About an hour into the call with her college’s bondholders, the president tried one last plea.
Jennifer N. Schuller and several of the college’s trustees had been trying to explain all that they were doing to keep Lake Erie College open in hopes their creditors would cut them a break on payments. Still, a representative from the holder of its major debt kept pushing back. Forget the coming years, would the college even remain viable in the coming weeks?
With the tension rising on that mid-September call, Schuller spoke up: “You know, me, especially having just come to this institution two years ago, just recently taken over as president, [I] hate that we’re coming to you at the 11th hour saying we need this or else we might have to close in January.”
“I don’t want to be another story in The Chronicle,” she added. “But it’s where we find ourselves.”
Two months later, Lake Erie is a story in The Chronicle — but it’s also still alive. Schuller has raised significant money from donors. Plans to boost enrollment are rolling along. But all is not rosy — the college still is waiting to hear whether those bondholders will waive payments for a while to let the college’s cash flow recover. And financial projections of the weeks to come still have too many negative numbers on them.
“I’m really confident in our future,” Schuller told The Chronicle, “but I’m not naïve. I know there’s a lot of chips that still need to fall in place.”
The pickle Lake Erie finds itself in isn’t uncommon, especially among small private colleges. Pressed by falling enrollment, harmed by faulty management, and hamstrung by debt, such colleges often find themselves with too little capital to invest in the programs that might boost enrollment and revenue.
Lake Erie College surviving into 2024 seems more likely than it did even on that call with bondholders two months ago. The college is working with donors to modify restrictions on the use of hundreds of thousands of dollars. It has also raised $1.3 million in cash gifts so far this year — already doubling last year’s total — with a few more millions in use-restricted gifts soon to be announced. On Monday afternoon, the college announced the Ohio Department of Higher Education had awarded it a Choose Ohio First grant totaling $1.2 million to support underrepresented students in the critical fields of science, technology, engineering, mathematics, and medicine through scholarships. The college has also made hundreds of thousands of dollars in cuts.
But unless Lake Erie gets temporary relief from its debt load, it’s not going to be able to stabilize its finances. At the same time, the college also needs its bondholders to agree to allow Lake Erie’s bank to be “made whole” first in a potential bankruptcy ahead of the bondholders. Bondholders currently have first crack at the college’s assets should it end up filing for Chapter 7. Without that change, the bank won’t extend additional lines of credit, and without that short-term credit, the odds of Lake Erie simply running out of cash increase — potentially leaving the college’s employees and vendors in the lurch. In an effort to win those concessions, Schuller and college officials have been working with the bondholders the same way they work with donors and foundations.
That level of communication is quickly becoming a mandatory part of a small college president’s job, Schuller said. “One of the lessons learned is the importance of communication with your bondholders and bankers. It’s just critical to do, even if it’s not good news you have to share.
“This is a role of the president not many, including a lot of presidents, think about. They clearly are major stakeholders.”
The Struggles
To passers-by, Lake Erie College projects a sense of Midwestern solidness. Buildings aren’t flashy architectural wonders, but also aren’t hastily thrown together office farms. The campus is full this fall, with empty beds in the single digits.
Enrollment is around 700 undergraduates, down from the nearly 1,000 that was the standard for much of the 1980s, 1990s, and early 2000s.
Located in a suburb about 25 miles northwest of Cleveland, the campus is roughly five miles from Lake Erie’s shores. Founded in 1845 as the Willoughby Female Seminary and relocated to its current location in 1856, it was known in those early years for its work in the suffrage movement.
The institution became co-ed in 1985, and for the next 35 years, campus life churned away without major disruption — some called it a sleepy campus — and nearly everyone at the college expected that to continue.
Then came April 2023. Board members became more and more concerned about what looked like financial stress, officials said. They hired an outside firm to look under the hood.
The findings were shocking.
“It is believed that there was a continued effort to shelter all stakeholders from LEC’s challenged and declining financial position, funds were somehow located to fill in the gaps, new initiatives were promised but not enacted, and unachievable projections presented,” the college wrote in a June 30 slideshow to its bondholders. “These combined efforts made it difficult to discern the financial stress until that financial stress became so great it could no longer be hidden.”
The board had seen financial statements that showed an average net decrease in college assets of about $500,000 a year. While grim news, it wasn’t catastrophic. But a forecast for 2023 seems to show the bottom dropping out.
A deeper dive revealed there had been “excess withdrawals from the endowment, the early release of restricted funds, and the utilization of millions of dollars of Covid-related funding,” the college wrote in an update to bondholders. At the same time, expenses had been increasing. Had the college not been reducing the number of full-time faculty and limiting pay raises, the financial hole would have been even worse.
The report laid the blame for the financial difficulties at the feet of then-President Brian Posler, who had led the institution for about seven years.
“We believe that this continued decline and lack of effort to reverse it was due to a void in the leadership of LEC,” the report to bondholders said.
On April 26, the college announced Posler’s resignation effective June 30, without any public word about the reason for his leaving. Posler declined to talk about his former college when contacted by The Chronicle.
Schuller was bumped up from the vice president of advancement to the presidency and quickly became aware she was now in charge of a leaky ship caught in a maelstrom.
