Concordia University’s future appeared bright to the hundreds of people who filled a blue-lit Portland ballroom to raise money for the historic school. Interim president Tom Ries took the stage and joked with the crowd as he wore a fur-lined winter hat, a nod to his Minnesota roots.
Hours earlier, he had delivered a very different message to the school’s trustees: Concordia’s finances had deteriorated so fast that leaders now had to decide between shutting down or rolling out a dramatic consolidation that might still fail.
University officials had plotted the two dire options for weeks, according to interviews with employees, students and administrators and internal documents obtained by The Oregonian/OregonLive. The records show administrators had huddled with their lawyers since December to discuss possible bankruptcy and other extreme options.
But they didn’t tell students who had paid tuition for winter term.
On the eve of the fundraiser, Concordia’s federal compliance was in doubt, its accreditation in jeopardy and its books in danger of an auditor’s red flag. The school had nearly maxed out its credit line, defaulted on bond terms and amassed tens of millions of dollars in loans and business debts.
In a draft version of Ries’ speech to trustees, he spelled out the “pronounced challenges” of Concordia’s 20-year deal with HotChalk, a California firm the school had paid hundreds of millions of dollars to jumpstart its online programs. The financial success of the deal depended on “overly aggressive enrollment targets,” Ries planned to say. Declining enrollment devastated the university’s finances.
People who attended the university’s Feb. 4 banquet said college leaders dwelled on Concordia’s future, rather than the potential disaster. Donors contributed $355,000.
Trustees voted to close the university three days later.
Administrators waited another three days to tell students. By then, it was too late for students to withdraw from classes and get any money back.
Concordia asked contributors to “honor the donation,” saying the money would be used for student scholarships for the school’s final semester.
The decision to go forward with the lavish banquet was one of many questionable calls by Concordia administrators. Ever since the 115-year-old university announced it would close forever, the exact reasons have been shrouded in secrecy. A cache of financial documents and internal memos obtained by The Oregonian/OregonLive illuminates Concordia’s mounting financial weakness and its desperate efforts to survive.
● Concordia leaders bet the college’s future on a partnership with Hotchalk. Over time, the school’s finances became dependent on HotChalk, and their operations became closely intertwined. The college routinely paid at least one-third of its revenue -- as much as $62 million a year -- to HotChalk.
● College officials approved the deal despite terms that increasingly left Concordia with less money and HotChalk with more. By 2019, the share of revenue that went to HotChalk exceeded 50%. When enrollment stopped growing at double-digit rates, the university had virtually no money to pay.
● Concordia appeared trapped in the relationship with HotChalk even as the deal drained its cash reserves. A 2018 internal analysis said the college’s liability to HotChalk could be as much as $400 million in the event of a liquidation.
● As the school descended deeper into debt, longtime leaders earned six figures each year with the sign-off of the board. The former president who oversaw the university’s partnership with HotChalk saw his pay increase 77% to $310,000 during that time.
● College administrators failed to heed warnings of a looming financial disaster that started at least by 2018. By 2020, the school faced a cash flow crisis, and no lender would offer a lifeline, Ries said.
Thousands of students are now in debt and without degrees, contemplating where they will go after Concordia. Fifteen hundred employees will lose their jobs, most by this spring.
Former long-time Concordia president Charles Schlimpert and most of his team of veteran administrators who ran the college as it fell into a financial tailspin had already left.
Student government treasurer Michael Pattiani attended the fundraising banquet and learned four days later how “bizarre” the night was.
“Somebody mismanaged this college,” said Pattiani, 36, an accounting student from Gresham. “Somebody lied. Somebody misrepresented the situation.”
Like many students, he is convinced administrators waited until right after the withdrawal date to announce the school would close.
Ries, a retired president of a sister school in Minnesota, started in January. Both schools are part of a larger Lutheran university system based in Missouri. He said he saw immediately when he arrived in Portland that the school was on an unsustainable financial course.
He sat down with reporters to discuss several of the records obtained by The Oregonian/OregonLive. He said many appeared to have been created before he was hired but did not question their authenticity. He confirmed that he had written the draft version of his report to trustees.
But he declined, multiple times, to confirm specific terms of Concordia’s obligations to HotChalk, as spelled out by some of the documents. “That’s proprietary information,” he said.
When asked how students should feel knowing so much of their tuition money went to HotChalk, his answer was generic.
“The message for students is that we're heartbroken,” Reis said. “We have been doing nothing but prioritize helping them transition to the next phase of their educational journey.”
A spokesman for HotChalk said in a statement that company executives were sad to learn Concordia would close. He declined to answer detailed questions about the company’s ties to the school.
