Amherst College

The Financial Framework

An Update – February 2001


The Board of Trustees convened the Priorities Planning Committee in February 1992 to study the College's near- and long-term prospects and priorities. The charge to that Committee asked four questions, two that related directly to the state of the College's financial and physical assets. They were:

III. Turning to the physical needs of the College, we are faced with an aging physical plant and competing pressures for new and renovated space in certain areas. What is the properly ordered list of our priorities for physical plant expenditures to the end of the decade?

IV. To evaluate the issues suggested above, it will be important for this Committee to examine current assumptions regarding our capacity to raise the necessary funds from endowment funds income, new contributions and tuition. The College's operating budget depends to an unusual degree (43%) on income from the endowment funds and annual gifts. At the same time, there are real pressures against raising tuition at a rate sufficient to alleviate this burden. Three questions emerge for consideration. What is a realistic forecast for increased fund-raising over the next decade? What consideration should be given to increasing the size of the College to generate additional tuition revenue (and how much of this revenue would be consumed by additional expenses)? How can we ensure that we are able to afford the present levels of financial assistance to students who cannot pay the full comprehensive fee?[1]

The Committee's Report included the Financial Framework Statement (“Financial Framework”), which articulated principles of institutional and financial equilibrium [2] and evaluated the College's financial status at that time against those principles. These principles of institutional equilibrium recognized the need to: maintain the support of the College's faculty and staff, continue to attract and retain a highly qualified and diverse student body and maintain the support of the alumni. The principles of financial equilibrium required that: operating budgets be balanced, operating budgets be reasonably projected to stay in balance, the purchasing power of the endowment be adequately maintained and the investment in facilities be adequate to protect their value. The Board of Trustees endorsed the Financial Framework in 1993.

1993 PPC Report Recommendations

The Report concluded, in summary, that the finances of the College were not in equilibrium and recommended a set of corrections, to be phased in over four years. Those corrections were in three specific areas:

The Endowment Funds – The report concluded that the rate of spending from the endowment funds was too high and recommended a gradual reduction to a level, based on historical market returns, that would reasonably protect the purchasing power of those funds on a long-term basis and provide “intergenerational equity."[3]

The Operating Budget – The report noted that there was not a provision in the operating budget to protect against unexpected revenue shortfalls or expenditure overruns. The recommendation was to gradually fund annual provisions in the operating budget for major maintenance and repairs to the College's physical plant, technology-related expenditures and operating contingency funds.

The Physical Plant – The report recommended, as noted above, that the College gradually add sufficient funds to the annual operating budget to maintain the value of the College's physical plant.

The report made a number of other recommendations with direct financial consequences. The first related to the College's largest source of operating revenues, the comprehensive fee. Given the sharp rise in the comprehensive fee during the 1980s (real increase [4] that averaged 4 - 5 % per year) and the increasing pressure on parents' ability to pay, the report recommended that real rates of increase in the comprehensive fee return to long-term averages, approximately 1.7 percentage points per year. The second set of recommendations was based on Amherst's having more square footage per student than nearly all of its peer institutions. The recommendations were: to use stringent criteria when deciding whether to construct new square footage on the campus, to pursue a strategy of adaptive reuse to upgrade existing facilities and to develop a prioritized list of capital needs for the next decade. Finally, the report urged the Trustees and administration to undertake a major comprehensive campaign in order to strengthen the endowment funds' support for the College's existing programs and provide the capital for extensive renovations to facilities on the main campus.

2001 Update - Introduction

Sufficient time has passed to assess whether there has been progress toward the goals set forth in the Financial Framework. Also, in the interim, a set of institutional benchmarks has been compiled by the administration, in consultation with the Budget and Finance Committee of the Board of Trustees. These benchmarks have been discussed with the full Board of Trustees and the Faculty Committee on Priorities and Resources. The purpose of these benchmarks is to provide objective measures of ongoing progress against the principles of financial and institutional equilibrium, i.e., to monitor the financial health of the College. Evaluating changes in the benchmarks over time will identify both positive and negative trends – a prerequisite for any corrective action. Year-to-year changes in these measures do not necessarily indicate the need for corrective action. The changes need to be analyzed, monitored and evaluated as to whether they are normal fluctuations or part of a trend.

