By Daniel Robillard || Investigative Reporter
This story is the first article in “F&M Money Matters,” a series by The College Reporter that seeks to shed light on the financial challenges facing F&M today.
Key Takeaways From the Fall BPC Forum
- According to this stocks broker, F&M is forecasted to have a $6.5 million deficit for the current year due to the impact of COVID-19, which is down from a negative operating margin this year of $15.8 million due in part to a substantial positive operating margin in 2020 and the hiring freeze implemented during the pandemic.
- Senior staff stressed that the College is currently not actively exploring measures such as salary cuts, layoffs, furloughs, or other reductions in personnel as a response to the deficit.
- The forum emphasized the College’s continued commitment to building an endowment that had been largely neglected, overdrawn, and mishandled in previous years.
- Senior Staff and the BPC remain reasonably optimistic about the College’s financial future.
In a Zoom event on Wednesday, October 7, the Budget Priorities Committee (BPC) hosted its fall budget forum, where the BPC and Franklin & Marshall senior staff gave an overview of the current financial state of the College and the road ahead.
BPC Chair and associate professor of art history Michael Clapper, Vice President for Finance and Administration Michael Todd, Controller and Assistant Treasurer Sean Galloway, and F&M President Barbara Altmann all delivered remarks on the financial challenges that F&M is facing in light of COVID-19 and the pre-existing budget difficulties.
In his remarks, Clapper explained the primary long-term financial challenges that the College currently faces, which are largely unrelated to the COVID-19 pandemic. Clapper noted that F&M’s financial aid budget has grown from $20 million a year to $60 million over the past 12 years. While the huge increase in financial aid—part of former President Daniel Porterfield’s American Talent Initiative (ATI) strategy—has been a substantial benefit to F&M, it also put the College under a significant financial strain, Clapper said.
“Dramatically increasing financial aid has been a very worthwhile investment,” Clapper acknowledged, “but it has also meant underfunding the other two main priorities—employee compensation and facilities maintenance while also leaving very little for saving and investing in the endowment.”
The College’s expenses, Clapper said, have been growing at a rate of about 2% each year, a rate generally faster than the rate the College can increase its revenue (more than three-quarters of which comes from costs of tuition, room, and board.) Broadly, Clapper emphasized the need to slow the rate of increase in comprehensive fees, replenish the College’s cash reserves, establish funds for strategic initiatives and contingencies, and reduce the draw on the endowment.
These long-term financial issues, which F&M has been addressing with a heightened awareness in the past two years, have been inevitably exacerbated by a pandemic that forced the College to switch to online instruction last spring and dramatically altered the 2020-21 academic year.
Financial Importance of Having an In-person Semester
F&M’s decision to return to in-person instruction helped stave off what would have likely been substantial financial turmoil if the College had closed for the fall. Without students’ return in-person, the College would have lost an additional $15 million in revenue per semester, Clapper said, highlighting the financial importance of remaining in person in the fall and, hopefully, the spring.
Todd, the VP of finance and Administration, suggested that the College may have no choice but to resort to layoffs or salary cuts if the College was unable to remain in-person going forward. “If we can’t sustain having students in residence,” Altmann said, “then [the deficit] is going to grow…alarmingly high.”
The 2020 Budget
One piece of encouraging financial news from the forum was the positive operating margin of over $7 million for the 2020 financial year. About $5 million of that money can be used for unrestricted purposes, most of which was used to offset the nearly $16 million deficit of the current financial year. Much of that surplus was a result of the impact of COVID-19, which forced the College to move online in March and reduced total expenses to $9 million under-budget. Revenue came in only $2 million less than expected.
Impact of COVID-19 on the 2021 Budget
If the situation continues as expected, F&M is expected to have a $15.8 million negative operating margin for the current year due to the impact of COVID-19 restrictions on the College’s programs and operations.
The College is estimated to lose about $3 million in tuition and fees while spending $600,000 more in financial aid. The largest loss comes from room and board, which is down more than $11 million this year as a result of campus de-densification efforts and the increased number of students now studying remotely. In total, the College is seeing a $20 million decrease in revenues (15% drop), offset slightly by a drop in expenses of about $4 million (3% drop).
Although the College faces a nearly $16 million shortfall for the current year, Todd outlined several one-time mitigating factors that will help dampen the size of the deficit. These include about $4.7 million from the positive operating margin from the 2020 financial year, in addition to several million from things like vacant employee positions, money saved from less students going abroad, and one-time cuts to certain budgets. All told, the various one-time items will net about $9.3 million against the $15.8 million shortage, leaving the College with a deficit of $6.5 million for the current year.
Although the forum’s speakers acknowledged the difficult position that the deficit puts the College in, they also noted that the current situation is not entirely as bad as it appears.
“It may not seem like it,” Todd said, “but from a broad view of higher education as an industry, we really have reason to be quite hopeful. The luxury of choice right now and control over our future is something that not a lot of institutions have.”
Clapper admitted that the present situation was far better than it potentially could have been if the College was not able to return to campus this fall. “COVID is a short-term problem,” he said. “We can solve it; we can weather it.”
Addressing the allegation that she is “unduly rosy” in how she presents the College’s financial situation, President Altmann emphasized the need to maintain a proper perspective. “It’s really important to recognize that, from the perspective of most of the institutions of postsecondary education in this country, we are very privileged,” she said. “It is a question of deciding how we spend our resources. We are not one of the schools that are going to go under,” she stressed.
