Underlying the establishment of a Priorities Planning Committee in January 1992 was knowledge that the College faces financial stringencies in the 1990s that are significantly different in magnitude from those of the 1980s. The latter decade was characterized by a high rate of growth in both operating and capital expenditures and by returns from endowment that were well above historic rates of return. The projection for the next decade is that the rate of growth in the resources necessary to maintain our expenditure and asset bases will be greatly diminished. Careful planning is now required to ensure that the continued financial health of the College is not impaired. These views are consistent with presentations made to the Amherst community over the last two years. Data used in this report were distributed at Faculty and administrative department meetings during Fiscal Year 1991/92.


The concept of financial and institutional equilibrium provides a framework for the evaluation of an educational institution's financial condition. The concept was originally developed at Stanford University, and has been endorsed by the educational consulting firm of Cambridge Associates1] Though it may tend to focus on existing programs and may not always be sensitive to, or helpful in, evaluating the impact of new programs, market conditions, current program gaps, and trends, the model provides a normative guide based on internal institutional relationships rather than on comparisons with other institutions.

The conditions for maintaining Amherst College's financial equilibrium are:

· Current income must be equal to or greater than expenses. Although the concept of a balanced budget is straightforward, the model of financial equilibrium holds that budgets must be balanced without eroding financial and physical assets, as described below.

· Growth in income must be equal to or greater than growth in expenses. Even with a current balanced budget, a projection of income and expenses may reveal the strong probability of future deficits. The trend of income and expenses over time is as important as their current relationship.

· Spending from the endowment must be at or below the level necessary to preserve its real purchasing power, after adjusting for investment returns, gifts, and inflation. The practical effect of spending more than the real (inflation-adjusted) return on the endowment's investments is that future generations will subsidize present expenditures, thereby adversely affecting the financial viability of the College's programs.

· Expenditures, or contributions to reserves, for renewal and replacement of physical plant and equipment must be at or above a level that preserves their useful life. If projected budgets do not provide for the renewal and replacement of physical plant and equipment, the College will consume its physical assets and inevitably will face financial difficulties.

Another integral part of this analysis is the broader concept of institutional equilibrium, which is based on the concept of maintaining the major non-financial assets of the institution. The conditions for maintaining institutional equilibrium include the following:

· College policies must maintain or increase the quality of its Faculty. Policies that balance budgets or preserve financial and physical assets, but undermine the quality of the College's Faculty, are obviously self-defeating.

· Educational programs and policies must maintain or increase the quality and range of our potential student pool relative to comparable colleges. The College's recruiting position is important since deterioration can cause long-term damage to our quality and reputation, as well as to our financial stability.

· Development efforts must maintain or increase the involvement and financial support of alumni and friends, who are of inestimable importance to our school's reputation and financial stability. In addition to maintaining or augmenting the real (inflation-adjusted) level of financial contributions, the College should seek to increase the number of contributors, the percentage of alumni participating in fund-raising campaigns, the real average contribution per donor, and to discover other measures of alumni involvement and support.


Using the foregoing definition of integrated financial and institutional equilibrium, what is the current state of Amherst College?

While our College rates well on the institutional equilibrium factors, it is presently in a state of financial disequilibrium, according to the following:

· Current income must be equal to or greater than expenses.

Following a long period of balanced operating budgets, the College had an operating deficit in 1989/90 and 1991/92, and projected deficits in the 1992/93 budget. The major reason for these deficits has been the inability to predict accurately, and project for, the extraordinary growth in financial aid expenditures. The College's budget has no specific, budgeted contingency reserve and, as a result, we are unable to compensate for significant revenue shortfalls and/or expenditure overruns once the fiscal year has begun. We are not in financial equilibrium when measured by this factor.

· Growth in income must be equal to or greater than growth in expenses.

Measured by the College's own financial projection model, expenditures are projected to grow at a faster rate than revenues. Large components of projected expenditures, not in our current expense base, would include sufficient funding for our annual deferred maintenance program, and a funded contingency reserve. We are in disequilibrium here as well.

· Spending from endowment must be at or below a level that preserves its real purchasing power after adjusting for investment returns, gifts, and inflation.

Using long-term real returns earned by the capital markets, the College is currently spending at a rate that cannot be reasonably projected to maintain the purchasing power of the endowment, i.e., our spending rate from the endowment is too high. For the fiscal year that ended June 30, 1992, the spending rate was 5.4 percent. Over time that rate should be in the range of 4.5 to 5 percent. The College is in the third year of a four-year program to reduce the spending rate. Part of the comprehensive fee increase for years has been directed towards reducing the unrealistically high subsidy of the total cost of an Amherst College education provided by the endowment. We are not in equilibrium on this component.

