How Southwestern Seminary is bouncing back from financial catastrophe

Over the past six years, we have spilt buckets of digital ink here bringing you the saga of Southwestern Baptist Theological Seminary in Fort Worth, Texas. I’m writing today not in the format of a news story but in the more personal format of an analysis piece, to bring some good news — finally — about this bastion of theological education for the Southern Baptist Convention.

At long last, there appears to be hope, as enrollment has stabilized and imminent financial catastrophe — that’s not hyperbole — has been averted.

I am not a dispassionate observer to these events, even though my connections are distant. I am a former student and staff member at Southwestern Seminary and was a small part of the team in the Russell Dilday years who promoted the school and helped raise funding for endowment and operations.

The fundraising campaign at that time, in the late 1980s, was called Upward 90. It was the second successful campaign of the Dilday years that endowed 12 faculty chairs and built several new buildings and launched new programs.

In 1990, Christianity Today released a poll of its readers ranking the effectiveness of American seminaries, and Southwestern Seminary was ranked No. 1 among the top 33 graduate theological schools in the nation. Thirty years later, the seminary was a shadow of its former self in both size and reputation.

Doing nothing would have been better

Before we get into the details of all that has transpired since then, here’s one important fact: Had Southwestern officials who came after the Dilday era — and even after the era of his successor, Ken Hemphill — simply left the endowment to grow through earnings and not added another dollar to it, it would be valued today at double what it is.

But that’s not what happened.

Instead, after the Dilday and Hemphill administrations, the seminary embarked upon a 21-year slide into financial precarity and enrollment losses unprecedented in the Southern Baptist Convention. That led to a cumulative two-decade deficit of $140 million.

My quest for the past year has been to tell the story of how this came to be and how it has been addressed. My research has included conversations with insiders both on and off campus, digging through two decades of financial reports with help from skillful accountants and lawyers, reading everything the seminary has published on the matter, and visits to campus.

The words in this article are my own and should not be attributed to any seminary official. I do not claim to speak for any administrator or trustee past or present. Obviously, others have helped inform my views, but these are not their words.

The bottom line is that what happened to Southwestern Seminary didn’t have to happen. And the near catastrophe that befell the school was not just the result of trustees wrongly firing Dilday as president in 1994. Even some SBC conservatives have said they think God has punished the school for the arrogance of its trustees in that fateful action.

Statistically, however, the problems did not start with Dilday’s firing and did not start with Hemphill’s hiring as his successor. The problems started when trustees forced Hemphill out of office and brought in Paige Patterson, co-architect of the SBC’s “conservative resurgence” as the conquering hero to lead the world’s largest theological seminary.

Patterson was and remains a larger-than-life figure to many admiring Southern Baptists — although the shine has worn off a bit lately as they’ve learned more about what was going on behind the scenes.

About that $140 million deficit

When David Dockery was named interim president after Adam Greenway’s departure in September 2022, he faced a sobering reality: The seminary did not have cash on hand to make the next payroll, and the school’s $5 million line of credit was maxed out.

He and trustee leaders worked a deal that would allow the school get additional credit in exchange for promises to cut spending by 10% immediately. Then eight months later, seminary leaders did something commendable yet notable for its rarity. They released 21 years of detailed financial audits.

“There is no other institution in the SBC that has shown the courage of financial transparency of Southwestern Seminary.”

There is no other institution in the SBC that has shown the courage of financial transparency as that of Southwestern Seminary. That came with a trustee report stating this sobering reality: “During the period from 2002-2022, annual operating expenses increased by 35% while SBC FTE enrollment decreased by 67%. The result of this failure to reduce operating expenditures was a $140.1 million cumulative operating deficit from 2002-2022.”

The audits show the trail, but that is complicated even for professionals to understand. Here, then, is a simple explanation of what transpired in those years.

From the beginning of Patterson’s presidency in 2003, expenses outpaced income.

He embarked on an expansion campaign that included construction of the 3,400-seat MacGorman Chapel and Performing Arts Center — at the time the largest performing arts venue in Fort Worth, larger than the renowned 2,000-seat Bass Hall — and a massive three-story missions building called Mathena Hall.

In 2000, shortly before Patterson’s arrival, the seminary dedicated the first phase of its Riley Center, a hotel and special events center that includes 55 guest rooms and multiple conference/banquet spaces that can accommodate up to 3,500 people.

Patterson also oversaw construction of Student Village Apartments, built in 2013 to replace aging apartments that were torn down. And then there was the controversial building erected in 2018 that is billed today as a Baptist Heritage Center but actually was intended as the retirement home of Patterson and his wife, Dorothy, before trustees later rescinded that decision when Patterson was fired.

