March 23, 2020
Dear Amherst Faculty and Staff:
While each one of us is focused primarily on protecting the health and safety of everyone in our community and continuing the educational mission of the College, I know that many of you are also beginning to wonder about what the economic impact of COVID-19 might be for our financial situation. I write to you today to provide some early insights.
We will not know for some time the magnitude, extent, and duration of the public health crisis. As a result, we also do not yet know how severe and long-lasting any related financial challenges will be, either in the broader economy or here at Amherst College. However, we already are closely monitoring these developments, assessing the potential impact to the College, and evaluating a range of potential actions and responses. While we hope for the best, it is important that we are as prepared as we can possibly be for whatever may lie ahead.
I look forward to updating you frequently as time goes by and more becomes known, and to engaging you in the work that lies ahead. For now, let me first reassure you on several key points, and also be very forthright with you about what these developments might mean for our financial health and our immediate and longer-term future.
What are our financial strengths?
On the plus side, we enter this period in a position of financial strength. We have prepared for years, and in many different ways, for the inevitable time when our finances would come under pressure. Even with recent sharp declines in investment markets, Amherst’s endowment remains strong as a result of many years of extraordinary giving by our alumni, parents, and friends; excellent investment returns; and prudent annual spending. In addition, we have built unrestricted and flexible reserve balances in recent years as a result of modest operating surpluses and strategic debt issuances at very low interest rates. We have ample lines of credit as well as a high level of liquidity in and out of the endowment, which provide additional support to meet our financial obligations.
These assets are there to provide crucial support in times of need – the proverbial “rainy day” – and indeed we are now relying upon them just for this purpose. Over the last few weeks alone, we have deployed some of these resources: to meet the financial needs of students for travel costs and technological solutions necessary to return home and be prepared for their studies; to process refunds for room and board for the second half of the Spring semester; to augment salaries for essential staff required to work on campus; and, to promise with confidence that every student worker and member of our talented and dedicated staff will receive uninterrupted income for at least the remainder of the semester, regardless of whether their family’s medical situation or the shift to remote operations permits them to work. We are estimating the one-time costs of these and other disruptions to our normal operations over the next few months may reach $10 million. While this is a substantial total, and difficult for any institution to absorb, including Amherst, we have managed our finances over time in such a way that we can handle unforeseen, one-time expenditures of this magnitude. For a time, we are fortunate to avoid having to make immediate tradeoffs between doing what we want to do to support our community and doing what we can afford.
What is going on in the outside world?
It is important, however, to understand that these impacts may only be the beginning. This “rainy day,” to continue the analogy, may turn out to be just that, or it might turn into a much more severe, long-term, and damaging storm. Looking ahead, we know that we face an uncertain future with the potential for significant challenges to our financial situation.
The global response to COVID-19 is, rightly, prioritizing the protection of public health at all financial costs. These broader costs, however, are both enormous and escalating. Economic activity has slowed dramatically and come to a virtual halt in some industries. Economists anticipate a rapid decline in global economic activity and a corresponding and devastating spike in unemployment, the likes of which the nation has not seen for many decades. Family and friends of some members of our community are already feeling these effects, which are very likely to grow over time.
In addition, investment markets have buckled. Global stock markets are down in the 30% range in only a month’s time, an unprecedented decline over such a short period, and there are signs that the underlying financial system is experiencing some forms of disruption and uncertainty last seen in the financial crisis of 2008. Aggressive efforts are being explored by federal policymakers to provide stimulus funds to people and businesses and to solidify financial markets; we hope these actions will help in the short and long term, but they may not be sufficient to fully alleviate these challenges. Some experts predict that the economy will come back relatively quickly when business can start up again. Others are less optimistic.
How should this impact our approach to our finances here at Amherst?
To start, we are best served by relying upon our financial strength and maintaining confidence and resolve in the sound financial strategies that we have pursued for years. Those include careful budgeting and cost containment; deploying an endowment spending policy that focuses on the long-term, rather than the vagaries of day-to-day moves in investment markets; and maintaining a compelling case for philanthropic support. These are wise strategies in good times and bad.
At the same time, we must increasingly be mindful that broader economic and financial market challenges may soon require us to act with greater urgency and to make difficult choices. Amherst has only three primary funding sources: endowment spending; comprehensive fee revenues, net of student financial aid; and philanthropy. These revenue streams are highly correlated, and in challenging times, we could experience depressed endowment valuations, escalating student need for financial aid, and declining giving rates and amounts, all at once. Additionally, as a College with one of the nation's largest endowment valuations per student, with well over fifty percent of our expenditures funded by the endowment each year, Amherst is more vulnerable than most to steep and prolonged investment market declines. We can manage through these for a time but not indefinitely. Inevitably, we will have to make tough decisions about our expenditures.
Where do we go from here?
- For now, we will continue to monitor developments locally, nationally, and globally. We will gain insight each day, week, and month about the situation that we will be facing. We are all hopeful, for public health reasons, foremost, that conditions soon stabilize and improve quickly, with corresponding rebounds in economic activity and investment markets. However, it is time to begin to consider and plan for more difficult outcomes on both fronts, even as we hope for the best.
- Every one of us must quickly change from expectations of incremental investments and budgetary growth that, happily, have prevailed during an unprecedented eleven-year period of economic expansion and investment market appreciation, to a mindset that emphasizes the preservation of core priorities and the maintenance of the financial health of the College. Some key assumptions that today we take as givens will possibly be challenged. Difficult decisions and shared sacrifices possibly lie ahead, to be guided by our shared goal of keeping Amherst the very best institution that it can be for its students, faculty, staff, and alumni, now and far into the future.
- Amherst is a community that deeply values shared governance and broad participation in decision-making. This has always been a hallmark of the College‘s strength and success as an institution. It will serve the College particularly well during this challenging time. Biddy, the Board of Trustees, the senior staff, and I look forward to collaborating very closely with existing governance bodies such as the Committee of Six, the Committee on Priorities and Resources (CPR), the Association of Amherst Students (AAS), Employee Council, Managers’ Council, and the Supervisory Forum, as well as exploring other ways to engage the broader community in these considerations. In 2008 the College established a committee with representation from all on-campus constituencies and the board. President Martin is committed to a similar approach when we have a better sense of the challenges we are likely to face.
Thank you, most importantly, for your deep commitment to the health and wellbeing of our community and the continuation of educational and student support during these trying times. These are truly our highest priorities. Thank you, also, for your interest in our financial situation and your willingness to approach the times that lie ahead with your ideas, your flexibility, and your understanding. Amherst not only has survived, but thrived, through many difficult financial times during its 200 years, always emerging stronger and well-positioned for the next phase. While I do not wish to minimize the challenges that we might face, I am completely confident that we will also emerge from this current period in excellent position to meet the needs of the future.
Chief Financial & Administrative Officer