana will retain its name and its athletic affiliation in the NCAA Division II. However, Urbana's board of trustees will disband and Urbana's leaders will report to Franklin.

The agreement will allow Urbana to remain open, while providing Franklin access to a more traditional student population along with new academic programs and faculty, such as Master's degrees in nursing and criminal justice.

Layoffs at Urbana are also likely as a result of its financial situation. But Franklin has said it will invest in the campus, and anticipates eventually making improvements to the campus and boosting enrollment figures.

"We are going to be greatly enhanced by the technology and resources that Franklin can provide," Peterson said. "The Blue Knights are still alive and we're going to be alive for many generations."

Banks absorbed the loss

The deal wouldn't have been possible if five banks hadn't absorb millions of dollars in losses. No one would say how much the debt totaled and bank leaders declined to discuss the financial details.

But a quarterly report from Perpetual Federal Savings Bank in Urbana shines some light on it. The statement to shareholders shows Perpetual alone absorbed a loss of about $3.3 million.

Michael Melvin, Perpetual president, confirmed the losses in the statement were the result of the agreement with the university. The agreement was possible, he said, because the banks are in a strong financial position to absorb the loss.

"Our net worth position is such that we can absorb this without affecting operations," Melvin said. "We don't want to but sometimes you have to do what you don't want to for the betterment of all."

The banks became involved in the discussion as early as February, working with government regulators and officials from both universities. Several officials involved in the agreement said eliminating the debt was necessary to make it viable for Franklin.

Banks were in the tough position of balancing their obligation to shareholders and depositors against what was best for the city and county, along with hundreds of local students and employees, Melvin said.

Urbana's relationship with Security National Bank goes back decades, said Andy Irick, senior vice president for the bank. He declined to discuss the details about the loss his bank absorbed.

The bank recognized that losing the university would have been a major blow to Champaign County, Irick said.

"We don't want to see that university close," Irick said. "I don't think the community wants to see that. The best thing that can happen for the community is for that university to stay open. We think that their presence is key to the economy in the area."

Officials at Champaign Bank and Peoples Savings Bank didn't return calls and Fifth Third Bank declined to comment.

The banks' sacrifice was a tough decision, Peterson said, but he argued Urbana University's long-term economic impact is also important. If the agreement with Franklin is successful, he said, student enrollment could grow and the impact could become greater.

However, the university's problems aren't more important than the concerns faced by the banks' shareholders and customers, Peterson said.

"We will never take that lightly," he said.

A history of struggles

Urbana is a small liberal arts college that hasn't raised tuition in two years.

Historically, it has always walked a fine line financially, said Steven Polsley, chairman of the university board of trustees. When plans to boost enrollment in recent years failed to produce results, the financial problems ballooned.

Board members believed a new administration, including Peterson, was starting to turn things around, Polsley said. But the university ran out of time.

"We had some business ventures that we expected would grow enrollment and they didn't," Polsley said. "We were borrowing to try to build those business plans and bring in more students, and our borrowing took us to a point where we just literally couldn't borrow any more."

Tax forms filed with the Internal Revenue Service highlight some of Urbana's financial woes.

The school saw about $574,000 in operating losses in fiscal year 2011 and had 404 employees. But that shot up to about $1.9 million in losses the next year -- and tax forms showed the institution had 25 more workers then.

Peterson admitted the university was overstaffed, and has since made cuts, mostly through attrition.

About seven years ago the university built a new dormitory, as it expected to attract more international students. But the enrollment numbers didn't materialize, leading to more debt.

"At the time we were very hopeful international students would come in droves and it just did not happen," Peterson said.

Urbana has always relied heavily on student enrollment dollars and sought assistance from donors to raise the capital necessary to stay afloat. But it became clear earlier this year the fundraising campaign wasn't going fast enough to meet expenses for the next school year.

"Our history had been to borrow against the next tuition revenue cycle so we were spending the next term's money this term," Polsley said. "And that was just a progressively unsustainable pattern."

Tax records also show a handful of board members disclosed financial transactions with the university, providing services such as information technology services and insurance. In recent years, those contracts ranged from about $10,300 for automotive services to as much as $1.4 million for medical insurance.

Board members discussed whether those contracts might have been a conflict of interest, Polsley said. But the board members who provided those services weren't allowed to vote on those contracts, he said, and they required the contracts to be competitive.

As the financial situation became clearer and board members had to spend more time, the number of board members was trimmed and Polsley said no board members currently have contracts with the university.

Patrick Field, an agent with Wallace and Turner Insurance in Springfield, previously had a contract for about $163,800 to provide insurance to the university. However, Field said the information was fully disclosed each year he served, and he never voted if the issue involved insurance coverage.

Daniel Harkins, a local attorney who handles cases involving nonprofits, said those kinds of arrangements are legal as long as they are disclosed, board members don't vote on the issue, and the organization seeks and selects the most competitive contract or seeks the opinion of a consultant familiar with the service being provided.

What's next

Several individuals affected by the acquisition said they are optimistic.

Urbana was founded by the Swedenborgian Church in 1850 but the members have never controlled its operations. Many of its members have attended and become donors, said Betsy Coffman, a university trustee and minister in the church.

She's heard from members nationwide who are curious about what the acquisition means for the church's connection with the school. Most members understand the struggles it has faced throughout its history, she said, and want to see the university continue.

The agreement with Franklin makes that possible, she said. Officials at Franklin have said they expect Urbana's relationship with the church to continue.

"Franklin, I think, knows and understands that it's a good idea to keep their friends and alumni in the community," Coffman said.

The agreement with Franklin was also ideal, Polsley said, because the larger university has the resources to provide stability to the Urbana campus. The transition is expected to take several months.

"They have the resources to help us with our cash flow problems and they have the experience to help us build enrollment and develop some programs that we just didn't have the resources to invest in," Polsley said.

Several faculty members also expressed optimism that that transaction will breathe new life into Urbana's campus, despite the threat of layoffs.

Faculty members haven't had a pay raise in at least five years, and have accepted cuts to retirement contributions and higher medical premiums to help the university stay afloat, said Dean Pond, a former faculty chairman and a director of education and field placement for the College of Education.

Many unanswered questions remain about how the acquisition will play out, Pond said. But the deal will allow faculty and staff members to continue serving students, he said, most of whom come from the local five-county region.