Oh, and there was the purchase of alleged fragments of the Dead Sea Scrolls that the seminary later disavowed as possible forgeries. Trustees reportedly allowed Patterson to take $2.3 million from cash reserves for that acquisition — an amount that apparently never was repaid.

Amid all this were expensive campus renovations and lavish expenditures on big game hunts and international travel for the Pattersons, who renamed the president’s home Pecan Manor and had hired help to serve guests tea and cookies.

All while enrollment and income declined.

But that’s not all

Annual expenditures that exceed income makes for simple math. But that was only part of the problem at Southwestern.

Shortly after Patterson arrived as president, the seminary’s longtime vice president for business affairs, Hubert Martin, retired in 2004. He was the seminary’s chief financial officer when I worked there 20 years earlier. I knew Martin; he was a stickler for conservative financial policies, and nobody pulled anything over on him. He was tough as nails.

One of his legacies was always budgeting for depreciation. That’s an accounting term that doesn’t have to do with cash on hand but has a lot to do with how you report your assets and liabilities.

Simply put, you’ve got to account for changes in the value of the things you own over time. It seems that after Martin retired, the seminary stopped budgeting for depreciation which had the net effect of inflating the stated value of assets. Over time, that adds up to millions of dollars in inflated assets.

Patterson’s building spree also came with hidden costs. Once you open a building, you have to maintain it. There are utility costs, replacement costs, cleaning costs, mechanical costs, staffing costs. A $50 million building doesn’t cost just $50 million. Its annual upkeep is an expense that keeps on going.

Those upkeep expenses also piled up.

For all these reasons and more, Southwestern’s annual expenses continued to grow while income continued to decline.

The income picture

All six SBC seminaries have five major income inputs: Tuition and fees, endowment earnings, SBC Cooperative Program gifts, Annual Fund giving, and income from auxiliary enterprises such as housing and food service and book stores. Three of those five are tied to enrollment.

As Southwestern’s enrollment declined, so did the income streams from tuition and fees, auxiliary enterprises and the Cooperative Program. The latter, the denomination’s unified budget, funds seminaries on a complex formula based on a three-year rolling average of approved SBC student headcount. Because of the rolling average, the drops in SBC funding are more gradual yet still inevitable.

As Southwestern’s enrollment declined, enrollment at some other SBC schools grew, which shifted the proportion of the pie going to each of the six schools.

Declining enrollment — combined with the reality of more online students who do not need to live on campus — left more campus housing unused and not generating income.

“During the period from 2002-2022, annual operating expenses increased by 35% while SBC FTE enrollment decreased by 67%.”

Refer back to that statement from the trustees: “During the period from 2002-2022, annual operating expenses increased by 35% while SBC FTE enrollment decreased by 67%.”

Oh, and there’s one more cherry on top of this melting ice cream sundae: That time the SBC’s main investment firm fired Southwestern as a client.

Current Southwestern Chancellor O.S. Hawkins, while serving as president of the SBC’s GuideStone Financial Resources in 2009, fired the seminary’s Foundation board as a client. The reason: Those trustees were too difficult to work with and were uneducated about long-term investment strategies.

In a letter dated Feb. 20, 2009, Hawkins wrote to Patterson: “GuideStone Capital Management has resigned from the investment advisory relationship with Southwestern Seminary’s Foundation as of Friday, February 6, 2009. … Simply put, the working relationship had become intolerable and in many respects insoluble in a go-forward manner.”

Among the specifics Hawkins cited:

• “Some of the members of your committee increasingly acted in a hostile, unprofessional, condescending and disrespectful way toward our people.”
• “Your committee has become in some ways dysfunctional.”
• “There is a huge philosophical difference related to investment management between the seminary Foundation board and GuideStone.”
• “Our people have never been treated nor talked to in such an unprofessional manner as certain members of your board have spoken to members of our staff.”
• “The board has little experience in asset management or endowment fund management and thus in our opinion has disregarded conventional endowment fund management concepts.”

The timing could not have been worse.

The two-month period from Jan. 1 to Feb. 27, 2009, represented the worst start to a year in the history of the S&P 500 with a drop in value of 18.62%. By March 2, the Dow Jones Industrial Average Index had dropped more than 50% from its October 2007 peak.

Southwestern was forced to withdraw its assets from GuideStone at the lowest point in the market cycle. Those millions of dollars in endowment funds were kept liquid for about six months, and when the funds eventually were reinvested, the seminary had lost about $30 million in value.

Some looked at this gap in retrospect and assumed the seminary pocketed the difference. That does not appear to be the case; rather, the value simply vanished.

How did the seminary stay afloat?

