The College made tangible financial progress in fiscal 2006/2007. In many ways it was the best financial year in the College’s history. The College has benefited from excellent investment results, strong gift revenues and a reduced operating deficit. As a result the College’s unrestricted net assets grew by 11.6%. On the other hand, the College suffers from a chronic operating deficit that is expected to grow in fiscal 2007/08. On balance we should celebrate the good results in fiscal 2006/2007, while being realistic about some challenges ahead.

Operations

In fiscal 2006/2007, the College posted an operating deficit of $718,000 an improvement of $1,380,000 over the previous year.

This year’s results were better than last year and in a number of significant areas better than the Board approved Budget. Net Tuition revenues grew 7 %, driven by a 5 % tuition rate increase and a 1.5% growth in enrollment. Budget affecting gifts and grants grew 12% partly due to the very successful benefit honoring Michele Meyers in April. Investment income based on our 6% draw formula is up due to investment gains and the incorporation of Sports Center donor funding into our endowment. On the expenditure side, the College tightly controlled its administrative headcount and other discretionary expenditures, while benefiting from an unexpected decline in energy prices together with an unusually warm early winter. Debt service costs increased 56% with roughly half the variance to do inclusion of the Sports Center donor funding into the endowment and half due to rising short term interest rates. Overall the operating deficit declined by 66%.

Investments

The investment portfolio performed extremely well this year, influenced by buoyant markets for a wide array investment types. With an overall return of 18% our investment advisor Commonfund, achieved solid benchmark results with a well diversified portfolio. During the year Commonfund assisted us in a thorough review of our investment portfolio composition, which resulted in a significant further diversification of the portfolio this spring. As of the end of July 2007, the College’s portfolio has out performed its bench marks for the month, the quarter, the calendar year and since the inception of the portfolio. Needless to say that is no guarantee of future performance, particularly in the highly unpredictable conditions prevailing at present. However, the latest available reports show the College’s investment portfolio weathering this summer’s storm in a very satisfactory manner.

Net Assets

Driven by strong investment results, a much reduced operating deficit, plus gifts and pledges totaling $14.6 million (vs. $9.2 million in 05/06), the College’s Net Assets grew by $14.6 million. Following is a comparative breakdown of the College’s Total Net Assets in thousands.

As a result, the College’s liquidity and solvency ratios have improved. A key ratio from the standpoint of our bond insurer, MBIA, measures the College’s unrestricted resources as a % of total debt. This ratio has improved from 74.3% on May 31 2006 to 90.2% on May 31, 2007. Another factor in the College’s credit risk profile which improved this year was the College’s exposure to variable rate debt. The College has benefited historically from the use of auction rate, i.e. variable rate, debt, due to unusually low short term rates. However, as short term rates rose and the yield curve flattened, this advantage dissipated, while the risk that long term rates might go up appeared to increase. In order to protect ourselves from this uncertainty, in early February 2007 we entered into a swap agreement which more or less fixes at 3.725% our interest rate on our auction rate, tax exempt debt, which comprises about 89% of our total debt.

Challenges Ahead

The College is a tuition dependant school, with relatively high tuition rates and our undergraduate enrollment appears to be constrained at current levels. While our graduate programs have room to grow, the impact of full enrollment in our present graduate programs would have a material but not dramatic positive impact on our operating result. Meanwhile there are a number of significant challenges to our cost structure, three of which I would like to highlight:

1. Faculty compensation levels are now constraining our ability to attract talented young academics and may also constrain our older faculty from retiring comfortably. We have a gradually aging faculty, which on average is 5 years older than our peers. This contributes to higher compensation costs, both salary and medical benefits.
2. Deferred Maintenance costs. This coming year we expect to make capital expenditures in the range of $1 million, which is roughly .5% of the replacement cost of our physical plant. The rule of thumb amongst peer institutions is that we should be spending about 2% per annum of replacement cost. Deferred maintenance is just that: deferred. We will probably end up spending more in the long run to renew our plant if we delay doing so now.
3. Medical Insurance Costs. Like many other institutions, we are burdened by rapidly rising medical insurance costs. In our case this issue is particularly acute. The College’s medical insurance costs have been rising at the rate of 14% per annum over the last three years. Insurance rates (i.e. factoring out headcount growth) have gone up by about 13% per annum over the same period. We have been placed on notice that our recent claims exceed the premiums paid, so we can expect another large increase in our insurance rates this coming fall.

These medium term challenges will not go away. Our 07/08 budget adds up to an operating deficit roughly twice as high as 06/07. Due to the composition of our freshman class it is likely that our discount rate and therefore our financial aid will exceed the budget. Although the College’s investment portfolio has performed well against bench marks so far, current market conditions are volatile and unpredictable.

From a medium term financial planning perspective, we must start from the twin facts that we have a chronic operating deficit and that the ways we have raised revenue in the past are unlikely to be as plentiful in the future. In particular it is physically unrealistic and academically undesirable to raise undergraduate enrollment. These factors will place increased emphasis on donor support, as we seek ways to fund new initiatives, while supporting the current pedagogical model and preserving the campus.

John Bernson
August 31, 2007