Bates in 2023: Financial Observations and Outlook
As we start the new year, I write to share a financial update on the college. I’d like to look back at the past two fiscal years, say a few things about the current financial year, and look forward given what we know now.
Where we’ve been
In the summer of 2020, we entered the pandemic with a great deal of uncertainty about how college finances would be affected by the pandemic. About 75 percent of our resources come from single fee income after financial aid. If students were unable or unwilling to come to Bates for a residential liberal arts education, the college would have sustained severe deficits. However, thanks to the creativity and dedication of the entire campus, and a robust COVID-19 testing program, we were able to enroll students at typical levels for the 2020-21 and 2021-22 academic years.
Savings from activities that, because of the pandemic, did not take place in the 2020-21 academic year helped offset over $6 million the college spent on direct COVID-19 costs, and kept us from having a deficit for the year. Meanwhile, the endowment grew at a strong rate. With gifts and investment returns, offset by the annual draw on funds from the endowment to contribute to operating expenses, the endowment finished the fiscal year at $466 million.
During the 2021-22 academic year, COVID-19 testing, masks, cleaning, and other direct pandemic costs were considerably lower, and more “normal” activities began to return. However, increased fuel costs drove the college’s utility expenses to nearly $1 million over budget. Similarly, inflationary price increases for food and travel drove overages in those areas. With savings in other areas of the college, combined with strong gift and grant activity, we were able to drive a net positive result for the year, which allowed us to continue to invest in facilities, most recently the Chase Hall revitalization. Unlike the prior year, however, the investment environment worsened and we closed the year with an endowment of $419 million.
Where we are now
Bates’ total operating budget for the current (2022-23) academic year is $131 million, which includes $98 million of net single fee income (75% of total revenues), a $20 million draw from the endowment (15%), unrestricted annual fund gifts of $6.5 million (5%), and $6 million of all other. Notably, the endowment draw is $3.1 million larger than the prior year caused by the significant increase in the endowment two years ago and gifts through the Bates Capital Campaign. Incorporated in the revenue budget is a $2 million increase in financial aid as we strive to make Bates more accessible.
These revenues are applied to our $131 million operating budget. Our largest allocation is to people – compensation and benefits of $84.3 million, or almost two thirds of the overall budget. This reflects the compensation increases from last summer, in addition to two off-cycle compensation increases provided to our hourly workers in both FY21 and FY22. Since the fall of 2017, overall budgeted compensation increased at a five-year compounded annual growth rate of 4.2%, led by a 7% rate for our hourly employees.
The FY23 budget reflects the impact of the remarkable capital campaign that closed this summer. With more than $100 million in gifts to the endowment received, the endowment distribution has grown from approximately $12 million a year prior to the campaign (FY17) to nearly $20 million in FY23. The 9% compounded annual growth rate from the endowment since FY18 has allowed the college to increase some expenditures, such as compensation (4.2% per year), at a higher rate than the single fee (3.2% per year). Overall, revenues and expenses have each grown at 3.7% over this period.
What we see ahead
Despite the college’s strong financial position, we anticipate some serious challenges ahead. These are the same headwinds that we experience in our individual daily lives. Everything the college needs to purchase – from healthcare to food to fuel – is more expensive. Our revenues do not grow as quickly as these costs, and the college finds itself in a challenging financial situation.
The single fee is one important lever to increase revenue, but it is important to recognize that Bates families, like the college, are experiencing increased inflation across the board, which limits how much the single fee can be increased in a given year. As noted, the endowment and its contribution to college revenues have grown considerably in recent years, but the current tumultuous markets suggest that the distribution into next year dictated by a formula to smooth yearly market fluctuations, will not grow commensurate with our costs. Meanwhile, we are experiencing pressure on healthcare, utilities, food, travel, and other core costs that are growing faster than our ability to increase revenues. Some of these price increases we cannot avoid – for instance, Bates will budget an additional $1 million for employee healthcare and another $1 million for utilities next year.
To address these expected challenges in next year’s budget, I have asked senior staff to reduce their programmatic (non-personnel) budgets by 5% to ensure we retain capacity for compensation increases and are able to support areas that are growing more rapidly than our revenue base and areas where we need to invest in better services or new ways of doing business. I recognize that this is a tall order for budgets that are already efficient and lean.
It may seem contradictory to hear that the college is financially strong, while also communicating increasing economic stress. We are indeed stronger than ever – with a larger endowment, larger financial aid budget, higher wages than before the pandemic, and with a new and renewed physical infrastructure to support the residential liberal arts experience. But the economic environment is changing, and we need to prepare ourselves to adapt to new circumstances. With everyone working together, I am confident that we will weather these challenges together and that Bates will continue to offer a distinctive and transformative experience for generations to come.
Thank you for all that you do every day to support Bates’ mission. I look forward to working with you as we put together the plans and budget for the coming academic year.