Guest Post – Concordia Ann Arbor: A Response – Part 2 by Mark Stern

Concordia Ann Arbor:  A Response, Part II

There are different ways to measure the financial health of a university.  One can look at its “operating income”, or one can look at its “net assets” from year to year.  Those two different metrics can each be accurate, yet tell very different stories.

Say in 2020, you owned a home worth $250,000, and earned $50,000 a year.  Your net assets were $250,000 and your operating income (salary) was $50,000.

In 2021, your home value increased to $300,000, but your salary stayed the same.  Your net assets increased from $250,000 to $300,000 – up 20% – but your operating income did not change.  Plus, your property tax bill went up from the higher home value.

Then in 2022, your house value went down to $270,000, but you received a pay raise, to $60,000 a year.  Your net assets decreased by 10%, but your operating income increased by 20%.  Also, you were able to get your property tax bill on your house reduced due to the decline in the market.

In which year were you better off? 

On paper, you had the most wealth in 2021 because of the 20% increase in net assets, but it wasn’t cash you could spend.  In fact, you had less money to spend because the “paper profit” on your house meant you had to pay a higher tax bill from your “operating income” that stayed flat.  That’s ok if you are 70, retiring, and selling your house to downsize.  But if you are 35, working, and raising a family, you were better off in 2022, despite the 10% loss in “net assets”, because you had more cash to spend from the higher operating income (pay raise), and you have time to wait for the house value to go back up. 

This example shows how Concordia University Wisconsin (CUW) can be “profitable” yet face a “structural deficit” at the same time.   

Retired CUW President Dr. Patrick Ferry defines “profitability” as “positive change in net assets”.  On a recent Lead Time podcast[i], he asserted that for nine of the ten years since the [CUW-Ann Arbor] merger, “CUWAA has been profitable on a consolidated basis, including the last two years.”  He said that the “average positive change in net assets – the average profitability over the last decade – has been $11.7 million a year.”  That is a legitimate way to measure profitability.  However, like rising home values, higher net assets don’t necessarily help pay the grocery bills.  (Yes, one could take out a home equity loan – not normally a good idea to pay monthly bills.)  

Dr. Ferry stated that on June 30, 2024, “assuming the stock market remains flat, CUWAA will certainly end the year in the black without having to sell anything.”  Yet he conceded, “That doesn’t mean that there aren’t financial concerns, right; you cannot have those kind of operating deficits year in year out.”  The latter statement seems to contradict his explanation about how profitable CUW has been over the last two years and will be in 2024, unless you understand that in fact, operating income may be much more relevant to the financial health of CUW than net assets. 

Current CUW President Dr. Erik Ankerberg is focusing on operating income.  In his initial February 13, 2024 message about the financial situation at CUW, Dr. Ankerberg referred to a “structural deficit”, meaning an ongoing shortfall in operating income. 

In a recent email to the CUW community, Dr. Ankerberg explained that in the past, CUW “leaders have used the university’s audits as a ‘North Star’ to denote the relative fiscal health of our organization.  This has occurred, despite the fact that those documents include numbers (such as market returns for our endowment and restricted contributions) that do not necessarily help cover our ongoing and rising operational costs.”  In other words, CUW’s paper profits did not necessarily translate into money the university could use to pay faculty and staff, or pay other operating expenses needed to run the university today.  Your house may be going up in value every year, but unless your salary goes up too, you may still struggle to pay rising monthly bills.

Both Dr. Ferry and Dr. Ankerberg have far more information about the finances at CUW than I will ever have.  The purpose of these articles is not to do a forensic audit, nor to recommend a specific solution for CUW.  Rather, I am trying to provide some clarity and realism for the average reader who is not steeped in the minutiae of higher education finance. 

It would be helpful if Dr. Ankerberg and the CUW administration released their financial analysis.  It would also be helpful if a trio of retired CUW administrators – Dr. Ferry, former CUW interim president Dr. William Cario, and retired CUW Chief Operating Officer Allen Prochnow – would publicize the financial analysis that they have prepared[ii].  Ideally, the release of those two documents would clarify two other significant points.

First, according to Dr. Ferry, “those who say that Ann Arbor has been an anchor to Mequon … it’s just not true.”  Dr. Ferry did not cite any figures in support of that claim.  Even if CUW was profitable as a whole after the merger, that does not establish that the Ann Arbor campus was profitable – nor would a bad year for CUW establish that the loss was caused by Ann Arbor.  Release of the CUW analysis could show the breakdown of costs and revenues between the two campuses, to demonstrate once and for all how each campus is doing.

Second, in speaking of the “average profitability over the last decade [for CUW of $11.7 million a year],” Dr. Ferry said:  “That has been typically just rolled over into the endowment.  This has allowed that endowment to grow.  When I first became president at CUW, we had a $25 million endowment.  It’s about $125 million now.”  He also stated that with regard to the $125 million, “$27 million of that came over from Ann Arbor as part of the merger.” 

Those numbers don’t add up.  Dr. Ferry became president of CUW in 1997.  If he started with $25 million, added $27 million from Ann Arbor, and added an average of $11.7 million a year for the last decade ($117 million total), the endowment would be at $169 million even if there was no growth at all for the 16 years between 1997 and the Ann Arbor merger, and no investment return. 

Dr. Ferry, Dr. Cario, and Mr. Prochnow should provide links to the CUW audited financials and a clear explanation of exactly how the endowment grew; the amount of debt and liabilities that came over along with the $27 million at the time of the Ann Arbor merger; and how their proposal demonstrates that CUW can continue to pay its bills without the “precipitous action” that Dr. Ferry says is unnecessary.

With disclosure of this information from both sides, interested parties can determine what analysis is more realistic, and can more effectively evaluate the options that the CUW Board of Regents may propose.

– Mark Stern is the former chairman of the Concordia University Chicago Board of Regents and now serves on the Concordia Seminary Board of Regents.  This article is his opinion and does not speak for either institution.

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[i] Available on YouTube at https://www.youtube.com/watch?v=ePIncodtnKI&list=PLMbPp2EY2cv1jDsidoDpS3vnDV2vVImLn&index=1&t=1358s.

[ii] The existence of such an analysis was referenced by Ann Arbor faculty spokesman Rev. Dr. Scott Yakimow at the Ann Arbor faculty and staff town hall meeting with Dr. Ankerberg.