GW lowers expectations for Knapp’s cost-cutting plan

The University’s flagship plan to cut costs and build new money-making programs vastly overestimated how much it could pull in for academics and research, administrators said last week.

GW decided to no longer count an estimated $25 million worth of projects from the Innovation Task Force this semester because their dollar-earning potential was unrealistic. The new projections soften the ITF’s rapid success that administrators have trumpeted in front of faculty, deans and the Board of Trustees over the past year.

The change in plans makes it tougher to reach University President Steven Knapp’s high-stakes goal of finding $60 million in new savings or revenue by next fiscal year, though administrators remained confident that GW would meet its target. The error also could hurt GW’s solid financial standing down the road, analysts and finance professors say.

The ITF, which Knapp started four years ago to give GW a financial jolt after the recession, comprises more than 60 projects and is now expected to put $34 million into GW’s budget by the 2016 fiscal year. Administrators and staff members pitch new ideas twice a year, and will gather again next month.

“Projections about the future are always subject to revision, but I have no reason to suppose that the stated goal of identifying $60 million in annual funding will not be reached on time,” Knapp said in an email Sunday. “Of course it’s important in this, as in every other matter, that we track our progress as carefully and accurately as possible. The aim is real progress, not the appearance of it.”

But three current or former top officials who have worked on ITF projects questioned whether GW has overhyped its progress.

“To be honest, none of the deans are clear about the numbers,” one high-level administrator, who spoke on the condition of anonymity, said. “What we are clear about is it’s an important project to President Knapp and the Board of Trustees.”

GW’s search to find new dollars has slowed down since administrators found about $17 million in savings during the ITF’s first two years. Newer programs and projects now mostly rely on raising revenue, rather than cost-cutting, and tend to have higher start-up costs.

For example, the business school programs that were launched out of the ITF did not perform as top officials had hoped. An online master’s of business administration program drew far fewer students than was expected, while the executive education programs ran higher costs. The programs’ financial rockiness helped lead to former business school dean Doug Guthrie’s firing in August.

“The intention is a very good one, to save money for students and research,” said one professor who has worked on ITF initiatives. “Unfortunately, I think that when things are proposed, people are more optimistic about the outcome. The revenue or savings don’t line up to what’s being proposed.”

Balancing expectations with success stories
ITF chair David Lawlor and Provost Steven Lerman stressed last week that the estimates were always subject to change and that the University will unveil new projects next month they hope will raise or save money for GW down the line.

They added that the programs removed from the initiative – an online business degree and executive education programs – could still count toward the ITF if administrators reassess their costs.

“When we put forecasts out there, they will change,” Lawlor said. “It’s like any stock portfolio. Some are going to fail, so let’s not get distracted on the failure side.”

The initiative does have plenty of success stories. It funneled about $20 million in this year’s budget through new or saved money, which helped pay for more than a dozen academic advisers, eight teaching assistants and 31 professors. GW’s signature academic programs to support veterans stemmed from the ITF last year.

The University also counts several million dollars saved from refinancing – and the increases in donor gift payouts and government money from research – as ITF money.

When top administrators briefed faculty leaders on the ITF’s progress last spring, they said the high-priority project was on pace to pour $83 million a year into GW’s academics and research over the next few years.

“This all seems too good to be true,” education professor Michael Castleberry said at the April Faculty Senate meeting.

Now, administrators are predicting a total of $58 million from projects like rent reductions and online programs by the time they are fully developed.

Financial implications
If ITF ambitions fall flat, financial experts say it could spell trouble for GW’s financial health. While occasional missed forecasts are expected, repeated over-estimates will make lenders uneasy, analysts and finance professors said.

Charlene Butterfield, the lead analyst on Standard & Poor’s credit report for GW, said the miscalculation itself would not impact GW’s credit rating. But, she said the University could see a downgrade if it doesn’t have the money it planned to use, bringing down its already-shrinking stream of net revenue.

“Who knows what that’s going to do? It depends what GW’s operating margins are. It may be harder for them to produce higher margins, but it’s not impossible,” said Butterfield, whose team has received updates on ITF for the past two years.

GW’s operating margin has dwindled in recent years as it poured more money into financial aid programs during the recession and increased its debt load to $1.4 billion – topping its endowment and raising red flags for the agencies who still call the University a reliable borrower.

Finance professor Mark Klock agreed that if ratings agencies expected $60 million from the ITF to flow into GW’s operating budget each year, and the University couldn’t follow through, it could see a downgrade.

“People understand that goals are optimistic, but this was overly optimistic,” Klock said.

Public relations in overdrive
By finding $60 million in new savings or revenue to use each year, the University would match how much money it uses from the endowment each year.

The strategy collected praise because schools across the nation, including University of North Carolina at Chapel Hill, used pricey consultants to find the best places to cut costs. GW stood apart from that group because “the University decided to trust its own people,” said Roger Whitaker, a professor of higher education and sociology who has been involved in the ITF since 2009.

“Everyone knew it would be hard to sustain momentum after some period of time. It is no surprise that it was easier to find successful initiatives in the first two years than later on,” Whitaker said. “Since innovation requires risk, it is also no surprise that some initiatives have been more successful than others. Even so, the track record so far seems pretty impressive.”

Administrators have also pointed to the ITF as evidence that GW is fighting back against mounting college costs and rising tuition.

The initiative’s public image has been carefully managed. GW previously published estimates for savings or new revenue for each project on the ITF’s website. The estimates were pulled off the website last year, and Lawlor declined to give specific estimates for the dozens of programs in the works.

“I don’t want people around this administration to say ITF is a flop, because four initiatives failed. That takes away from the message that four may fail, but we have 63 that work,” Lawlor said, adding that releasing specific estimates would “muddy the water.”

As the ITF doubles down on six more projects in its seventh round of project approvals next month, pressure will mount on the program to continue to find new projects. As the program’s success slowed, administrators and professors have said the University will be hard-pressed to find new places to cut costs or create new funds.

Anthony Yezer, an economics professor, cautioned that GW is pushing the limit of how much departments can cut and how many options there are to increase revenues.

“If revenues can’t rise very much and the costs are going up, that’s going to put a squeeze on you. Slower growth of revenues as costs increase, that’s the challenge,” Yezer said.

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