Staying True to Mission in a Resource-Constrained Environment
This impressive list of accomplishments, in some respects, may be more remarkable given the economic environment in which higher education finds itself today. As the media has persistently and ably chronicled, colleges and universities are under greater scrutiny to justify fees, student debt levels, mission creep and a so-called country-club environment that some campuses are accused of creating.
We are different in most respects. Instead of mission creep, we developed and are implementing a strategic plan that is focused on our uncommon strengths, on the development of character of our students and on the importance of access to our programs. Meeting these objectives has resonated with alumni, whose philanthropy has played a major role in our ability to achieve many of these strategic initiatives.
But philanthropy is only one part of the equation. Over the last several years, we have focused greater attention on managing costs while making certain that these efforts do not hamper our mission. This means steering a delicate balance. The interrelationships among activities and programs often serve multiple purposes and constituencies. But we simply must achieve that balance in an environment where revenue growth is slow, and we are committed to controlling our price.
In identifying areas on which to focus cost containment or cost reduction, we must first be sure that nothing we do adversely affects the core educational program. For example, we have identified utility management as a promising area for cost reduction. In April 2009, we participated with approximately 30 other schools in a conference sponsored by the Jessie Ball duPont Foundation on energy management and how this group of schools might better manage consumption. We left with eyes opened. We learned that within this group of 30 schools, we had the highest energy use per square foot.
We immediately recognized an opportunity. Since that time, we have developed an Energy Master Plan that outlines necessary actions to reduce consumption and the carbon footprint over various time periods. This plan yielded two initiatives. The first is our Five for Five plan: Projects intended to improve our infrastructure and equipment to generate greater awareness and efficiency in utility usage. The name derived from an investment of $5 million in these projects with a five-year payback. The second initiative was the implementation of the Energy Education Program. As opposed to equipment, this program targets behavior and system setups to reduce energy consumption. The program is based on a guaranteed savings goal that funds two staff members with sole responsibility for the program, through a company named Cenergistics.
To date, these efforts have been successful beyond our expectations. We have seen reductions of 23 percent in electric usage and 33 percent in natural-gas usage since their introduction. We recently won the Region 2 Corporate Energy Management Award from the Association of Energy Engineers at the World Energy Engineering Conference. In spite of this early success, we will be steadfast in our institutional conservation efforts and in offering greater community education about energy conservation. In addition, we will focus more of our efforts on water conservation, as water and sewer charges now exceed our cost for natural gas. We believe there is another 20 percent to 25 percent in reductions that we can achieve over the next four years.
Our reliance on printed materials is another area that has undergone increased scrutiny. It is clear, however, that many constituents still want to receive printed materials from us. We can still accomplish that while reducing the volume of printing that we do. Where possible, we have converted and distributed newsletters, such as "Generally Speaking," through an electronic format. We have scoured mail lists for redundancies in addresses and names. Admissions has moved to the use of smaller pieces that encourage the student to get more information from the website (something prospective students prefer anyway). In addition, with more video and multimedia links from various announcements and publications, we can tell stories directly from the individuals rather than through the interpretation of the writer. All of these create a more dynamic presence of life at Washington and Lee than we can normally present through a simple printed piece. The results have been outstanding. In the last three years, our printing costs have declined by 15 percent, while postage has fallen by 23 percent.
When trying to manage costs, strategic initiatives and the desire to curb costs often conflict. This is certainly true on the personnel front. As indicated in the Strategic Plan, we have goals to improve compensation for faculty and staff to the levels of our academic peers. While the Lenfest Challenge has funded many of these gains, we have used unrestricted revenues to absorb others. Nevertheless, this is an area where we have focused our attention.
In recent years, we have adopted a policy of carefully reviewing open positions for potential elimination or reallocation. As a result, we have tempered personnel growth from what had averaged 2 percent per year for the 20 years ending in 2009 to a combined growth of less than 1 percent over the past three years. We will finance new positions either through reallocations of existing positions, through savings that can be generated by the position or through endowed programs. We are blessed by a talented and dedicated faculty and staff, but we must be careful to limit growth in order to manage costs.
This report provides a snapshot of our financial picture and outlines how we use fiscal resources to provide a rich and rewarding experience for students and faculty.
We experienced more moderate growth in assets over the past year. From $1.598 billion in assets as of June 30, 2011, our assets grew to $1.636 billion by June 30, 2012. Two areas led this growth: endowment and land, buildings and equipment (see Fig. 1).
Endowment: Endowment comprises two elements: monies that others have gifted to us and that we have held in the investment pool, and Trusts Held by Others. Our aggregate endowment grew to $1.262 billion in 2012 (see Fig. 2). This was an increase from $1.218 billion as of June 30, 2011. This growth in assets occurred in spite of both a challenging investment environment and drawdowns from the funds of $46.7 million for operating support. Trusts Held by Others climbed by nearly $50 million, while the internally held endowment dropped slightly by $6.1 million.
