Critical Issues for Community and Small College Fiduciaries

Audio Description

How can small colleges or community colleges position for financial success? By navigating capital market pressures while building a culture of philanthropy.


This transcript has been generated by an A.I. tool. Please excuse any typos.

00:09 - 01:08

Welcome to Inspired Investing. I'm your host, Clare Golla national managing director for Bernstein Foundation and Institutional Advisory Team. Today, we'll share some content from a panel discussion I moderated with Bernstein, senior investment strategist Roosevelt Bowman, the third, and George Boggs, President and CEO emeritus of the American Association of Community Colleges. We discussed industry trends specific to small, higher adding community colleges, shifting economic and capital markets, pressures affecting those portfolios, and strategies for investments, operations and philanthropy. Roosevelt Bowman is a member of our firm's Foundation and Institutional Investment Policy Group. We started the discussion with Roosevelt outlining some of the challenges facing investment committees of smaller colleges and community colleges with a lack of exposure to alternatives being high on the list. He also focused on some of the strategies we're recommending, particularly around spending policies for clients in this space during a challenging year.

01:08 - 01:51

Then you'll hear from George Boggs, who shared his perspective on building a culture of philanthropy at a community college and the work that goes into that. In addition to his roles with the American Association of Community Colleges, George is a superintendent and president emeritus of Palomar College in San Marcos, California. He teaches classes in emerging higher education issues in the doctoral programs at Kansas State University and at San Diego State. And he's the author of more than 100 articles, books and chapters on various aspects of higher education. Roosevelt. What do you see as some of the top challenges for community colleges and other higher ed institutions from an investment standpoint, looking ahead into this coming academic year?

01:51 - 02:40

Certainly. So, when we looked at the data, kind of looking at the national information from college and university business officers, it shows this bifurcation. The large institutions have somewhat insulated themselves from these volatile moves in the public markets and stocks and bonds, those traditional assets by investing in alternatives, different types of strategies that provide a return stream that really can offset some of the volatility in those core traditional assets that just move very differently than your typical stocks and bonds. The smaller institutions have not. We'll talk a little bit more about that in a moment. But the smaller institutions with that lower or sometimes zero allocation to those alternatives really suffered the full brunt of the sharp interest rate increases and the volatility around where yields were going.

02:40 - 02:52

So a concern then, looking ahead is how portfolios are positioned today when it comes to cash in this environment. How are you thinking about inflation in right sizing cash reserves for institutions today?

02:52 - 03:22

Yeah, certainly. And I think the inflation question does also tie back a little bit to some of those solutions around how you deal with the problem. For those smaller institutions. They may not be aware that there are alternatives available to them even at that smaller size. That is part of dealing with the inflation challenge that some of those alternative strategies actually appreciate and or generate more income as interest rates move higher, which is the main financial market kind of transmission through which inflation impacts asset prices.

03:23 - 03:58

I think in terms of the cash reserves, it's another important question and really it's sort of mapping out what the spending is going to be so that given these new challenges and given the additional volatility, how can you make sure that you have enough to meet those needs and doing a bit more planning in terms of really addressing what the goals are for those different pools of assets, kind of separating the asset base and assigning it sort of a a date, if you will, and understanding that, hey, for this certain amount of time we need a certain amount of money and then allocating kind of before getting the rest of the assets for longer term growth.

03:58 - 04:13

Right. I mean, it wasn't that long ago that you could hold on to significant excess cash. And when inflation is virtually nothing or very low, it's not as big a deal as it is today. Obviously, when we're in this inflationary environment, when you're continuing to lose that purchasing power over time.

04:13 - 04:54

So I want to get back to the question of alternatives and whether institutions on the smaller side can take better advantage of what's out there that can complement their portfolios for institutions. As you know, you need to have $5 million in your portfolio or more to be an accredited investor. This just opens up your universe to certain alternative asset classes or different types of instruments. And then to be a qualified purchaser, you need $25 million or more, generally speaking. And so we've come across a number of emerging institutions, especially a number of community colleges, that have been advised that they're just not big enough to access alternatives. Could you share a little bit about some of the common pitfalls or trade offs that investment committee should consider as they're considering alternatives?

04:55 - 05:48

Absolutely, Clare. And I think the first one you alluded to is an important one, that there's sometimes there's this entire universe of alternatives. And the assumption for the small institution is that, oh, we're just not big enough for any of them, when in reality some of them are available even for those accredited investor institutions. So I think that's number one, having a better understanding of the options and the menu may be smaller, but it does exist that it's not an either or. I think the other part is getting comfortable with the illiquidity. If you think about the spread of investments. One of the keys is that you're basically allowing the capital to be locked up, if you will, for a certain amount of time where you can access it. The reward for that are higher returns and also different return streams than stocks and bonds. So that's something that often committees have to take a while to get comfortable with that you don't have instant kind of daily liquidity access to the funds that you normally do and your stock and bond investments.

