Friends, This newsletter is intended to inform you about some significant financial challenges that Earlham is facing. While the content is not the sort of news we prefer to share, I write to you with great confidence and optimism about the future of the College. Make no mistake, we have a lot of work to do. There are difficult decisions to make as we figure out how the College will adapt to changes in the higher education landscape. As a community, this will test us in ways we have never imagined. Those of us who understand and appreciate Earlham, however, know that it is imperative that we remain gracious with each other throughout this process. We need to embody and model the values that will allow our College to honor its mission in a financially sustainable way. It's also important to remind ourselves of the number of advantages we have when thinking about how we will face this daunting, yet, doable challenge. We have a beautiful campus and a compelling mission. Our faculty, staff and students have proven themselves capable of great resourcefulness and resilience. As we face financial realities, we have a data-informed Strategic Plan that anticipated these very challenges and offers good ideas for how to address them. We also have a faculty-approved Curricular Vision Statement in which our faculty speaks clearly about what an Earlham education ought to be. Our Quaker principles and practices that remind us of the kind of College we aspire to be. And we also have you: a worldwide community of alumni, parents and friends of the College who care deeply about this College and are ready to engage with us to make Earlham the best it can be. This is not the last time you will hear from us about how we are responding to these challenges and charting a course forward. Sincerely, Avis Stewart `74, Interim President Do you have questions you would like us to answer in future communications? Write to us at questions@earlham.edu. EARLHAM'S PATH TO FINANCIAL SUSTAINABILITY As many of you know, Earlham College is facing a significant budget deficit, and we are taking steps to respond to this situation. On June 6 of this year, Debbie Hull `67 (out-going Chair of the Board of Trustees) wrote to the campus community to share that the College needs to limit expenses in its 2019-20 operating budget to $42M. This represents a reduction in the annual budget of approximately $8M. A PDF of that full communication is available here. Earlham is not alone in our current financial struggles. Other outstanding colleges have shared news of worrisome multimillion dollar deficits in recent weeks, and others are likely facing challenges that they have not yet disclosed. Many colleges and universities across the country, especially smaller liberal arts schools, are having difficulty attracting students in a price-competitive market. Costs are rising, and families are struggling to afford the price of attendance. Schools are competing fiercely for students, offering unprecedented levels of financial aid, among other tactics. This past year, for instance, Earlham provided students with about $32 million in student financial aid, while students brought only about $14 million in net tuition revenue. This approach is not sustainable. In the Midwest and Northeast, regions from which many of our students come, the population of high school aged students is declining, and colleges and universities of all sizes are facing challenges. In November 2017, Inside Higher Ed reported that 61 percent of all colleges and universities in the Midwest did not make their enrollment goals, with smaller schools being particularly hard hit. We remain committed to providing a diverse group of students with access to an Earlham education. We are proud that we enroll higher percentages of first generation and Pell-eligible students than most similar schools, and that we provide institutional aid to international students. But these commitments are expensive. How Did We Get to this Point? Since the global financial downturn of 2008-09, the Net Tuition Revenue per student has fallen, which has necessitated larger draws on the endowment. We are not able to continue this approach indefinitely. While it is reasonable to spend the earnings from our investments, endowment draws to cover large deficits erode the basis and permanently reduce future endowment earnings. This chart illustrates our recent challenges. Net cash flow and cumulative net cash flow are expressed in millions. $(000) FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 NTR $ per Student $15.1 $14.2 $14.5 $14.4 $12.0 $12.0 Net cash flow $(5,556) $(6,183) $(9,434) $(8,090) $(7,233) $(10,813) Cumulative net cash flow $(5,556) $(11,739) $(21,173) $(29,263) $(36,496) $(47,309) Earlham has been increasingly relying on its endowment as a tool to get it through tough times, both to fund deficits and in the form of 'supplementary draws' to fund special initiatives designed to increase revenue. Our endowment (as of 3/31/18) is valued in the aggregate at $438 million, including about $49 million designated for the Earlham School of Religion. The endowment is divided into restricted funds, which can only be used for purposes specified by donors, and a smaller unrestricted portion (projected to be $150M, as of 06/30/18) that the College can use at its own discretion. The College has long used the restricted funds to pay for scholarships and endowed professorships, and it will continue to do so. Income from the unrestricted portion of the endowment is used to supplement the operating budget. So long as draws on the unrestricted endowment are modest, this practice is sustainable indefinitely, as earnings generated by the endowment over time will exceed the amount drawn. It is when our draws exceed our earnings that real problems