Deficit & Financial Situation

This is a section of Cooper Union's Financial FAQ. Click here to read the rest of the document.

What is Cooper Union’s deficit?

The cash deficit or shortfall results from revenues falling short of expenses. Shortfalls have been covered in the past by spending from the unrestricted portion of the institution’s investment portfolio (the unrestricted portion is only part of the endowment which also includes restricted funds).  The projected deficit was estimated at approximately $16 million for FY 2012 when President Jamshed Bharucha informed the community in fall 2011 and called for the development of a sustainable financial model. 

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What does it mean to have a sustainable financial model?

A sustainable model is one in which at least the following criteria are met, consistent with best practices in private higher education: 1) Annual revenues equal or exceed annual expenses, i.e., there is no cash deficit; 2) Annual revenues drawn from the financial portfolio of the endowment fall within the endowment spending policy, which currently is 5% of the 20-quarter running average; this ensures that the real value of the portfolio can be sustained in perpetuity; and 3) In stable state, annual revenues grow at the rate of inflation at which the institution’s on-going expenses grow.

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Is it true Cooper has previously faced the prospect of insolvency?

Yes. On December 15, 2011, The Board of Trustees issued a statement concerning Cooper Union’s present circumstances and future prospects, and referred to “extraordinary efforts” over the years to keep the institution solvent. The introduction states, “For decades, members of the Board of Trustees have strived to keep The Cooper Union solvent while preserving both the excellence of its educational offerings and the full-tuition scholarship policy. This has required extraordinary efforts. Indeed, providing a high quality education without having the benefit of tuition income has necessitated the sale of institutional assets over many years.”

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What evidence is there that tuition and other options were considered at other points in recent decades?

The financial model was recognized as unsustainable at least as early as 1971. In that year, the institutional publication “At Cooper Union“ presented excerpts from a Trustees’ Statement considering a range of options, including “phasing out the activity of the Engineering and Science School entirely,” “converting The Cooper Union from a full-scholarship to a tuition-charging institution,” and “a reorientation of programs and activities.” Similar suggestions can be found in Board of Trustees reports in more recent decades.

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What is the “projected deficit” for The Cooper Union going forward?

The cash deficit is projected to be $12 million in FY 2023 (even after the $4 million expense reduction of FY 13 is implemented).  The annual cash deficit is projected to increase to $20 million by FY 2027 – if additional action is not taken.

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In calculating deficit projections going forward, what assumptions have been made regarding 1- Fundraising, 2- The return on the investment portfolio, and, 3- Inflation?

The deficit projections for FY 13 and beyond reflect various assumptions. 

The main assumptions are,

1-     Fundraising: One assumption is that the Development Office’s efforts will result in increases in Annual Fund giving of 5 percent a year for the next 10 years starting in FY 13. (This is higher than the most recent rate of increase of 3 percent a year. A 5 percent increase starting in FY 13 would generate an additional $4.4 million during that 10-year period.) Another assumption is that a new capital campaign will generate at least an additional $100 million over 10 years.

2-     Return on Investment: Calculations of the deficit for FY 13 and beyond also reflect assumptions of a 5 percent return on the investment portfolio.

3-     Inflation: The projection includes the assumption of a 3 percent increase for expenses excluding employee benefits, and a 7.5 percent inflation rate for employee benefits (which includes medical, pension and all other benefits).

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Are all financial problems solved in 2018 with an expected increase in Chrysler Building revenues?

No.  Cooper Union’s largest source of annual revenue is derived from its ownership of the land under the Chrysler Building.  Despite a significant step-up in Chrysler ground rents beginning in 2018, projected gaps remain between expenses and revenues beyond 2018. 

The facts:

·        The Chrysler land in FY 13 generates approximately $9 million in annual rent payments and $18 million in annual tax equivalency payments to Cooper Union.

·        The year 2018 marks the beginning of a scheduled rent increase, by $21 million, to $32.5 million for the full fiscal year of 2019, from the tenant, Tishman Speyer. The increased ground rent is estimated to result in an increase to $22.3 million in tax-equivalency payments from Tishman Speyer to The Cooper Union (based on current tax rates). 

·        However, Cooper Union’s debt service expense will begin to increase in 2019 as well.  Cooper Union will make principal payments on the MetLife Loan in 2020 in the amount of $5.5 million annually beyond the current interest payments of $10.3 million (in 2019, paying $15.8 million a year in debt service).

·        Most importantly though, after the rent increase in 2018, the annual rent payment remains flat for 10 years, not even growing with inflation. With inflation assumptions (discussed in another FAQ), a deficit climbs again within a few years. The next step-up in rent occurs in 2029, but this is only $9 million (in 2029 dollars), and again remains flat for 10 years.

·        Even with the step-up in revenue from the Chrysler Building ground rents in 2018, the deficit is projected to be $11.3 million and is projected to increase to $16 million by FY 2025 – if action is not taken to both reduce expenses and to increase revenues.