“Throughout this recent challenging period for the university, we did our best to offer creative solutions to help the university survive and thrive into the future,” a statement said.
Challenging business model
Concordia wanted to grow. For several years, HotChalk helped Concordia do just that.
Together they launched an online Master of Education degree program, branded with Concordia’s century-old seal. Overall enrollment quadrupled between 2009 and 2013. The graduate student population grew twice as fast.
The small private college became one of the nation’s largest providers of Master of Education degrees.
For HotChalk’s “recruitment services,” the school reported paying tens of millions of dollars. The payments added up to $62 million during the school’s 2014 fiscal year – at 46%, representing nearly half of all tuition and other revenues Concordia brought in that year.
Questions percolated about where HotChalk stopped and Concordia began. Federal rules prohibit colleges from outsourcing more than half of their instructional programs to ensure the quality of degree programs.
The U.S. Education Department investigated the deal five years earlier, prompted by a whistleblower lawsuit filed by HotChalk employees. In July 2015, a federal prosecutor concluded the HotChalk program appeared to have violated laws.
Concordia and HotChalk agreed to pay $1 million to end the case but admitted no wrongdoing.
The settlement was largely unknown to the public until The Oregonian/OregonLive wrote about the school’s relationship with HotChalk in 2016. The news organization reviewed tax documents filed by 36 peer institutions from tax year 2013 and found no other schools that reported a contract with any company that came close in size and scale.
Months before reaching the settlement, Concordia officials identified dozens of steps to “increase compliance assurance” and realign “services provided originally by” HotChalk, according to a 2014 risk mitigation document provided to The Oregonian/OregonLive. Concordia would take control of hiring online faculty, offer academic support services year-round to online students and make financial aid decisions “all in Portland,” among other steps.
It’s not clear how many of those plans were realized. The school kept paying millions of dollars a year to HotChalk.
No longer under federal scrutiny, the partners faced a new challenge: Demographics.
Fewer young people pursued college as the economy recovered from the Great Recession. Colleges became more competitive amid a shrinking student pool.
Ries said the school’s total enrollment dropped from 8,000 four years ago to 5,400 today.
Changes in state laws compounded the problems. Fewer states required teachers to complete Master of Education degrees to attain full certification, cutting into what officials thought was an endless stream of students.
But Concordia owed HotChalk a growing share of tuition money, according to multiple internal documents reviewed by The Oregonian/OregonLive.
Ries said he could not confirm whether a document that listed the revenue split over time was correct. He declined to say how much Concordia owed HotChalk today.
“Vendor relationships like this are always proprietary,” he said.
HotChalk also declined to discuss terms of the agreement or say how much it is owed. In its statement, the company said it had “made long-term, significant and ongoing investments” in Concordia.
“We helped develop one of the most innovative online educational programs for teachers in the country,” it said.
Concordia’s internal revenue-share document says HotChalk’s cut increased to more than half in July 2019 and was slated to increase again in July 2020. Each bump would cost Concordia nearly $5 million, “even if no growth took place,” the document said.
Concordia would keep just $1 of every $3 in shared revenue by 2024.
“This gives a sense of the size of the business model challenge,” it said.
A massive liability
By 2018, Concordia’s situation was dire. Financial projections showed it might get worse.
The Oregonian/OregonLive obtained a “liquidation analysis” dated June 30, 2018. The analysis is a single page and lacks any sort of introduction that might offer a fuller explanation or additional context. Ries said he’d never seen it when presented with a copy Feb. 26.
Among Concordia’s largest potential obligations:
· $41.1 million to the Lutheran Church Extension Service, the financial branch of its parent church.
· $17.4 million to faculty members who had signed three-year-contracts.
· $4.9 million for a former Best Buy store near Portland International Airport that Concordia had leased for a satellite campus.
But all those liabilities paled in comparison to HotChalk. The analysis said Concordia could owe HotChalk $400 million in long-term contractual obligations.
A footnote offered additional detail, which has been edited for clarity: “Should Concordia terminate without cause, they are obligated to pay HotChalk an amount equal to the past 36 months of revenue, plus full reimbursement of revenue advances made by HotChalk at time of termination.”
“Conservatively, annual revenue would be $100 million annually, and the cumulative reimbursement depending upon the time of termination might well be an additional $100 million,” the footnote concluded.
To put the figure in perspective, the university’s 2019 audit said it had just $38.5 million in assets.
Presented with a copy of the liquidity analysis statement, Ries said he had never seen the statement, which would have been created more than a year before he arrived.