05:48 - 06:13

I think the other part too, and it's a bit nuanced but important is kind of how you measure return. If you think about stock, your return is really, you know, if you get some dividend, but really the price going up and down on bonds, it's mostly the income, the coupons you receive. And then secondarily the price going up and down with these alternatives, you're actually getting cash flows that are not in any sort of regular schedule.

06:13 - 07:01

I'm glad you mentioned that these vehicles in many cases aren't quite as transparent and there could be a quarter's worth or a half a year's worth of lag in terms of reporting of returns. So it's really about communication upfront with your advisor. So for any of the listeners out there who are working with advisors on our team or across our firm, definitely have that conversation with them upfront. So Rusev aren't for institutions that are relying on a draw, a consistent draw from the portfolio you're in. You're out there. Spending level may seem daunting this year. We had a brutal first half of 2022. And so if you're looking at 4% based on 2021, you're on values that suddenly a much bigger spend relative to where the portfolio is today. How are you advising committees that may be nervous about tapping into a larger piece of that pie, particularly at smaller schools?

07:01 - 07:31

It's a great question, Clare. I think, number one, it's understandable because it's such a different environment than what a lot of committees have used to over the past five years. If you looked at most of the five years up until now, even during the pandemic, the snapback and the recovery in markets was robust off of those kind of March low. So a lot of times you're used to, well, we have this spend. Guess what? The portfolio is going up every year no matter what anyway, with the exception of some pockets like the end of 2018.

07:31 - 08:15

So we've been recommending is is kind of smoothing out that process, thinking about, All right. Instead of just saying, hey, we're going to take 4% of this on this specific date, looking at sort of an average over a 12, 16 month period and saying, hey, let's think about those values there and taking that percentage so it's not so lumpy at a time when portfolio values are really depressed. So again, it's not it's not a tool or strategy that's been necessary because we've kind of seen asset values just rise sharply over the past five years. But in this period of really extended volatility now that's smoothing and thinking about the market value over an average period of time rather than a point estimate. And I'm pulling from that is an important way of kind of helping that process and making it less jarring.

08:15 - 08:22

The smoothing policy has been so helpful for a number of institutions that we work with across the country. I'm glad that you mention that.

08:23 - 08:36

So, George, you teach doctoral students in the effective management of community colleges. So from your perspective, maybe you could share with us your view on some of the top challenges facing financial decision makers at community colleges and other small institutions today.

08:37 - 09:05

Well, thank you, Clare, and hello to Roosevelt. I really appreciate the invitation to be part of this panel. First of all, I want to endorse this idea of a smoothing policy that Roosevelt and and you talked about Clare. I'm chair of the board of Rite Aid Kappa, which is the International Honor Society for Community Colleges. And we established a smoothing policy a few years ago. And it really keeps the spending drawdown pretty stable, which is important for organizations.

09:06 - 09:54

So moving on to the top challenges facing our colleges right now, I think there are three interrelated challenges. One is constrained operational resources. Second is the loss of enrollment during the pandemic. And then the third is planning for the loss of the federal Higher Education Emergency Relief funds. So first of all, we need to think about how community colleges are the least well-funded institutions in all of higher ed. We serve 43% of all the students in public, higher ed in the country, but we receive only 27% of the federal, state and local public funding. So we have a very small amount of public funding for a large amount of students, and they turn out to be, of course, the most at risk students who who need the most support.

09:54 - 10:38

Overlaid on this is that there's been a steady state disinvestment in higher education. Back when I went to college in the 1960s, there was a feeling that there was a societal benefit to education, that the more education people got, the better off society was going to be. In fact, this was just post Sputnik that went up in 1957, and the country was really focused on educating more of its people, in particular, of course, in STEM fields. But over time we lost this belief and the societal benefit of higher ed and moved to an individual benefit that the more education a person gets, the better quality of life that person is going to have. So therefore, that person and his or her family should pay more for it.

10:38 - 11:29

As the states cut back on funding, we saw tuitions going up dramatically in higher education and of course in community colleges. We try to keep tuition costs low, but we serve such economically disadvantaged students that they still often need financial support to to go to community college. Then, of course, we had enrollment loss during the pandemic. We had to turn on a dime in higher education to move our classes and services online. And of course, because we serve such economically disadvantaged students, a lot of them didn't have computers or or the technology or the bandwidth they needed. And if they did, even if they did, they probably had schoolchildren at home who needed to be on that computer to stay up at the school. So we lost a lot of enrollment during the pandemic, and we're developing strategies to try to get them back.