Changes in endowment value reflect gifts and additions, distributions for spending and appreciation from the underlying investment funds. For 2012, gifts and appreciation accounted for an increase in funds available by $30.3 million, while distributions for spending totaled $36.4 million within the internally controlled portion of the endowment. For Trusts Held by Others, appreciation accounted for $59.8 million, and distributions for spending totaled $10.3 million.
While returns on a nominal basis for the internally controlled endowment fell short of our long-term expected return (2.1 percent versus 7.5 percent), on a relative basis they reflect strong results. This portion of the portfolio ranked in the top 20 percent of all endowments in the Mellon Trust Endowment Universe, and at 2.5 percent for five years in the top 25 percent and with a return of 7.1 percent over 10 years in the top 35 percent. While detailed results from the Commonfund/NACUBO Endowment Survey have not been released as of this writing, the preliminary results show that the average return for all endowments was -0.3 percent, while those with assets greater than $1 billion averaged 1.2 percent.
Physical Facilities: Our physical facilities represent the second largest financial investment. Unlike the endowment and trusts, the physical plant does not appreciate over time but requires constant upkeep and preservation. At the same time, the investment in facilities is necessary to continue to create stimulating learning and social environments for the students and faculty.
Over the 2011-12 year, we finished the renovation of Payne Hall, thus completing the second phase of the five-phase renovation of the iconic Colonnade. We also began the renovation of Washington Hall. In the summer of 2011, Alpha Delta Pi, the sixth sorority house located at the crescent, opened. In addition, we continued our upgrades to systems and infrastructure with the Five for Five energy-conservation investment program and necessary upgrades and enhancements to the central heating and cooling plant to provide adequate capacity for the campus as it is further developed and enhanced.
We will structure continued investment in facilities to meet our strategic objectives. We completed Washington Hall at the end of 2012, and we now shift our attention to the final two phases of the Colonnade project, Robinson and Tucker Halls.
At the north end of Stemmons Plaza, work will begin within the next two to three years to create the new Center for Global Learning. This facility will transform the front of duPont Hall and create a new wing off the back to meet our programmatic needs.
When Warner Center opened 40 years ago, we had an all-male population of about 1,400 and only 11 varsity athletic teams. With today's student population of about 2,300 and 24 varsity teams, we will embark on the development of a new indoor athletic and recreation center.
At the Law School, we anticipate improvements in space that will better accommodate the significant changes that we have made in the curriculum.
On the student residential front, we will begin renovations to Graham-Lees and Gaines Hall to update and modernize these facilities to house all of our first-year students. And finally, we are exploring options for expanded upper-class student housing.
Our approach to funding these significant projects will rely on the success of the capital campaign and on our ability to secure more debt, which we would use primarily for the residence hall projects that are not targeted by the campaign. It is an ambitious plan, but one that will position us to continue to build on our strengths and attention to the core mission.
Contributions Receivable: As Honor Our Past, Build Our Future continues to generate new commitments and gifts, many donors make them in the form of multi-year pledges. These play a vital role in aiding our planning efforts to ensure that we can match timing of implementation of a strategic initiative with the funding that will support it. As of June 30, 2012, contributions receivable were valued at $53.9 million.
Other Investments: The last major asset within our financial structure is categorized as "Other Investments." These are deferred arrangements by which a donor gives us a sum of money to invest and manage. The donor receives an income interest from these investments for a specified period of time, after which we receive the remainder of the invested funds to support our operations. These investments totaled $74.4 million at the end of this most recent fiscal year.
On the other side of the ledger, we have liabilities totaling $203.6 million. Three types of liabilities compose 91 percent of this total: debt, future annuity payments and retirement benefits (see Fig. 3).
Debt: Utilizing the principles and guidelines of the comprehensive debt policy we adopted in 2006, we carefully evaluate the need and timing of debt issuance. We last issued debt in the fall of 2010, and over the last decade, interestingly, we have held our debt fairly constant in the $125 to $135 million range (see Fig. 4).
Our largest liability is long-term debt that we have secured over the years to support capital building projects. This liability fell by $3.4 million to $127.6 million over the past year. As of June 30, 2012, our outstanding debt comprised seven different instruments. Six were tax-exempt issues through either the Virginia College Building Authority or one of the local industrial development authorities. The balance of the seventh, a small taxable note through Bank of America, has declined to $.95 million.
As part of the debt issuance process, we sought and maintained ratings with Moody's Investor Services and S&P. Currently, our debt is rated Aa2 and AA by Moody's and S&P, respectively. These strong ratings reflect outside agencies' evaluations of our financial health and our ability to repay our obligations.
As noted previously, we will be increasing overall debt in the next few years to support those necessary capital improvements and additions to the campus that are not part of the capital campaign, including residence hall improvements. The administration and Board of Trustees are exploring debt capacity and the impact of debt on operations to determine prudent levels that we can support.