A September 2018 budget forecast for Concordia’s partnership with HotChalk said a “simple extrapolation of current trends” in revenues and costs showed Concordia would lose money on the venture in the foreseeable future.
By 2020, the “budget gap” would add up to $7.8 million for Concordia, the projections said.
The estimates relied on the online Master of Education and Doctorate of Education programs growing every year. Ries acknowledged the school and HotChalk sometimes did not meet set goals of how many students they hoped to enroll.
“Did we hit our enrollment targets? No,” Ries said. “We take joint ownership of that.”
Administrators announced in February 2019 that they would shutter a handful of degree programs -- English, history, chemistry, global studies and community psychology -- on its leafy 24-acre campus.
As financial losses mounted, the school drained its cash reserves from $11.4 million to $2 million between 2015 and 2017, according to an internal analysis.
Its parent church in Missouri extended credit lines. Concordia borrowed $9.4 million against the line in 2017 and $8.1 million in 2018, an audit from that same year says.
All the while, core college executives cashed larger paychecks. Charles Schlimpert presided over the university when it made the deal with HotChalk. His pay increased from $175,000 to $310,000 from 2010 to 2017, according to tax filings from those years.
A working phone number for Schlimpert could not be located.
He retired from his post in 2018 after more than three decades, while the college’s outlook started to slide.
Former Concordia professor Kris Kuhn said college leaders withheld information from faculty about administrative pay and the school’s deal with HotChalk, even when pushed for answers.
“The frustration is that accountability seems to get buried in the miasma of trying to preserve an institution's image at the cost of the truth,” she said.
A ghost campus
In November 2019, Concordia officials thought they’d gotten a temporary reprieve.
The financial arm of its parent church had agreed to ease Concordia’s cashflow crisis by extending a $4 million line of credit and by purchasing more than $5 million worth of Concordia bonds.
But at some point in January, the church reversed itself and withdrew its offer of more financial assistance, Ries confirmed.
The university’s “financial responsibility ratio,” a key benchmark used by education regulators to gauge a school’s financial strength, had fallen below what the U.S. Education Department and accrediting organizations considered acceptable.
Ries decided Concordia would have to be radically restructured to survive. It would have to eliminate its athletic program and several academic programs. It would have to lay off 130 to 150 professors and other staffers.
The plan would have been bad for teachers, athletes and the entire organization in Portland. It would have been great for a familiar player -- HotChalk. The contractor’s employees helped author the plan.
The reorganized university would have emphasized its online programs, according to the plan.
The turnaround plan called for HotChalk to keep its prominent role in recruiting and enrolling new students.
Concordia brought in other outside help in late 2019. It assigned two of its existing professional firms -- Portland accounting firm Moss Adams and law firm Stoel Rives -- to examine, among other things, the school’s relationship and liabilities to HotChalk. Stoel Rives was also assigned to analyze Concordia’s options, including bankruptcy, handing over control to a court-appointed receiver or winding down operations.
Ries said he presented trustees two options, but staying open would have meant cuts, and more cash issues, and possible issues with federal regulators. Ries said in his planned Feb. 4 speech to trustees that they had been kept in the dark about the relationship between enrollment and the school’s financial future.
“By the time enrollment processes were understood, and their effects on financial performance understood, the accumulated losses in net assets and cash were out of hand,” his draft speech said. “These gaps have also contributed to the paucity of reliable information that has been presented to the council of trustees.”
Facing all of this, Ries and others said later that they decided to move forward with the school’s February fundraiser, because trustees hadn’t decided for sure whether it would close.
“It was business as usual,” said Liz Loulan, a Concordia spokeswoman who sat in on the interview with Ries.
Loretta Smith, a candidate for Portland city council, paid for a ticket to attend the event. She thought the money would help underserved students.
“They had students from the Latino community talk about how it would help them get an education," she said.
“The emotional pull was seeing people thriving and that our money would be helping them,” Smith said. “So when we found out that they were closing, I was shocked. Everyone was shocked.”
Even as Concordia’s survival became increasingly doubtful, the school never stopped recruiting students. They arrived at teacher Fabian Carballo’s high school in Bloomington, California, last fall and convinced him to sign up for Concordia’s Doctorate in Education program. He started in December.
Months later, the social studies teacher got the shocking news that his new university was shutting down. No one ever warned him the school was in financial trouble, he said. By then, he had paid Concordia $22,000, all of which he had borrowed.
“No one will return my calls,” Carballo said. “It’s like a ghost campus.”
Everton Bailey Jr. of The Oregonian/OregonLive contributed to this report.
-- Jeff Manning
-- Molly Young
myoung@oregonian.com