Financial Exigency and Mergers: Considering Identities and Interactions

Abstract

This case study is designed for graduate students interested in higher education finances. It presents the challenges that higher education is facing regarding financial exigency elements that have led to responses with a primary focus on mergers. This financial exigency process has also caused increased legal considerations in higher education settings as administrators, faculty, staff, and alumni challenge finances in academic settings. This case highlights the complex issues that administrators must confront while considering mergers that will provide students an opportunity to evaluate the complex issues related to the financial status of an institution of higher education.

Background Information

Higher education in the United States has been subjected to increased scrutiny over the past decade. Decreased state funding has had marked impacts. State budgets in higher education have decreased over time, with one study noting a loss of seven billion dollars for education between 2008 and 2018 when adjusted for inflation (Mitchell et al., 2018). These changes have caused institutions to shift more of the financial burden, or cost of education, directly to students in the form of increased tuition and student fees (Heller, 2002; Mitchell et al., 2018). Institutions have come to rely more heavily upon sources of less reliable funding, namely philanthropy and any number of auxiliary services or privatization efforts. These transitions and policy changes have been referred to as resource-based conceptualization wherein the government is no longer the primary investor in public higher education (McClure et al., 2020).

The perception of the public and potential students has also been impacted by these changes. The increasing costs are reported based on the full cost of attendance, as “the federal government requires institutions to post that high price, and it is often the easiest number to find” (Levine, 2022, p. 3). Such requirements impact how stakeholders view higher education expenses. Ripley (2018) also sheds further light on the situation stating, “The U.S. ranks No. 1 in the world for spending on student-welfare services like housing, meals, health care, and transportation, a category of spending that the OECD lumps together under ‘ancillary services’” (para. 8). Ripley posits that this is due to many American students living away from home for college, adding additional expenses at a rate higher than other countries. The uncertainty of higher education funding structure and ability to respond has also been demonstrated by reliance on dining, housing, and other money-generating services that can be impacted or incur additional expense by unforeseen events (Kelchen et al., 2021). These factors have been effective in exposing just how financially weak some institutions of higher learning have become while creating new calls for higher education to respond to financial pressures.

As one study noted, the importance of higher education seems to be decreasing among families, with the study noting: “In June 2019, Gallup found that just over half of Americans (51%) said a college education is ‘very important,’ a 19-point decrease from the 70% of U.S. adults who said the same in 2013” (Gallup and Carnegie Corporation of New York, 2021, p. 10). In addition, the present and future effects of lower enrollments due to the realization of lower birth rates with the steepest declines predicted to be felt in 2025, could see another mass disruption to higher education on the horizon (Copley & Douthett, 2020; Harvey-Smith, 2019). Without immediate and potentially even radical overhauling of business models that many of our institutions rely upon for funding, the future may be stark for some as we approach what might be characterized as another perfect storm.

With these factors, many institutions may have considered claims of financial exigency, which allows for options such as closing departments, terminating faculty and staff, and potential mergers. In May of 2020, Rick Seltzer predicted that declarations of financial exigency are likely to rise. He cited Lincoln University, Central Washington University, and Missouri Western State University as the only three institutions that had made public declarations of financial exigency due to COVID-19. Likely CARES and HEERF funding from the federal government have allowed institutional leadership an opportunity to tread water for a while longer. As Seltzer (2020) notes, the drive toward even studying exigency or looking at smaller alternatives is not without a cost as he notes that such conversations are “sparking concern from the AAUP, which argues exigency rules exist in part to protect academic freedom” (para. 8). Seltzer also quotes Steven F. Agran, managing director at Carl Marks Advisors, who notes,

It’s a process to create a financially stable school given what’s gone on, given all the unknowns and given what the last 20 years have created in fixed cost structures at schools. And you really need an approach that is cumulative of all of the stakeholders. (para. 10)

