The $10-million pledge to Spelman College came with big plans.
The historically black women’s college would take the money—the largest corporate donation in its history—and create a pipeline to Wall Street for black women, preparing them for international-finance careers by offering new courses, internships, and Chinese-language instruction. The program’s home would be called the Lehman Brothers Center for Global Finance and Economic Development.
When the gift was announced with great fanfare, in 2007, no one imagined the investment bank’s eventual collapse. The college would receive just $3-million of the original pledge—enough to start a Chinese-language program but not enough for the rest.
Spelman wasn’t the only institution to see pledges shrink or slow down when the economy tanked. Over the past two years, colleges big and small have seen donors fall through on commitments or hesitate to make new ones. Florida Atlantic University removed the name of its biggest donor from its business school after he said he could pay only a third of his $16-million pledge. Cornell University saw its credit-rating outlook revised to negative, in part because of a significant decline in gift revenue, including a decline in new pledges. And Duke University estimated last year that it would not collect $46.5-million of its outstanding pledges, compared with $14-million in 2008.
Even in good times, pledges occasionally fall through. But in a bad economy, donors who took a hit on their assets were more likely to postpone, cancel, or reduce their gifts, according to interviews with more than two dozen financial experts, consultants, and fund raisers in five hard-hit states. Depending on the project, colleges may have to absorb the costs when pledges don’t come through as expected. They can often do that without much pain. But when coupled with bigger financial problems, such as endowment losses, state cutbacks, and declines in enrollment, uncollected or delayed pledges can put stress on college finances.
Unfulfilled pledges have led colleges to delay programs and expansion projects, slow hiring, take on new debt, and tap cash reserves to meet their needs. To lower their financial exposure, some colleges are tightening their policies about how much of a pledge they must have in hand before moving ahead with new buildings or programs.
F. John Case, a financial consultant to colleges who was formerly a university’s chief financial officer, says counting on pledges involves a gamble. While most donors are committed to making good on their promises, he says, if colleges rely too heavily on pledges, they can put the institution at risk.
As a sense of uncertainty about the economy lingers, fund-raising experts say fewer donors seem willing to commit to long-term pledges. If that trend continues, colleges could see the effect on their endowments, campaigns, and future plans.
Uncollected Sums
No national statistics are kept on the frequency or amount of unpaid or delayed pledges. Colleges, which are protective of donors’ privacy and of their own image as places that people can trust, don’t like to talk about such matters. And to be fair, not every pledge is alike. In some cases, colleges don’t start spending until a pledge is paid off, while in other cases they take on debt to start a project and count on pledges and future gifts to help pay it down.
Pledge agreements between an institution and a donor are considered enforceable contracts, and large pledges often have a detailed written agreement that includes payment deadlines and how a gift will be used. But if payment problems come up, colleges very rarely, if ever, take legal action, preferring to work with donors to find solutions and avoid any negative publicity a court battle could bring.
According to their financial statements, many institutions expect that between 2 percent and 5 percent of all pledges will not be collected. That includes small pledges as well as large ones, which go uncollected less frequently but tend to cause colleges the most pain.
In the past two years, a number of institutions, including Arizona State, Brandeis, and Cornell Universities and the University of California at Los Angeles have raised their estimates of uncollectable pledges. Brandeis, Cornell, and UCLA officials say they raised the estimates as a conservative budget tactic but didn’t see much, if any, change among their biggest donors. (Arizona State did not return calls requesting comment.)
Delayed or canceled pledge payments for building projects can have more ramifications than do delayed pledges for endowment gifts, which are usually not used immediately. “You put a hole in the ground, and things need to move forward,” says Bruce Matthews, vice president of Campbell & Company, which does fund-raising consulting. He’s seen colleges scramble when gifts for new facilities or renovations don’t come in as expected.
Otterbein College, in Ohio, experienced that last year. It was two-thirds of the way through building a $5-million equine-science facility when the project’s lead donors—parents of a student—told the college they could not make any of their $1.5-million pledge.
In the past, Otterbein had waited to start building capital projects until it had a certain percentage of the cash in hand. But because the lease was up on its old facility, and the college saw its equine-science program as a strategic priority, it had started building before the gifts came in.
“We knew we needed to do this, and do it in the short term,” says Thomas C. Morrison, chairman of the Board of Trustees. “We decided to go ahead in the hope and belief we could raise the money.”
Otterbein borrowed money to build the equine center and a science center, counting on pledges to help pay the debt service. Losing the key donor means the college now carries more debt than it would like—4 percent of its budget, rather than the preferable 3 percent or less. That one percentage point means the college pays about an extra $570,000 a year out of its operating budget that is not available for other things, Mr. Morrison says.
Otterbein believes the risk was worth it. The center has a waiting list for boarding horses, and the college is hosting equestrian competitions. It will continue raising money for the project; so far it has brought in $500,000. The college hopes to find another lead donor who will give at least $1.5-million for the naming rights, a challenge that will be tougher, its chief fund raiser says, because the building is already in use.
Another institution was caught in a similar situation. In 2002, Middle Tennessee State University received a $1.5-million, 10-year pledge from Robert W. McLean, an alumnus, to purchase 54 Steinway pianos. The university went ahead and bought the pianos, borrowing money in anticipation of receiving payments from Mr. McLean, for whom the music school was then named, says Joe Bales, vice president for development and university relations.