arise. It is important to note that we have a Strategic Plan (approved by the Board of Trustees in 2015) and a Curricular Vision Statement (approved by the Faculty Meeting in 2016) to guide us. The Strategic Plan anticipated many of the challenges we are now facing, and the Vision Statement articulates the qualities of an Earlham education that our community most highly values. The Plan contains specific suggestions for how Earlham can better respond to the needs and desires of current and future students. Earlham is presented with some difficult choices. Like most schools, a significant portion of our operating budget goes to salaries and benefits for our faculty, staff and administrators. Administrative operating budgets already have been cut several times in recent years, so we have limited options when it comes to reducing expenses. The people who work at Earlham are the lifeblood of the institution. They are the ones who make possible the amazing educational opportunities we provide. Saying goodbye to members of our community who have served our students well is painful to contemplate. How Has Earlham Responded to this Challenge? In recent years, we have made a concerted effort to address our financial realities. We have invested $65M in new or improved academic facilities. The College has added teaching faculty in sought-after academic areas. We have bolstered and expanded upon the College's longstanding strengths in off-campus study programs, student-faculty research opportunities, and experiential learning. The College has combined these offerings with additional support for internship placement and career exploration. We have worked to improve the admissions recruitment processes and have invested more in branding and marketing. Alumni and friends of the College have supported our mission and have recently responded to our needs with several of the largest individual gifts in the history of the College. We had our most successful Earlham Fund campaign ever during the 2017-18 academic year. All of us at Earlham are grateful for the generous support of alumni, parents and friends. In the coming years, it is essential that we reach out to even more alumni and friends in the effort to gain additional financial support for critical initiatives to move the College forward, among them: EPIC, increased funding for student financial aid, support for expanded learning opportunities for students, and additional financial support for our amazing teaching faculty. Unfortunately, even if we increase alumni giving and continue to improve our admissions yield, it is possible that those measures alone will not close our budget gap. Colleges like Earlham are now finding themselves in competition not only with schools of similar size and orientation, but we are also competing, for instance, with honors programs at large state universities. For price-conscious students and families there are many options, so schools like Earlham must make sure what they are offering is truly compelling and distinctive, and offered at a cost students are willing and able to pay. BUDGET DEFICIT REDUCTION PROCESS Last winter, an ad hoc committee, known as the Phase I Budget Reduction Committee, produced a plan for reducing the College's 2018-19 expense budget by $2 million. That plan was approved at a special board meeting on March 17, 2018. At the Board of Trustees' regularly scheduled June meeting, trustees learned that the College's budget deficit for 2018-19 was projected to be $12.8M, after a $2M reduction in expenses. That total was significantly higher than the $9M deficit that had been predicted at the beginning of the fiscal year. This change was driven largely by lower than expected net tuition revenue. Given a larger deficit, combined with the realities of a price-competitive market for students, the Trustees then decided that the College needed to create an operating budget of $42M for the 2019-20 academic year. A committee, known on campus as the Phase II Committee, was formed to explore cost reduction and revenue enhancement. The Phase II Committee is convened by Jonathan Diskin (Economics and Center for Social Justice) and James Logan (Religion, African and African American Studies, and Associate Academic Dean). The committee includes students, teaching faculty from all academic divisions, administrators and hourly staff. This broadly representative committee has gathered and examined key data about the College's budget and academic program. The co-conveners have been consulted by, and worked with, vice presidents and other budget managers about reductions in the expense budgets of non-academic departments, done some more general budget analysis, and have been exploring opportunities to enhance revenue. The committee is also in close discussions with the conveners of the Faculty Affairs and Curricular Policy committees (FAC and CPC) in order to connect the work of the Phase II group with curricular responsibilities and duties of these standing faculty committees. Any specific proposals for laying down academic programs or eliminating faculty positions will be created through the College's existing governance process, led by the appropriate faculty committees (FAC and CPC), as required by the Faculty Handbook. Whatever plan (or plans) emerge from this broad consultative process will then be presented as recommendations to the president, in consultation with the academic dean where curricular programs, staffing and budgets are concerned. Reductions in administrative areas will be recommended by the president in consultation with the vice presidents and budget managers. A progress report on budget deficit reduction efforts will be shared with the Board of Trustees at their October meeting, and the trustees intend to approve a final plan in late 2018.