The assessment that follows evaluates the results of the efforts made by the Board of Trustees and its Committees, the administration, faculty, staff, students and alumni to return the College to a state of financial equilibrium. The positive results reflect the contributions of all members of the Amherst community.


Principles of Institutional Equilibrium

1) College policies should maintain or increase the quality of the faculty and staff.

Amherst continues to attract and retain the highest quality faculty and staff. Although hiring at a liberal arts college, in certain disciplines, does have its special considerations, the College is generally able to hire its first-choice candidate for any open position. The relatively small number of tenured faculty members who choose to leave the College do so for reasons such as geographic location or the opportunity to join a university rather than due to Amherst's practices or policies. Salaries for faculty and staff are benchmarked annually against competitive standards. As a result of this ongoing annual analysis, the College in the late-1990s undertook and completed a three-year plan to increase the competitiveness of faculty salaries. In addition, funds have been added to the operating budget to supplement faculty research support, offsetting reductions in federal funding.

The College modified its staff salary system in the early 1980s. However, only a portion of the program was implemented at that time; consequently, staff salaries grew at a rate that exceeded market and competitive benchmarks — a situation that was not sustainable. In order for the College to remain an equitable and dependable employer, the staff salary system was modified. Today it is both financially sustainable and competitive. During the same 10-year period, the College eliminated the difference in retirement plans for faculty and staff. Moving the staff from a separate defined benefit plan to a defined contribution plan resulted in a significant increase in cost to the College and the goal of a more equitable retirement plan for the staff has been achieved.

2) Educational programs and policies should maintain or increase the quality and range of our potential student pool relative to comparable colleges.

The College continues to attract a well-qualified and diverse pool of applicants. The number of applicants has risen from 4,572 in 1992 to 5,352 in 2000. The quality and diversity of both applicants and matriculants remain strong. In fact, the average composite SAT score has increased from 1364 to 1398 in the time period.[5] The percentage of students of color has increased from 25% to 36% of the entering class. Amherst is regularly one of the two or three most selective liberal arts colleges in the nation.

3) Development efforts should maintain or increase the involvement and financial support of alumni and friends.

A critical gauge of the College's vitality is alumni participation in the Annual Fund. The Fund has continued to establish new records for dollars raised and has, from 1995 forward, reached and sustained a participation rate that is the nation's standard. The 2000 Annual Fund raised $7.2 million, doubling the $3.6 million raised in the 1992 Annual Fund.[6] The 63.7% participation rate for the 2000 Annual Fund (1992 Fund = 58.2%) remains among the highest nationally. The Amherst College Campaign reached its stated goal of $200 million prior to the June 30, 2001 completion date, with participation from roughly 80 percent of the alumni. Advancement has expanded its programming to maintain contact with alumni, parents and friends on an ongoing rather than episodic basis.

Principles of Financial Equilibrium.

1) The operating budget should be balanced.

The operating budget has been balanced each year since FY1993.

2) Operating budgets are reasonably projected to stay in balance.

Assuming moderate real increases in operating expenditures, the financial projections of the College [7] indicate that operating budgets will continue to be balanced without eroding either the purchasing power of the endowment funds or the value of the physical plant. The operating budget also contains a funded operating contingency to meet unexpected revenue shortfalls or expenditure overruns, as well as a provision for technology and major maintenance and renewal for the facilities.

3) The purchasing power of the endowment is being adequately maintained.

Since 1992 the rate of endowment spending has declined from 5.6% to approximately 4.1% (see chart and graph on Exhibit I). The rate is calculated by dividing the current year endowment spending by the three-year moving average of market values of the endowment funds. That decrease has been achieved through high investment returns and by slowing the year-to-year increase in the amount provided to support the operating budget. The compounding effect of moderate differences in the spending rate is significant. Had Amherst spent at the lower Swarthmore rate for the 20-year period 1979 – 1998, the value of Amherst's endowment funds at June 30, 1998 would have been 54% higher ($831.8 million versus $539.8 million).