One challenge with determining how to structure such financial exigency in higher education is that higher education systems are not entirely like one another. Consideration may include organizational differences and the varied programs that institutions offer, but there are also more challenging issues. As Dr. James Garland wrote in a 1983 journal article for AAUP, the diversity of higher education institutions makes standardizing of financial exigency, even by the courts, a virtual impossibility. For example, some state institutions may operate under a law forbidding them from accruing deficits or disallowing borrowing money. Other issues may include who is held legally responsible for decisions made under financial exigency actions, as “the corporate status of the independent college is vested in the governing body-the board of trustees [. . .] which holds legal title to the property, and possesses the powers granted by the legal instrument which created the institution” (Johnson & Weeks, 1985, p. 456). The powers that the courts have recognized related specifically to education are inclusive of the right “to eliminate departments, to approve cost-reduction programs, to determine admission standards, to reduce faculty salaries, to hire and terminate employees, to eliminate degree programs, and to alter retirement policies” (Johnson & Weeks, 1985, p. 457).

Another challenge that may impact mergers of American institutions of higher education is connected to a financial source, that of philanthropy. Differing institutions often approach philanthropic efforts and donor involvement in various ways and bringing together two institutions can lead to complications. As one source readily notes, “Emotions can be intense during a merger, and alumni and supporters from each of the former institutions may feel a deep sense of loss. In response, they may fight to preserve the integrity of their foundations” (Azziz et al., 2019, p. 180). To address philanthropic and donor concerns, communication becomes more urgent, with engagement becoming a key element as campus leaders may need to engage in stewardship of the merger by engaging alumni, donors, and other such stakeholders to ensure that such parties “understand the advantages of the merger and [are] willing to continue their support for the college” (Churchill & Chard, 2021, p. 143). Thus, identity and engagement are key elements of maintaining philanthropic involvement in an institution created by merger.

Closings and Mergers

Higher education responses to financial exigency have been far-reaching. The most extreme examples are those of mergers and closings. Both private and public institutions have histories of such responses, and since 2016, there has been several such examples. A 2019 article from Insider Higher Education listed 20 private colleges or universities that have shuttered since 2016 indicating a sharp rise in the overall number of closures as compared to historic trends in institutional closures over time and, of note, the data are pre-pandemic (Jaschik, 2019). The numbers of such closures and mergers have since increased among both profit and nonprofit, as well as private and public (Lederman, 2021). Mergers tend to be more common among public institutions, with examples including Abraham Baldwin Agricultural College merging with Bainbridge State College, Georgia Perimeter College merging with Georgia State University, and the consolidation of many University of Wisconsin campuses as they were absorbed into others. Closures tend to be more common among private institutions, with recent examples including even well-established institutions such as Mills College in Oakland, California and MacMurray College in Illinois, one of the oldest women’s colleges in America.

As history demonstrates, for public institutions, mergers serve as an opportunity to persevere. There exists some notable history of mergers among public institutions. For example, in 1974, the University of Wisconsin merged with Wisconsin State University to control rising expenses and duplicate programs (Russell, 2019). Russell further details how Connecticut is also consolidating its 12 state community colleges into a single institution in response to the ongoing challenges of the state’s finances. This demonstrates how mergers address financial exigency concerns as,

Connecticut policymakers predict that combining 12 existing community colleges will save the system $28 million, primarily through replacing 12 separate community college presidents, chief financial officers, and provosts with a single vice chancellor, a single provost, and a single chief financial officer. (Russell, 2019, p. 122)

While these financial considerations are notable, there are more considerations beyond the financial that should be considered regarding public higher education institutions.

College and university mergers have an impact not only on public funding concerns but also on students’ financial and academic concerns. In one study, Russell (2021) found that student financial burdens may be increased by mergers, highlighting two notable points: “mergers increase own tuition and fees by 5-7%, on average,” and that some of this is offset by increased grants, but that “only one-third of students at merging institutions receive institutional financial aid, so actual prices increase for at least two-thirds of students” (Russell, 2021, p. 100). Another study showed the increase as significant, where a “statistical analysis revealed a 27.4% increase between the pre and post-consolidation full-time undergraduate cost of tuition, implying that tuition increased following consolidation” (Hicks, 2021, p. 106). The same study noted increased expense did not slow enrollment, which saw an average 5.2% increase between the premerger and postmerger efforts, but found that “consolidation did not lead to a statistically significant increase in retention” (Hicks, 2021, p. 97). As students and their families express increased concern about the return on investment higher education can provide, these concerns about mergers leading to higher expenses and no improvement in retention might impact students over the long term.

