Parameters for the 2021-22 Operating Budget

To: Members of the University Community
From: Steve McAllister
Subject: Parameters for the 2021-22 Operating Budget
Date: April 9, 2021

As has been common practice in years past, I write to you today to share information on the development of the 2021-22 University Operating Budget. Before going into the details, I think it is important to provide some context on decisions relative to prioritization of expenses, especially given the challenging environment we have faced as a university over the last year and which may continue into the 2021-22 fiscal year.

Last fiscal year, with the need to go virtual midway through the Winter Term, we experienced a $4.8 million operating budget loss. In the current year, we anticipate a loss of approximately $3.0 million, which includes an estimated $3.75 million in direct costs associated with managing the COVID-19 environment. Both of these deficits are being underwritten by the Trustee Reserve Fund, which was established by the Board of Trustees utilizing operating surpluses to mitigate periods of economic challenge.

In building the expense projections for the 2021-22 fiscal year, we prioritized the following actions:

  • Restoring the reduction in the university's match on the employee retirement contribution to a maximum 5% match instead of the current 2.5% match;
  • Providing a cost-of-living adjustment for salaries and wages across the university;
  • Beginning to restore the Trustee Reserve Fund based on a protocol developed in the spring/summer of 2020; and,
  • Generating some flexibility to cover costs that may be incurred as we continue to operate within the COVID-19 pandemic.

Accomplishing these goals requires continued tightening of discretionary departmental expenses; however, should projections play out as currently anticipated, we expect that such tightening can be relaxed beginning in the 2022-23 fiscal year. With these points as background, let me share more detailed information related to the assumptions that will guide the development of the final 2021-22 Operating Budget.

Revenues

  • Entering class size of 475 at the undergraduate level and 120 at the Law School, as well as four additional transfers above historical levels as we work to expand the number of transfers-in. Retention of returning students at the five-year average, and 70 students participating in Fall Term or Winter Term Study Abroad (71 participated in 2019-20 prior to the impacts of COVID-19).
  • Undergraduate tuition and fees were approved to increase 3.5%, while Law School tuition increases by 2%. At the undergraduate level, tuition and fees are as follows: tuition at $58,260, room at $8,600, board at $7,670 and fees at $1,120. For the Law School, tuition is $51,060. It should be noted that with adjustments across other peer institutions, we are at the mean for tuition, room and board in the current year. As such, we can shift to "maintenance" increases in order to remain at the peer mean in future years. We reached this position a year earlier than anticipated.
  • We will defer for one more year the implementation of an increased meal plan structure requiring a minimum meal plan of 15 meals per week for every student. Revenues have been adjusted to reflect this deferral.
  • The undergraduate aid budget allows the first-year class to accommodate an additional five Questbridge students (taking us from 15 to 20 in the entering class) as part of the Diversity, Equity and Inclusion (DEI) initiatives announced over the summer. Additionally, with the admitted applicant pool now known, we have included a contingency within the first-year aid budget to reflect an admitted pool that includes an increase in the number of students who would qualify for aid. Otherwise, parameters around the undergraduate aid budget remain static. It is worth noting we have retained $375,000 in economic hardship funds for returning students whose families may have experienced negative economic consequences from COVID-19 that did not emerge in the aid awards for the current year. In what may be a somewhat surprising outcome, undergraduate aid has remained well within budget for the current year, and there has not been significant pressure through the year for adjustments or reconsideration of awards. Law School first year admissions is targeting a 50% discount rate, which is down from the budgeted target in 2020-21 of 55%.
  • Aggregate net tuition revenues are expected to be up by 0.8% with the Law School seeing a 7% increase. It is important to recognize that even with the increase in undergraduate tuition, all undergraduates receive a subsidy toward the cost of their education. This subsidy, estimated at more than $14,000 per undergraduate, is underwritten by endowment payout and outright gift support. Students receiving financial aid receive an even larger subsidy toward the cost of their education.
  • Endowment returns through February 2021 yield a 16.0% increase for the fiscal year. This increase allows us to follow the policy-defined incremental adjustment of inflation plus 1% in unit endowment spending for 2021-22, with the 5% payout cap not coming into play (the current estimate calculates a 4.60% payout in 2021-22). Our current return assumption for the endowment in subsequent years is based on the most recent assumption on the mid-term return environment of 6.9% from Makena Capital, our outsourced investment office.
  • L.P. Evans Distribution growth has a lowered assumption of 2.5% growth based on what has been slowing dividend growth for the trust in recent years. This translates to a smaller allocation to the Capital Reserves from this source in 2021-22, and likely the inability to fund the Capital Reserve under the modeled formula in future years. Additional focus will need to occur in this area over the coming year as we fall short of best practices from a financial planning standpoint.
  • Short-term investments assumptions continue to anticipate the low interest rate environment through much of next fiscal year. We project an earnings rate of one-half of 1%.
  • The Annual Fund will likely be impacted in a negative way whether the university's name remains the same or it changes. For purposes of modeling, we have assumed a 10% decline from the 2019-20 year for 2021-22. We recognize the naming decision may have a more dramatic negative impact on the Annual Fund, which would require us to adjust both revenue and expense assumptions in future years.
  • Under the assumption we will have weathered the worst of the COVID-19 pandemic by the end of this academic year, we anticipate a rebound in Auxiliary operations. However, it is unlikely that Catering and the University Store will rebound to pre-2019-20 levels in 2021-22. As a result, while Auxiliary operations revenues will certainly grow beyond the those of the past two years, they will remain muted by historical standards.