Anyone with a basic knowledge of income and expenses would understand no household, business or school can go on indefinitely spending more than they take in. Which rightly leads us to ask how Southwestern Seminary stayed afloat as it accumulated $140 million in deficits.

The answer is simple: Cash reserves and redirected endowment funds.

“By the time Patterson was fired and Greenway was pushed out, those cash reserves were gone.”

During Martin’s tenure as CFO, and during the presidencies of both Dilday and Hemphill, the seminary built up huge cash reserves as a protection against down years. By the time Patterson was fired and Greenway was pushed out, those cash reserves were gone.

That’s why on his first week as interim president Dockery faced the immediate threat of not making payroll. There was no cash in reserve. It had been spent.

That alone was not enough to make ends meet the prior two decades, though. The other major stream of stopgap funding came from redirected endowment gifts.

To be clear, seminary officials swear to me they have found no evidence of endowment gifts being redirected without a donor’s consent; to do so is a federal crime. I don’t have access to the details of these changes, but I do find this claim hard to swallow.

Here’s a single example raised to me by Benjamin Harlan, who served as dean of the School of Church Music from 1995 to 2003, leaving just as Patterson came on board.

“The most significant financial gift to the SWBTS School of Church Music was from Kathryn Sullivan Bowld for whom the Bowld Music Library is named,” he said. “Her gift, in excess of $10 million, provided for capital improvement, scholarships, instrument purchases and upkeep, and three endowed professorships in the names of James McKinney, Robert Burton and Al Travis, beloved professors all.”

Those funds originally were managed by GuideStone and likely were among the assets moved in 2009, Harlan said. “The unanswered questions: What was the value of those funds prior to their withdrawal by internal seminary management? What is the value of those funds today? How much would those funds have been worth had they continued to be managed by the GuideStone professionals who understood the daily fluctuations in the value of investments? What were those funds used for? What is being done to make those funds whole?”

The donor, who was an older student at Southwestern during my tenure there, died in 2000. It would not have been possible to consult her about redirecting those funds — if, in fact they were redirected. However, there is another possibility.

Many legal instruments describing large gifts to institutions — particularly for endowments — come with “what if” clauses that allow changes to be made if, for example, a program ceases to exist or if there no longer are students from rural Wisconsin needing scholarships.

It is likely many of the redirections of seminary endowment funds that appear to have kept the school afloat in the Patterson years could have been moved on this legal basis. But again, it’s hard to know without a thorough forensic accounting.

There’s yet a third way seminary officials appear to have balanced the books, and that is by temporarily using other designated funds as a kind of loan to the operating budget. Take, for example, gifts given for any of the major construction projects. Often those funds are raised in advance, and it appears such funds could have temporarily cushioned the cash flow problems.

Consider this fact: The Student Village Apartments, built in 2013, carried an interest-only note from 2013 to 2021. No principal was paid down on that $15 million loan until 2021.

The Greenway years

After trustees fired Patterson, they turned to Greenway, whose primary academic administration experience was a stint as dean of the Billy Graham School of Evangelism at Southern Baptist Theological Seminary in Louisville, Ky. Greenway hit the ground running in Fort Worth, pledging to correct the excesses of the previous administration.

Despite those intentions, he appears to have fallen victim to the same kind of grandiose visions that plagued Patterson. As enrollment and income continued to slide, he kept spending money.

Greenway notoriously laid off faculty and then hired new faculty at higher salaries, creating a greater strain on payroll than he had eliminated.

“Greenway went through three CFOs in his brief tenure as president.”

All this created internal conflict with his own staff who were sounding the alarm on spending but were unheeded. Greenway went through three CFOs in his brief tenure as president. At the end, he claimed he didn’t know the financial situation was as precarious as it was, yet there is a paper trail documenting his knowledge.

And then there’s COVID-19. Educational institutions everywhere took a hit.

Like many other schools, Southwestern applied for and received a $4.5 million PPP loan from the federal government to help keep people employed. That loan was completely forgiven.

At the same time, trustees authorized a $10 million extra drawdown from endowment assets due to the critical challenges of the pandemic. Also not repaid.

Both those infusions were one-time solutions, not new annual income. Despite that reality, the seminary did not reduce its spending. There was no behavioral change.

In the end, trustees accused Greenway of financial mismanagement, a charge he denies. Yet the financial record is clear: The cupboard was left bare.

What ultimately forced Greenway’s ouster was a last-ditch scheme he proposed to liquidate restricted scholarship assets and have the seminary endowment purchase the seminary campus as its sole asset, thereby converting the endowment to a cash infusion.

Trustees said no way.

Why isn’t Southwestern Seminary bankrupt?