Mr. McLean, a stockbroker, never finished paying his pledges to Middle Tennessee. He was accused of running a Ponzi scheme and committed suicide in 2007. His estate ended up in bankruptcy court, and his name was removed from the university’s music school.
Middle Tennessee was on the hook for $1-million for the pianos, and it would have to make the debt payments from its operating fund. “When you take it out of general operations, it obviously affects your operations and other activities you’d like to do,” Mr. Bales says. Mr. McLean had also pledged $500,000 for enhancements to a new baseball stadium, but because construction hadn’t started on that project, it could be canceled.
Other colleges are waiting to build. The University of South Carolina has raised less than half of the $75-million cost of a new law school it had hoped to start building by now. Because of the economy, some donors have asked for more time to start paying their pledges, says Michelle Dodenhoff, vice president for development and alumni relations. The university is considering borrowing to build the school, and it may push the project back a year or two, depending on when payments are now expected to come in.
“You can’t pay the contractor with a pledge,” Ms. Dodenhoff says. “You have to have cash in hand.”
Duke University was planning to build a home for its Nicholas School of the Environment, which is spread among several campus buildings, but those plans were put on hold when the cash from a major pledge made in 2003 did not come through, says William H. Schlesinger, the school’s dean until 2007.
Mr. Schlesinger says none of the money from a $70-million pledge came through when he was dean. Michael J. Schoenfeld, vice president for public affairs, says that the Nicholas School building is on hold, but that the project is not dead. Duke does not comment on payments for specific pledges, he says.
In general, major gifts are complex financial transactions, and colleges need to take a long view and make adjustments when needed, Mr. Schoenfeld says. “Any institution is going to have to be flexible in dealing with major donors.”
Spend or Wait
Colleges can insulate themselves from some of the risk in accepting pledges by having a policy about how much cash they must have before moving forward on a project. Philanthropy experts say colleges are looking at these policies again and tightening them.
In the case of Spelman, a conservative spending policy helped protect the college when the Lehman Brothers pledge fell through. “We don’t spend money unless we have it,” says Kassandra Jolley, vice president for development. “We were very disappointed, but we were not in a position of having any financial liability on our part.”
Still, helping Spelman graduates find jobs in finance is part of the college’s strategic plan, something its leaders want to finance but cannot out of the college’s operational budget. The college is looking for new donors to step into the spot that Lehman Brothers left, though Ms. Jolley acknowledges that will be difficult.
At Otterbein, which deviated from its spending policy to build the equine center, the college will most likely go back to its earlier policy of requiring a significant portion of cash in hand before starting to build future projects, Mr. Morrison says.
Middle Tennessee, after getting burned by the donor who didn’t pay his piano pledge, strengthened its gift policies two years ago. It now recommends having 50 percent of a gift before moving ahead with purchases or construction, a policy that is reassuring for both the college and the donor, Mr. Bales says. “I think it gives both sides a greater comfort level that all obligations and commitments will be met.”
The Future of Pledges
Of more concern for colleges than current pledge payments is whether donors will be willing to make major pledges that stretch over several years. Even colleges that said they saw no significant issues with pledge delays or pullbacks during the recession report that donors are less willing than before to make big commitments three or five years into the future.
David Bass, director of foundation programs and research at the Association of Governing Boards, says an informal poll he did this summer of 25 institutions showed “fairly broad agreement” that donors were reluctant to commit to big pledges. Because of that, some may be rethinking campaign goals, he says.
Bruce Flessner, a principal at Bentz Whaley Flessner, a fund-raising company, compared the situation to the unwillingness of consumers to take on new debt. While donors with current pledges want to make good on them, he says, those considering a gift now are reluctant to commit.
Instead, they’ll make one-time donations. And that could affect the momentum of campaigns. “You don’t get the big oomph” from smaller, one-year gifts, Mr. Flessner says. “There’s a certain psychology of having success to show.”
At the University of Miami, which is in the planning stages of a fund-raising campaign, Sergio M. Gonzalez, senior vice president for university advancement, is seeing uncertainty among donors, who aren’t as willing to reach and make large pledges as they were in the past.
That could mean the university would need to be more cautious about starting future projects, and focus instead on its priorities as it expands. “We’re as ambitious as ever,” Mr. Gonzalez says, “but we’ve had to tone it down.”
Some colleges have found creative ways to encourage donors to pledge. Rather than ask for a specific payment schedule, which typically includes a payment every year for the duration of the pledge, Pepperdine University is now soliciting pledges with an end date but no schedule for installments.
Keith Hinkle, senior vice president for advancement and public affairs, says it might be a little more risky to do that, because payment schedules typically help ensure that a pledge is fulfilled. Donors could wait until the last day to pay the whole amount and find they don’t have enough to cover it. But the decision to remove annual payments on some key pledges has given donors more confidence they’ll be able to make the gift, he says.
“We may be waiting a little longer for final payment,” says Mr. Hinkle. “With all the uncertainty out there, we found it appropriate to not push too much and set a date we can all agree on.”