· Expenditures or contributions to reserves for renewal and replacement of physical plant and equipment are at or above a level that preserves their useful life.

We are spending enough to provide for current maintenance needs, and to reduce the previously deferred backlog of required maintenance. But there is no provision for the continued funding of those expenditures after June 30, 1996, when proceeds from the current Massachusetts Health and Educational Facilities Authority (“MHEFA”) bonds and existing maintenance reserves will have been fully spent. Maintaining our physical assets should be reflected in our total costs and factored into how we determine our required resources. The financial projections in this Statement include the phasing of that funding into the operating budget over a period of four years, beginning July 1, 1992. Even then, we will not be in equilibrium on this point without either increasing revenues above the levels currently projected or reducing current expenditures.

Without correction to bring the College back into financial equilibrium, it will only be a matter of time before further financial deterioration will bring us to a point where the maintenance of quality is at serious risk.


1. Revenue Projections

Amherst College relies primarily on three sources of revenue: student tuition and fees, the endowment funds, and gifts and grants. Student tuition and fees support 56 percent of the annual operating expenditures of the College; the endowment provides approximately 25 percent; and gifts, grants and other miscellaneous revenues provide the balance, approximately 19 percent. The difference between total revenues and the amount provided by student tuition and fees means that each student who attends Amherst receives at least a subsidy equal to approximately 44 percent of the cost of educating that student for a year at the College. In addition, approximately 47 percent of all students receive direct assistance through the College's need-based financial aid program. The College's unrestricted and restricted funds provide qualified students with scholarships that average about one-half of the current comprehensive fee, or c. $12,000.

During the 1980's, the first of these revenue sources, the College's comprehensive fee (tuition, room and board), rose at approximately double the rate of the increase in the Consumer Price Index (CPI): our average annual rate of increase was 9.6 percent compared to 4.6 percent for the CPI. As a result of that escalation, the comprehensive fee rose from being approximately 35 percent of the national median family income in 1980 to almost 50 percent in 1990. Families no longer have access to credit to finance tuition payments at the same levels as they had in the past decade. In addition, although the College does not have data from parents who do not apply for financial aid, a national trend seems to be developing in which the high cost of private education will result in a skewed socio-economic distribution of the student body at highly selective institutions. Aided students will be concentrated at one end of the continuum and very wealthy students will be at the other, with the number of middle-income students in between diminishing rapidly. If the comprehensive fee continues to consume a larger portion of median family income, students who do not quite qualify for aid ­ and their parents ­ will be less willing to finance the cost of private higher education, even through borrowing. According to the College's own financial aid formulae, the cost of the comprehensive fee, without some type of financial assistance, is already beyond the reach of nearly 90 percent of American families. We acknowledge that the rate of annual increases in the comprehensive fee must be slowed to parallel more closely the growth rates in the twenty years prior to 1980: on average, those rates were 1.8 percent per year above inflation, as compared to the 4.7 percent from 1980 until the present (ExhibitI).

Endowment is the College's second source of income. Like tuition and fees, our endowment funds also grew at nearly double the rate of inflation during the 1980s; but that growth helped only to recapture the losses in purchasing power suffered during the previous decade. In fact, given the size of the institution and its operating budget, with adjustment made for inflation, the College is considerably less wealthy, on an endowment-per-student basis, than it was in 1965. Although our endowment per student in 1990 was nearly twice the 1980 value, it was still only 60 percent of the 1965 value. This is explained by both the losses in purchasing power in the 1970s and the fact that the College grew from 960 students in 1966 to 1,570 students in 1990 (Exhibit II). That growth in size has placed additional pressure on the endowment, because the marginal cost per student over time has grown faster than the net revenues provided by student tuitions. Future increases in the size of the College should take place only if the endowment-per-student ratio remains the same (through growth in the endowment funds), or if the marginal cost of adding new students is less than the net tuition revenues they provide (see “Statement on Size of the College”). Projections based on historical data indicate that investment returns will not continue to grow at anything like the high rates we enjoyed in the 1980s. Inflation-adjusted returns achieved in the 1980s were more than double those experienced during the prior eighty-year history of the capital markets. For the future, real returns can prudently be expected to be between 4.5 and 5 percent per year rather than 12 percent or more as they were in the 1980s.

