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An Open Response to the May 27, 2014 Boston Globe Story on Olin College

An article in this morning's Boston Globe, "Losses Soar at Acclaimed Olin College", badly misrepresents the financials of Olin College of Engineering. The following open response serves to correct the misperceptions created by the article.  It’s important that the public understand the truth about Olin so please share this liberally.

The bottom line is that Olin is in stable financial health and over the years has been thoughtful and proactive about its financial management allowing the college and its students and graduates to flourish. 

The Background:

We were approached some time ago by Jon Marcus, a higher education reporter, who freelances for a number of media outlets including the Boston Globe. He has done a lot of writing in the past few years on the costs associated with a college education. Our IRS Form 990s, which are public record, caught his eye, in particular the drop in our endowment in 2008 caused by the Great Recession. In response to inaccurate conclusions he drew from this data, we provided context, accurate information and feedback, which he largely chose to ignore.  Olin argued repeatedly that it would be impossible to understand whether it was incurring losses without referring to its audited financial statements. . To rely only on the 990 forms—as was done in this story by the Boston Globe—is irresponsible because these forms are not intended to identify all sources of revenue, and in this instance led to completely false and misleading conclusions.

Below are the facts:

1. Endowment spending to reduce the cost of attendance

The premise of the article is that any spending from the endowment to reduce the cost of attendance is a “loss.”  In an article published by the Boston Globe in 2007, a U.S. Senator proposed mandating that all universities spend at least 5 percent per year of their endowment for this purpose.  We did not invent this concept.  Olin’s founders mandated that Olin use its endowment in this way and the Globe has inaccurately labeled this as “soaring losses.” 

The author reached his erroneous conclusions by ignoring our repeated efforts to explain our financial model and by ignoring the audited financial statements, which we sent to him and which also appear on our website.  Treating the endowment spending as a loss rather than a source of revenue explains many of his false conclusions.  It is standard operating procedure for colleges and universities to withdraw funds from their endowments to support their operating budgets. Because Olin is a small start-up engineering college, has a unique mission of transforming engineering education across the country and world, has very few alumni (almost all under age 30) and is one of a few schools to offer across-the-board merit-based scholarship and need-blind admissions to all students, our draw from the endowment is higher than many other institutions.

2. Olin is in solid financial shape

Although our endowment lost a great deal of money during the Great Recession, the percentage decline in endowment value was near the average for all colleges, universities and non-profits.  We are very different from most other colleges because we are heavily dependent on endowment spending to meet operating expenses—by design.  In addition, our tuition revenue stream—which did not exist before the Great Recession because we were 100 percent merit-based tuition scholarship—is intentionally kept low by our commitment to half tuition merit-based scholarships and need-blind admissions with full need-based aid for all students.  Furthermore, as a young institution, we cannot rapidly replenish our endowment with donations from a mature alumni base. Finally, our project-based, hands-on learning approach is more cost intensive than other forms of learning.  And, engineering education is inherently more expensive than many others fields and majors.  However, in spite of these special challenges, with wise and prudent fiscal planning and some tough decisions, we’ve been able to slowly regrow the value of the endowment. Currently, the endowment per student is in excess of $1,000,000; one of the few of this size in the country.

We changed our outsourced investment consultant after the crisis and the results have paid off. Last fiscal year we posted a 9.5 percent gain. Standard & Poor’s (A+) and Moody’s Investors Services (A2) have assigned strong credit ratings to the College.

Olin has a unique financial model in that it was started with a large financial gift just 12 years ago. Spending from our endowment has steadily declined, both in total dollars and in percentage, and currently accounts for 60 percent of our operating budget. We are well along in developing a more diversified revenue stream that can better withstand unexpected financial stresses in the future. 

In conclusion, the implication in the Globe article that Olin has “lost” more than $100 million in five years and currently has an unsustainable financial model is clearly at odds with the facts here.  How could Olin lose such large sums of money and grow its endowment at the same time?  The glaring inconsistency of the Globe analysis speaks for itself.

