A Closer Look into Davidson College’s Finances: Breaking Down How Davidson Allocates its Funds

Andrew Kenneson-

At some point before every semester, we all log on to Banner Web, click on “Tuition Fees and Balances.” We scroll down the page until we see a number. That number tells us what we have to pay to go to Davidson this year.

Generally speaking, we complain about and stress over that number a lot. But we don’t really examine it. It’s easy to say Davidson is too expensive. It’s much harder to dig into the details of why it’s so expensive and how the college comes up the amount we pay every year.

Over the past few weeks, I met several times with Ed Kania, Davidson’s Vice President for Finance and Administration. His primary job is to create the budget for Davidson. We dug into the details of how Davidson works from a financial standpoint. Tis article is the product of those conversations.

Total Costs

It costs $147 million to run Davidson for the fiscal year 2017. Everything from professor’s salaries to lawnmowers to Wi-Fi is part of this number. Davidson employs about 150 faculty and 600 staff. We have pledged to meet all demonstrated financial need of all of our students. We have 209 computers on campus and Wi-Fi everywhere. We have eighteen Division I sports, a campus on the lake, a scratch kitchen, study abroad programs all over the world, access to hundreds of research databases, four gyms, an outdoors program, miles of running trails, and so much more. None of these things are cheap. If student’s tuition paid for all of it, we would all be paying much more. But the college business model allows all of us attend Davidson for less than what it costs for us to be here.

The Business Model

In college finance, revenues from students do not cover costs. If we think about tuition like the college selling pies, the college’s pie sales would not cover the costs of running the college. They would not even come close. In our case, tuition only accounts for $84.8 million of the total cost, and that’s not just because of scholarships. It costs $65, 672 for every student to be here. Even if everyone paid the full $60,119, we would still be short of the total cost. It’s a crazy business model, but colleges aren’t businesses. They’re non-profits.

The government decided a long time ago that college education was important enough to give colleges non-profit status. So even though Davidson is private, we don’t have shareholders. We don’t pay taxes. While people who work here earn a wage, we don’t make money. Hence, even students who pay full tuition, or “sticker price,” to come here are still paying a lower rate than they otherwise would if Davidson were not a nonprofit.

Where Money Comes From

Once the tuition is taken out of the total cost, there’s still a $62.2 million hole in Davidson’s finances. Where does the rest of this money come from? Fortunately, non-profits are equipped with several tools to make up this difference. The first is the endowment.

Davidson’s endowment is $661 million. Every year, we take about 5% of that money and put it towards operations. For the fiscal year 2017, we will take out $29.7 million. That shrinks the $62.2 million hole to $32.5 million. $16 million of the remaining hole gets filled by fundraising. Davidson is very, very good at raising money. We’re fifth in the country in alumni giving rates. Our “Game Changers” campaign has a goal of raising $425 million over seven years, of which we’ve raised $327 million. Evidence of our fundraising is all over campus. People like the Belks, the Chidseys, the Dukes, the Richardsons, and many more have given generously to Davidson in the past, and are rewarded with their names inscribed into the front of buildings.

The final $16.5 million comes from a variety of sources. Although we are private, we get some government money, mostly in the form of Pell grants (grant money from the government for college). That accounts for $3.8 million. A few other gifs and trusts fill up another $3.7 million. Te remaining $9 million comes from auxiliary services, namely RLO and Dining Services. Part of the money we pay for housing and meal plans goes to general college support. This is one of the reasons Davidson keeps of-campus housing to a minimum and began requiring mandatory meal plans for all class years.

Now that we’ve established where money comes from at Davidson, let’s take a look at where it all goes, and how it ends up there.

Building the Budget

There’s an old way and a new way to build a budget in a university. The old way is for the college administration to go around and ask the people who are in charge of all the departments in need of funding how much money they need. Then they would add up all the totals and back into a number for tuition. The new way is just the opposite. The administration sets a goal for the almost inevitable tuition increase, and then sets up the budget with that number in mind.

This takes tuition of the table entirely. If Davidson wants to do something new, we first have to look for something to stop doing instead of just asking students to pay more money. This means we look at everything that’s done on campus with a critical eye. If something doesn’t quite conform to the mission of the college, it could be cut to do something better. This is an especially hard job because no one thinks what they’re doing isn’t essential.

The laundry is a good example. By most accounts, Davidson ran a pretty good laundry. Even though it didn’t seem crucial to the Davidson mission, we probably could have kept it with a small rise in tuition. But that’s not how Davidson operates. We make trade-offs. The laundry disappeared. Since then, we’ve beefed up the pre-major advising program, revamped Career Services, boosted disability counseling, and many other things that are arguably more important.