Our third source of revenue is gifts and grants. The College ended its last major comprehensive fund-raising campaign in 1985. Since that time the Office of Development has been able to sustain the higher level of giving that was achieved during the campaign period. However, the current economic climate, the public's impatience with tuition increases, and public criticism of higher education across the nation make it unlikely that, without another campaign, giving to the College will increase at a rate higher than the rate of inflation. The College also finds that there is intense competition for charitable dollars. For many of its alumni, the College is no longer the principal focus of charitable giving.

In summary, the College must expect realistically that the annual growth in revenues during the 1990s will be significantly less than that experienced in the last ten years; so, it must plan accordingly. But the likelihood of a slower growth in income is not the only sign of new stringencies. The pinch also will come from steps we must take to return the College to financial equilibrium, and to meet annual operating expenses that are now underfunded or not funded at all.

2. Expenditure Projections

Planning only to slow the growth in what we spend on our current programs is not enough to guarantee our financial security for the future. Over the last ten years, the largest one-year deficit that the College experienced was $400,000, approximately .8 percent of that year's operating budget. The College has not in the past budgeted a contingency provision to absorb unexpected revenue shortfalls or expenditure overruns. In order not to draw on quasi-endowment funds or to defer critical plant maintenance to cover these surprises, we must include a funded contingency provision in the operating budget equal to .75 percent of that year's operating expenditures, or $450,000 in 1992/93.

The College has a total current deferred maintenance backlog of approximately $25 million. Since 1985 the College has invested approximately $2 million a year to reduce its maintenance backlog. That investment has been financed through the use of tax-exempt bonds. The debt service for our existing outstanding debt is a component of our current total expenditures. To continue the deferred maintenance program after 1996/97, when the bond proceeds and major maintenance reserves are fully expended, the College will need to add $1.5 million annually to the operating budget.

Also, the College has not yet recognized budgetarily the full impact that the technological advances achieved in the 1980s will have in the form of annual funding required for replacing obsolete equipment, especially of computer network equipment. The estimated permanent annual addition to the operating budget for upgrading these resources is $300,000. We must also eliminate the $245,000 deficit budgeted for fiscal 1992/93. These currently underfunded needs total $2.5 million.

It is important to note that, besides funding current programs and assets of the College, important new program and capital needs will have to be met over the next decade. From information provided by each department, the Committee on Priorities and Resources compiled a list of current major capital needs for all departments at the College. Meeting the needs described in that report would require the investment of many millions of dollars, and redirection of current operating funds will not be sufficient to meet those needs.

We conclude, then, that our operating budget is not now in equilibrium and will require adjustment to regain equilibrium. Predicted major capital needs must be met from new revenue sources that are not yet known or assured. They must be met, nonetheless, to maintain the quality of the College and the education it offers. Meanwhile, the College must continue to have the flexibility to respond to new initiatives and the changing requirements of its academic and administrative program. This philosophy underlies our planning.


The most important step the College must take in managing for the 1990s is to adopt budgetary guidelines to ensure that all existing expenditures grow at a rate equal to or less than our revenue projections. Those projections indicate that ongoing expenditures, including financial aid, can grow no more than 1.25 percentage points per year in real terms (above the rate of inflation). However, that discipline alone will not be sufficient.

As noted above, there are also other components required for financial equilibrium which are not now provided for in the annual operating budget. For the College to reflect responsibly the costs of its programs, we need to add to its operating budget the four categories of expenditures previously discussed ­ reduction of the current budget deficit, annual funds for unexpected contingencies, for deferred maintenance, and for bringing technological equipment up to date. Without any compensating reduction in expenditures, this would result in an annual deficit of $2.5 million by Fiscal Year 1996/97 (Exhibit III). To phase those items into the operating budget over the next five years (Fiscal Years 1992/93 through 1996/97), we will need to take other steps to avoid growing deficits.

First, we must reduce other expenditures; then, we must increase our revenues. As discussed previously, we must reduce spending from the endowment in order to protect the purchasing power of those funds. Without the addition of new endowment funds, the endowment cannot be prudently drawn upon to any further extent. Nor can we look to large comprehensive fee increases for help. The earlier discussion of the public's ability to afford - and their willingness to pay - the true cost of private education leads us to conclude that we will not be able to rely on larger tuition increases to cover all the anticipated revenue shortfall. The only option for generating additional student revenues is to increase the number of students at the College, rather than continuing our practice of raising the comprehensive fee significantly faster than inflation. This recommended modest increase is consistent with our wish to make maximally efficient use of our capital plant and to promote institutional efficiency.

