Parameters for the 2023-24 Operating Budget

To: Members of the University Community
From: Steve McAllister
Subject: Parameters for the 2023-24 Operating Budget
Date: April 19, 2023

As in years past, I write to you today to share information on the 2023-24 University Operating Budget. Before going into the details, I want to share some of the more notable factors influencing revenues and expenses for 2023-24.

Aggregate revenues expected to only grow by 2.2% over current year revenues;
Revenue growth constrained by two factors: flat net student fees and negative return environment of last eighteen months will likely trigger 5% payout cap on internal endowment;
Compensation budgets anticipated to increase by 4.2% with a faculty and staff salary pool of 3.0%, a 5.1% anticipated increase in benefits costs and the balance of the growth resulting from new faculty and staff positions for 2023-24;
Continued investment in the university's strategic plan expected, with new faculty and staff positions and programming to advance a number of these initiatives funded through the Board of Trustees' authorization for special draw on endowment;
Inflationary pressures continue to lead to additional growth in departmental budgets;
New debt that is planned to be issued in the spring of 2023 has only a modest impact on the budget as interest expense is offset by earnings on the project funds and principal repayment is deferred for the first two years.

In developing the budget, there are a number of guiding principles that inform the process each year. These include a strong desire to operate at breakeven or a modest surplus, maintain Trustee and Capital reserves at appropriate levels, continue to increase accessibility and affordability through financial aid, provide competitive salaries and wages, ensure an appropriate and strong benefits package, adhere to a responsible endowment payout policy, and manage debt within reasonable fiduciary parameters. In some years, we can meet these objectives without significant conflict among them, and in other years, we have to make choices between competing priorities among these principles, which may lead to some in the community viewing the budget process outcome as less than ideal. With that as background, let me provide some context on the various components of the budget and the assumptions relative to those variables.

Revenue Factors

Entering class size of 467 undergraduate students and 120 law students. Retention of returning students at five-year averages, and 75 students participating in Fall or Winter term study abroad which has been the norm in recent years, excepting years at the height of the pandemic.
Approved increases to undergraduate tuition and fees of 4.5% and law school tuition of 2%. Undergraduate tuition will be $63,315, with room at $9,230, board at $8,455 and fees of $1,210. Law school tuition is established at $53,120. As noted below, even increases in these rates does not necessarily translate into additional net revenues from students.
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 2022, the budget has capacity to accommodate gains in the number of Pell-eligible students for the incoming first-year class. Otherwise, parameters around the undergraduate aid budget remain static. Law school first year admissions is targeting a 60% discount rate, which is up from the budgeted target in 2022-23 of 52.5% in hopes that the additional aid will help yield an increase in the median LSAT of the 1L class.
In spite of the increases in tuition and fee rates, net student fees (gross student fees less institutional student aid and scholarships) are expected to be 2.2% greater than budgeted in 2022-23, but decline from the expected 2022-23 result by 0.7%. It is important to recognize that even with the increase in the undergraduate tuition rate, all undergraduates receive a subsidy toward the cost of their education. This subsidy, estimated at $17,300 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. When combined with the -7.0% return in 2021-22 and spending in 2021-22 and 2022-23, it is likely that endowment payout in 2023-24 will hit the 5.0% spending cap rule rather than being able to adjust payout by inflation plus 1%. The value of the internal endowment has fallen from its high of $1.50 billion at June 30, 2021 to $1.32 billion as of February 28, 2023. This limits the expected increase in endowment payout available to operations to just 1.6%. However, in support of certain objectives within the university's strategic plan, such as the DeLaney Center, expansion of the Leading Edge program, and increased opportunities for student research and internships, the Board of Trustees has authorized a supplemental payout of $2.0 million for 2023-24. With this supplement, endowment payout will grow by $2.7 million in 2023-24, or 5.4% over the current year budgeted level.
P. Evans Distribution, the largest of the trust held by others distributions, is expected to grow by 4.5% based on the increase in the Coca-Cola dividend. This is in line with the growth of this distribution in the current year. The L.P. Evans trust is expected to generate $17.8 million in support of the university in 2023-24. As an aside, the cumulative distributions from the L.P. Evans Trust exceeded $250 million to the university in the current year. The distribution in the first year in which W&L was a beneficiary of the trust, 1954-55, was just $23,786.
As interest rates have increased, we have seen short-term investment earnings increase as well. While we are not necessarily anticipating significant increases over next academic year, we do expect rates to hold at current levels for the foreseeable future.
The Annual Fund showed a strong rebound last year and broke the $10 million barrier again. In the current year, we have seen the fund continue to grow but at a much more modest rate, and anticipate achieving the public goal of $10.25 million. Continued modest growth is anticipated for 2023-24. The Annual Fund along with spendable gifts supporting student financial aid are expected to grow by nearly 4% year-over-year to nearly $12.4 million in aggregate.
Auxiliary services have fully moved past the challenges to their operations as a result of the pandemic. Nevertheless, these supporting businesses are still challenged by the changes in course material delivery and declines in use of print media. While the University Store and the Copy Center have continued to modify their operations to reflect these changes in the marketplace, growth is muted with only a 3.3% increase anticipated in 2023-24 over the current year's expected result.

