Educational Promises Kept Despite Sour Economy

May 1, 2009       Tom Pope      

Ron R. Kitchens is finding money despite the economic problems faced by the nation. He beamed as he described receiving more than $80,000 for an educational scholarship program in Dieterich, Ill., while similar goals are in place in Effingham, Teutopolis, Altamont, and Beecher City.

Kitchens is chief executive officer of Southwest Michigan First, a community development group in Kalamazoo, Mich. The organization tries to find donors to support college tuition for local students.

Scholarship programs modeled after the Kalamazoo Promise offer the guarantee of a full college scholarship to almost any graduate of the Kalamazoo Public School district since November 2005.

“We’re one of the originators of the Kalamazoo Promise,” he said. “We provide public support services and marketing for Kalamazoo.”

Graduates from Kalamazoo Public Schools who live in the district and were students for at least four continuous years are eligible for the money.ÊThey must be admitted to a public Michigan university or community college, continue toward a degree or certification, and keep a 2.0 grade point average (GPA). The scholarship offers up to four years of tuition and mandatory fees, which could range from $2,000 a year for a full-time student to more than $9,000. Cost to donors is expected to run to $12 million a year once four classes of “Promise-eligible” students have graduated.

Kitchens doesn’t think the economic crisis will have an effect on the Promise because of the funding through a group of anonymous benefactors. The crisis could play a part in future promises in other areas, he said.

Kitchens was next off to Mt. Clemens, Mich. “We’re helping other communities start their version of a promise,” he said. “We haven’t seen a change in donors although it’s too early to know if people were in the pipeline and changed minds because of the economic conditions.”

The Kalamazoo Promise might be unique in having, “all the funding needed,” according to Michelle Miller-Adams, a visiting scholar at the Upjohn Institute who has written extensively on the Kalamazoo effort.

“Most of the speculation is that some donors are billionaires,” she said. “The promise will go on for decades based on the estates of the donors, and even if they lose a lot in the market, they still have the money.”

This version of the promise has funds, through anonymous donors, channeled through a holding company into a 501(c)(3) in perpetuity. No endowment is involved.

“The amount arrives from the holding company into the 501 every year based on the number of children enrolling in kindergarten in public schools,” she said.

Donors looked at a no-end date plan, as the effort is a multigenerational goal, according to Miller-Adams. Even if the enrollment doubled to more than 20,000, enough money would be in place.

Miller-Adams admitted the billionaires could decide to change their minds, although that is unlikely. “Unless they have some breakdown and forget they made their commitment, a change probably will not happen,” she said.

Any drastic change to end the program would still see every child in kindergarten today with money years from now, according to Miller-Adams. “At any moment there is 23 years worth of scholarships in the system,” she said.

In other areas, like the El Dorado Promise, an oil company made sure the program was fully funded from the start. Other cases find funding from various sources, such as an endowment. The Pittsburgh Promise was formed via a group of foundations.

“Other areas that aren’t lucky to have wealthy donors are at risk for funding problems from the market crisis,” he said.

Some privately-funded support is from donors who invested in real estate or the market, so the downturn will probably reflect on a decreased giving from them. The same could be true if a foundation’s portfolio is affected by the market.

“Some investment dollars might be reduced because of higher risk investments,” Kitchens said.

Accessing public support for revenue from casinos or taxes rather than an educational drive also doesn’t usually work well, according to Kitchens. “If it depends on tax dollars, people hesitate and the advantage to gain their help for a cause could be lost,” he said.

Kitchens uses the effort to assist in community development that is linked to the scholarship program. That development is hurt more than the promise by the crisis. His $50-million venture capital fund could face a lack of credit flow.

“We’ve seen dramatic increases in short-term interest rates that hurt expansion,” he said. “Capital investment projects are being put on hold because rates are too high or the available capital was minimized.”

Kitchens links the economic development with the Kalamazoo Promise in showing how his community has drawn people from 33 states and eight foreign countries. “We’ve helped rejuvenate the city’s school system,” he said. “We attracted 1,400 new students and more than 5,000 new residents during the past two years.”

Kitchens said that he does worry about the economic crisis on the future of development. “Last year we provided 6,000 new jobs,” he said. “If the market continues to sag, that will slow down home sales and job creation — we can encourage relocation only if the employment stays steady.”

The Oklahoma State Regents Office in Oklahoma City offers a promise similar to Kalamazoo, although that program is publicly funded. Basically, students sign on in the 8th, 9th, or 10th grades to a promise that if they take certain courses, maintain a 2.5 GPA, and stay out of serious trouble, that the tuition for up to five years will be covered. This is available to families with incomes limited to $50,000.

