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Budget debunked: reallocations remedy as usual, larger trends threaten forecasting

Budget debunked: reallocations remedy as usual, larger trends threaten forecasting

By Althea Billings

In the final weeks of the fall 2016 semester, a special faculty meeting on the budget was held to discuss priorities in light of the budgetary shortfall. The budget process is usually a project for the Dean, the Financial Office and the faculty Budget Advisory Committee (BAC), so it was odd that the faculty was included. The inclusion of the faculty, coupled with five percent cuts across departments, was taken by many faculty members to be an omen of some sort.

While it is true there was a budget shortfall this school year, Chief Financial Officer Alan Finn maintains that these situations are pretty standard.

Fall 2016 saw smaller enrollment numbers than expected, but “Classzilla,” the oversized class from the 2015-16 school year, lessened the impact of this year’s shortfall. In fact, every year a 2 percent net margin of tuition is reserved for these types of ups and downs.

When constructing the budget, the first step is to start big. Finn explains this philosophy.

“Let’s put everything we wanna do in the pot and then let’s see what it looks like and then let’s start taking things out of the pot until we sort of get ourselves where we need to be … going into it, there’s always sort of a hole that you have to fill.”

But, as Finn explains, that is quite often the case in colleges like Lewis & Clark.

“There’s also a way budgets work in higher ed, because the life-blood is our net tuition which is completely driven by our enrollment. And so, especially the last few years, in higher ed everywhere, it’s been much harder to predict what that fall class is going to look like.”

As an institution, LC is 85 percent dependent on tuition, room and board, which while certainly high, is not uncommon among most higher ed institutions.

“[85 percent dependence] is true of most colleges. The less tuition dependent you are, the less true that is. You’re able to smooth out with other things …  It’s hard to respond quickly here because 65 percent of our budget is people… And the margin allows us to be thoughtful and to take our time in getting ourselves realigned,” Finn said. “The nature of higher education is that the model of the way it exists right now is really a struggle for everybody other than Harvard, Princeton, [and] Yale.”

For those select colleges, interest on the endowment and strong fundraising efforts preclude dependence on tuition. At LC, 4 to 5 percent of the interest on the endowment goes toward funding the operating budget, some of which pays for scholarships and endowed faculty positions, but endowment funding is limited.

“I think it was around 2010 or 2011, we refinanced all of our debt from a really low rate to a fixed rate. And there were three of these swaps that we were not able to retire because of the valuations on them. We would have lost a ton of money on it,” Finn said.

At the time, a decision was made to take an interest rate swap under the assumption that interest rates wouldn’t stay low for long. The then vice president and the investment committee then took the proceeds from refinancing to pay the interest for five years, but it hasn’t turned out as planned.

“Interest rates are still too low for us to be able to retire that swap. So right now not only are we spending the 4.5 to 5 percent of the endowment, we’re also spending a million and a half dollars a year to pay the interest on that swap until we can retire it. Interest rates have slowly been coming up, and at the same time as we’ve been paying that, the market has not been, other than recently, doing really super well. So we’re barely earning what we’re paying out which is a challenge,” Finn said. “The endowment is sort of treading water while inflation is going up.”

When Finn, the BAC and Dean Kodat held the open budgetary meeting with the faculty, their intention was to understand the priorities held by faculty, in order to incorporate them into the budgeting process.

“It’s my philosophy that we should talk to more people instead of fewer people … In my mind it’s the start of a new process. I think it just got off to a clunky start,” Finn said. “Clearly the message we heard back from the faculty was, things around faculty, the faculty searches, making sure we’re keeping our salaries competitive, that those are more important than some of the other things.”

Those priorities were factored heavily into the final budget. In the final budget, the shortfall is resolved through a few changes. One change was reducing the reserved net tuition margin to 1.8 percent, putting 0.2 percent of what would normally be set aside in the 2 percent margin, back into the CAS budget, to be reassessed in two years. Another change included consolidation in Dean Kodat’s budget and leaving two staff positions open without plans for hiring, allowing the school to accrue what would amount to salary and benefits for those positions. According to Finn, these measures put the school in a good position, monetarily, without too much sacrifice.

“Protecting the instructional mission and the student experience, that’s like the sacred cow. That is the last place we go. Which is why we’re gonna keep having more conversations with faculty about ‘What are the priorities? What are the things we should be looking at in terms of outside of your areas? What are the things that are really important to you in student affairs?’” Finn said.

The difficulties in projecting the enrollment, and by extension the budget, are common among most higher ed institutions. According to the Chronicle for Higher Education, four in ten private colleges missed their enrollment and tuition goals in 2016, and college enrollment as a whole has been down since 2012, according to new data from the National Student Clearinghouse Research Center.

This means that colleges are competing for a waning pool of applicants, and with the advent of the Common App, enrollment has become increasingly hard to predict.

“We have models we use to model this behavior, and you’re basing your career on the behavior of 17-year-old men and women right? And that’s pretty hard to predict because it’s an emotional decision for a lot of people. For whatever reason, you fall in love with a place and it’s hard to predict that behavior,” Finn said.

 

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