4) Investment in facilities is adequate to protect their value.

The Frost Library, the Science Library, the Mead Art Museum, the Amherst College Depository and the Departments or Programs of Biology, Psychology, Theater and Dance, Fine Arts, Athletics, Asian Languages and Civilizations, Creative Writing, Neuroscience and Russian have, or will soon have, significantly improved facilities. The conversion of Appleton added dormitory space and Valentine Hall received a complete renovation. Numerous other upgrades have been accomplished, including improvements to Clark House, Smith House, Newport Dormitory, College Hall, the Cole Assembly Room, Buckley Hall and Kirby Theater. In all, approximately 570,000 square feet on the main campus (half of the 1.1 million sq. ft.) will have been renovated since 1992. The College has also continued to make significant upgrades to the utility distribution systems and campus roadways and landscaping.

The industry benchmark for major maintenance and renewal funding (i.e., funded depreciation) is 1.5 – 3.0% of the total replacement value of the plant.[8] The estimated replacement value of Amherst College's physical plant is now $380 million. Since FY1992, the College has invested a total of $97 million in facilities, funded from capital and operating budgets. On the average, that represents annual spending over 3% of the replacement value of the physical plant. The annual operating budget now provides approximately $3 million for deferred maintenance. That amount is projected to continue to increase and deferred maintenance reserves also exist for that purpose. It is assumed that the College will continue to raise funds and use its debt capacity to supplement the provision in the operating budget for major maintenance and capital projects.


The following section reviews the institutional indicators. As noted earlier, the purpose of these benchmarks is to provide objective measures of ongoing progress against the principles of financial and institutional equilibrium, i.e., to monitor the financial health of the College. Evaluating changes in the benchmarks over time will identify both positive and negative trends – a prerequisite for any corrective action. Year-to-year changes in these measures do not necessarily indicate the need for corrective action.

Assets (Exhibit II)

Total assets include the estimated market value of all financial and physical assets. Since the physical assets are not appraised on an ongoing basis, liquidated, or transferred to support the College's operations in the normal course of business, the market value of the endowment funds, relative to the size of the College, is the most salient component of total assets.

The market value of the endowment funds should be maintained in real terms. It should also increase for the following two reasons:

1) The operating budget, driven mainly by our commitment to personnel expenditures and financial aid obligations, will continue to grow in real terms. Therefore, the investment base must also grow in real terms so that the College's relative ability to support its programs is not eroded.

2) Gifts to the endowment funds should reflect corresponding growth in principal over time. Therefore, in order to determine whether the purchasing power of the endowment funds is being adequately protected, the base value should be adjusted by the value of gifts added to those funds.

The investments of the endowment funds continue to generate high real returns. A significant shift in the asset allocation strategy, begun in 1993, has resulted in a greatly diversified portfolio that has performed well in current market conditions. Although the investment returns for FY2000 are not expected to continue, the diversified structure of the portfolio should produce good returns in strong markets and protect the endowment in more volatile times. The annual average real return for the endowment funds for the 20 years ended June 30, 2000 is 12.6% (nominal = 16.8%).

Realized gifts to the endowment funds, from 1992 – 2000, excluding unrealized pledges, totaled $84.5 million, or approximately $52,800 per student. Investment performance during this period has maintained the purchasing power of the initial endowment funds per student and the value of gifts added during the period. The market value of the endowment funds, in total and on a per-student basis, has continued to increase in real terms and has exceeded the previous high value achieved in 1965. However, the Amherst College endowment per student is still less than at a number of highly competitive colleges and universities.[9] The increase is the net effect of investment returns, gifts to the endowment funds and spending from the endowment funds to support the operating budget.