Faculty should also be considered regarding the impact of mergers as a response to financial exigency. Mergers influence faculty status and productivity in various ways. In studying the merger of “disparate institutions” in the University System of Georgia, one study noted that the merger caused a “pronounced productivity decline” related to research productivity (Slade et al., 2022, p. 1). There are also concerns about how faculty will transition as the differing cultures of campuses intersect, such as if the environment is collegial or corporate in nature. One study noted that poor “person-organization fit” would lead to “higher levels of stress, and higher levels of turnover intention” (Ribando & Evans, 2015, p. 115). Moreover, there have been examples of concerns about how varied faculty will merge as the consolidation of the institution of higher education can lead to new considerations of how to count years of service, which tenure agreements to honor, and more (Ellis, 2011).

Legal Considerations of Note

One should consider some legal precedents in the case of institutions of higher education seeking to merge. Cases that address financial exigency involve the abovementioned groups taking action against the institution with claims based on concerns of not honoring contracts related to tenure for faculty and students claiming that the institution misrepresented its financial status. These diverse cases may help inform responses in this case study.

In the first instance was a dispute in Shorter College v. Baptist Convention of Georgia. Shorter, a religiously affiliated private liberal arts college, had wished to loosen, if not outright break, ties with the Georgia Baptist Convention, which controlled the appointment process of Trustees to the College. College leadership, in citing potential sanctions and threat of loss of accreditation from the accrediting agency, argued that the conservative board leadership appointed by the Georgia Baptist Convention posed an ongoing and immediate threat to academic freedom, and thus put the college at great reputational risk and likely loss of accreditation. The college’s charter specifically outlined that the Georgia Baptist Convention had sole discretion to approve and/or appoint the trustees of the college. The college president along with members of the board of trustees for the college’s institutionally related foundation sought a legal remedy for this impasse by dissolution of Shorter College and reassignment of all assets to the Shorter College Foundation. Ultimately, the court found the dissolution was lacking because a transfer of assets did not cause the organization and its function to cease or desist. The actions taken by the college merely sought to reassign assets and reregister with the same name, in essence a maneuver to deprive the Baptist Convention of its rights as outlined in the institution’s charter giving them great power over institutional governance. The issue of potential loss of reputation and/or accreditation had no bearing upon the court’s decision. However, the defendant, Shorter College, argued that it was the fiduciary responsibility of the president and agreeable trustees to protect the institution and thus were compelled toward the dissolution of the original Shorter College.

In Gray et al. v Mundelein College et al., the courts once again examined procedures associated with actions to dissolve one institution due to financial exigency while also seeking to survive by way of a strategic affiliation with another institution of higher education, Loyola University of Chicago. Broad strokes illustrate that institutional leaders must observe protocols as outlined in documents associated with the governance and, specifically, the faculty handbook. As it relates to this part of the discussion, Gray et al. v Mundelein College et al. is also helpful for the examination of motivations and actions taken to dissolve the college. The college was facing dire financial difficulties from successive years of declining enrollments and likely, had the college followed the procedures of declaring financial exigency as outlined in the faculty handbook, their claim for dissolution would have been more sound. In an attempt to circumvent handbook procedures, the college willfully created the circumstances to escalate and hasten dissolution by causing a debt call from a previous loan that had been collateralized against college assets. College leaders and trustees entered into an agreement with Loyola University to take over the college, essentially absorbing Mundelein so that the legal entity known as Mundelein College would substantially no longer exist. Of the many material facts that exist in the case, the cautionary fact is the court finding that Mundelein College did in fact not cease to exist nor did it function any differently save for administration by Loyola University officials because as part of the agreement between the two institutions, Mundelein College would functionally remain separate and distinct from Loyola University. In this instance, the courts ruled that an affiliation between distinct organizations does not meet the threshold for dissolution.