The financial problems were so dire the college had trouble paying its vendors. Though it typically made payments within two months, the college wrote in August, payments had recently been pushed “as far as 178 days” and vendors were asking to see that period “brought to under 90 days as soon as possible.”
Schuller’s new job also meant finding ways to grow enrollment and increasing donations. But the major task was getting bondholders to cut the college a break on the debt it owed.
In 2019, Lake Erie issued just under $30 million in revenue bonds. That money was targeted for refinancing existing debt and upgrades to campus facilities, including the school’s equestrian center, its centerpiece program.
By August 2023, the college was asking its creditors for help. Specifically it asked the firms to refund about $780,000 already paid to them so that it could pay vendors; defer all payments through April 1 of next year; and allow the prospective lender behind a $2.5-million line of credit to have priority on collateral the college had already offered to secure the bonds. It also wanted the ability to give another lender the first rights to property to be used as collateral in exchange for a line of credit.
If bondholders agreed to these terms, it could free up a little more than $6.5 million for the 2024 budget, the college said in a September filing to bondholders. That could put the budget into the black by just over $1 million.
In the end, debt financing is ultimately meant to generate a return on investment for creditors. The dilemma for creditors is: Would a payment pause actually allow Lake Erie College to eventually make good on all the principal and interest it would owe across the next 30-plus years? Or, will creditors in effect be allowing Lake Erie to just forgo paying down its debts right up until the restart of repayment forces the institution to close, thereby leaving the college’s bondholders to duke it out with other creditors in bankruptcy court for the bondholders’ share of the college’s assets.
The Ask
For the first several minutes of the September 15 phone call, Lake Erie officials detailed for bondholders the moves they had been making — trying to raise donations, pushing the legal limits in taking restrictions off endowment money, cutting staff.
But board members emphasized these efforts would be worthless if the bondholders didn’t give the college a break.
“I’ve seen a lot of progress so far this year in decreasing costs, increasing revenue, but we’re going to have a deficit for the next two years,” said Ric Selby, a board member. “And if we’re going to survive that deficit and get to the point where we have a balanced budget, we’re going to need some of the relief we’re seeking.”
Another board member, Bill Haag, said the college had cut all it could. “We are very hesitant to go any deeper to the bone.”
Then came a brief pause on the call — perhaps the bondholders were ready to make a deal?
Nope.
“Just like the board, the bondholders are also fiduciaries,” said Mark Angelov, a lawyer representing the bondholders. “They’re fiduciaries for the investors in their funds. And so the same way that the college cannot make decisions, these decisions lightly, nor can the bondholders.”
He then pointed out the college had spent a considerable amount of money it had on hand to pay some vendors. “We were very surprised that that decision was made to release all that cash,” Angelov said.
Then came another awkward pause, followed by a bombshell.
“Well, I guess I’ll just say this,” Angelov said. “We discussed this at length and studied this. And based on the information we’re seeing, the bondholders are not prepared at this point to defer payments, release cash, or subordinate their bonds to the line of credit.”
College officials and their creditors went back and forth for another half hour. The college pointed out it had had to pay vendors to remain open and that it was out of options, while the bondholders pressed for more information about its finances. The meeting ended with no resolution.
Since that call, the college has sent bondholders more information and held additional one-on-one calls. A revised ask, with specific details about where the college would spend the money it got from the deferrals, is expected later this month.
The college now believes it will make it through this school year, even if it doesn’t get any relief from bondholders. It is current on its debt payments.
“I can say with confidence — we’re going to make it,” Schuller told The Chronicle.
The Future
In the run-up to the 2010-11 school year, Jonathan Tedesco was looking for a tenure-track position teaching chemistry. He interviewed at a small college just outside of Cleveland and was struck by the potential of Lake Erie College.
Over the next 13 years, he worked his way up the chain and became dean of the School of Natural Sciences and Mathematics, giving him an up-close look at the school’s inner workings.
“There’s a lot of pieces there,” he said recently, citing the involvement of the faculty and the wide range of students the college serves. “That potential has never been realized.”
One factor holding back that potential was significant turnover in the upper-administrative ranks, with many of those who came in looking at the college as a line on their resume on their way to something bigger, he said.
There were often new plans announced of how the college was going to operate, but largely they were “new words put on an old plan” that didn’t get implemented, he said.
There were also the finances. While he thought the college was struggling like other small liberal-arts institutions, he didn’t know how bad until this summer. It wasn’t a shock to learn it was in the red, he said, but “the magnitude was a surprise.”
Among the reasons for the deficit, Tedesco points to the board. Like other small schools, there were very few board members who knew how higher education worked, which meant they didn’t know what questions to ask.
“They also trusted the administration,” he said. “There was no real accountability.”
That’s been changing in recent months as a new administration and board has worked to dig Lake Erie out of its financial hole.
The last few months “have been the most stressful, but also the most satisfying,” he said. “It’s the way people have rallied together. It’s been a breath of fresh air. We know the common goal — we understand what needs to be done.”
The college is looking at its core curriculum to see how it can change to meet the changing world. “This is the most unified we’ve been since I got here,” he said.
But Tedesco isn’t starry-eyed about the college. He knows what’s at stake.
“In the short term, it’s going to take some help, especially from the bondholders,” he said. Like many at the college, he believes the long-term future is bright — if it can withstand the next six months.