Spending Rate (Exhibit I)

The spending rate on the endowment funds must be sustainable for the long term. Because such a high percentage of the operating budget is devoted to personnel expenditures, financial aid and fixed costs, the operating budget cannot be subjected to sudden bursts of expansion or contraction. Therefore, the growth in spending from endowment funds should be subject to a smoothing formula and the rate should fluctuate within a sustainable range. That range is estimated at 3 – 5% of the three-year moving average of the market value of the endowment funds. Adherence to an absolute rate may subject the budget to greater volatility due to the inherent volatility of the capital markets.

Historically the prices for goods and services utilized by colleges and universities have risen faster than inflation. The Higher Education Price Index [10] has risen, on the average, 5.7% per year for the 32 years ended 1995, while the consumer price index has risen 4.9% per year for the same period. Therefore, to maintain the strength of the endowment funds relative to existing programs, the value of the endowment funds must grow at a rate nearly 1-percentage point higher than the increase in the consumer price index. Conversely, the real rate of spending should be approximately 1 percentage point less than the real return projected on the endowment funds. Based on the increase in the HEPI, the equilibrium spending rate is defined as follows:

Equilibrium Spending rate = Actual rate of investment return – CPI – 1%


Equilibrium Spending rate = Real investment return – 1%

Debt (Exhibit II)

The College's bond ratings (AA+/Aaa) and liquidity allow the institution to issue tax-exempt debt at very attractive interest rates. In 1992 the College had four different fixed rate serial bond issues outstanding, totaling $38 million, with interest rates ranging from 4.15% - 6.8%. That debt has been refinanced and now carries interest rates in a range of 4.05% - 5.3%. The reduction in rates results in significant savings in interest costs to the College over the life of the bonds, which could be as long as 30 years.

Based on the College's needs, debt should be issued for capital projects, provided the financial capacity exists to service both the interest and principal of the amount issued. The College has the financial flexibility to absorb the potential volatility of short-term, historically lower cost, variable rate debt. The current debt is a mix of longer-term fixed and short-term variable rate debt. The College should continue to refinance existing debt whenever the opportunity arises to lower the total cost of borrowing. As a percentage of the College's endowment funds, debt outstanding has declined since 1992, although the absolute amount of debt has increased.

Income (Exhibit II)

Student Revenues - Student revenues have increased from 57.4% to 61.2% of total expenditures as the result of a plan to reduce the discount of Amherst's stated tuition relative to the College's cross-applicant schools. In addition, since 1992, the annual rate of real increase in the comprehensive fee has been 2%, as compared to 4.3% in the prior 10-year period (Exhibit III). As noted previously, due to the high percentage of the operating expenditures (69.2%) devoted to personnel costs, financial aid and the need to fund new academic areas of knowledge as they emerge, the budget will continue to grow at an annual rate of at least 1% above the rate of the consumer price index. Affordability will continue to be a concern. Maintaining real annual increases in the comprehensive fee in the 1 – 2% range would help ensure that the College doesn't become less affordable.

Gift Revenues – Gift revenues to the College are assessed in terms of 1) progress of The Amherst College Campaign (“The Campaign”), 2) relationship of the amount raised by The Campaign to prior levels of giving and 3) an appropriate benchmark for assessing ongoing giving.

1) Progress of The Campaign - The Amherst College Campaign is scheduled to conclude on June 30, 2001. As of December 31, 2000, The Campaign had raised $222.8 million in gifts and pledges as compared to a goal of $200 million. Actual gifts added to the endowments funds, at June 30, 2000, totaled $71 million (Exhibit IV). In addition, the College had raised approximately $40 million in deferred gifts for endowment purposes. The Campaign goals classify gifts by final designation, i.e. operating, endowment funds and facilities. Both the endowment funds and facilities goals assume that some gifts to that purpose will be made through the use of deferred gifts. Thus, The Campaign has exceeded its stated goal and will ultimately realize the anticipated amount of endowment gifts.