Overall, revenues for 2023-24 are estimated at $173.9 million, an increase of 4.4% over the current year budget and only a 2.2% increase over the current year estimated result.

Expense Factors

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 2023-24 is the salary pool adjustment which includes a 3% salary pool to be allocated by deans and vice presidents to help mitigate increased cost of living. I have had many conversations over the last eighteen months related to the challenges of inflation, especially in light of the salary pool increases since 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, the philosophy has also focused on the need for real wage growth over time. This latter objective usually translates to salary pools that exceed inflation in low inflationary environments while being challenged to keep up with inflation in higher inflationary environments as we have witnessed over the last two and a half years. As inflation pressures ease, I fully expect to see future years' salary and wage pools that are greater than 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%.
Position increases reflect new positions hired in this year but not planned in the 2022-23 budget along with those that have been approved for 2023-24. Among those that are included in the 2023-24 budget are faculty positions that are affiliated with the DeLaney Center but also supplement their home department curricula. Two positions supporting student health and counseling will be added, along with a new position in Career Placement focused on medical professions, an Assistant Dean for Student Success in the Law School, a full-time technician in the IQ Center, an additional Athletic Trainer to support not just intercollegiate athletics but growth in club and intramural sports, a new Assistant Director of Admissions who will focus on the visitor experience, and two new Grounds staff members as the university transitions away from a contract service for maintenance of the grounds for Greek Housing.
The benefits budget is anticipated to grow by 5.1% in 2023-24 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 by the university, and a 6.0% increase in s health insurance premiums. This increase in health insurance follows medical trend cost changes. The university recently employed a benefits consultant who manages a consortium of similar colleges and universities. It is anticipated that this arrangement will lead to less volatility in health insurance costs going forward and may lead to savings from the current structure through participation in the consortium.
As we look to 2023-24, most departmental budgets are expected to experience growth over the current year budget levels as inflation has impacted the costs of many goods and services. Utilities are expected to grow by 14% over the current year's budget while software licenses and maintenance are increasing on average by 5% to 6%, and we have all felt the impact of inflation on travel with higher lodging, food and fuel prices. Property and liability insurance continues to face a hard market with projected rate increases in the low double digits. As we look at departmental budgets, there is very little discretionary spending based on the programs and services that we offer, and as such budgets have little room for adjustment without impacting programs. 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 this challenging environment.
The Annual Capital Budget will increase from the current year of $4.86 million to $5.16 million. As with the current year, the budget is targeted to address replacements and deferred maintenance. Given the inflationary environment, this increase simply allows us to keep pace with this investment in facilities and equipment. With requests that nearly doubled the amount of the available budget, academic deans and department heads have been able to identify other funding to help supplement the capital budget to advance high priority needs. This allows the university to stretch these funds to reach a greater number of needs and priorities across the campus.
By June 30, 2023, the university will issue $52.7 million in new debt supporting projects that advance the strategic plan as well as address needed renewals across the campus. Fortunately, we have determined that we can structure the debt to minimize the impact on our debt service schedule. Interest expense in 2023-24 will largely be mitigated by earnings on the proceeds from the debt as the projects are completed. In addition, principal repayment will not begin until 2025-26, and even then, the majority of the principal due will be deferred until 2034-35 and beyond. Overall, we anticipate debt service in 2023-24 increasing by less than 3%.
While preliminary models for the 2023-24 operating budget anticipated an allocation to the Trustee Reserve of $1.0 million, given the revenue constraints along with expenditure drivers, including the desire to maximize our salary pool, we do not anticipate making such an allocation in 2023-24. With the fund reaching nearly $22 million by the end of this fiscal year, we believe that there is adequate capacity for the fund to mitigate the impacts of a significant financial crisis, just as it did in the Great Financial Crisis and the pandemic.

Expenses are estimated at $173.9 million, an increase of 2.4% over the 2022-23 expected operating result.

Operating Results and Reserves

Constraints within revenues with net student fees being flat and the internal endowment distribution likely to be impacted by the 5% payout cap limit the level of growth in the budget in spite of continued inflationary pressures on expenditures.
A special allocation authorized by the Board of Trustees from endowment will allow for investments in the strategic plan, and the expenditure budget focuses on balancing the needs to continue to invest in current faculty and staff while being mindful of the costs of other essential goods and services as well as obligations for investment in the university's facilities.
The university will forego its planned allocation to the Trustee Reserve within the budget for the year as it prioritizes other spending.
With inflationary pressures starting to show some level of easing, and the university seeing growing momentum in fundraising toward strategic initiatives, it is anticipated that 2024-25 will reflect a better budgetary environment in which the university can begin again making real gains in compensation while still making the necessary investments to ensure continued quality and growth of programs and services for the betterment of the student experience.

I hope this has provided a good overview of our financial picture as we approach the year ahead. I know many of you were able to attend the Budget Town Hall on April 12. For those who were not able to attend, there is a video capture of the town hall session available.