Parameters for the 2022-23 Operating Budget
To: Members of the University Community
From: Steve McAllister
Subject: Parameters for the 2022-23 Operating Budget
Date: April 20, 2022
As in years past, I write to you today to share information on the 2022-23 University Operating Budget. Before going into the details, I want to share some of the more notable factors influencing revenues and expenses for 2022-23.
- A salary increase pool of 6.0% for faculty and staff, with additional pools to address promotions and equity adjustments;
- Continued investment in the University's Strategic Plan with new faculty and staff positions that help to advance certain initiatives;
- Increases in departmental budgets, reflecting emergence from restrictions in operations brought about by the pandemic as well as inflationary pressures on day-to-day activity;
- Expansion of the benefits budget to underwrite a significant increase in health insurance while altering the premium structure to ensure affordability and access to health insurance for our lower-paid staff;
- Robust revenue growth, primarily driven by increased endowment payout and growth in net student fees over the 2021-22 year budget.
There are a number of guiding principles that inform the budget process. These include a strong desire to generate a modest surplus, fund Trustee and Capital reserves to appropriate levels, continue to increase accessibility and affordability through financial aid, provide competitive salaries and wages, ensure an appropriate and strong benefits package, and adhere to a responsible endowment payout policy, among others. As we emerge from the pandemic environment and a 2021-22 academic year during which we have experienced more normal operations than the previous year, we face new and different challenges. Most notably, we are experiencing the highest inflationary environment that many of us have seen during our careers. The planned budget reflects a number of changes in base assumptions that attempt to mitigate this new challenge.
- Entering class size of 467 at the undergraduate level and 120 at the Law School. Retention of returning students at five-year average, and 75 students participating in Fall or Winter Term Study Abroad, a return to the pre-COVID norm.
- Approved increases to undergraduate tuition and fees of 4.0% and Law School tuition of 2%. Undergraduate tuition is $60,590, room is $8,945, board is $7,975 and fees are $1,160. Law School tuition is $52,080.
- We will implement a new meal plan structure requiring a minimum plan of 7 meals per week for every student. Revenues have been adjusted to reflect this adjustment. This requirement will likely be increased to a 15-meal minimum plan when we are able to renovate the Marketplace and expand capacity to accommodate greater student traffic. This change allows us to ensure that every student has access to at least one quality meal a day.
- The undergraduate aid budget has been structured to at least retain gains made in recent years on enrolling a more diverse student population. Should the admissions pool depth allow and yields remain at levels for the class that entered in the fall of 2021, the budget has the capacity to accommodate additional modest gains on this front. Otherwise, parameters around the undergraduate aid budget remain static. It is worth noting that we have retained $250,000 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. Law School first-year admissions is targeting a 52.5% discount rate, which is up from the budgeted target in 2021-22 of 50% in hopes that the additional aid will help yield a more diverse 1L class.
- Net student fees are expected to be 4.4% greater than budgeted in 2021-22 but decline from the expected 2021-22 result by 1.6%. This reflects the impact of COVID-19 on Study Abroad numbers, especially in the fall of this year. 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 $13,000 per undergraduate, is underwritten by endowment payout and outright gift support. Students receiving financial aid get an even larger subsidy toward the cost of education.
- Endowment returns through February have been effectively flat for the fiscal year. However, with the extremely strong return in 2020-21 (+36.6%), we are still able to follow the policy-defined incremental adjustment of inflation plus one percent in unit endowment spending for 2022-23, with the 5% payout cap not coming into play (the current estimate calculates a 4.49% payout in 2022-23). In a high inflationary environment, the payout policy formula helps increase endowment revenues to a level that can underwrite the growing expenses that result from inflationary pressures. Our return assumption for the endowment in subsequent years is based on the most recent assumption on the mid-term return environment of 7.7% from Makena Capital, our outsourced investment office.
- L.P. Evans Distribution, the largest of the trust held by others distributions, is expected to grow by 4.7% based on the increase in the Coca-Cola dividend. This is nearly twice the growth rate for the distribution over the last two years. The L.P. Evans trust is expected to generate $16.6 million in support of the University in 2022-23. As an aside, in 2022-23, the cumulative distributions from the L.P. Evans Trust will exceed $250 million to the University. The distribution in the first year in which W&L was a beneficiary of the trust, 1954-55, was just $23,786.
- Short-term investments have begun to rebound with recent interest rate increases. We anticipate additional rate increases over the balance of this calendar year, which will generate nearly twice the level of revenue in 2022-23 as budgeted in the current year.
- The Annual Fund has rebounded in the current year. As of the end of March, it is tracking at 5% greater than last year's results at the same time and is expected to continue that trend through the balance of this year. We would anticipate further improvements in the fund in 2022-23, projecting the fund to exceed $10.0 million for the first time since the 2020 fiscal year.
- Under the assumption that the COVID-19 pandemic will have minimal impact on operations in 2022-23, we expect Auxiliary revenues to continue to rally back from the significant declines experienced through the pandemic. Conservatively, they are budgeted at $5.86 million in 2022-23.