2) Relationship of the amount raised by The Campaign to prior levels of giving - Gift revenues, for both operating and capital purposes, have doubled, even after adjusting for inflation, during The Amherst College Campaign, FY1996 – FY2000 (Exhibit IV). The impact of the additional gifts to the endowment funds (defined as the amount exceeding the prior five-year average) on the June 30, 2000 endowment funds market value is estimated at $79 million. That amount includes additional investment earnings on the increased endowment funds base. In the future, the College will continue to benefit from the increased giving in this Campaign through payment of pledges in the short term and realization of gifts to the life income funds in the longer term. The Amherst College Campaign has also heightened philanthropic attitudes throughout the constituency. The total number of donors to the College has increased from 10,199 in FY1990 to 14,434 in FY2000. In the same period, the average gift has increased from $1,290 to $2,460. We believe these increases are sustainable.

3) An appropriate benchmark for assessing ongoing giving - An appropriate Amherst College benchmark for annual gift revenue to the endowment funds is assumed to be a range of 2.5 to 3.5% of the market value of the endowment funds, on the average.[11]Historically, the comparison of actual gifts to the endowment as measured by the benchmark is:

Amherst College Campaign (FY90 – FY95) 2.57%

Thirty five years (FY65 – FY00) 1.65%


It should be stressed that this benchmark needs to be measured over time and is “on the average.” For example, it is not reasonable to assume that endowment funds gifts to the College would increase by 50% in one year, the amount required in FY2001 to maintain this ratio, given the College's FY2000 investment return. Ongoing fundraising efforts must be maintained in order to continue to achieve the targeted benchmark of 2.5 to 3.5% of the market value of the endowment funds.

Expenditures (Exhibit II)

The operating budget has continued to grow in real terms, driven largely by personnel expenditures, financial aid and the provisions for contingency funds, technology and deferred maintenance recommended in the Report of the Priorities Planning Committee. Student aid has increased as a percentage of total expenditures. Within Amherst's set of peer institutions, it appears as if student aid may continue to be the area of greatest financial pressure. More institutions are establishing or extending merit aid and preferential packaging programs to students not otherwise qualifying for financial aid. If the College were to modify its own need-blind policy and extend merit aid - a major policy change - this would add incrementally to our own financial aid budget. In addition, the current financial aid formulae are dated and may not adequately provide for the need of those students and their parents who are self-help only or at the lower income levels of the no-need group. A revision to these formulae would increase the College's scholarship budget.

The College's financial projections indicate that if the aid requirements for the Class of 2004 are replicated in future classes, the real net revenues from the comprehensive fee will decline (Exhibit II). Given the historic growth rate in the costs of colleges and universities and the fact that more than 60% of the College's operating revenues come from the comprehensive fee, continuing to replicate the Class of 2004's aid requirements would place increased pressure on the endowment funds and other operating expenditures.

Other Information (Exhibit II)

Admission statistics – The size and strength of Amherst's applicant pool has remained one of the strongest among the COFHE college and university group. Amherst is one of the nation's most selective liberal arts colleges. The College is able to remain truly need-blind and fund the full demonstrated need of all accepted students. The percentage of students on aid has fluctuated greatly from year to year. However, in 1994 the administration modified the budgeting process to accommodate that volatility while maintaining an adequate provision to fund the College's financial aid commitment.

Physical plant - Comparative data indicates that Amherst's square footage per student is still among the highest for a liberal arts college. The sweeping renovations accomplished in the past decade were done without significantly adding to the existing size of the physical plant. The College continues its master planning efforts for facilities, begun in the 1990's. Major expenditures for physical plant are proposed only after a wide range of alternatives is developed and considered.

Faculty salary and compensation – As noted earlier, the Trustees and administration completed an initiative in FY2001 that significantly increased the competitiveness of faculty salaries at each rank. In addition, the Faculty Committee on Priorities and Resources recently undertook a review of faculty benefits. The Report on Faculty Benefits, February 17, 2000 was intended as a framework for future faculty discussions of benefits rather than as a definitive statement. The Report stated “the CPR believes that generally speaking, Amherst College benefits compare favorably with those at other schools. … There are, however, at least two benefits that are markedly less generous at Amherst College than at many other schools.” The first was the College's dental plan. The CPR recommended major improvements, under consideration by the administration, to the plan. Those improvements were made as of July 1, 2000. The second was the grant-in-aid benefit. The CPR did not recommend an immediate increase in that program but urged instead a clarification of the rationale for that benefit.