Future Annuity Payments: The deferred-giving instruments mentioned above, in which we serve as the trustee, create a liability based upon expected future payments to the donor. This is the second largest liability within our balance sheet. As of June 30, 2012, this liability was valued at $42.5 million. It is safe to say that we welcome an increasing liability in this area, since it reflects a growing deferred-giving program, which will lead to greater financial support in the future.
Retirement Benefits: Finally, we have maintained a retirement health benefit for those employees who serve 10 years or more and retire. This commitment creates an annual expense for the program as well as a future liability. This liability, as actuarially calculated, now stands at $15.1 million, up slightly from $14.7 million at June 30, 2011. We have altered our retirement health plan for employees hired after June 30, 2003, to shift to a defined contribution plan for employees. This will reduce the rate of growth of this liability over time.
Equity: In the corporate world, assets minus liabilities reveal the enterprise's equity. Within higher education, this equity is broken down into three components: Unrestricted Net Assets, Temporarily Restricted Net Assets and Permanently Restricted Net Assets.
SOURCES AND USES
The depth of our resources translates into the programs and services we provide to students. As noted above, Endowment and Trusts Held by Others make an enormous contribution to our revenue stream and provide us the ability to invest in the education program. However, they are not the only revenues available to us, as Fig. 5 depicts.
Tuition and fees remain the single largest source of operational support. After a period of catching up with peers on tuition, the last four years have reflected more modest increases in our sticker price for tuition. And as a significant component of the Strategic Plan, we have increased financial aid to ensure that we can recruit the very best students without regard to geography, race, ethnicity or ability to pay.
In 2011-12, net tuition revenues grew to $55.9 million, an increase of $1.7 million from the prior year. We continue to significantly fund financial aid through endowment and gifts (51.5 percent in 2011-12), thus providing access for students who otherwise may not be able to attend and allowing us to continue to attract the very best students.
In reading the operating results (see Table 1 at the bottom of the page), one must look at three pieces to understand our full commitment to financial aid. Within revenues, financial aid is shown as a reduction of tuition ($34.1 million); this is also the case with Auxiliary Enterprise revenues, which reflect an aid discount of $1.9 million. Finally, within the Expenses section, there is a line item for financial aid that totals $2.6 million. Combined, student financial aid that we award in 2011-12 increased 11.6 percent, to $38.6 million.
Endowment Allocation, whether from the defined payout formula or through distributions from the Trusts Held by Others, accounted for 35.6 percent of the operating revenues in 2011-12. This source has grown in importance as a portion of the revenue stream (see Fig. 6), and as a result, the diligence of management of the underlying assets and considerations of payout allocation models are as important, if not more important, than 10 years ago.
Current gifts and grants also play a significant role in our ability to provide a world-class educational program. For instance, in 2011-12, the Annual Fund exceeded $7.8 million in total commitments for the first time and reflected an increase of nearly $400 thousand from 2010-11. In addition, we established new highs in undergraduate alumni participation, with 51.4 percent making gifts. These unrestricted gifts underwrite all aspects of University life. In aggregate, we received more than $10.35 million in contributions in 2011-12 to underwrite operations. If we had to rely on our endowment to generate the same level of contribution, we would need an additional $230 million.
We use these resources to fulfill our core mission-education. As demonstrated in Fig. 7, Instruction and Academic Support (libraries, University computing, etc.) comprise nearly 60 percent of total expenditures. Fig. 7 also demonstrates that only 14 percent of expenditures go toward administration, including fund-raising.
As in past years, comparisons of expenditures within the top 25 group of liberal arts colleges reveal that we consistently spend a higher percentage of our budget for educational expenditures than the peer average (61.6 percent versus 53.2 percent). However, our aggregate expenditures per student fall below the average expenditure per student of the peers by $7,000.
While the results from operations reflect a deficit, it should be noted that we do not formally budget for depreciation ($11.8 million). We do, however, pursue significant fund-raising to support the capital program, and many of these commitments are made but allocated to the project in a different year. This adjustment from temporarily restricted to unrestricted operations is made in the non-operating activity section of the financial statements.
We are one of a very few institutions in higher education with the ability to build on its foundation of excellence from a position of financial strength. Our adherence to the core values and mission has meant that we have not reacted to the challenging environment. There is an identity crisis in higher education today; many institutions adjust their missions, abandoning their traditional strength and employing gimmicks to grab attention and fleeting market share. We have avoided the pitfalls that come with such a crisis.
We build our planning models around the importance of fiduciary responsibility. These models assume low tuition and fee growth, modest endowment returns for the foreseeable future and reallocation of resources to needs rather than simple incremental growth. This is not new. Our planning over many years has incorporated such approaches to ensure that we can weather the difficult times without curtailing our programs, while flourishing, but not going overboard, during the good times.
This prudence has served us well for the last 264 years. It is as critical today as it has ever been.