The College needs to achieve and maintain financial equilibrium in two steps. The first step is to return the operating budget, endowment spending, and asset reinvestment to a state of financial equilibrium. Our financial model, assuming the predictions for revenues, and a growth rate of no more than 1.25 percent above the rate of inflation for continuing expenditures, projects that financial equilibrium can be achieved if expense reductions of $2.5 million are achieved by 1996/97. With over one-half of the operating budget devoted to personnel expenditures, some savings in that area will need to be considered. Intermediate targets should be set and the process of realizing expense savings should begin immediately.

The second step is for the College to embark on a major fund-raising effort to generate the additional capital required to finance programmatic initiatives, augment funding for new and existing programs, and address the College's capital requirements (see “Statement on a Comprehensive Campaign”).


The College is presently not in a crisis that would threaten its quality, but its financial status is uncertain. To return the institution to a state of financial equilibrium requires a prudent two-step strategy that will avert future crises. The first group of steps would include:

· Reducing the projected operating deficit of $2.5 million by fiscal 1996/97 through a combination of eliminating or reducing expenditures and marginally increasing the number of students at the College;

· Allowing the annual growth in the comprehensive fee to be no greater than two percentage points above inflation;

· Continuing to lower our rate of endowment spending, through the remaining fourth year of the correction begun in 1990/91, in order to protect the purchasing power of the endowment;

· Budgeting as an operating expenditure the total annual cost of deferred maintenance;

· Budgeting the amount estimated to be required for upgrading and replacing of computer and network equipment;

· Budgeting an institutional contingency fund to prevent drawing on quasi-endowment funds for unexpected revenue shortfalls or unanticipated expenditures;

· Managing the rest of the budget so that total expenditures, including financial aid, grow no faster than 1.25 percentage points above the rate of inflation.

The second group of steps of the program includes:

· Planning a comprehensive fund-raising campaign with a goal (if possible) as large as $150 million;

· Allocating a portion of the new funds generated by a fund-raising campaign to meet capital needs identified as priorities by the Priorities Planning Committee;

· Allocating a portion of the new funds generated by a campaign to the College's endowment funds as new unrestricted endowment.

These steps will allow the College to return to a state of financial equilibrium defined by a balanced operating budget, protection of the College's endowment funds, and reinvestment adequate to maintain fixed assets (buildings, systems, and equipment). Returning to a state of financial equilibrium will protect the College's institutional strength and ensure that it can continue to perform its mission at its present high level.

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Following discussion of this “Financial Framework” within the Priorities Planning Committee and also at an open, all-campus meeting held September 29, 1992, the Administration used this document as the basis to formulate the College's operating budget for Fiscal Year 1993/94. The Board of Trustees, at their October 10, 1992 meeting, mandated that the operating budget for Fiscal 1993/94 be in balance. Many discussions within the Committee on Priorities and Resources, throughout the Fall of 1992, focused upon how to move toward a state of financial equilibrium, and, specifically, how to achieve a balanced budget for Fiscal 1993/94 within the context of the “financial framework.” The result of that process was to recommend expense reductions totaling nearly $1.1 million, as well as to begin with the 1993/94 budget to factor in the required funding for deferred maintenance, technology, and contingency funds. Those net savings, if actually realized in the budget and proven to be sustainable, would reduce the projected $2.5 million 1996/97 deficit to approximately $1.8 million. These actions were consistent with the PPC's recommendation, with the concurrence of the CPR, that the College take immediate steps to move toward a state of financial equilibrium.


Debt service

Annual interest and principal payments that the College is required to pay on debt it has issued.

Purchasing power of the endowment

The value of the endowment funds after adjustment for the effect of inflation. The most desirable situation is to maintain the level of the endowment in relation not to the general Consumer Price Index (CPI) but in relation to the average level of cost rise across the institution.

Quasi-endowment funds

These are funds that the Board of Trustees has designated as endowment but which are not subject to any legal prohibitions against spending. They are considered endowment funds in determining the endowment available to support the operating funds. Withdrawals of principal from quasi-endowment funds relieve pressure on the endowment to support to the operating budget. Also known as “funds functioning as endowments.”

Spending rate

Also known as a “payout rate,” this is the annual amount spent ­ not reinvested in endowment principal ­ from the total return earned on the endowment funds. The spending rate is generally expressed as a percentage of the market value of the endowment.

Total return

The total amount produced by the investment of funds which includes income or yield (interest and dividends), and capital appreciation and depreciation (realized and unrealized capital gains and losses).

[1] Cambridge Associates, Analytic Framework for Long Range Planning at College and Universities (1990).