Both of the above cases illustrate that it is not enough to reorganize or restructure an organization to meet dissolution threshold. Unless all aspects of the organization cease in material ways to exist and all functions of the organization desist as well as all assets disbursed, the organization likely remains in whole, or in part as do its obligations to parties who have entered into an agreement or contract with said organization. In the case of the former example, the dissolution was found to be a sham dissolution by the majority of justices for the Georgia Supreme Court. With Gray et al. v Mundelein College et al. as one example, the courts have had much experience navigating tort claims for breach of contract; however, it is the [potential] survival of contract obligations beyond declarations of financial exigency that this examination explores.

In the instance of Squeri v. Mount Ida College, the court examines tort claims brought by students against college administrators and board members for damages after a declaration of financial exigency that led to insolvency and dissolution. Students argued that college leadership intentionally withheld the seriousness of the financial peril the institution faced and acted in bad faith by continuing to recruit students to enroll in their various programs. Both courts that heard the case examined, among other elements, the contract or implied contract between the institution and students, testing damage claims. While the courts ultimately sided with the defendants, this is an element that administrators ignore at their peril. A crucial defense element hinged upon the idea that leadership had a superseding fiduciary responsibility to the college. While exploring all options, including a merger and debt restructuring, it would have proved irreparably damaging to the college had the administration broadcast the details of the institution’s financial distress. When the college was exploring various options, it was not believed that dissolution was inevitable. The defense further argued, and the court agreed, that the annual report filed each year provided transparency and was easily accessible to those interested. Assets and the remainder of the college’s small endowment were negotiated and ultimately transference approved by Massachusetts attorney general in a sale to UMass Amherst.

Squeri v Mount Ida College also illustrates an additional element of fiduciary responsibility that must be considered should an institution find itself in the position of dissolution. As part of the dissolution process, college leadership, working with the state department of higher education, created a matriculation agreement between Mount Ida College and UMass for most academic programs, allowing Mount Ida College students to easily access transfer. Ironically, the students represented by the suit charged the defendants with violating FERPA in this proactive arrangement. The courts disagreed and looked favorably upon the defendants for exercising this element of care, illustrating the many facets that administrators and leaders must navigate as they work through dissolution.

The first three examples view financial exigency and dissolution through the lens of the private institution. From the point of practicality, it is far easier for private institutions to make a declaration of financial exigency as those organizations are typically independent, even if religiously affiliated, from sovereign actors such as a state. A state is far less likely to be able to claim with credibility financial exigency, and as many court cases have proved, publicly funded institutions are considered agencies of the state. The following cases will illustrate considerations from the perspective of publicly funded higher education institutions.

In the case of Edionwe v Bailey, Alexander Edionwe was an associate professor with tenure at the University of Texas Pan America (UTPA). Edionwe was granted tenure by UTPA and the University System of Texas in 2000. However, in an attempt to downsize and gain efficiencies within the system of the state legislature, there was a 2013 vote to abolish two public institutions of higher education, the University of Texas Pan American and the University of Texas Brownsville. These two institutions were abolished by legislation and a new institution was created in 2015 named University of Texas Rio Grand Valley (UTRGV).

The Texas legislature ordered the Board of Regents to create a process for reviewing applications for tenured and tenured track professors of both dissolved institutions in what was considered Phase 1 hiring for UTRGV. Edionwe missed this phase of hiring claiming that because he was out of the country, he was unaware and incapable of applying during the allotted time for Phase 1. Edionwe was encouraged to apply during Phase 2, which was open to the public. He did so and was later informed that the position he was applying for would not be filled and his employment with the University System of Texas would be terminated. In his suit, Edionwe claimed that he had suffered harm due to a loss of property interest resulting from his tenure contract with UTPA. He had not been given sufficient due process and claimed a substantive due process violation. After hearing the arguments, the courts ruled in favor of the defendant, affirming that when the state takes action by way of legislation to dissolve a state entity, all property interests associated with that entity dissolve. The court further found that the legislative act before the public with hearings and comment period is itself due process and deemed sufficient. The fact that Edionwe missed his opportunity to apply to UTRGV during the Phase 1 period further demonstrated that Edionwe had been afforded an opportunity, even if unexercised, to be reinstated as an employee of the University System of Texas. Because UTPA was abolished by legislative action, there could be no arbitrary or capricious action taken by an individual.

