Financial Impact and Response to COVID-19
To: W&L Faculty and Staff
From: Steve McAllister, Vice President for Finance
Subject: Financial Impact and Response to COVID-19
Date: April 7, 2020
I write to you today to provide important information regarding the financial outlook of the university. As employees, we all have a personal stake in W&L's financial stability, and we all play an integral part in its long-term success. I hope you will find this information useful in understanding the challenges Washington and Lee is facing today as a result of the COVID-19 pandemic.
As President Dudley has shared in previous communications, the university's immediate priorities as we moved to virtual instruction were:
- Supporting all of our students, and particularly our most vulnerable students;
- Helping our faculty and staff by ensuring employment through at least June 1, even if their usual work is not currently required;
- Treating W&L families fairly by refunding a pro-rated share of room and board; and,
- Helping the faculty convert their courses to virtual instruction while sustaining personal attention to students.
Thanks to your collective efforts and the financial health of the university, we have been able to meet these priorities. This is no small feat and illustrates the strength of our community to rally in support of our mission. We are fortunate to work at an institution that has the resources to pursue and accomplish these objectives.
These efforts come at a significant financial cost. In the current fiscal year, their cumulative cost will be at least $6.35 million.
Additionally, we are experiencing lower net revenue in a number of our operations, including Catering and the University Store, and anticipate lower gift levels as a result of the economic outlook across the country.
President Dudley and I have been in discussions with the Finance Committee of the Board of Trustees on these matters, and we have considered the financial adjustments that will need to be made in order to weather the impact of the crisis on the university.
Fortunately, the university benefits from the foresight of the creation of the Trustee Reserve fund, which will help to mitigate the impact of this financial challenge, just as it did during the Great Recession in 2008-09. The Trustee Reserve exists to provide operational support in times of financial hardship and has a current balance of almost $18 million. We will deploy these emergency reserves judiciously to see us through the economic downturn, the duration of which is uncertain.
The Trustee Reserve fund will be drawn down by approximately $7.6 million in the current year to offset the losses of revenue and additional expenses we have incurred as a result of the pandemic. The reserve will then have a remaining balance of approximately $10 million, which we expect to provide adequate supplemental support over the next two years, assuming that we also make appropriate adjustments to expenses and recognize that we simply cannot operate in a "business as usual" environment.
Outlook for 2020-21
Our financial model for the years ahead assumes that we will be able to resume residential education this fall. We are creating contingency plans in the event that we are unable to welcome students back to campus in September — a situation that would require us to take more serious steps. What I can share with you now are our expectations for 2020-21 and beyond, based on our current projections.
There will be a significant reduction in endowment payout in the 2020-21 fiscal year, due to the precipitous decline in financial markets. We currently expect the endowment payout to be $9.8 million less than was originally budgeted for 2020-21. We also anticipate that the economic downturn will result in families applying for additional financial aid and in donors reducing their charitable giving to the university in the year to come. In total, budgeted revenues for 2020-21 have been adjusted downward by $12.5 million. The Trustee Reserve will cover $7 million of this shortfall, but the remaining $5.5 million will have to be achieved through reductions in next year's expenses. If difficult economic conditions persist into 2021-22, the final $3 million in the Trustee reserve will be used for budget support. In the years beyond, we will need to rebuild the reserves so that W&L is well prepared for the next financial crisis, whenever that should come.
In consultation with members of the President's Cabinet and with the endorsement of the Finance Committee of the Board of Trustees, we have developed the following principles to help guide decisions on the management of expenses moving forward:
- Maintain the academic excellence and student experience that are hallmarks of W&L;
- Avoid layoffs, if at all possible, of the dedicated workforce that makes this such a special community.
Every W&L employee will need to help us meet our objectives. The following are the primary budget actions that will occur in 2020-21. We understand that these steps are significant, and we do not take them lightly. These measures are essential to being able to sustain our commitment to our employees, our students and our educational quality:
- A freeze on salary increases for the coming fiscal year. The only exceptions to this will be faculty promotions and staff promotions that have already been approved.
- Heightened scrutiny of position replacements as attrition occurs, reducing total employee headcount by approximately 3% over the next two years;
- A reduction in the maximum match to the employee retirement plan from 5% to 2.5%. The university will continue to make an automatic 5% contribution to the retirement plan for all eligible employees;
- Departmental budget reductions across the university;
- Reductions in the annual capital budget achieved by rescheduling projects that can be deferred.
More detailed information about these measures and the decisions that informed them will be included in the annual budget memo, which I will share with the university community next week. That memo will also include information about an already planned 7.8% increase in health insurance premiums, which was recommended by the Benefits Committee prior to this crisis situation in response to higher than anticipated insurance claims in recent years. The university will continue to cover 75% of the premium cost.
In addition to distributing the detailed budget memo, I will host a virtual town hall at 2:00 p.m. on Friday, April 24, where I will provide a financial briefing to the community on the decisions that have been made in establishing the 2020-21 operating budget and answer your questions.
I recognize that these are difficult and uncertain times for all of us. Our goal is to minimize the impact of this crisis on you while continuing to provide a high-quality education for our current and future students. I am confident that with the sacrifices each of us will make through this period, W&L will emerge from this crisis in a position to thrive and achieve the objectives that have been developed in the Strategic Plan. While challenging, we have a track record of emerging as a stronger institution from periods of economic downturn.
I appreciate your efforts and support during this unsettling time and wish you all good health.