Amherst remains very competitive on the Thirteen College Survey using total compensation as a measure. However, due to the relatively high percentage of full professors the dollar requirement for achieving competitive salaries per rank is higher than at most peer institutions, which have a lower percentage of faculty at the full professor rank. The Annual Report on Faculty Salary and Compensation for 1999 – 2000 stated, “the Amherst faculty currently includes 62.3% full professors. The range for the rest of the schools in the liberal arts comparison group is 31.9% to 56.3%."[12] That report concludes, “In this environment, Amherst needs to run very fast just to stay in place, while doing justice to other budgetary priorities as well.” The College will need to continue to monitor the competitiveness of salaries and compensation at each rank.


The College is in financial equilibrium and all of the financial benchmarks indicate a positive trend. The goals established in the Report of the Priorities Planning Committee have been achieved. The principles of institutional and financial equilibrium continue to be valid ones for guiding the institution. The financial and institutional indicators are measures to determine if the requirements of those principles are being maintained.

However, the College needs to continue to be cautious in managing its resources. There are a number of institutional commitments and features that require larger annual investments than at comparable colleges and universities. They include:

- The need-blind financial aid policy,

- The size of the physical plant, and need to adequately maintain it, and

- The percentage of full-time faculty with tenure and at the full professor rank.

All of these reflect values of the College. In order to properly support these values Amherst requires very high relative endowment funds per student, a competitive comprehensive fee charge and a consistent flow of gift revenues. That need is further compounded by the need to maintain the quality of Amherst's programs in order to compete at the highest level.

The value of the endowment funds is stronger now than at the time the Report of the Priorities Planning Committee was issued. Much-needed investments have been made to upgrade buildings across the campus. The progress made on the value of the endowment funds must be preserved and enhanced in order for Amherst to remain one of the leading colleges in the country.

[1] Report of the Priorities Planning Committee; Amherst College; March 1993.

[2] The concept of financial and institutional equilibrium provides a construct in which to evaluate an educational institution's financial condition. The concept was originally developed at Stanford University and endorsed by the educational consulting firm of Cambridge Associates in their publication, Analytic Framework for Long Range Planning at Colleges and Universities (1990).

[3] “Intergenerational equity” means that future students should enjoy the same benefits as present ones.

[4] The term “real” adjusts prices or values by the rate of increase in the consumer price index thereby eliminating the effect of inflation on the change in those prices or values.

[5] For comparative purposes, 50 points have been added to the composite SAT score for the class entering in 1992. That is the standard adjustment used by admission professionals to reflect the effect of the College Board's “recentering” of the SAT scores in 1996.

[6] The increase from $3.6 million to $7.2 million is in nominal dollars. After adjusting for inflation, i.e. in real terms, the increase is 62.3%.

[7] The financial projections of the College are prepared and updated by the Budget Officer in consultation with the members of the President's Staff. They are reviewed annually with the Budget and Finance Committee of the Board of Trustees and the Committee on Priorities and Resources.

[8] Kaiser, Harvey H. The Facilities Audit. Alexandria, Virginia: APPA: The Association of Higher Education Facilities Officers, 1993. p. 46.

[9] Endowment assets per FTE student at June 30, 2000


Princeton University $1,321,911

Harvard University 1,049,415

Yale University 929,313

Pomona College 720,864

Swarthmore College 658,249

Williams College 650,810

Wellesley College 551,909

Amherst College 545,693

[10] The Higher Education Price Index (“HEPI”) measures the average relative level in the prices of goods and services purchased by colleges and universities, including salaries and fringe benefits of faculty and staff, through operating educational and general expenditures. The weights within the various items in the index represent their relative importance within operating educational and general budgets, based on national averages.

[11] Wingerd, Daniel A. The Growth of College Endowments 1960 – 1990. (Westport: The Common Fund Press, 1993).

12] Amherst College Committee on Priorities and Resources. Annual Report on Faculty Salary and Compensation for 1999 – 2000. p. 7.


Exhibit I