Draft submitted by Financial Goals Committee: Andy Tanaka (chair), Sun Chyung, Mark Hovey, Chandra Joos, Chris Olt, Andrew White
In its 2017 response to Wesleyan’s interim report, the Commission requested the Fall 2022 self-study give emphasis to the institution’s effort to achieve its financial goals. We are pleased to report that since 2017 Wesleyan has maintained positive operating results in each period, had strong fundraising results, experienced remarkable growth in its endowment, fortified the statement of financial position, and explored a number of strategic initiatives with significant financial ramifications.
The Office of Advancement plays a major role in the financial success of the University; nearly 30% of the 2021 operating revenues, for instance, were generated through the Wesleyan Fund, endowment spending, or from grants. Our most recent fundraising campaign, This Is Why, was an historic effort for us – raising $482M (surpassing a $400M goal) despite starting during the Great Financial Crisis of the 2007 era. Largely an endowment campaign to build economic sustainability, This Is Why and strong endowment returns helped doubled the University’s endowment from $500M to $1B, which since then has experienced further growth. As of June 30, 2021, the Total Investment Pool stood at $1.67B.
Beginning in 2010, Wesleyan rebuilt its investment office, hiring a new team that adopted best practices in governance, asset allocation, manager selection, risk management and back-office administration. Under the new team, Wesleyan has seen its endowment more than triple since 2010, creating much stronger financial footing for the University.
The endowment is managed by the Wesleyan Investment Office (WIO), which seeks a long-term maximum return with appropriate consideration to controlling risk and providing for the University’s cash needs. In particular, the WIO strives for a nominal investment return that, at a minimum, equals the sum of inflation (as calculated by HEPI, the Higher Education Price Index) and the percentage withdrawn to support the University’s expenses. Wesleyan’s annual endowment spending is based on the Tobin Rule: 70% of the annual payout is based on the prior year’s spending payout plus inflation and 30% based on 4.5% of the endowment market value. The implementation of this new spending rule in 2013 has kept the effective spending rate below 5%, enabling higher contributions to the annual budget each year while maintaining the purchasing power of the endowment.
The remarkable growth of the endowment (endowment per student has almost doubled since 2017) means that the budget support it provides ($29,499M in 2012) has increased to $45,625M. Wesleyan’s Aa3/AA long-term credit ratings with Moody’s Investors Service (Moody’s) and Standard & Poors (S&P) were reaffirmed during the summer of 2021.
The June 2021 credit opinion from Moody’s referred to Wesleyan’s “consistently strong operating performance” and “an ingrained culture of conservative budgeting and disciplined expense control.” Wesleyan has continued to be very deliberate in how programs are analyzed and funded. Requests for funding that would add to the operating budget are submitted by cabinet members as “New Money Requests.” These requests are evaluated by Cabinet, the Budget Priorities Committee, and ultimately the Executive Budget Committee. This process – in which projects are funded on a three-year pilot basis and, if deemed successful, added into the operating budget – provides for strategic deployment of resources to advance the University’s priorities. The process also provides for input from representatives from across the University’s community.
Budget surpluses that are generated are added to our Strategic Initiatives Fund, used for capital improvements and other strategic priorities. Expenditures from this Fund are reviewed each Fall by the Board’s Audit Committee.
The 2017 interim report to the Commission was written at the conclusion of This is Why; in 2018, the next campaign was already being prepared. Wesleyan retained CCS Fundraising to conduct a campaign feasibility study and an assessment of the University’s fundraising and alumni and parent relations operations. The conclusion of this study was that Wesleyan undertake a $600M comprehensive campaign over ten years. In fiscal years 2017-2021, Wesleyan has recognized over $224M in contribution revenue (on a GAAP basis) and has entered the leadership phase of the next comprehensive campaign.
In 2016, Wesleyan issued a $250 million century bond, primarily to refinance the majority of its then-outstanding debt. Under the terms of the new issue, Wesleyan will pay interest only until 2116, when the full principal is due. To ensure its ability to pay out principal, the University set aside funds to be invested until the bond matures: assuming a 5% compounding return, these funds will grow to satisfy the full amount due in 2116. In 2020 and 2021, the University took advantage of historically low interest rates to borrow additional funds to be used towards three strategic priority building projects – Film Phase III, the renovation of the Public Affairs Center, and the construction of a new science building. In all of the debt issuance work, a Bond Working Group (comprised of trustees and experts) evaluated the opportunities and risks associated with each transaction.
In 2017, the University issued an update to its strategic plan, Beyond 2020: Strategies for Wesleyan, which re-emphasized access. In FY 2018, the University added $2M to the financial aid budget to adjust for a federal methodology change (prior, prior year) and an additional $2M (phased in) to increase the financial aid budget to improve financial aid packages – increasing the discount rate for each incoming class, giving additional grants for health insurance, and providing start-up costs. During the COVID-19 pandemic, Wesleyan added $4.2M to the financial aid budget to assist students and families. (This included waiving the summer earnings expectation for all students and adding an additional $500K in budget per class.) Starting with the class of 2025, the University has doubled the threshold for families to qualify for financial aid packages: “no loan” moved from $60,000 family income to $120,000.
Looking back over time at Wesleyan’s Generally Accepted Accounting Principles (GAAP) financials, we see a steady growth in operating revenues mirroring the growth in operating expenses. Through 2019 (prior to the COVID-19 pandemic), the University’s operating revenues and other support grew at a compound annual growth rate (CAGR) of 3.1% while operating expenses compounded at 3.0% for the same period. During FY 2020, however, the University provided approximately $11M in room & board refunds resulting in a decline in net student charges; and the following year we had a high number of students elect to defer enrollment or take a leave of absence, resulting in under-enrollment.
Annually, the Finance Office prepares a series of key performance indicators (similar metrics to those tracked by credit rating agencies, peer rankings, human resource metrics, and metrics for energy use and progress towards carbon neutrality) and reports on them to the Finance Committee. The financial KPIs indicate the University has maintained and built financial capacity.
Identification of opportunities for new sources of revenue has happened primarily through working groups of the Board and Cabinet. In recent years, the institution has evaluated and rejected several potentially revenue enhancing opportunities, with financial analysis and administrative bandwidth being key considerations. In FY 2021, a new Chief of Staff also took on the position of Director of Strategic Initiatives charged with spearheading the investigation of opportunities going forward.
For more on how Wesleyan manages its financial resources and achieves its financial goals, see Standard Seven: Institutional Resources.