Budget Priorities and Plans
According to the forum speakers, the budget process is still in the phase of developing and sorting out all possible courses of action, and no decisions or recommendations have been made yet. The budget plans must be finalized by mid-January in time for the Board of Trustees’ winter approval meeting. Serious conversations about the measures are happening in November and December, President Altmann said. One of the highest priorities for the Administration is protecting personnel and avoiding salary cuts across the board. “That will be an absolute last resort,” Todd said.
Although the Administration is still in an exploratory phase, some of the plans discussed in the forum included changes to the financial aid strategy, a reexamination of enrollment and class size, temporary reductions in some benefits such as retirement contributions, reducing the draw on the endowment, and saving institutional cash accrued outside the operating budget. President Altmann also suggested that the College would likely be able to reduce about half of the $6.5 million deficit by making one-time draws from a couple of places that have built up a surplus. “The other half of that is going to be the piece where we need to make some hard decisions,” President Altmann said.
Acknowledging the variety of options to close the $3.5 million gap the College is targeting this year, President Altmann stressed her desire to avoid any measures that would do lasting damage to the College. “We will try to preserve people’s jobs and we will try not to erode the base pay for any of our jobs because we want to be able to pick up where we left off with the faculty salary enhancement plan and to launch professional staff salary enhancement plan,” she said. As for the possibility of salary cuts for senior staff this year, President Altman held that it was unlikely: “For two out of the last three years senior staff have taken a disproportionately low amount or no raise in staff salaries […] We only have one of each of the senior staff positions so […] we can’t afford turnover in that group.”
The Endowment and Past Financial Priorities
A common theme among each of the speakers at the forum was the allusion to the past financial practices and budget priorities that have placed F&M in a relatively constrained position in the past two years. Particularly, the main factor was the mishandling and lack of growth in the endowment before President Altmann arrived in 2018.
Although F&M has moved up in college rankings, coming in at #26 in the recent Wall Street Journal/Times Higher Education Rankings, most of its peer institutions have doubled their endowments over the past decade while F&M’s has remained relatively flat, Clapper said.
Although F&M’s endowment dwarfs that of similarly ranked institutions, it is a testament to the College’s ability to overcome its limited financial capabilities. “It demonstrates that we do a lot with a little,” President Altmann said, though reiterating that “anything we can do to feed [the endowment] and protect it…assures our collective future, and if we don’t do that, we’re going to go into a downward spiral from which it is going to be nigh impossible to recover.”
President Altmann discussed how, in past decades, F&M’s financial strategy largely ignored the endowment to build-up campus—under the leadership of President John Fry—and invest more in need-based financial aid—under former President Porterfield. While President Altmann noted that these strategies had tremendous benefits, “what they did do was privilege things other than the endowment and we’re paying for that now,” she said.
The endowment had also performed extremely poorly under the College’s previous investment firm, which it left in March just as the pandemic was beginning.
In addition to being poorly managed in the past decade, the forum’s speakers emphasized another factor that has stagnated the endowment. Net endowment investment returns for the past decade were about equivalent to the rate of the draw on the endowment, meaning the College was essentially draining the money it was generating from the endowment each year. To compound the problem, very little was being done to replenish the endowment, Clapper said.
In the last ten years, the College added $65 million to the endowment, $50 million of which came in just the past two years as a result of the Now to Next Campaign, launched by President Altmann in her first year at F&M in 2018.
President Altmann noted some of the financial strategies that she has put in place over the past two years to place caps on and reduce the draw that the College has taken off the endowment.
The forum’s speakers made clear that building and preserving the endowment would have to be the primary financial priority of the College going forward, linking the College’s future financial sustainability with the College’s ability to invest money for the future. “There is one sure and a substantial way for us to have more money to spend in the future, and that is for us to save and invest money now,” Clapper said. Todd also emphasized the importance of F&M focusing on “sustainability for the future,” saying “we don’t want to mortgage the future for the expenses of the current.” One thing that initially attracted him to F&M, he said, was the College’s “institutional honesty to have conversations around budget” which has “gone a long way in the year and a half before COVID.”
President Altmann was adamant that she would not take money out of the endowment to close the coming budget deficit: “We are simply not going to do it because it contradicts exactly what got us into this position in the first place,” she said.
An Uncertain but Optimistic Future
Acknowledging the difficulties that the College’s financial position poses, the speakers all remained confident that F&M would overcome those difficulties.
“We can do it,” Clapper said of the challenges ahead. “We need to make choices about what is most important to our mission [and] allocate our limited resources accordingly […] so that we have more to spend in the future.”
Concluding her remarks, President Altmann stated, “Are these rough times? Yes. Is there a lot of work to do? You bet there is. Do we need to figure out how to rationalize our budget? Absolutely. But we can do it, otherwise, I wouldn’t be here.”
However, much of F&M’s ability to overcome its ongoing financial issues may likely rest in the larger community of students, faculty, parents, and professional staff’s willingness to understand the nature of the College’s financial situation and support the courses of action the College takes.
Junior Daniel Robillard is an Investigative Reporter. His email is firstname.lastname@example.org.