11:29 - 11:54

Of course, the colleges were held harmless by the funds from the federal government, but those are going away. So colleges are planning how are we going to avoid going? Off a financial cliff here. So those are kind of inter-related issues, all sort of funding related enrollment. Of course, enrollment lost means a loss in funding. So. So I think those are the important things that are on the radar right now for a lot of community college leaders.

11:55 - 12:12

You paint a picture that's concerning, right? Especially thinking about the fact that community colleges are a means of starting to potentially bridge that wealth gap that just continues to grow. So why is it overall that smaller colleges or community colleges are less successful in fundraising than, say, larger universities or institutions?

12:13 - 12:39

Well, Clare, I think the most important factor is that we have no history of fundraising. Our leaders are not experienced in fundraising, and there's a lack of staff. You know, if you look at major universities, they have a lot of staff in their development of raising money. If you look at community colleges or some of the other smaller institutions across the country, they're lucky to have any staff in the development office. And that makes a big difference.

12:39 - 13:34

When I was at Palomar College, just just to give you an idea of what the culture was like, I had to convince my board and my faculty to invest in development. And I had a member who told me she didn't think we should spend money on development because we were a public institution and the taxpayers deserved the education they were willing to fund. So so that was her philosophy. And faculty were saying, Hey, you shouldn't be spending the $150,000 on a development office. You should be putting it in the classroom. So there were those challenges that I'm sure a lot of our small colleges face. They're struggling to even put the necessary supports in the classroom and student services. So how do you fund a development office? So I think that's a big challenge that a lot of our community colleges and smaller institutions face. We've heard concerns, of course, about why we don't have the strong alumni base that are harbored.

13:34 - 13:36

Yeah, but I was going to actually ask about that.

13:36 - 14:09

Yeah. But, you know, we do have alumni and a lot of them are proud of their attendance at a community college. We don't track them very well in community colleges, but I think we have another advantage that a lot of the larger institutions don't have, and that is that we're very close to the businesses in our communities. And a lot of the business leaders went to the community college or the small college, and they have an allegiance to it. And a lot of their employees are trained by that college. So they would be natural allies in fund development for a community college or a small college and a community.

14:10 - 14:26

That makes a ton of sense, that partnership with businesses in the local community. So, George, you mentioned some of the challenges that you encountered during your tenure. Are there specific items that you could share in terms of how a college president could make fundraising a higher priority or maybe how you could get some of your board members there?

14:26 - 14:49

Well, you know, I did get a 4 to 1 vote to go ahead and do it. So so I did. I told them that we would make that $150,000 and more. Give me a year. And, you know, in a year, we we made much more than $150,000. And of course, by the time I left Palomar, we were making millions of dollars a year. So I think they have to see the results. I think that's the way that you can build.

14:50 - 15:07

So, George, you've written in some of your work about the matrix of skills and experiences needed by board members. Given how the pandemic has forced so many community colleges and other small colleges to change the way they do business, are there different characteristics you might look for in a board member today as opposed to, say, five or ten years ago?

15:07 - 15:30

Thanks. That's a great question. And partnership is the word to think about. First of all, the reporting relationship is important. The chief advancement officer has to report to the president, the president of the college or chancellor or whatever the title is, the chief executive officer. You can't delegate that to some lower level administrator or it's not going to be important. It has to be important.

15:30 - 16:18

So at Palomar, I was very lucky to hire a very experienced fundraiser. He was an experienced fundraiser in the health care area. He didn't know anything about community colleges or how we operate. But on the other hand, I knew about community colleges and our mission, but I think about fundraising. So we formed a great partnership. I taught him a lot about community colleges. He came to all my cabinet meetings, so he understood what the issues were and how we were dealing with them. And he taught me a lot about fundraising, for example, who to ask for money, how to ask for money, and how much to ask for. So I learned a lot and I learned a lot about plan giving from him. It was definitely a partnership, and I think that's the way colleges and presidents need to think about the relationship with the chief investment officer.

16:18 - 16:28

So that's great advice. You've been such a champion of building a culture of philanthropy at institutions. What does that mean to you and how might a leader establish that philanthropic culture?

16:29 - 17:17

Oh, thanks, Clare. That's a good question, because the foundation board is critical to have a good functioning foundation board. I think it's important to have a development committee. The foundation board that is constantly evaluating the effectiveness of the fundraising efforts and to identify potential board members and to recruit them and orient them. So what do we look for? Well, we need to look for community leaders, people who know people, people who know people who have resources and people who know plan and giving. And of course, they have to understand the mission of the college. And they know and they have to know what kind of students come to that college and what the issues are. And we just talked about some during the pandemic that the students had to struggle with. So it's important that the board members know. No about that.

17:17 - 17:49

Here's an interesting side note. When I was at Palomar College, I developed another group that was a subset of the foundation called The President's Associates. And the way this got started was I had a conversation with one of my elected board of Trustees members at Palomar College. It was a banker, and he was well respected in the community. So I said, Can you possibly get together a group of some of the most important people in the community to talk about possibly forming a new organization that would be affiliated with the president of the college?

