3/17/17: CUHP website launch!
In 2006, Cooper Union borrowed $175 million as part of a complex and risky plan promoted by then-President George Campbell to finance a new academic building. The plan immediately began failing, with its key assumptions steadily unraveling over the first two years. When the stock market collapsed in late 2008, the damage already promised by the plan's failure was greatly magnified, and transformed the entire project into an albatross. The new building was finished, but the school's finances were broken in the process.
Cooper Union remained in denial of this development for three years. Instead of confronting the impending insolvency, President Campbell and the then-chairman of the Board of Trustees, Mark Epstein, provided the community with misleading information suggesting that Cooper Union's finances were strong.
There was no debate over four key optimistic assumptions that were at the heart of the loan plan. There was no substantive discussion of an apparent conflict of interest involving a key decision maker. There was no review of the future downsides to the overall plan even if it worked properly, and no acknowledgment of or planning for the potential failure of the plan.
The first key assumption relied on by the loan plan was that Cooper Union would achieve unprecedented expense reductions. Despite the finance chair's repeated emphasis of that point, the Board did not address the risk of relying on a campaign of expense control more rigorous than had never been achieved in the school's modern history. It established no safeguards, early-warning system, or contingency plans to control and respond to this easily-monitored, internal, administrative component of the loan plan's success.
The second key assumption was that the school would receive tax benefits worth about $6 million a year in connection with its commercial property developments at 51 Astor Place and 26 Cooper Square.
The third key assumption was that Cooper Union would receive at least $40 million in Building Fund contributions over the five years beginning in 2007. These projections substantially exceeded Cooper Union's demonstrated fundraising capabilities. And since the building itself would be finished in 2008, most contributors would be being asked not to make a new building possible, but to retire debt on a completed project. The evidence does not reflect that the Board ever established any safeguards, early-warning systems, or contingency plans to allow it to respond if contribution levels did not meet those assumed by the Board.
The fourth key assumption was that the investment pool would earn 7% annual returns, sufficient to generate a profit on the $3 5 million in excess borrowing from MetLife being carried at 5.85%.
President Campbell's employment contract created an apparent conflict of interest in connection with the 2006 loan plan. In March 2005, the contract was amended to entitle him to a $175,000 bonus if the New Academic Building was built, and another $175,000 for leasing out the property at 51 Astor Place. In presentations to the board in 2005 and 2006, President Campbell concluded that completing the new building and the related 51 Astor Place transaction were necessary to secure Cooper Union's financial future. When the loan plan was proposed, President Campbell advocated in its favor before the Board, and stated that further delay in commencing construction would be unacceptably costly.
Because the Chrysler Building property was a restricted asset, the school was required to obtain the approval of the Court for its plan in a cy pres proceeding. OAG reviewed Cooper Union's cy pres petition, and relied on the accuracy of the information in that petition when it determined whether or not to raise any objection with the Court. The petition stated that the old engineering building needed to be replaced because its outmoded character threatened continuing student recruitment as well as reaccreditation by the Middle States Commission on Higher Education ("Middle States"). The petition did not acknowledge that the engineering faculty of the school did not agree that the building needed to be replaced, or that Middle States had not actually said anything connecting its replacement with re-accreditation.
The loan plan did not fail because of construction-cost overruns on the new building, which were modest. Nor did it fail because of any problem with the revenue generating 51 Astor Place commercial lease transaction, which was actually very successful as a stand-alone negotiation. The plan failed because its four key, inadequately-assessed assumptions all went unrealized.
The failure of all four assumptions within the first couple of years meant that Cooper Union was likely to run out of cash to fund its deficits before the 2018 reset of the Chrysler Building rents.
President Campbell gave an interview to the New York Times in February 2008, in which, according to the Times, he noted that Cooper Union had balanced its budget for the first time in 25 years, and that Cooper Union had grown its endowment from a mere $138 million to more than $600 million "with some smart real estate deals." President Campbell's reported statement that Cooper Union had balanced its budget was technically true, in that for the first time in 25 years Cooper Union did not need to dip into its existing investment pool to cover an actual $10 million operating deficit, but only because it received $175 million in loan proceeds that year. President Campbell's reported statement that the value of the endowment had been increased from $138 million to more than $600 million was based on an accounting change, not an actual increase in value.
In a June 30, 2009 interview with the Wall Street Journal, President Campbell reportedly claimed that Cooper Union was following a conservative investment approach, because "[w]e knew that if we took a big risk and lost, we couldn't recover." The Wall Street Journal article allowed readers to conclude that Cooper Union had "skirted" disaster, when Cooper Union had information sufficient to know that without radical changes, insolvency had become inevitable.
Until the end of his term in June 2011, President Campbell provided reports and projections to the Board and the community that did not reflect an accurate depiction of the school's finances and its future prospects. At the time President Campbell reportedly made the statements described above concerning the school's financial condition between 2008 and 2011, the Board possessed sufficient information to determine that the statements, as reported, were most likely inaccurate. The Board did not take any discernible action to address the failure of the 2006 loan plan during the remainder of the Campbell administration. Instead, the Board repeated, and adopted, President Campbell's reported claims about the school's finances.
