To: Campus Community
From: Steve McAllister
Subject: 2009-10 Operating Budget Update and Parameters
Date: February 12, 2009
This year has posed a number of financial challenges. I want to describe how the economy will affect the 2009-10 Operating Budget. As you will see, while we will all need to make sacrifices to ensure that the University maintains a strong financial position through 2009-10, the University will proceed with a number of strategic initiatives in the coming year. Highlights of the 2009-10 budget include continued increases in student financial aid (as a result of the Johnson Program) and in faculty and staff salary pools, which allow for further progress to address differences between our salaries and those of our peers (using the Lenfest Challenge plus other specially designated funds). This occurs in a context in which revenues will be reduced by an estimated $10 million from initial projections. The following provides greater detail into these highlights.
First, on the revenue side: With the market value of the endowment down 17 percent through December, payout from the endowment will almost assuredly be impacted. The current forecast anticipates that the endowment allocation for operations will be $24.3 million in 2009-10. This is $4.0 million less than the University will receive in the current year, and $6.8 million less than we would have projected for 2009-10 had investment returns for the year been positive. But endowment allocation alone is not the only element. With interest rates at low levels, short-term investment earnings are expected to be less than one-half of the amount earned just a year ago. The forecasts for both philanthropic support and distributions from trusts held by others are also more conservative than in past years.
Within this economic climate, President Ruscio has identified as a priority the need to ensure that Washington and Lee continues to be a financially viable option to our students and parents. The administration recommended, and the Board of Trustees approved, an undergraduate tuition increase of 4 percent, while holding the Law School increase to 5 percent. Student financial aid, however, will grow more rapidly for two primary reasons. The first is the continuation of the Johnson Scholars Program for its second year, ensuring that another entering class will receive about 40 full scholarships on top of the regular financial aid program. The second factor is a contingency fund to address cases where circumstances for a family have changed from a year ago. Finally, in efforts to hold down costs for families, room and board rates will increase 4 percent and 5 percent, respectively, in 2009-10, their lowest levels of increase in several years. Projections for Auxiliary Enterprises reflect a modest increase in the contribution that will be made to help underwrite the academic program in 2009- 10. Overall, revenues for 2009-10 are expected to fall by at least $5.7 million from the current budget and $9.9 million below our initial forecast for 2009-10.
Second, the University has been using a portion of recent budgets to build reserves. Both the actual reserves and the commitment to the allocation to reserves provide tremendous flexibility to address this significant change in the revenue picture; however, even with this level of flexibility, we will ask departments to tighten their belts.
As many of you are aware, the University's single largest expenditure component is compensation. While there will be no new positions in 2009-10 other than those with external funding, there is good news to report on the compensation front. The pool for faculty and staff salaries has been established at 2.9 percent, with a condition that no full-time employee will receive an increase of less than $1,000. In addition, on the faculty side, the Lenfest Challenge will provide additional funds that will be allocated based upon a structure developed by the deans and provost. On the administrative and staff side, a pool of $150,000 will address equity issues between our salaries and those of our peers. As one of the key elements identified in the strategic plan and one that President Ruscio highlighted earlier in the year as a priority for funding, it is believed that these funds will allow the University to improve salaries relative to competitors within the market. Beyond salaries, benefits make up a significant portion of the compensation budget.
We are fortunate that there will be no major changes in benefit programs for 2009-10. The University is currently receiving pricing on the health insurance plan and, based upon preliminary indications, will be able to renew within the anticipated budget without changes to the plan. If the final pricing permits, the administration will again consider increasing the portion of premium that the University covers above the current 66 percent level. Finally, as part of the Work-Life Initiatives on campus, a number of new wellness programs have been established (Weight Watchers at Work, Smoking Cessation, etc.) that will be continued into 2009-10. The Human Resources Office is looking at developing additional programs to promote healthy lifestyles.
Departmental budgets as a whole will not be as fortunate. In developing the parameters, we first identified areas of greatest discretionary spending as the first and most immediate source for potential expenditure relief. They include reductions in operating budgets for the following components: travel, entertainment, printing and publications, library acquisitions, postage and subscriptions. Where reductions are sought, targets of 10 percent to 15 percent in those areas will be needed to meet the University's budget objectives. The majority of other elements will need to be held flat, recognizing that certain expenses fall outside of a department's control. I know that many of these will not be easy and may limit a department's ability to address needs as in the past; however, it was felt that this was preferable to reductions in other expenditures, such as salary and benefits. In the budget submission process (which will be distributed to budget managers early next week), an aggregate target budget will be provided, and I will ask all managers to adhere to this target as they make their submission for 2009-10.
Third, another area of discretionary spending is capital projects. In recent years, the University's operating budget has provided more than $4 million annually to support capital spending. For 2009-10, this has been reduced to $3.2 million. With the strong cooperation of deans, department managers and others, the 2009-10 capital projects budget has been successfully completed and approved by the Board of Trustees. Please recognize that to achieve this result, a number of changes in practices will need to occur in 2009-10. One example is a change in the desktop computer replacement cycle. For 2009-10, the automatic replacement cycle will be abandoned in favor of replacing equipment based upon documented need. While this change cannot be sustained in the long term (and reduce costs significantly), savings can be achieved over a one- or two-year period.
Related to capital spending are the University's debt service obligations. While we continue to look at ways to lower our annual debt service payments, no immediate options warrant the risk/reward payoff. Debt service in 2009-10 is scheduled to be $9.24 million, which is $200,000 less than the current year's budget.
Finally, as I noted above, reserves have played a major role in recent years in budget development. Reserves to accommodate potential revenue shortfalls, capital needs and endowment allocation reductions were created and have been building since the start of the decade. These reserves provide an additional option for the University to address this changing environment. In the current year, the budget called for an allocation of $6 million to the various reserves. Our original forecasts for 2009-10 identified additions to these reserves of $7.3 million. Based upon the economic circumstances, the administration requested and received authorization from the Board of Trustees to suspend these additional allocations to reserves for the short-term. This change eliminates the need to make more immediate adjustments to operating budgets for 2009-10 and is a testament to the forward thinking and prudent financial management that the Board of Trustees has sought in recent years.
I hope that this memorandum provides you a better sense and context for decisions that have been and will be made related to the 2009-10 Operating Budget. Washington and Lee University is in a relatively strong financial position, and these actions will help assure that we remain so.
On a final note, it is imperative that we look internally at ways to be more efficient in our daily routines and examine how we can generate savings within our own departments and jobs while preserving our key programs and services. Your ideas for budget control are welcome. Over the next few weeks, President Ruscio and I will be holding town hall meetings to discuss these parameters specifically, and the impact on future planning. I hope that you will make every effort to attend one of these sessions.
As always, should you have any questions or need additional information, please do not hesitate to contact me.