Inside STEM Hall, Johnson C. Smith University’s science building in Charlotte. Mark Hames Mark Hames
Inside STEM Hall, Johnson C. Smith University’s science building in Charlotte. Mark Hames Mark Hames

Local

JCSU to critics: University is ‘financially sound’ in the wake of unprecedented challenges

By Elizabeth Leland and

Ames Alexander

eleland@charlotteobserver.com

February 13, 2016 04:49 PM

The lowest moment for Johnson C. Smith University came when hundreds of students discovered they could no longer pay for college.

Students wept. Their parents wept. Monroe Miller, chairman of the trustees, said he didn’t sleep. The federal government had quietly imposed tighter eligibility standards for Parent PLUS loans, limiting the money families could borrow toward a child’s education.

Within one week in 2012, the university stood to lose 300 students and $3 million in revenue, according to President Ron Carter. That “seismic event” followed two others, the 2008 recession and a decline in endowed scholarships.

“This is when we had to make a moral decision,” Carter said. “So we made investments in our students.”

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The university withdrew money from its unrestricted cash reserves and was able keep 180 of the 300 students from being forced out, he said. The account held $9.5 million in 2008-2009, Carter’s first year as president. By 2013-2014, it had dwindled to $35,181.

It was a period of financial and emotional turmoil. Even now, the university operates on a tight budget. But it is a balanced budget, Carter stressed.

Seeking to dispel skepticism about its finances and leadership, JCSU officials offered the Observer a rare public glimpse into some of the private’s school’s finances.

The endowment has risen to $66 million, they said. A fundraising campaign topped $122 million. Unrestricted cash reserves also rebounded, to $1.4 million in 2014-2015.

“Johnson C. Smith University is financially sound, and we have robust systems in place to ensure we are properly and strategically managing our resources,” Carter said in a recent interview.

But Carter also confirmed that JCSU is under federal order to pay back $1.8 million in student aid that auditors said the university received in violation of government regulations. A report filed last year by the U.S. Department of Education detailed “significant areas of noncompliance.”

Carter said the financial aid department made mistakes during a period of transition several years ago and changes have been made to ensure they don’t happen again.

The Observer first requested an interview in November after a former trustee petitioned to have Carter removed as president. Talmadge Fair, a 1961 JCSU graduate and head of the Urban League of Greater Miami, raised questions about money, morale and federal scrutiny.

JCSU officials initially declined to talk, but eventually agreed to an interview on Feb. 5. With Carter were Monroe Miller, chairman of the board of trustees; Greg Petzke, chief financial officer, and Shelline Warren, financial aid director.

Facing a “moral decision”

Carter offered a historical perspective on JCSU and the challenges it faces as one of the country’s historically black colleges and universities (HBCUs).

Eighty-six percent of students receive financial aid, he said, and many are first-generation college students. He said JCSU is committed to educating these “new mainstream Americans.” Their average family income is $37,000, he said, while the average annual cost of attendance is around $25,000.

These circumstances made JCSU and other HBCUs particularly vulnerable during what Carter described as “a perfect storm.” It began with the recession in 2008, followed by a decline in endowed scholarships, then the unexpected changes in Parent Plus loans.

For several years, JCSU increased the amount of money it took from its unrestricted cash reserves for “unfunded aid” for students, topping out at $6.6 million in 2013. Last year, the total amount spent on “unfunded aid” dropped to $5.3 million.

The university also spent cash reserves on deferred maintenance, Carter said, to fix leaking roofs, broken heating units and other infrastructure.

A hefty penalty

In the midst of those problems, the U.S. Department of Education conducted a review of the university’s records in May 2013, auditing a sample of 35 student records from the two previous academic years.

The federal auditors faulted the university for an “inability to administer” federal student aid programs, which totaled $22 million during 2012-2013. The auditors found that JCSU had received $3.3 million in violation of federal regulations.