Therefore, there is a short-term problem and a long-term (structural) problem. The short-term problem is exhausting our unrestricted funds. The long-term problem consists of chronic deficits that climb a few years after 2018.

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Why do the Chrysler rent revenues go up in 10-year intervals?

These are the terms of the contract between Cooper Union and Tishman Speyer. Cooper Union has an unusual financial model, since its largest revenue stream is from one source, the Chrysler Building ground rents and tax equivalency. Most colleges and universities can project and control their revenues from one year to the next. Cooper must project revenues based on a step function with 10-year steps, even though expenses increase annually.

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Are there risks in our financial projections?

Yes. First, there is enormous uncertainty in the financial markets in this economy. Non-profits cannot expect the same rate of appreciation of their financial portfolio as they have expected historically. Second, college and university presidents are mindful of increasing pressures to make Payments in Lieu of Taxes (PILOT’s) as local governments struggle financially. Third, Cooper Union has not had the margin to set aside reserves each year (for unexpected expenses in the future) as most institutions do.

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Why is the deficit structural?

Even a balanced budget achieved in one year will turn into a deficit unless revenues compound at least at a similar inflationary rate as expenses. The deficit is thus structural because it is impossible to even maintain current programs at their current levels in the face of inflation.

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How large is Cooper Union’s endowment?

Cooper Union’s endowment totals around $650 million.  Real estate (including the value of the land under the Chrysler building) comprises the largest portion of the endowment.  As of June 30, 2012, the estimated value of the non-real estate component of the endowment stood at approximately $116.2 million, of which at least $66 million is permanently restricted. The permanently restricted pool consists of endowment funds whose principal cannot be spent down beyond the endowment spending policy. In other words, donor agreements – in tandem with state law – require the institution to maintain the value of the principal in perpetuity.

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What is the endowment spending policy for The Cooper Union?

The value of the restricted portion of the endowment is expected to be maintained in perpetuity. An endowment spending policy governs the amount that can be used for the budget while reinvesting enough to maintain its value. Cooper Union’s endowment spending policy is 5 percent of the 20 quarter running average market value of the financial portfolio. This is in line with best practices at colleges and universities. The reasoning has been that the historical average return on investment is 8 percent, and inflation has been 3 percent, leaving 5 percent as a prudent endowment spending rate enabling the purchasing power to be maintained in perpetuity. At present, spending from the restricted pool is in accord with the endowment spending policy, while spending from the unrestricted pool exceeds the endowment spending policy in order to cover the deficit.

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What are Cooper’s debt payments on the $175 million MetLife loan?

In 2006, Cooper took out a 30-year, fixed-rate loan of $175 million at a 5.87 percent interest rate from MetLife to supplement the capital campaign.  The loan is interest-only through 2018, and the annual debt payments are approximately $10.3 million.  Additional payments for principal (5.5 million) begin in 2019.

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Why wouldn’t Cooper pay off its $175 million loan now if it had the ability to do so?        

The pre-payment penalty varies according to prevailing interest rates; when rates are lower, the penalty is higher, and vice versa. The MetLife pre-payment penalty for the 30-year loan is approximately $81 million (as of August 2012). 

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Is Cooper cutting its budget?

Yes. Cooper achieved $1.8 million in savings in FY 12. An Expense Reduction Task Force worked in the spring of 2012 to help identify ways to reduce operating expenses. The proposed FY 2013 budget reflects a $4 million reduction.

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What is Cooper’s total operating budget?

The most recent audited financial statement, for FY 11, recorded unrestricted expenses of $70.3 million.  Audited financial statements are generally available in December for the previous fiscal year. This number includes non-cash items such as depreciation and the accrued post-retirement benefit cost. The cash budget is roughly $60 million after the $4 million reduction taken in FY 13.

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Does Cooper release audited financial statements?

Yes. The Audited Financial Summary and Consolidated Balance Sheet prepared by the auditing firm KPMG providing the Liabilities and Net Assets Cash Flows for the period July 1, 1999 through June 30, 2011 can be found here and via in the Trustees section of the Cooper Union website  You can also find an archive of financial statements from 2000-2011 found via Finance & Administration page.

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  • Founded by inventor, industrialist and philanthropist Peter Cooper in 1859, The Cooper Union for the Advancement of Science and Art offers education in art, architecture and engineering, as well as courses in the humanities and social sciences.

  • “My feelings, my desires, my hopes, embrace humanity throughout the world,” Peter Cooper proclaimed in a speech in 1853. He looked forward to a time when, “knowledge shall cover the earth as waters cover the great deep.”

  • From its beginnings, Cooper Union was a unique institution, dedicated to founder Peter Cooper's proposition that education is the key not only to personal prosperity but to civic virtue and harmony.

  • Peter Cooper wanted his graduates to acquire the technical mastery and entrepreneurial skills, enrich their intellects and spark their creativity, and develop a sense of social justice that would translate into action.