Case Narrative

As enrollment declines and state appropriations are being decreased, Midvalley State University (MSU) and Middle State Technical Institute (MSTI), both state-sponsored regional higher education institutions have announced plans to merge. There is a need to put together a plan of action to present this merger to students, faculty, staff, and other stakeholders.

The profile of the institutions are as follows:

MSU began as a Normal Institute in 1914 to train teachers and evolved into a traditional, four-year liberal arts institution with graduate programs in many areas, including three doctoral programs in the educational fields. MSU has a diverse faculty, with approximately sixteen percent of faculty tenured or tenure track. MSU has a residential campus that can house up to forty percent of its total enrolled population, though recently, student housing has experienced around ten percent of rooms being unfilled. To address this concern, the university announced a policy that required all freshmen and sophomore students who do not live within fifteen miles of campus to live on campus. Roughly seventy-five percent of MSU’s first-year student enrollments are traditional students. The institution is in NCAA Division II and has a notable history of women’s bowling and men’s golf success.

MSTI initially began as a private 2-year technical institution in 1929 funded by a local paper mill, but transitioned to a public institution in 1959. It then grew into a 4-year college, serving those interested in agricultural programs and industrial arts such as forestry, computer-aided drafting, and tool and die operations. MSTI does not have a tenure system but has historically offered 5-year renewable contracts. More than 85% of MSTI’s enrolled student population meets at least one defining trait of nontraditional student status. It does not have residence halls, but 4 years ago, it entered into a partnership with an apartment complex to provide guaranteed student rates, and a 10-year agreement with the institution agreeing to ensure at least 90% occupancy in rooms given that rate. The institution does not have an intercollegiate athletics program.

To maintain the quality of the programs each institution offers, the reorganization has been encouraged to follow guidelines for the merger. First, to ensure an efficient structure and reduce administrative costs, the organization of the new institution should be arranged in four colleges. Second, existing policies, when applicable, should be merged to maintain the contractual and social obligations of the previous institutions. Third, community stakeholders inclusive of business and nonprofits within the range of the campuses should be consulted. Fourth, historical precedents and records should be shared and merged into a collective archive. Fifth, all proposals should be posted to invite public feedback as these are state institutions. One broad recommendation is to consider using the Midvalley State University campus as the preferred location of the merged institution as there is more land available and the infrastructure related to campus support such as power grids, road access, and security has been more recently updated than Middle State Technical Institute.

Discussion Questions

1. What are the problems that will need to be addressed for this merger?

2. Given the legal precedents and the expected cultures of each institution, how can a policy be developed to address the disparate faculty employment statuses?

3. How should the new institution create a shared identity to address the disparate origins of the faculty and staff?

4. What problems could you foresee in creating a student identity from the populations of each institution?

5. How should the institutions address their respective challenges with housing agreements?

6. What elements do you think should be addressed in the merger plans?

7. How should concerns of increasing tuition following a merger be addressed?

8. What potential problems do you see with solutions related to mergers such as this one?

In-Class Activities

Review the court cases listed in this case study to see what mergers and financial exigency mean to higher education institutions. Begin with a general discussion of the case and the details involved. Participants should identify and analyze the problems of merging disparate institutions with historically different purposes. Students should consider the needs of each institution and can divide into two groups representing each institution and may further divide into groups within the institutional groups to present the view of groups such as faculty and students. From the viewpoint of each group and population, the students should prepare proposed details of a merger that addresses their concerns in their role while also being mindful of the financial exigency needs that mandated the merger.

Once students have had an opportunity to consider the views of their institution, they should draft expectations of the merger that will serve their needs. Once representatives of each institution have established their expectations, they should come together and mediate until a merger agreement is drafted that addresses existing challenges, agreements, and so on. What are points of disagreement? What challenges were more difficult to resolve? What are the perspectives that need more consideration?

Once completed, participants should consider what mergers may mean to the overall future of public and private education. What differences do they see in the public and private sectors?