Most violations stemmed from failure to verify information submitted by students (such as household size and income) and failure to verify inconsistent data submitted by students. In a few cases, auditors said JCSU failed to return federal aid for students who didn’t attend any classes and for students who withdrew. The auditors uncovered a high rate of errors in JCSU’s financial paperwork and a $39,000 deficit in one account that was used to advance loans to students.

JCSU appealed the findings. Warren, the new financial aid director who has a background in compliance, said she was able to find documents to confirm eligibility for most students.

The government reduced JCSU’s liability to $1.8 million. In November, the case was closed. Petzke said JCSU has been paying back $25,000 a month since May.

Penalized by a late filing

The Department of Education also placed JCSU on its “heightened cash monitoring” list of more than 550 colleges and universities requiring additional oversight.

The department originally listed the reason as financial responsibility but later changed it to reflect a late filing.

Carter said that’s all it was – a late filing necessitated by a last-minute change to a document. He pointed out that in fiscal year 2014, JCSU got the highest possible composite financial score from the federal government.

Nevertheless, the university must bear the stigma of being on the “heightened cash monitoring” list for five years, he said. The government also required a $2.2 million letter of credit.

‘A balanced budget’

University officials released excerpts of audited financial statements to show that JCSU is “financially sound.” They declined to release the full versions of the documents, saying the documents are “proprietary information in a very competitive environment.”

▪  The endowment, which funds scholarships and programs designated by donors, grew from $47 million in 2008 to $64 million last year, and reached $66 million in January.

▪  As of Dec. 31, 2015, the university had raised $122.5 million in a fundraising campaign launched six years earlier to pay for academic resources, scholarships, facilities, books and other student supplies.

▪  Although unrestricted cash reserves dipped to $35,181 in 2013-2014, reserves climbed back to $1.4 million in 2014-15.

Petzke said JCSU is also generating new revenue streams with a Masters of Social Work degree program, online degrees and expanded adult classes.

Making ends meet

The university is not operating at a deficit, Petzke stressed. JCSU officials were concerned that earlier news accounts left that impression.

In a November story, the Observer cited Form 990s filed with the Internal Revenue Service, which are often the only financial information available to the public about a nonprofit organization. The story reported that JCSU listed a $29 million surplus for the year ending June 30, 2012, dropping to a $10 million deficit in 2013 and a $7.5 million deficit in 2014.

JCSU officials maintain that the use of the terms “surplus” and “deficit” created a misleading picture. They say IRS Form 990s simply account for an organization’s activities in a given year for tax purposes, and are not a reflection of operating results.

In this case, Petzke said the $29 million boost in revenue recorded on the Form 990 in 2012 came from a $35 million gift the university received from the Duke Endowment for construction of a new science center, scholarships and renovations to Duke Hall dormitory. The Form 990s in the following years documented the university’s incremental spending of the gift, making it appear the university finished those years with a deficit. In fact, that spending was covered by the gift documented in the 2012 tax year.

Asked about reported cash-flow problems, Petzke said most money comes into the university at the beginning of each semester, thus creating challenges toward the end of each semester. But he said if a payment to a vendor is late that’s because of paperwork issues, not because the university can’t pay.

“Our budget is a balanced budget,” he said, “but there is not a significant margin spread there. So we know at the beginning of every year that we’re going to be faced with that tight spread … It’s tough out there, but we’re doing what we have to do to make ends meet.”

Leland: 704-358-5074; Alexander: 704-358-5060

JCSU at a glance

Located: Johnson C. Smith University is on Charlotte’s west side, at 100 Beatties Ford Rd.

Founded: A private college, it was inaugurated in 1867 as The Freedmen's College of North Carolina for people newly freed from slavery.

Enrollment: 1,452, with 86 percent of students receiving financial aid.

Endowment: $64.4 million.

Unrestricted cash reserves: $1.4 million in 2014-2015.

Commitment: “To educate our talented, highly motivated, mostly first-generation students who depend on financial aid to go to college.”

Goal: “A radical transformation to become a 21st century ‘New Urban University’ – with more diverse students, new programs and revenue streams and a more visible role in our community.”