John R. Smith – Financial Vice-President
In 1970 Boston College hired John R. Smith as Financial Vice-President with the assignment of shepherding the institution out of the worst financial crisis in the school’s history. Smith was both eccentric and brilliant. He came from the Healthcare industry and had no experienced in Higher Education, but this unfamiliarity probably allowed him to provide a fresh and innovative approach to fiscal management and policy.
Of significance was Smith’s recognition that the application of information technology was going to be transformative, allowing management to better budget and control costs and to provide timely information and communications. So as one of the conditions of his employment, Smith prevailed on Fr. Frank Shea (Executive Vice-President) to have the Computer Center report directly to the Financial Vice-President.
I first met John Smith while he was interviewing for the job. It was a Saturday or Sunday afternoon and I was working in the basement of Gasson Hall and Fr. Shea was giving Smith a tour of the Computer Center. Smith asked Fr. Shea if he could talk privately with me for a few minutes. The conversation was routine: what was my job, organization, resources, size of staff, issues, etc.
Not long after Smith was appointed he called me to his office. Back in 1970 the entire Financial Office staff was housed in a single room in the area now known as Gasson 100, and the Financial Vice-President’s office was no more than a cubicle. Before our conversation commenced Smith forewarned me that he would ask me some of questions that were going to make me uncomfortable but he needed honest answers. Smith didn’t know me but I assume that he was impressed by the fact that when he met me I was working extra hours on a weekend. Smith asked me for an evaluation of each of my fellow Computer Center employees, including the Director. The Director held a dual appointment as a tenured faculty member in Mathematics Department and Director of the Computer Center. Within a week of my meeting with Smith, the Director was removed from his position. I didn’t like the circumstances but it was the right move. In the end I was also impressed by Smith’s decisive management approach and his commitment to getting the job done. With the Computer Center operating without a director Joe Harrington and Bruce Clement continued to proceed with the design and creation of new Financial Accounting System, and Susan (Kremer) Riley and I worked on the development of an Undergraduate Admissions and Student Record System. Eventually Rev. Joseph Pomeroy, S.J. was appointed as the new Director.
When John Smith took over management of the fiscal affairs of BC, the existing approach to fiscal management could be described as a “Mom-and-Pop, Pay-As-You-Go” model. The University would take in money, principally from tuition, pay out expenses and hopefully there was a surplus in the end; much like a family manage their household bank account. Unfortunately BC was spending more than it was taking in. In addition the contribution of Jesuit services, which helped to defray expenses, were declining and contributions from the Jesuit Fund could no longer cover shortfalls. Tuition increases or fund raising then became the only options for getting income and expenses back in balance. Smith quickly recognized that in addition to stronger fiscal management and budget control, new and different business approaches were needed.
John had a folksy way of viewing of issues and reaching solutions. I used the term “folksy” because he had the gift of explaining an intricate fiscal issue and the solution in a way that was easily understood by non-financial people. Smith also didn’t pretend to be technology-savy but rather he would pose an issue and ask for possible solutions from experts (both business and technology) before he would pursue an encapsulated and progressive direction.
Smith determined that the University needed to build the Endowment at the same time eliminating the practice of escalating tuition increases. Concurrently the University was also being pressured to meet the demands for more on-campus, student housing. Adding more funds to the Endowment while escalating the building of new dormitories didn’t add up fiscally to anyone but Smith. Smith rationalized that schools could handle the debt for new resident halls in much the same manner as individuals take a mortgage to buy a home. This concept of “depreciation funding” was the opposite of the existing practice of raising funds first and then building. The only problem with Smith’s approach was that standard college and university accounting practices didn’t recognize and accept the concept of depreciation. Smith went about pioneering the concept of depreciation funding and with the assistance of the University’s external auditors (Coopers Lybrand). And in 1976 the concept was approved by the Financial Accounting Standards Board (FASB). Fifteen years later the FASB ruled that that Smith's concept of depreciation should be a requirement for all colleges and universities.