Overall, revenues for 2022-23 are estimated at $165.7 million, an increase of 6.6% over the current year budget.
- The compensation budget remains the largest driver of expenses at the University. The budget changes from year to year based on three primary drivers: salary and wage pools, benefit adjustments and changes in positions. The most significant of these in 2022-23 is the salary pool adjustment which includes a 6% salary pool to be allocated by deans and vice presidents to help mitigate increases in costs of living as well as to recognize performance. I have had many conversations in recent months related to the challenges of inflation, especially in light of the salary pool for the current year and the salary freeze in 2020-21. While our pay philosophy has been, and I anticipate will continue to be, one in which we target salaries to be competitive with our academic peers, I do believe over the long-term, salary growth will exceed inflation. Beyond the base pool, the University also has budgeted pools for promotion and equity adjustments for faculty and staff. These pools supplement the base by approximately .5%.
- The benefits budget is anticipated to grow by 10.3% in 2022-23, with the growth being driven by higher salaries, as many benefits are correlated to the underlying earnings of an employee, increases in the number of faculty and staff employed at the University, and a material increase in the University's health insurance premiums. Of course, as noted in the memorandum from the Employee Benefits Committee, the University restructured health insurance premiums for 2022-23 to make health insurance more affordable to lower-income employees. This is just one step that the University has taken in recent years to raise compensation levels of the lower-paid members of our community, with the other notable adjustment being the increase in the minimum wage for full-time employees to $15.76 in the current year with an increase to $16.25 in 2022-23 planned.
- Position increases reflect new positions hired this year but not planned in the 2021-22 budget, along with those that have been approved for 2022-23. Among those that are included in the 2022-23 budget are the Associate Provost for DE&I, a Physician Assistant in Student Health and Counseling, two additional custodians in Athletics to help maintain the recent investments in indoor athletic and recreation spaces, expansion of six administrative assistant positions primarily supporting academic departments, a data analyst in Facilities Management and two positions in Communications to assist with internal and campaign communications. Beyond these, the Board is underwriting, pending successful fundraising, three positions to staff the DeLaney Center (Director and two faculty lines) along with staff to support the expansion of the Leading Edge program and outdoor education and student recreation programs.
- As we look to 2022-23, we believe most departmental budgets will experience growth as significant mitigation of the pandemic allows us to return to a far more normal operating environment which will include greater travel and professional development activities. In addition, the impact of inflation on the materials and supplies required for the day-to-day operations of the University is driving budgets higher. I want to express appreciation to budget managers for the timely submittal of budget requests and the care that was taken to evaluate current spending and determine where adjustments needed to be made given these two overarching themes. Based on the initial reviews, the requests were thoughtful and well-documented. In addition, many reflected changes in operations where the pandemic has helped us identify ways that expenditures could be reduced without impairment to programs.
- In 2020-21, the University expended over $4 million toward COVID mitigation efforts, and in the current year, we anticipate that we will expend $1.25 million, with the bulk of this going toward testing. The 2022-23 operating budget does not anticipate significant expenses for the continuation of these efforts as we shift from treating COVID-19 as a pandemic to an endemic. If, over the coming months, we determine that we need to employ substantial mitigation efforts, then we will work with the community to find temporary budget reductions to underwrite those costs.
- The Annual Capital Budget will increase from the current year of $4.39 million to $4.86 million. As with the current year, the budget has been targeted to address replacements and deferred maintenance, with a modest but growing amount available to provide funding for enhancement projects. In addition, in working with the Deans and departments, a number of projects that will advance are accompanied by financial support from sources other than the Annual Capital Budget allotment. This allows the University to stretch these funds to reach a greater number of needs and priorities across the campus.
- Debt Service assumes that no new debt service and no refinancing occur. 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 has been less than 1% over the current year.
Expenses before reserve allocations are estimated at $164.6 million, an increase of 7.0% over the 2021-22 operating budget.
Operating Results and Reserves
- Robust revenue growth allows the University to invest in people and programs to advance the University's Strategic Plan. In addition, the revenue growth provides the University with the ability to increase expenses to mitigate many of the impacts of higher inflation.
- With an arsenal of tools to combat the impacts of COVID now available, we see 2022-23 as a "normal" year from an operating perspective. We recognize that the past two years have challenged us as a community, and each of us made sacrifices in order to serve our students as well as possible under the circumstances. We are grateful for these efforts.
- With revenues modestly exceeding expenses, we can also comply with the Board of Trustees' request to allocate $1 million into the Trustee Reserve in 2022-23. Having achieved the desired Trustee Reserve funding, we will be able to utilize future surpluses to consider ways to advance Strategic Plan efforts, strengthen our balance sheet, or both.
I hope this has provided a good overview of our financial picture as we approach the year ahead, and I hope many of you were able to attend the Budget Town Hall on Monday, April 18. For those who did not, there is a video of the town hall session available.