17:49 - 18:17

And he did. And from that small meeting of about six community leaders, we formed the president's associates, which expanded before I left to 55 members who were each paying $1,000 a year to be able to meet with me and talk about the college and issues in the community. And then they began to do some fundraising beyond that. So I would say Clare look for community leaders. But it's also critical that they know the college and they know the mission and who the students are.

18:18 - 18:24

I love how you made sure folks knew where those new resources were coming from. So this has been extraordinarily helpful.

18:24 - 18:37

Now, we'll address a couple of questions from the audience. Roosevelt, this one goes to you. How, if at all, would you recommend speaking to donors about the institution's investment policies and what you'll do with funds received from them?

18:37 - 19:05

Absolutely. Really good question. I think it's multifaceted. So, number one, having, you know, a lot of times we will work institutions and they may have a philosophy, but not a formal kind of investment policy statement. We certainly work with institutions to build that. So therefore, you have a set of rules and kind of parameters. But if someone inquired, you can then present presented terms of not only the risk elements but what you're investing in. And that's kind of the second part of it.

19:05 - 19:45

You know, a lot of times donors have really they have a request that the money they donate will be consistent with their values. And we've seen this more and more in kind of the responsible investing space for donors. And also the boards themselves say, hey, we want to reflect the values of the organization. We don't want to invest in certain companies. And so, you know, for us, it's been responsive. Investing has been a huge part of our platform for well before, and I think it was popular kind of more broadly. And so, you know, in our eyes, that is a big part of the fiduciary duty of the board when sometimes donors are requesting that, but also to be able to answer to the rest of the constituents.

19:45 - 20:36

It is important, I think, from an education standpoint that there are always tradeoffs in investing, even if you do it differently. The tradeoff is not lower return. We haven't seen that at all, but we have seen as that you have a different type of return stream. This year is a perfect example. If you have a responsible investing portfolio, you're not going to have fossil fuels. But this year that's pretty much only the one investment or part of the market that has done well. So now in this year you've had sometimes underperformance of those responsible investments. But as a short time period, those responsible investments conversely outperformed for most of the last 3 to 4 years, because you do usually deal with those environmental, social governance problems through innovation and technology. Those companies in general have done very well up until this year, and you were actually outperforming your standard kind of non-responsive investing options.

20:36 - 20:57

So I do think it's both having a strong investment policy statement that sets those rules and parameters and goals for what the endowment and what the funds are for. But then it's also understanding that and being open minded to the idea of this responsible investing that may not only match the values of the organization, but of the donors as well.

20:57 - 21:26

I'm glad you brought up the idea of responsible investing, because this is something we're seeing with a number of our educational clients as well as other types of institutions we work with. So first of all, let me just say that it is completely fine for an institution to show the investment policy. Some institutions even have it on their website. It's something that donors really do have every right to ask for. And we've seen more of this with smaller institutions over the last few years than we've ever seen historically, primarily because of this shift in the business of philanthropy.

21:26 - 22:04

Right. There are a lot of donors who are providing larger and in some cases completely unrestricted gifts to community based institutions, organizations that frankly didn't have access beforehand to these six or seven or eight figures. Your gifts prior to this period. So, look, our team also at times walks through the investment portfolio of an institution with a prospective major donor or a current major donor to help get them comfortable. So we're happy to do that any time. And now a question for George. We're struggling with recruiting and retention challenges at the executive level. Do you have any ideas for improving on this for a community college?

22:04 - 22:55

Yeah, this has become a big issue Clare post-pandemic. And there are some positions that are in particularly hard and harder to find, but one of them is Chief Financial Officer. There aren't a lot of people in the pipeline and IT specialists, information technology folks can make a lot lot more money out in the private sector. So institutions are having a tough time right now. I've talked with some college presidents who are really struggling with this. So I've talked with a couple of national associations to see if we could put together a commission to look into this. And I've talked with one of the universities that I teach for to see if there's some way we could develop a program that prepares more of these specialists in these high level administrative positions. It's an important issue right now for sure.

22:55 - 23:43

That's great. Thank you. And you're hitting on something important there that I think you've been hitting on throughout our conversation today, and that is the importance of social capital at institutions. I'd argue that the board, the leadership of the institution with their various networks can also be champions for the institution in terms of recruiting efforts. Well, we've covered a lot of ground in this discussion, and I think it's been extremely helpful. So I want to thank Roosevelt, Bowman and George Boggs for sharing their perspectives on these timely issues, which are particularly relevant for Fiduciaries at community colleges and small colleges, but also for other foundations and institutions as well. If listeners have questions about any of these topics, please reach out to your financial advisor or email us at FIA at Bernstein dot com. Thanks.

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