After 40 years of service, H. Lee Merritt retired as the chief financial officer and vice president for finance at Fuller Theological Seminary in 2010. During his tenure, Fuller grew from 400 students in Pasadena, California, to nearly 5,000, including students at satellite sites in Colorado Springs, Houston, Phoenix, Sacramento, San Jose, and elsewhere.
In this interview, Merritt talks about the importance of analyzing academic programs’ margins, how cross-subsidies can help seminaries, and the difficult decisions facing seminaries today. His advice is straightforward and serious, but given out of a desire to ensure the economic viability of seminaries for the future.
Lee, you’ve said that a CFO’s main job is managing the “tyranny of the budget.” Why do you call it that?
Because the budget dominates thinking for most, if not all, institutions. CFOs also handle issues related to general administration, investment of resources, and the endowment fund, but their biggest responsibility is how to cope with the tyranny that annual shortfalls impose upon planning.
Has this “tyranny” always been there, or is it more acute because of the current economic crisis?
The budget is always a problem for institutions. I recall studying this issue of “budget tyranny” decades ago. A few academic administrators may think that wealthy institutions are exempt from margin analysis, but it’s not true. All institutions face budgeting issues.
Do you see any evidence that the financial picture is getting better for seminaries?
I think it’s getting worse for some. I’m concerned about how seminaries with fewer than a hundred students can actually survive. All across the membership of the Association of Theological Schools, enrollment trends are not good. As more seminaries open in the United States and Canada, without an increase in overall enrollment, the result is smaller average enrollments across the spectrum.
As CFO, how did you respond to these budgeting challenges?
I used budgeting as a way to channel resources to invest in really good and financially sustainable programs. Of course, that meant that sometimes it was necessary to downsize programs that weren’t successful. That decision can be contentious. I advise an integration of strategic planning and disciplined financial planning.
What’s the most important advice that you give seminaries today?
The most important advice is to establish a break-even point for financial stability — the point at which your gross revenue is sufficient to cover both fixed and variable costs. (If your revenue is insufficient to cover even variable costs — that is, the cost of paying the instructor for each class — you’ll never reach a break-even point.) Once you know your break-even point, you know that every tuition dollar beyond that is adding to your margin.
You need to compute the break-even point for each of your programs or departments. This is sometimes called “activity center” or “resource center” budgeting. Once the CFO and the CEO know which departments or programs are producing positive margins, and which are not, they can analyze whether these departments or programs should grow or be cut. It’s not the CFO’s decision alone.
How do you calculate the break-even point?
CFOs already know how to do this, but if you want to read more, there are some helpful resources. [Merritt’s recommendations are listed under “For the CFO’s bookshelf” at the bottom of this page]
Aren’t some financially unsuccessful programs necessary for mission, whether they’re financially sustaining or not?
Yes, every institution subsidizes programs that are not necessarily successful because they define the character and mission of that institution. But while a certain amount of subsidy might be acceptable, if the amount of that subsidy rises, perhaps even growing exponentially, that might not be sustainable for the institution. Closing programs is a matter of survival and sustainability. If you don’t close down those programs, you will go bankrupt. That’s not a good alternative. To end a program that is not leading your school toward financial sustainability is essential.
How can schools avoid getting into that situation where they have to close down programs?
It’s important to monitor marginal finances year by year, to set up a system so you can begin dealing with issues before they become dire. Financially unsuccessful programs deprive other programs of the capital they need to invest for success. Institutions need to invest for success. If capital is diverted to support programs that are not succeeding, the result is mediocrity.
There are always programs, faculty, and activities that are more successful than others. In order to survive and have a sustainable operation, you have to invest in those programs that the strategic plan defines as your future and identify those revenue-producing programs that have the highest margins, because they help sustain the institution.
For any program with a negative margin, when direct expenses exceed revenue streams, you have to ask, “Why are we doing this? Who is subsidizing this? Is it really worth it?”
Are there are other ways seminaries subsidize their programs?
Seminaries that are embedded in institutions that have undergraduate or other graduate programs — as opposed to freestanding seminaries — have the opportunity to possibly enjoy some cross-subsidies from those programs.
For example, if some of the seminary faculty members teach undergraduate courses in religion, then some of their direct expenses can be allocated to the undergraduate program, which may result in the seminary having a more favorable financial margin. If a seminary department is not teaching any undergraduate courses, their direct expenses must be entirely matched with tuition revenue from the seminary.
Are some seminaries looking at merging with larger institutions as a way to survive?
I think merging should be on the agenda of every seminary that has an uncertain financial future. A university can paint a picture that highlights their religious and denominational convictions in ways that supports their embedded theological school, because the seminary is part of the institution’s character. This can undergird student recruitment, even for undergraduate programs.
Are there examples where the cross-subsidy goes the other way — where the seminary subsidizes the larger university in which it’s embedded?
There are probably only a half dozen institutions in which resources flow from the seminary back to the larger university. I imagine that may be true at a few theological schools where all the faculty are “free” because they sit in endowed chairs. Those few are not faced with the tyranny of the budget in the same way most seminaries are.
Fuller is a freestanding seminary, not embedded in a larger university. Without such subsidies, I assume you occasionally had to make hard choices.
Yes. Programs that we would have liked to have had, but couldn’t succeed because enrollments or endowed monies weren’t there — well, they had to close. For example, Fuller has some extension sites that have thrived, and a few that have not. We have had to close a couple of the nonthriving sites. But it was never my responsibility as CFO to close down a unit. It was my responsibility to present the data so the administration could make those decisions and integrate them into a strategic plan that provided for long-term financial stability.
What is the board’s role in these decisions?
The board has to insist on financial sustainability. They can’t let academic units that are not producing adequate margins out of the discussion about accountability. The financial officer needs to present real financial data to the board, and the board needs to tell the provost and president to present a viable, sustainable financial plan.
It’s true that making sure that the financial plan actually considers the margins from individual academic programs and faculty productivity is the most contentious issue in planning. Ultimately faculty members have to be more open to being more flexible, but these are complicated issues and tense discussions. Sometimes academic governance and curricular objectives may conflict with financial viability.
Boards have to encourage the administration to have the courage to move ahead. The fiduciary responsibility of the board is to make sure that the financial and strategic plans are well integrated. That’s their key role.
For the CFO’s Bookshelf
H. Lee Merritt, the retired vice president for finance at Fuller Theological Seminary, recommends these resources:
“A Data-Centered Approach to Managing Instructional Costs and Enhancing Faculty Productivity,” by Michael F. Middaugh (PowerPoint presentation available at www.udel.edu/IR/cost/campusdata/datactr.ppt).
Honoring the Trust: Quality and Cost Containment in Higher Education, by William F. Massy (Jossey-Bass, 2003, 376 pp., $45).
Prioritizing Academic Programs and Services: Reallocating Resources to Achieve Strategic Balance, by Robert C. Dickeson (Jossey-Bass, 2nd edition, 2010, 256 pp., $36).
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