Smith’s logic was simple. A building (dormitory in this case) has a useful life, for example 50 years. So the occupants (resident students) should share by paying the cost equally spread over the useful life. This approach was in contrast to the standard practice of accounting for the total cost upfront and students 20 or 30 years from now getting to live in a building that was paid in full many years earlier. In accounting terms Smith's concept called for an annual “use allowance” that would be charged against every asset that was depreciated.
Smith also recognized that the Federal Government was offering extremely low interest rates with the hope of encouraging colleges and universities to construct student housing. The time period was the early 1970s when commercial interest rates rose into double digits with private home mortgages reaching as high as18 percent. For Smith it was a perfect storm. He could borrow money from the Feds at a very low rate to build a new dormitory, depreciate the asset over the useful life, charge a use allowance against tuition and fees, and park the principal in a high-bearing interest account or investment.
The proceeds that were realized from Smith’s building and accounting scheme became known as the Quasi-Endowment and gave BC a needed jump-start in growing its Endowment Fund. Back then the Endowment Fund was in the range of $5 million; today the Endowment is approaching $2 billion. The demonstrated growth in Endowment had the additional effect of helping the University increase its bond rating, which in turn helped in accreditation and has made it easier for the University to borrow more money at lower rates.
As John liked to say, “The more we can borrow and the bigger our debt, the more money we will make.” The statement would seem counter-intuitive but Smith made it work. Smith’s fiscal genius not only helped BC get out of debt but also established Boston College as a fiscal model that was copied by institutions across the country. Borrowing for capital expenditures escalated rapidly across the country until years later the Federal Government stepped in capped the limit for each institution. By that time Boston College had expanded its undergraduate resident population from approximately 10% to 90%, built or remodeled most its academic, administrative and recreational facilities. In the information technology sector the purchase of capital equipment, such mainframe computers and the build-out of the campus network, were all financed as capital expenses. Utilizing Smith’s scheme allowed Information Technology to launch many progressive and expensive projects, such as the Agora Project that brought voice, data, and cable TV services to every student in the dormitories. The beautiful, modern and high-technological campus that we have today is in large part a byproduct of John Smith’s genius.
In 1970 Boston College hired John R. Smith as Financial Vice-President with the assignment of shepherding the institution out of the worst financial crisis in the school’s history. Smith was both eccentric and brilliant. He came from the Healthcare industry and had no experienced in Higher Education, but this unfamiliarity probably allowed him to provide a fresh and innovative approach to fiscal management and policy.
Of significance was Smith’s recognition that the application of information technology was going to be transformative, allowing management to better budget and control costs and to provide timely information and communications. So as one of the conditions of his employment, Smith prevailed on Fr. Frank Shea (Executive Vice-President) to have the Computer Center report directly to the Financial Vice-President.
I first met John Smith while he was interviewing for the job. It was a Saturday or Sunday afternoon and I was working in the basement of Gasson Hall and Fr. Shea was giving Smith a tour of the Computer Center. Smith asked Fr. Shea if he could talk privately with me for a few minutes. The conversation was routine: what was my job, organization, resources, size of staff, issues, etc.
Not long after Smith was appointed he called me to his office. Back in 1970 the entire Financial Office staff was housed in a single room in the area now known as Gasson 100, and the Financial Vice-President’s office was no more than a cubicle. Before our conversation commenced Smith forewarned me that he would ask me some of questions that were going to make me uncomfortable but he needed honest answers. Smith didn’t know me but I assume that he was impressed by the fact that when he met me I was working extra hours on a weekend. Smith asked me for an evaluation of each of my fellow Computer Center employees, including the Director. The Director held a dual appointment as a tenured faculty member in Mathematics Department and Director of the Computer Center. Within a week of my meeting with Smith, the Director was removed from his position. I didn’t like the circumstances but it was the right move. In the end I was also impressed by Smith’s decisive management approach and his commitment to getting the job done. With the Computer Center operating without a director Joe Harrington and Bruce Clement continued to proceed with the design and creation of new Financial Accounting System, and Susan (Kremer) Riley and I worked on the development of an Undergraduate Admissions and Student Record System. Eventually Rev. Joseph Pomeroy, S.J. was appointed as the new Director.
