November 7, 2011
To: The Cooper Union Community
From: Cooper Union Board of Trustees
Subject: Cooper Union’s Financial Challenges
The recent reports in the press and elsewhere about Cooper Union’s financial difficulties have resulted in an outpouring of comments and questions from alumni, students, faculty and other friends of the institution seeking more information about the situation as well as offering suggestions for possible courses of action or, in some cases, seeking to ascribe blame. The Board of Trustees believes that, consistent with the spirit of openness and transparency that President Bharucha has conveyed, it is important for everyone to have a better understanding of Cooper Union’s financial structure and the impact of events over the past several decades in order to facilitate a constructive discussion of Cooper Union’s current financial predicament and possible paths forward.
Beginning with the Presidential Search for the institution’s 12th President, the trustees sought to create a process of inclusion by bringing together the community. Faculty, students and alumni alike made it clear that there was a lack of transparency at the institution and that what they were seeking in a new president was leadership that was open, honest and focused on building on the exceptional academic reputation of The Cooper Union. During those discussions, many questions were raised about the Board’s decision to build the new academic building and, today, the question continues to persist.
Brief History of Cooper Union’s Structural Deficit
The cost of operating The Cooper Union exceeds the institution’s current sources of income and has for some time. The commitment to the full-tuition scholarship policy has required the institution to spend a significant amount of its endowment assets in recent years in order to fund the deficit. This reduction in the size of the endowment in turn has reduced the investment return the endowment can provide. While the return we have been able to generate on the invested endowment for the past several years has been above the average of other colleges, we are generating returns from a progressively smaller base. In recent times, during periods of market downturns, our investment strategy has been to keep risk at an absolute minimum.
In addition to the return on the invested endowment, the institution’s major sources of income are the rent and tax equivalency payments on the Chrysler building and donations from alumni and friends of the college.
In the mid-1970s, the poor economic conditions resulted in a series of more sizable deficits as a result of which the decision was made to sell Green Camp to fund operating needs. Beginning in 1990, the steep decline in the New York real estate market resulted in a decrease in the payments received from the Chrysler building, which declined by approximately $2 million (from $13 million to $11 million between 1992 to 1997). As a result of this decrease in current revenues, combined with increases in expenses (including many mandated by regulatory requirements) and inflation, by 1994 there were recurring annual operating deficits of $5-8 million. In the absence of other revenue sources, the only way to fund these deficits was to draw on the unrestricted investments in the endowment, which in turn reduced the earnings produced by the endowment, thereby exacerbating the deficit each year.
Increases in expenses have continued to outstrip the earnings on the investment pool and payments from the Chrysler lease. In 2011, budgeted income from real estate and investment earnings provided 46% (approximately $27.5 million) and 12% (approximately $7.5 million), respectively, of required operating revenues, leaving a deficit of approximately $16.3 million that had to be funded by drawing on the investment portfolio, further reducing investable assets.
Building 41 Cooper Square
The Board approved the construction of the new academic building in November 2006. The premise behind the plan to construct the building was to consolidate two academic facilities into one, reducing operating costs and replacing the more than 50-year-old engineering building with a building that is adaptable to the evolving learning environment of the 21st century. In addition, the building, an architectural icon in New York City, was viewed by the Board as a key magnet for the Capital Campaign which had been launched in 2001.
While The Cooper Union raised approximately $197 million in the Capital Campaign, including $60 million for the building, we nonetheless fell short of our goal of $250 million. At the same time; however, in January 2008, Cooper Union closed on the long-term ground lease on 51 Astor Place in connection with which it received a payment of $97 million. Those funds went to help pay for the costs of the new academic building, which totaled $166 million. Under the 51 Astor Place lease agreement, Cooper Union will also receive, upon completion of the building on that site, annual payments in lieu of taxes of approximately $2 million which is equivalent to the income that would be earned by $40 million in endowment if invested at a rate of 5%.
$175 million MetLife Loan
As the level and rate of receipt of donations in the capital campaign fell behind expectations, the decision was made to borrow $175 million from Met Life. The loan was approved by the Board of Trustees in September of 2006 to:
– Provide cash flow for the construction of the new academic building on the order of $115 million and secure the Guaranteed Maximum Price agreement with Sciame Construction, protecting the project from major cost escalations.
– Pay back the outstanding Dormitory Authority of the State of New York (DASNY) Bonds ($23 million) that had been issued to finance the construction of the residence hall (29 Third Avenue) in the early 1990s.
– Fund necessary capital improvements to the Foundation Building
– Invest the balance of $32 in the endowment to achieve a greater rate of return than the 5.87% fixed interest rate on the loan. This investment would ultimately be used to fund the institution’s structural deficit.
The $175 million loan allowed the college to proceed with the construction of the new academic building which made it possible to sell the land lease on 51 Cooper Square which unlocked value from that site ($97 million) for addition to the endowment.
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The members of the Board of Trustees are committed to Cooper Union’s educational mission. Many of us are ourselves alumni, but a good number had no prior connection to Cooper Union and have become involved with the institution because of our belief in its unique educational mission. All of us donate our time and serve on the board without compensation and, indeed, have made significant financial contributions to the college over the past decade. We acknowledge the need for greater transparency moving forward as we evaluate all possible options to enhance revenues. Above all, we have a responsibility to current and future generations of students to ensure the survival of the institution by adopting a sustainable financial model which will require achievable revenue sources that will enable us to eliminate the structural deficit.
November 7, 2011