The Big Two

Although we are always looking for efficiencies two things in the budget are almost never in question: academic affairs and scholarships. This is no surprise. Davidson wants great people teaching their students, and, with the Davidson Trust, the school has a stated commitment to meet all financial need. It’s worth noting that from 2006 to now, spending on scholarships jumped from $16.9 million to its present level of $47.9 million.

The other 22% is taken up by about but a dozen things like athletics, utilities, physical plant, admissions, technology, and student life. Here’s the whole $147 million budget broken down into a pie chart. These a rough estimates of how much money each area receives.

The Endowment and Allocation

Here’s where we get into complicated nitty-gritty of making the budget. It’s not all that hard to show where Davidson gets its money. It’s also not all that hard to show where all that money ends up. What is really hard is showing how the two connect. Questions like, “How much of my tuition money goes to fund professors salaries?” are tough to answer because that number is always changing. However, it’s not impossible to show some guidelines in how these decisions are made.

The endowment plays a massive role in how money gets allocated at Davidson. This is because the endowment isn’t just a big pot of money. When donors give money to the endowment, they often give it for a specific purpose. This divides the endowment up into a bunch of individual accounts that are purposed for a variety of things.

For example, $88 million of the $661 million is purposed for professorships. For fiscal year 2017, Davidson will slice of $4 million to help pay for professors. Once the college determines how much the endowment can contribute to specific causes, other money starts to fill in the gaps. So, in the above example, the $4 million from the endowment goes into the $21.6 million used to pay professors.

Other sources of money, like tuition, have not been pre-allocated in the same way the endowment has. Therefore it’s hard to say exactly how much goes into each bucket. But it’s a pretty good guess to say that since tuition comprises 58% of total revenue, then about 58% of each bucket is paid for by tuition. In the professorships example, somewhere around $12.5 million from tuition is probably going into that bucket.

This gets tricky, however, when you consider the unrestricted parts of the endowment. Some donors don’t have specific purposes when they donate. They just think Davidson is a really great place that will do good things with their money regardless. $66 million of the endowment is unrestricted.

Another $66 million are undesignated funds functioning as endowment, which means the donor didn’t tell the college whether or not to use the funds as endowment or as a current gift. Since it’s undesignated, the college can use it however it wishes, just like unrestricted money. Add these two together and Davidson has about $132 million to go toward anything in the 2017 fiscal year. This can fill in anywhere, making it even harder to say what money is going where.

Hopefully this gives you an idea of how the college decides what money goes where. See the above graph showing spending pulled from the endowment. These are just the parts of the endowment that contribute over $1 million to operating costs.

Not surprisingly, funds going to scholarships and aid, namely the Trust, make up over half the money pulled from the endowment. However, this only comprises about $15 million of the $47.9 million spent on scholarships every year. As a final example of how this all works, let’s break this down. Of the remaining 32.9, tuition should contribute 27.8, which is 58% of 47.9. Then fundraising should kick in 11% of the total, which is 5.2. Auxiliary services would add in 6%, which is 2.9. Add all these together, and you get $50.9 million, which is pretty close to the total. The real numbers would be different, and not just because this estimate is $3 million off. Fundraising would probably account for more since it’s popular to donate to scholarships, while tuition would be less because it’s less popular to use one student’s tuitions to pay for another’s. However, this is the general process.

Why Tuition Rises

One of the unfortunate realities of college finance is that tuition goes up just about every year. Davidson is no different. However, we are getting things for those increases. One reason is that Davidson needs to pay people a decent wage to keep them. As they work here longer, they demand more money. Benefits rise too, particularly for health insurance. More recently, the cost of technology has driven tuition up the most, as students and faculty demand better service around campus. Bandwidth has increased tenfold in the last decade in response to student and faculty needs. Davidson has also been investing in more advisors, counselors, directors, and other important members of the community that are critical members of the college’s success. But they come at a cost.

Davidson: Not an Outlier

From a financial standpoint, Davidson hardly stands out from our peers. When you look at other small, academically rigorous, liberal arts colleges like Williams, Pomona, Washington and Lee, Carleton, Middlebury, and others, not much distinguishes us from them: we have similar tuition costs, hovering around $60,000 a year, and similar small school size. Davidson has one of the smallest endowments of the liberal arts colleges at about $2 million, but have higher rates of fundraising than the other schools.

Going to a school like Davidson is not getting cheaper. But it does look worth it. Forbes annual college ranking, which places enormous emphasis on return on investment a student receives, ranks Davidson the best school in the South and the 25th best school in the country. Given our alumni giving rates, people who graduate from here seem to think they made a good choice. Once we all graduate, hopefully we will too.

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