3. Using data from the period 2008 – 2011 to measure financial performance.

The period from 2008-2011 includes the greatest global financial recession since World War II.  Almost every academic institution underwent unusual financial stress and imposed stop-gap measures to address unanticipated problems.  While private schools were badly affected by rapid declines in endowment values, state-supported schools also experienced major declines in state subsidies.  However, many of these institutions have developed new trajectories and are now beginning to recover their financial sustainability. The point is that the period from 2008-2011 is not representative of the financial operating conditions of any school today. 

4. Could Olin have cut costs rather than raise tuition?

Through prudent management, Olin cut operating costs by about 10 percent—a significant reduction by any measure, and deferred substantial new expenditures in 2006, two years before the recession hit. As signs of the financial crisis grew, we began to quickly make adjustments.  At the time a very high percentage of Olin's operating revenue was derived from investment returns from our endowment, making the financial difficulty caused by the Great Recession that much more impactful. A special board-level Financial Sustainability Committee was established and they explored more than 60 different recovery models. The administration decided – after talking to the community in large and small groups and holding Town Hall forums—that the best course of action would be to offer a 50 percent tuition scholarship, instead of a 100 percent tuition scholarship to all admitted students, beginning in 2010.  This decision preserved the commitment to a full tuition scholarship for all four years, for every student who was admitted before 2010.  In addition, it preserved our historic commitment to need-blind admissions and full need-based aid.   

Due to the loss of endowment value and the resulting reduction in ability to spend from the endowment, Olin needed to reduce about $5 million in annual operating expenses to balance our budget, or approximately 25 percent of the operating expenses that were not fixed expenses (e.g., debt service, utilities, etc.). In order to impose such a large reduction, on the heels of the recent 10 percent reduction, we would have had to cut our staff budget by two thirds, which would have decimated Olin and severely damaged its unique academic program.  Given Olin’s mission, as stated in the Founding Precepts to “become an important and constant contributor to the advancement of engineering education in America and throughout the world,” this would have put us in default of our covenant with the founders. Thus, we reduced the tuition scholarship to 50 percent.

5. Are administrative salaries at Olin too high?

Olin benchmarks its salaries against its peer schools. We regularly update this data to make sure we are in line with the compensation structures of our competitors. We make the salaries of our highest paid administrators publicly available and we know that they are not higher than our peer schools.

6. Is Olin a good value today?

Olin graduates are in the top tier of wage earners. On average they make 25 percent more than their counterparts. In addition, our graduates enter the workforce with very little debt. In several recent articles, including one in the Boston Globe, Olin was rated as lowest in student debt. Olin was also named a “Best Value School” by Princeton Review

In addition, Olin is rated number 4 in the most recent U.S. News ranking of engineering schools in our category.  We are also rated by Princeton Review as #2 in students who study the most, #6 in professors who get high marks, #6 in best science lab facilities, #10 in best classroom experience, #11 in best college dorms, #11 in best quality of life, #15 in best career services, #17 in students who love their college, and #18 in great financial aid.

About 40 percent of Olin graduates have continued on for graduate study.  Of those that do, about 25 percent go to Harvard, Stanford or MIT.  Olin is among the top producers in the U.S. of NSF Graduate Research Fellows per capita, and four times in the last eight years, Olin has been identified as a Top Fulbright Scholar producer.

Olin has always had a need-blind admissions process, unlike many other colleges.  In addition, students with demonstrated financial need receive full need-based aid in the form of grants (after a very small family contribution).  Approximately 40 percent of Olin students receive need-based aid with an average grant in the $22,000-$23,000 range.

Demand for admission at Olin College is very strong, with an overall admission rate just over 10 percent, with a yield of more than 60 percent.  The alternative schools for Olin students include the top engineering and science schools in the nation.

Olin’s value proposition is very strong and will remain so in the future.