The General Theological Seminary discovered that as far as the Department of Education is concerned, a $29 million lump sum they received on a development lease is a huge liability on their balance sheet.
According to an article in the Chronicle for Higher Education, the Department of Education says this makes the seminary one of 114 private institutions of higher learning that failed their test of financial stability.
The Very Rev. Ward Ewing, Dean and President of the Seminary, says this “belongs in the category of “stranger than fiction” or “you’ve got to be kidding.”
Ewing wrote an open letter to students, faculty, alumni and the church explaining the situation.
So how can a lump sum payment of $29 million be anything but an asset? Because according to Generally Accepted Accounting Procedures (GAAP), they won’t be able to count the full value of the money until the a 99-year land lease the Seminary signed with the Brodsky Organization to develop a new building on their property runs out.
Ewing writes:
Why did we fail the test? Because we received a payment of $29 million for this lease that in accounting terminology is a liability. For accounting purposes, we cannot count the full amount as income; rather we only count what we would receive each year in rent. This is analogous to a designated gift. When we receive a designated gift, we do not count the gift or grant as income until it has been spent on the designated purpose. Should we not spend it on the designated purpose, we would have to return the funds. Therefore, until the gift is spent, it is a potential liability. In the same manner, for accounting purposes the income for the lease is $29 million ÷ 99 = $292,293 each year for 99 years. The balance remains a liability on our financial statements.
Our audit is correct in showing this $29 million as a liability, even though the lease has unquestionably improved our financial situation. We have asked the Department of Education to change our score, but it is not certain, given the limitations of their formula, that they will. We have also written The Chronicle of Higher Education asking for some form of correction or clarification from them. We expect this clarification to be published.
The Seminary will probably have to remind people of this accounting rule every year for quite a while. Ewing says that “It is possible (another part of “you’ve got to be kidding”) that this will happen every year until the liability is so small as not to effect the Department’s formula.”
The whole letter, which went out as an e-mail, is below the fold.
THE GENERAL THEOLOGICAL SEMINARY OF THE EPISCOPAL CHURCH
THE VERY REVEREND WARD B. EWING
DEAN AND PRESIDENT
An Open Letter to General Seminary’s
Faculty, Staff, Students, Friends, Alumni/æ, and the Church at Large
June 11, 2009
When is a $29 million lease a liability?
When it is listed according to GAAP (Generally Accepted Accounting Principles).
This letter is in response to an event that belongs in the category of “stranger than fiction” or “you’ve got to be kidding.”
As you may know, just over a year ago we signed a 99-year land lease with the Brodsky Organization to develop the new building on Ninth Avenue for which we received a lump sum payment of $29 million. Later we received another $4 million as a result of inflation. I was surprised when our annual audit last year showed this as a liability, but it was explained to me (see explanation below), and I thought nothing more about it.
Then this week this accounting practice came back to us in a shocking and unfortunate manner. In the issue of The Chronicle of Higher Education dated June 12, 2009 there is an article under the headline “More Than 100 Colleges Fail Education Department’s Test of Financial Strength” in which GTS is listed as one of the “114 private, nonprofit degree-granting colleges that are in such fragile financial condition . . . that they failed the Department’s financial-responsibility test.”
Why did we fail the test? Because we received a payment of $29 million for this lease that in accounting terminology is a liability. For accounting purposes, we cannot count the full amount as income; rather we only count what we would receive each year in rent. This is analogous to a designated gift. When we receive a designated gift, we do not count the gift or grant as income until it has been spent on the designated purpose. Should we not spend it on the designated purpose, we would have to return the funds. Therefore, until the gift is spent, it is a potential liability. In the same manner, for accounting purposes the income for the lease is $29 million ÷ 99 = $292,293 each year for 99 years. The balance remains a liability on our financial statements.
Our audit is correct in showing this $29 million as a liability, even though the lease has unquestionably improved our financial situation. We have asked the Department of Education to change our score, but it is not certain, given the limitations of their formula, that they will. We have also written The Chronicle of Higher Education asking for some form of correction or clarification from them. We expect this clarification to be published. It is possible (another part of “you’ve got to be kidding”) that this will happen every year until the liability is so small as not to effect the Department’s formula.
The Chronicle of Higher Education is read by many officials in institutions of higher learning throughout the country. It is most likely that others will see General Seminary listed in this article. In the light of other seminaries’ decline, this article will encourage rumors that General Seminary may close. I write to assure you that the event that put us on this list is actually part of the reason we are financially healthier today than we were two years ago!