“The cost of the program has continued to grow,” said Bryce Fair, associate vice chancellor scholarships and grants. “We’re committed from the state with a priority so we’re assured the money will be there.”

Fair admitted that the overall revenue coming into the state is always a potential risk. The economic crisis could hurt the state’s budget.

Such an event would not have an impact on the program, according to Fair. The Oklahoma legislature put into action a funding law change in 2007 that dedicated a funding priority to take money off the top of the state’s general revenue fund for the program.

This is the first year of the Oklahoma Promise’s operation and an adopted funding estimate for next year’s program has been forwarded to a board that determines the amount the legislature has to appropriate.

“We have over $5 billion in the general revenue fund and $54 million was taken off the top for the promise,” he said. “If we lose a couple hundred million in the general fund, the money would still have to be set aside for a 100 percent coverage of the promise.”

Any desire to change the funding would require the legislature to change the law. “Legislators would have to oppose an educational program,” he said. “No one has mentioned any of that even though the economy is suffering.”

Fair’s office is able to estimate the number of students because sign ups can not occur after the 10th grade. “We have a fixed number of students in the program so we can predict how many qualify and go on to college pretty well,” he said.

Some states have a lottery for revenue or use the general fund. Those approaches can be more volatile or susceptible to economic swings, according to Fair.

The one variable is what happens with tuition rates. “We find out a year or so in advance what the increase will become,” he said. “We’ve been able to get close enough to avoid major problems.”

“Prior to the present process, we were dependent on an annual method of seeking funds,” he said. “That wasn’t as certain as it is now so we don’t anticipate insufficient funds this year or next.”

In Pennsylvania, the Pittsburgh Foundation acts as a donor and fiscal agent for the Pittsburgh Promise while a $100-million commitment from the University of Pittsburgh Medical Center over 10 years serves as a challenge grant.

“Their contribution is conditional on us raising another $15 million each year,” said Saleem Ghubril, the executive director for the Pittsburgh Promise. “I have noticed the tone of conversation changing from other donors who now sound more guarded and cautious.” Overall, the economy’s woes affecting the Pittsburgh Promise are not clear. “It’s still early on for us to notice an impact,” he said.

The Pittsburgh Foundation is the fiduciary agent for the Promise as a free-standing nonprofit corporation. The Pittsburgh Promise tells young people that a graduation from a public school with minimum requirements guarantees money will not be an issue.

The goals of the Promise are to provide the funds, help with preparation, and reform the public schools. “We want urban schools to become places that enable students to focus on Shakespeare rather than gunshots,” he said.

Currently the program promises every child who graduates between 2008 and 2011 up to $5,000 a year for four years of education. The class of 2012 could see up to $10,000 a year. While the 2008 scholarship worked only for tuition and fees, the future aims to cover the total cost of attending that would include books, along with room and board.

The Pittsburgh method is more diversified, according to Ghubril. Both the El Dorado and Kalamazoo depend on one source. “The donor with the wealth in Kalamazoo is probably one donor, and there’s one company in El Dorado,” he said. “That’s relying too much on one donor rather than a broader model.”

Miller-Adams credits the El Dorado community as being a closely-knit one where the oil company is dedicated to the effort. “The funding might not be that much of a problem,” she said.

Even the Pittsburgh Medical Center’s contribution is seen as only one part of the total need. “The Pittsburgh Promise will need a lot more from other sources, so the problem with one donor might not be a serious blow,” she said.

Most donors seem to view the timing from the economic crisis as being too soon to analyze how an impact will hit the promises. The Pittsburgh Medical Center declined to speak aside from the comment that the organization was not being affected at this time by the economic crisis.

Miller-Adams is optimistic. If the market becomes worse and the loss of portfolios turns billionaire donors in Kalamazoo into millionaires or they change their minds, the funding for the promise would be in place for 23 years.

“For three years the cost has only been $3 million,” she said. “There are many ways to do this cheaper, because we have a first-dollar scholarship system.”

That means students don’t have to apply for any other scholarship. The promise writes the college a check for the full amount of the tuition.

“The other way could be a last-dollar program where students find other financial aid either from federal or other institutions,” she said.

Funding isn’t the challenge, according to Miller-Adams. “The idea is that this is an investment, so most donors are not pulling back,” she said. NPT Tom Pope, a New York City-based journalist, writes on management issues.