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New ECU leadership faces significant financial challenges

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Hundreds gather outside of the new student center at East Carolina University for its opening in January.

Harry Smith.jpg
Dan Gerlach

By Bobby Burns
The Daily Reflector

Monday, May 6, 2019

The new leadership at East Carolina University faces a dwindling cash flow and declining enrollment as it begins its transition today, but UNC system officials said the team they are putting in place will correct financial management and move the university forward.

Today is the first day on the job officially for Dan Gerlach, the interim chancellor appointed last month to fill the position vacated by Cecil Staton, whose last day was Friday. In July, a reconfigured Board of Trustees will be seated with a new chairman, although new members — along with Gerlach — already have been in conversations with ECU and UNC system officials to assess challenges facing the university.

“The Board of Governors has been very concerned about ECU for some time, about the fiscal environment, the enrollment environment, but we are so proud of the new Board of Trustees that we've recruited and asked to serve, and it's not official yet, but we are very excited about the new leadership of that will be coming in to help lead the university,” BOG member Tom Fetzer said during a visit to Greenville on Monday to meet with some of the new trustees and campus officials.

“But they are going to have some real challenges, not the least of which is turning around the financial situation, which has suffered significant decline in the last three years, and the enrollment situation, which is going to decline it looks like two years in a row now.”

Sara Thorndike, East Carolina’s vice chancellor for administration and finance, brought the financial concerns into sharp focus in February during a private discussion with several state-level officials outside a Board of Governor’s meeting.

Thorndike told BOG Chairman Harry Smith, Clinton Carter, the system’s senior vice president for finance and budget, and BOG member Jim Holmes, chair of the audit committee, that she no longer could balance the books, Smith said on Friday.

“She told us point blank, ‘I cannot make the numbers work any more. We are facing a large reduction in workforce at ECU,’” Smith said.

A single page, 16-line spreadsheet produced by Thorndike that outlines steady declines among ECU’s revenue-generating operations was circulated among BOG members.

The sheet showed a bottom-line cash surplus of more than $34 million in 2016. It projected minimum losses of $28 million by the end of this fiscal year. Losses are expected to grow in 2020 and beyond.

While ECU generated more than $20 million in cash from state appropriations and tuition tied to enrollment in 2016, the projections show enrollment funding sources losing more than $10 million this year. ECU Physicians is expected lose an additional $5.3 million, and athletics is expected to lose more than $12 million, according to the projections.

Enrollment and the university dropped by 413 students between 2017 and 2018. Latest projections for the coming fall semester show a drop of another 442 students, in large part due to the university graduating its largest class ever on Friday. The university is expecting a slight increase in the number of incoming freshmen in the fall.

A drop in enrollment, even just a few hundred students, translates into millions in lost revenues, officials said.

East Carolina officials have been tight-lipped about the finances.The Daily Reflector in March asked Thorndike to explain her projections, and she referred the paper to ECU’s news bureau.

A statement from the news bureau at that time said that the university was not confident in the reliability of the numbers. It called the spreadsheet a working document and said reporting the numbers would be premature.

Subsequent requests to question university administrators — requests made after public reports of projected losses began to surface — also were denied. No interviews about the budget would be granted until the UNC system conducted an operational assessment at ECU as part of the chancellor’s transition, a statement from ECU said in April.

A last request on Wednesday for comment to be included in this story also was denied.

“The university doesn’t plan to provide comment until after the completion of the routine operational assessment,” ECU spokeswoman Jeannine Hutson said.

Details about the assessment were not available. Josh Ellis, the UNC system’s associate vice president for media relations, did not respond to multiple requests for information about the assessment timeline and who is conducting it.

Gerlach said during an April 17 interview that he would answer questions on finances after he had time for a thorough review. Chairman Smith said on Friday that the system had ordered a full, third party external audit to help officials have a clear understanding of ECU’s financial situation.

ECU’s Board of Trustees, charged with ensuring strong financial footing at the university, never has discussed a decline in cash flow or possible layoffs publicly, even though the panel met six times since January, including the board’s retreat in Pinehurst that month.

Four of the meetings were special-called meetings in Greenville that were promptly closed to the public. Confidential personnel matters were on the agenda for each of those meetings, although one on March 13 also included a discussion on audit information, according to the meeting announcement.

Board of Governors members said that finances are a public matter and should be discussed openly. Fetzer, a lawyer and former mayor of Raleigh who now resides in Wilmington, said last week that Thorndike’s assessment has been widely discussed and that the numbers are accurate.

