Lost revenue and increased spending drains funding reserves
On Oct. 6, Reed College Vice President and Treasurer Lorraine Arvin emailed faculty and staff a letter detailing the college’s revised operating budget for the current fiscal year. The budget, approved by the Reed College Board of Trustees three days prior, was the revised edition of a previous budget approved by the board in April 2020. The new budget does not paint a pretty picture of the college’s current financial situation as Reed faces a $10.5 million loss of revenues and a total operating deficit of $10 million for the fiscal year 2021.
The details of Reed’s operating budget starkly highlights the financial challenges the college faces due to the COVID-19 pandemic. With students living on campus at 60% of normal capacity and revenue from enrollment at 95% of the projected budget, Reed faces over $10 million in revenue losses for the 2021 fiscal year. Safety measures and adjustments related to the COVID-19 pandemic add an additional cost of $7.7 million. COVID-19 testing costs are projected at $5 million, and an additional $2.7 million will go towards a variety of additional expenses including investments in technology, paving over the Quad, purchasing tents, temporary staff health positions, personal protective equipment and cleaning supplies, and additional cleaning. And while the budget does project $8.2 million in cost savings resulting from reduced capital spending, salary freezes, and reductions in departmental travel, entertainment, and catering budgets, when all is said and done the college projects an operating deficit of $10 million for the 2021 fiscal year.
These numbers present a harrowing portrait of the college’s current financial straits. Fortunately, Reed has the necessary reserves to fund the $10 million operating deficit, at least for the current fiscal year. To give perspective, the college’s typical annual operating budget is roughly $100 million, so with the increased spending and revenue loss, Reed will spend 110% of their normal budget. As a result, they need to pull $10 million from additional sources and reserve funds.
To do so, the college will rely upon a reserve fund for endowment and enrollment volatility as well as the redesignation of certain internally restricted funds. Perhaps most importantly, Reed will draw upon the budget surplus from the prior year that was previously designated for a massive library renovation project. During the 2019-2020 school year, the college announced plans for a complete renovation of the Reed College Library’s South Wing after it was discovered that it lacked structural reinforcement against earthquakes. The project was slated to begin this summer and conclude by the start of this school year, and the renovations would have eliminated the top two floors of the South Wing while adding a new floor dedicated to the Math Department and the growing Computer Science department. These plans, however, have been put on hold for the indefinite future, and the funds will go to covering the deficit.
Although Reed has the reserves to fund the current deficit, major financial challenges lie ahead for the college. According to Arvin, most of the reserve and other funds held outside of Reed’s endowment will be depleted after the 2021 fiscal year. This means that the college will have to engage in urgent discussions regarding the rebuilding of reserve funds and develop a funding plan for the library renovation project.
The concerns extend to the current year’s budget as well. “We continue to ask all faculty and staff who manage budgets to exercise additional prudence in the spending of this year’s budget,” Arvin wrote in the letter. “It is important that only essential expenditures are approved by departments for the remainder of this fiscal year.”
But questions regarding when COVID-19 is going away, much less the contours of a post-COVID world, are far from clear, and the college will likely have to contend with the possibility that their financial struggles are far from over. Whether Reed’s $582 million endowment will remain untouched throughout this process—a decision usually considered anathema by college administrations—and whether Reed will be able to find the necessary funds without faculty and staff layoffs remain open questions.
To address some of these issues, the administration plans to hold a series of conversations with faculty and staff to discuss the college’s finances in late October. According to Arvin’s letter, the discussions will primarily center on Reed’s business model, future financial challenges facing the college, and processes by which faculty and staff can provide input on financial decisions that impact Reed’s academic program.
Reed, of course, is not alone in confronting financial challenges that stem from the effects of the COVID-19. The pandemic has had disastrous consequences on higher education institutions in the United States, as colleges and universities across the country are struggling to grapple with budget shortfalls resulting from decreased enrollment and additional COVID-19 related costs. Hundreds of colleges have laid off employees, while several colleges have had to shut their doors for good. Fortunately, Reed’s relative fiscal conservatism over the years means that the college is faring better than many other schools around the country, especially compared to other small, liberal arts colleges. But at the very least, the details of the revised budget make it clear that Reed’s financial challenges are not only very real but have implications that extend well into the future.