When John Smith took over management of the fiscal affairs of BC, the existing approach to fiscal management could be described as a “Mom-and-Pop, Pay-As-You-Go” model. The University would take in money, principally from tuition, pay out expenses and hopefully there was a surplus in the end; much like a family manage their household bank account. Unfortunately BC was spending more than it was taking in. In addition the contribution of Jesuit services, which helped to defray expenses, were declining and contributions from the Jesuit Fund could no longer cover shortfalls. Tuition increases or fund raising then became the only options for getting income and expenses back in balance. Smith quickly recognized that in addition to stronger fiscal management and budget control, new and different business approaches were needed.
John had a folksy way of viewing of issues and reaching solutions. I used the term “folksy” because he had the gift of explaining an intricate fiscal issue and the solution in a way that was easily understood by non-financial people. Smith also didn’t pretend to be technology-savy but rather he would pose an issue and ask for possible solutions from experts (both business and technology) before he would pursue an encapsulated and progressive direction.
Smith determined that the University needed to build the Endowment at the same time eliminating the practice of escalating tuition increases. Concurrently the University was also being pressured to meet the demands for more on-campus, student housing. Adding more funds to the Endowment while escalating the building of new dormitories didn’t add up fiscally to anyone but Smith. Smith rationalized that schools could handle the debt for new resident halls in much the same manner as individuals take a mortgage to buy a home. This concept of “depreciation funding” was the opposite of the existing practice of raising funds first and then building. The only problem with Smith’s approach was that standard college and university accounting practices didn’t recognize and accept the concept of depreciation. Smith went about pioneering the concept of depreciation funding and with the assistance of the University’s external auditors (Coopers Lybrand). And in 1976 the concept was approved by the Financial Accounting Standards Board (FASB). Fifteen years later the FASB ruled that that Smith's concept of depreciation should be a requirement for all colleges and universities.
Smith’s logic was simple. A building (dormitory in this case) has a useful life, for example 50 years. So the occupants (resident students) should share by paying the cost equally spread over the useful life. This approach was in contrast to the standard practice of accounting for the total cost upfront and students 20 or 30 years from now getting to live in a building that was paid in full many years earlier. In accounting terms Smith's concept called for an annual “use allowance” that would be charged against every asset that was depreciated.
Smith also recognized that the Federal Government was offering extremely low interest rates with the hope of encouraging colleges and universities to construct student housing. The time period was the early 1970s when commercial interest rates rose into double digits with private home mortgages reaching as high as18 percent. For Smith it was a perfect storm. He could borrow money from the Feds at a very low rate to build a new dormitory, depreciate the asset over the useful life, charge a use allowance against tuition and fees, and park the principal in a high-bearing interest account or investment.
The proceeds that were realized from Smith’s building and accounting scheme became known as the Quasi-Endowment and gave BC a needed jump-start in growing its Endowment Fund. Back then the Endowment Fund was in the range of $5 million; today the Endowment is approaching $2 billion. The demonstrated growth in Endowment had the additional effect of helping the University increase its bond rating, which in turn helped in accreditation and has made it easier for the University to borrow more money at lower rates.
As John liked to say, “The more we can borrow and the bigger our debt, the more money we will make.” The statement would seem counter-intuitive but Smith made it work. Smith’s fiscal genius not only helped BC get out of debt but also established Boston College as a fiscal model that was copied by institutions across the country. Borrowing for capital expenditures escalated rapidly across the country until years later the Federal Government stepped in capped the limit for each institution. By that time Boston College had expanded its undergraduate resident population from approximately 10% to 90%, built or remodeled most its academic, administrative and recreational facilities. In the information technology sector the purchase of capital equipment, such mainframe computers and the build-out of the campus network, were all financed as capital expenses. Utilizing Smith’s scheme allowed Information Technology to launch many progressive and expensive projects, such as the Agora Project that brought voice, data, and cable TV services to every student in the dormitories. The beautiful, modern and high-technological campus that we have today is in large part a byproduct of John Smith’s genius.