“I’ve' seen those numbers, and I've also seen the system CEOs validation of those numbers,” he said. “So, you know, it's a public university, and I think the public has a right to know what the situation is.”

Outgoing Chairman Kieran Shanahan addressed some of the concerns in an interview with The Reflector after the trustees regular meeting on April 12.

He said the likelihood of flat or lowered enrollment is negatively affecting finances, but no faculty or staff layoffs are pending.

“It is a significant, negative impact on our operating budget,” he said. “But it isn’t anything that will require us to think about letting people go or shutting down services we provide. It’s an indication we have to continue to advocate to the legislature for resources, to spend dollars wisely and to get other revenue sources.”

East Carolina University has $200 million in reserves, Shanahan said.

“You think of them as a rainy day fund. Well, it’s raining a little bit,” he said. “Different people may agree or disagree on why it’s raining a little bit, why we have a need to use those funds.

“The sky is not falling. We definitely have financial challenges … so we have to constantly be reevaluating as we evaluate the way we deliver education to the people we deliver it too,” Shanahan said. “It’s fluid, dynamic and something that requires vigilance, forward thinking, good planning and executing the plan.”

Fetzer and others have questioned ECU’s reliance on reserves and how much reserves actually are available. Fetzer added, contrary to concerns raised by some ECU proponents, that the state is more than fair in its distribution of resources to the university.

“In the last three years, ECU has doubled its debt from 200 million to 400 million, seen its cash flow go from a positive 30 million to a negative 40 million and suffered declining enrollment,” he said. “It is neither responsible nor rational to blame this on the legislature.

“Other than UNC-Chapel Hill and N.C. State, ECU gets as much or more money from the state than every other public university, 300 million last year, none of whom are experiencing sudden and massive negative changes in cash flow and declining enrollments simultaneously,” Fetzer said. “What is happening at ECU is serious and systemic and the new board leadership, along with the returning members of the board, must get at the root causes and face these challenges head on.”

The Board of Governors in March appointed three new members to the trustee board, Phillip Lewis of Greenville, Thomas Furr of Durham and Angela Moss of Chapel Hill. It returned Leigh Fanning of Greenville to the board. Two more members will be added by the state legislature before the board convenes in July. The board has 13 members including the ECU student body president.

UNC governing board member Mike Williford, an attorney from Fayetteville, is the liaison to the ECU trustees and helped guide selection of the new members. He said officials at the state and local level are devoting time and expertise to ensure problems are corrected with innovative, forward-looking measures rather than cuts.

An idea that he supports is a waiver on the cap of out-of-state students that can be admitted to the university, currently set at 18 percent for state schools. Allowing a number greater than 18 percent, taking care not to exclude qualified in-state students who want to attend, can help ECU reach its enrollment capacity while increasing revenues with out-of-state tuition.

Out-of-state students pay higher tuition to attend ECU than North Carolina residents, but ECU is an attractive option to many who live on the East Coast because it’s a nearby, quality school and still cheaper than paying in-state tuition where they live, Williford said.

“There are a lot of talented people on our boards, at ECU and in the UNC system,” Williford said. “It’s going to take some work, but we’ll figure a way that this is a blip on the radar screen and we’ll move on down the road.”

Gerlach said last month he will work to unify as many as he can at ECU on the task. He said the work will take a little time but he believes problems are solvable.

“My job is to bring Pirate Nation together to move forward, to help get as many people as possible the opportunity to succeed here, to make sure we continue to have a strong financial underpinning and prepare the way for growth in the future,” he said.

Smith said he supports Gerlach and believes the interim chancellor and the new board can guide the university to out of its financial issues.

He said the conversation about layoffs has been put to bed, “and I think it’s been put to be in large part by Dan Gerlach.

“Dan Gerlach came in said we’re going to grow our way out of this, which is the right attitude, and we’re going to support him,” Smith said. “And we’re going to support these new trustees coming in, and I can tell you the new trustees that are coming are already woking tirelessly on advocacy at Jones Street and with the Board of Governors and that’s what you’ve got to do.”

Failure is not an option for the new board and leadership at ECU, Fetzer said.

“The consequences to the university and the region that it serves are too significant to not have success,” he said. “So we are we're very optimistic that the new leadership team will address these problems and find solutions.”

Ginger Livingston contributed to this report. Contact Bobby Burns at baburns@reflector.com and 329-9572.