Overall, revenues for 2021-22 are estimated at $155.7 million, an increase of 5.9% over the current year budget.

Expenses

  • Salary and Wages will benefit from a cost of living adjustment of 1.5% with small additional funds to support promotions, structural and equity adjustments.
  • Positions reflect the new positions that were identified and hired this year as part of the University's DEI initiatives. Positions in the departments of Mathematics and Chemistry are also additive and funded through savings that have been achieved in recent years from faculty retirements. A retirement incentive program that was offered to a number of administrative and staff employees in Fall 2020 proved helpful in lowering compensation costs during this period of financial challenge.
  • The most significant change within the benefits budget is the return to the maximum 5% match on employee contributions into the plan. We had lowered the match to 2.5% for the 2020-21 year with the hope we would be able to return to the full match in 2021-22.
  • While the restoration of the retirement contribution was a priority, I am happy to note we are slated to have no increase in health insurance premiums in 2021-22. This outcome results from better overall claims experience, as well as savings that will be achieved through the change in pharmacy benefit management.
  • The Educational Grant program (tuition benefit for dependent children) budget reflects a significant change in the cost of the program as the per-participant benefit dropped substantially in the current year, leading to a downward revision in projections for the foreseeable future.
  • To meet the desire to restore the retirement contribution and provide cost of living adjustments while still maintaining some flexibility to cover potential costs associated with COVID-19 in Fall 2021, we expect S&E/Departmental budgets will hold flat, with reductions made in discretionary areas to take advantage of certain gains that we learned are possible during the pandemic. Discretionary expenses such as travel and entertainment can be reduced, as we know Zoom and other approaches can be an effective alternative to some in-person meetings and visits. In areas that fall outside of departmental control (utilities, property/casualty insurance, taxes, etc.), we anticipate some increases.
  • For the purpose of departmental budgeting, we will provide departments with a base budget utilizing these parameters and allow them to seek exceptions through a written process to be managed by the deans and vice presidents.
  • We have built in $200,000 for COVID-19 costs in 2021-22. This allows us to maintain a COVID-19 testing facility on campus, as well as to lease four mobile classrooms to better serve in-person instruction should social distancing requirements and some level of screening testing be needed in 2021-22. As you will see below, we have capacity to increase this budget if needed.
  • The Annual Capital Budget will increase from the current year (when excepting capital costs associated with COVID-19) to $4.56 million. As with the current year, the budget will be targeted to address replacements and deferred maintenance, with a small amount available to provide funding for enhancement projects. In addition, we have identified $403,000 in projects within the approved list that we are going to hold until we have a better sense of the costs we may need to incur for COVID-19 in Fall 2021. Should our COVID-19 costs exceed the allocated budget of $200,000, we will reallocate up to $403,000 from the Annual Capital Budget to the COVID-19 line and defer this group of projects until the 2022-23 Annual Capital cycle.
  • Debt Service assumes that no new debt service and no refinancing occur, though we continue to explore opportunities for refinancing that may lower our annual debt service costs. The schedule simply follows our known principal and interest payments with an assumption that the interest rate for the 2018B Variable Rate note with Century Bank is at 2.5% for budget purposes -- higher than the current rate, which is less than 1%.

Expenses before reserve allocations are estimated at $154.0 million, an increase of 4.0% over the 2020-21 expected result before accounting for extraordinary expenses.

Operating Results and Reserves

  • The good news is the model yields a slight surplus in 2021-22 after beginning the restoration of the Trustee Reserve (one percent of total revenues dedicated to this purpose). Our forecast also meets the expected growth in the allocation to the Trustee Reserve in 2022-23 (2% of revenues) and 2023-24 (3% of revenues) and then maintains that level in 2024-25, subject to a cap to be defined in the coming year by the administration and Board of Trustees. As importantly, it allows us to provide in 2021-22 a cost-of-living adjustment for salaries and wages and a return of the retirement match contribution back to 5% in 2021-22, following a year of salary freezes and a reduction in the match to 2.5%.
  • As the public health response to COVID-19 appears to be turning the corner, we are optimistic that 2021-22 will resemble a school year that operates more closely to normal. However, uncertainty on the question of the name change decision remains as we make commitments for 2021-22. Should that decision lead to greater financial implications than built into this model, we must be realistic that the majority of the response from an operating perspective will need to be factored into our budget for 2022-23.

I look forward to discussing these parameters and the factors that have played into these decisions at the town hall sessions planned for April 13 at 9:00 a.m. and April 14 at 4:00 p.m.

Thank you for your patience and cooperation as we have navigated this challenging year. I hope this update has provided a good overview of our financial picture as we approach the fiscal year ahead.