To: Wellesley College Faculty and Staff
From: Courtney Coile, Provost and Lia Gelin Poorvu ’56 Dean of the College, and Piper Orton, Vice President for Finance and Administration and Treasurer
Re: Update on the College’s budget for FY26 and beyond
Date: March 24, 2025
We are writing to share an update on the College’s budget for FY26, in advance of the report from the Advisory Committee on Budgetary Affairs (BAC) that is expected at the April 24 Academic Council meeting. We are taking this step because of our community’s interest in better understanding the budget landscape given the uncertainties regarding federal policy changes that could affect higher education—as discussed by President Paula Johnson in her recent remarks at Administrative Council and Academic Council—and ongoing conversations about the possible cost to the College of the WOAW-UAW contract. We also believe it is important to provide this update to supply context for any cost-saving actions that we might announce in the coming weeks.
The College is facing a large budget deficit for FY26. While we often project a modest deficit at this point in the budget cycle and can make adjustments to get to a balanced budget, the projected FY26 deficit of over $8 million will require more significant action. We are working to produce a balanced budget that can be presented to the College’s board of trustees for approval at its early May meeting, and we may need to consider actions such as a hiring freeze and across-the-board reductions on budget items like food or travel to achieve this result.
The FY26 deficit reflects the effects of several ongoing structural factors, which we will describe briefly here before addressing the impact of possible changes in the higher education arena.
The first structural factor is the College’s strong commitment to a need-blind, meet-full-need admission policy, which is integral to Wellesley’s excellence. The budgetary implication of our commitment is that revenues grow relatively slowly over time because increases in the comprehensive fee do not affect students receiving financial aid, i.e. 55% of the student body. For example, a 4% increase in the comprehensive fee translates into a 1.8% increase in tuition revenue. This makes it difficult for tuition revenues—which fund 40% of the College’s $280 million budget—to grow as quickly as spending on faculty and staff compensation (which comprises 52% of expenditures).
For FY26, we anticipate increasing our financial aid spending by $3 million, related to the decision approved by the board of trustees in January to calculate a family’s financial need in a new way that will increase aid packages for about 750 current students and many newly admitted students. Earlier this year the BAC and the Committee on Admission and Financial Aid (CAFA) discussed this change, which is critical to maintaining our competitive position in an evolving financial aid landscape.
The second structural factor is the College’s dependence on the endowment distribution to fund 45% of our budget. The year-over-year increase in this distribution is slowing in FY26 for two reasons: First, we realized an outsized endowment return in FY21, which increased the annual distribution rate during the past three years, but the annual distribution is no longer growing at the same rate. Second, the College has withdrawn funds from the endowment to pay for critical repairs to academic buildings (Clapp Library, Pendleton East), which reduces future distributions. The distribution rate from the endowment is projected to increase 2.1% next year, below the projected rate of increase of compensation. While it may be appealing to imagine that we can increase the spending rate on the endowment, the reality is that our spend rate (inclusive of the recent special drawdown) is consistent with that of our peers and is calculated at a level to preserve the endowment’s ability to fund the College’s needs into the foreseeable future, consistent with the intent of the donors who made the endowment possible.
The third factor is the College’s continuing need to invest in our buildings. As is now well understood, the College underinvested in buildings for decades. To rectify this situation, we have had to make room in the operating budget for spending on campus renewal projects. Despite recent renovations to the Science Center and Clapp Library, Wellesley still has over $800 million of deferred maintenance in its buildings, among the highest of its liberal arts peers. Even if all the buildings slated for future work were suddenly renovated at zero cost to the College, we would still need to budget for building maintenance costs. Failing to maintain newly renovated buildings would only repeat mistakes of the past.
A fourth factor is the endowment tax, which has been levied since 2017 on colleges and universities with endowments of more than $500,000 per student. The current tax rate is 1.4% of net investment income. For reasons too complex to explain here, we had some relief from the full impact of the tax in its early years, but for FY26 we expect the tax to cost the College on the order of $3 million to $4 million.
We also acknowledge the importance of maintaining our commitment to offering competitive salaries and benefits so that we can continue to recruit and retain excellent faculty and staff. Tenure-track faculty salaries have lagged relative to that of our peers, particularly since 2020 (the BAC FAQs that were circulated to Academic Council members in advance of the September 2024 meeting provide more details), and we have recently reviewed administrative staff salaries relative to the market. While we have not yet made decisions regarding salary increases for tenure-track faculty and administrative staff for FY26, the importance of striving for competitive salaries was discussed at a recent BAC meeting.
Some have asked how the College could be facing a large deficit in FY26 when we ran a $15 million budget surplus in FY24. The FY24 surplus was the product of a number of unforeseen one-time events that will not recur this year or in future years. These include receiving a final installment of federal COVID-19 funds, receiving significant gifts that generated income in FY24 in advance of earnings being spent on programming, and having high interest earnings, as we held cash to pay for upcoming capital projects and the interest rates paid on those balances shot up. The trustees designated the interest earnings ($8.2 million) to be spent on capital projects and designated the balance of the surplus to the endowment to be budget-relieving for the current and all future years.
Unfortunately, the combined effect of these various structural factors is a challenging budget environment for FY26 and future years. To balance the budget, we must come up with changes to our operations and programs that will allow us to make permanent spending reductions. While we hope to identify some areas where we can achieve these cost savings with minimal impact, the reality is that in other areas reduced spending will mean deciding to do less. We need to set our sights on the art of the possible, confident that we can offer an outstanding liberal arts education using the resources we have.
Finally, we wish to look beyond the known factors discussed thus far and address the unknowns—the possibility that the budget landscape will shift due to policy changes affecting higher education. Moody’s rating agency last week downgraded the outlook for the higher education sector from “stable” to “negative.” We want to stress that there is uncertainty about the changes that might occur and the magnitude of their financial impact. The possibilities are sobering. As was shared last week, the College is one of 60 institutions that received a letter from the U.S. Department of Education’s Office for Civil Rights warning of potential enforcement actions related to the College’s obligations under Title VI. Federal contributions to our students’ financial aid total $9 million per year. Federal grants that have been awarded but not yet spent could be rescinded ($7 million), and our ability to secure future grants could be at risk. In addition, as President Johnson has reported, the current endowment tax rate of 1.4% could increase to between 10% and 35%, based on recent proposals. An increase even to 10% would raise the College’s tax bill by $20 million per year. If the College experiences any or all of these events, we will have to seriously examine how we go about providing a Wellesley education.
Our focus in the short term is on achieving a balanced budget for FY26 by identifying areas for permanent spending reductions rather than one-time savings, as is necessary to address the structural deficit. The College will, of course, work hard to boost revenues via fundraising and to channel most gifts to areas of ongoing need, like financial aid and endowed professorships. But philanthropy is seldom a quick fix, and there are headwinds. We are living with increasing economic uncertainty in the U.S. and globally, and we face challenging public conversations about higher education. In addition, the share of alumni giving to their alma maters has been declining across higher education in recent years. Wellesley alumnae are very loyal, but the College is not immune from these larger forces.
We will be discussing these budget issues with the BAC in our remaining meetings this year, and we anticipate that the BAC will play an important advisory role in addressing our budget challenges for FY26 and beyond.