Were Southwestern Seminary a smaller institution or a younger institution, it would be out of business — bankrupt. Even the extensive cash reserves once on hand and the availability of endowment funds to move around had reached a limit.

The irony is that the seminary is asset rich while being cash poor. The school still owns 180 acres of land even after recently selling off 20 acres of unused student housing in a deal that netted more than $14 million.

That infusion of cash came none too soon — just two years after Dockery discovered he might not be able to make payroll his first month as interim president. The first allocation of the $14 million went to wipe out $6.8 million in short-term debt. The rest went to rebuild cash reserves, which now stand in excess of $12 million.

And the truth is, the seminary still has more unused land it could sell. Trustees have authorized a study group to explore all options.

There are pluses and minuses to the potential sale of land.

A plus is the seminary has large swaths of vacant land it acquired but never developed that would be appealing for large-scale development. Another plus is the school has a 3,400-seat performing arts center it uses two times a year for commencement and that is vastly too large for its twice-weekly chapel services. Not to mention more classroom space than is currently needed due to the fact that 55% of its students now attend class online and its enrollment is half what it once was.

A minus is that the seminary is located on the south side of Fort Worth in what might best be described as a lower-income neighborhood. Most of the neighborhoods adjacent to the seminary are comprised of small wood-frame houses built before or immediately after World War II.

For now, seminary officials say they are open to all possibilities and are encouraged by the recent sale of the Carroll Park student housing property to a coalition of nonprofits. They want to get the most value out of their real estate, but they also want to have good neighbors.

What solvency looks like

The marker seminary leaders most want to talk about is called the Composite Financial Index. That’s gobbledygook to most of us, but it carries great weight with accrediting agencies and education groups.

This is a scale that measures financial responsibility and capacity. It assesses whether an institution has the liquid assets to meet its obligations. The scale runs from zero (very bad) to 1.5 (minimal acceptable) to 3 (highest possible).

In 2022, Southwestern’s score was less than zero, meaning it could not be any worse. Today, it is 3, the highest possible score.

While this scale seems arcane and obtuse to most of us, it is a number that matters a lot in the world of education. And the fact that this number has risen from zero to an acceptable range within two short years is a remarkable feat.

“We cannot completely dismiss the trustee board, which aided and abetted the gross mismanagement of this institution in the years prior.”

Credit must be given to President Dockery and his leadership team, along with some trustees who have found the light. We cannot completely dismiss the trustee board, which aided and abetted the gross mismanagement of this institution in the years prior. Some of these are the same trustees who blindly followed Patterson and Greenway to the brink of catastrophe.

Dockery has been the steady hand at the wheel who has brought sanity back to the administration at Southwestern Seminary.

There’s also an unsung hero among the trustee board, a man unknown to most Southern Baptists who should be credited with saving the seminary. His name is John Rayburn, and he’s a businessman and real estate investor in North Fort Worth.

Toward the end of the Patterson administration, Rayburn became chair of the trustee Business Administration Committee and is the person who instigated an audit of how restricted gifts were being used. It was this damning evidence that began the process of Patterson’s firing, before the allegations of mishandling a sexual abuse claim piled on.

And it was Rayburn who later sounded the alarm about Greenway’s runaway spending and detachment from the reality of cash insolvency. Amid a trustee board that had been puffed up with Patterson yes men, here is a person who stood above the fray and did the right thing.

This year, the seminary has a $35 million budget, with $12 million in income from tuition and fees, $8 million in endowment earnings, $6.2 million in Cooperative Program gifts, $3 million in Annual Fund giving and $7 million from auxiliary income.

With $160 million in endowment value, Southwestern remains the best-endowed of the six SBC seminaries. The next-closest is Southern Seminary, with $110 million.

And now, about half the seminary’s endowment funds are managed once again by GuideStone — the SBC ministry that once fired Southwestern as a client.

To circle back to the beginning, while all this is good news for now, the reality is Southwestern Seminary likely would be a more vibrant and financially secure institution today had the Patterson administration never happened.

For now, and especially for all you who swear BNG never reports any good news from the SBC, hear me clearly: For the first time in many years, Southwestern Seminary appears to be on stable footing. The seminary is indeed sustainable. If there’s a class on miracles, this should be in the curriculum.

 

Related articles:

Southwestern Seminary says land deal erased its short-term debt

Southwestern trustees release 20 years of financials that show devastating decline began under Patterson

Southwestern trustees change their mind: David Dockery will now be interim president, and O.S. Hawkins will be senior advisor

Land deals have been part of Southwestern Seminary’s story from the beginning

Southwestern trustees told previous administration made ‘imprudent’ and ‘unwise’ financial decisions

Layoffs begin at Southwestern Seminary

Southwestern appears to have stopped the bleeding