In late 2011, a new President, Jamshed Bharucha, revealed to the community that the school's finances were in dire straits. In 2013, President Bharucha announced that the only way for the school to recover from its weakened condition was to charge tuition and expand tuition-based programs to generate more revenue. After students opposed to the change occupied his office, President Bharucha agreed to the formation of a working group to study alternatives.
The working group was given seven weeks to provide an answer to a problem that had festered for nearly seven years. It was denied access to information. When the working group presented its report suggesting alternatives to tuition to the Board of Trustees, President Bharucha's appointees to the working group issued a "minority report" that undermined it.
In 2014, the Board of Trustees voted to begin charging tuition. It also adopted President Bharucha's Financial Sustainability Plan ("FSP"), which he projected would ensure continual growth in revenues and a steady recovery for the school's depleted investment pool. But the FSP suffered from similar drawbacks as the 2006 plan, mainly optimistic assumptions and inadequate risk-assessment.
Specifically, the Financial Sustainability Plan relied on the following assumptions: (1) limitation of annual operating-expense growth to less than 4.5%; (2) generation of $4 million in profits, plus annual escalations, from new programs to be launched starting Fall 2015; (3) unrestricted Annual Fund contributions approximately level with past levels of support, while contributions to endowment at consistently higher level than past levels of support; (4) continual growth in enrollment and in tuition-revenue yield per student.
Cooper Union has not launched new programs on the proposed scale in its modern history, and the plan counted on the school succeeding in this effort, at least to start, amidst considerable public controversy. Expenses could run significantly higher, and enrollment could turn out significantly lower, than forecast, limiting or eliminating any net revenue to the school. And the success of such a program would depend on comity between the administration, board, and faculty. The risk of relying on positive outcomes for new revenue-generating programs would later be demonstrated when the first effort, the planned bachelor's degree in computer science, failed at startup in April 2015.
The FSP presented an ideal scenario for future solvency, but only if its assumptions were not inquired into. OAG has found no evidence that the Board identified or analyzed these assumptions when discussing the FSP or its predecessor proposals.
Based on the projections of the FSP, the Board determined in mid-2014 that even with the expected new revenue from tuition, the school could not make it to the 2018 Chrysler Building rent reset without threatening the invasion of the school's endowment corpus. As a result, after conducting due diligence concerning various options in terms of lenders and loan structures, the Board obtained a $50 million bridge loan in August 2014, secured by future tax benefit payments from 51 Astor Place, to carry the school through to the 2018 rent increase.
Throughout most of President Bharucha's term, the administration and the Board continued the prior pattern of communicating inaccurate information to the community regarding the school's financial condition. Although the administration and Board were no longer claiming that the school's finances were strong, they continued to deny that the failure of the 2006 loan plan was at the root of the school's immediate financial crisis.
On December 15, 2011, the Board released a written statement that purported to explain the causes of Cooper Union's recently-revealed financial crisis. It focused on three items: (1) stock market losses; (2) poor alumni donation efforts; and (3) failure to control expenses.
First, with respect to the stock market losses, the statement noted that the endowment performed better than 98% of its peers between 2007 and 2011. The liquid investment pool actually performed relatively poorly during that time, and the total loss of the extra $35 million borrowed from MetLife for investment purposes resulted in a substantial increase in long-term debt-service costs, resulting in an added drain on the endowment.
Second, the board's discussion of alumni financial support in the statement was also not accurate. Both alumni contributions to the annual fund, and the total contributions to the annual fund, exceeded the board's 2006 projections in every year between 2007 and 2011. The problem was not lack of support for annual giving. The problem was that the school was counting on receiving twice as much again in contributions to its separate Building Fund as it ordinarily got in contributions to just the Annual Fund. The shortfalls cited in the board's statement were not shortfalls in Annual Fund giving, but in Building Fund giving during the period after the NAB had already been constructed.
Third, with respect to expenses, the Board did acknowledge that Cooper Union failed to control them, but never mentioned that the administration abandoned the 10% expense reduction plan less than a year after committing to it.
With respect to a separate issue, in 1998 Cooper Union had identified a need for enhanced planning and assessment functions in its self-study report to the Middle States accreditors. In connection with this self-recommendation, the school established the Planning and Assessment Council ("PAC"), which would have broad participation among faculty and administrators. In August 2014, the Engineering Dean, who was President Bharucha's representative on the PAC, announced that the council's activities would be suspended. There would be no further non-administrative input on matters of planning and assessment during the remainder of the Bharucha administration.
On April 15, 2015, OAG met with the Executive Committee of Cooper Union's Board of Trustees to discuss concerns about the content of the CS Program application filed with NYSED, and about the then-ongoing solicitation of Engineering-school applicants into the program without disclosure that the CS Program was not part of the Engineering school. Later that day, the Executive Committee voted to terminate the CS Program. Students who had been admitted to the CS Program were instead offered admission to the Engineering school programs they had originally applied to. On May 4, 2015, the Engineering Dean announced that she would resign as Engineering Dean and Chief Academic Officer, effective June 30, 2015. On June 10, 2015, President Bharucha announced his resignation, effective June 30, 2015.
The Cooper Union History Project website is currently maintained by Barry Drogin. This page last updated: March 17, 2017.