Day 16: The College Budget Project

A series following my new class: The Economics of Higher Education

In the Day 15 post, I talked about the biggest assignment of the Block: The Consulting Project.

Today we’re talking about another big one: The College Budget Project.

I got the idea for this project from my college thesis advisor Jeff Parker and his co-teacher Jon Rivenburg, then the Director of Institutional Research at Reed. They taught a class on the Economics of Reed College and I absolutely loved it. One of our final assignments in 2003 was to adjust Reed’s budget in the face of an adverse event. I think at the time we were responding to a large market downturn and thereby a reduction in the endowment payout, but my memory of the details is foggy. I just remember that when I was actually faced with making the budget decisions, my opinions about which recent Reed administrative decisions were good or bad became much more nuanced.

Below you’ll find the assignment I designed for my students this year. Email me if you’d like your own copy of the spreadsheet so you can play with the numbers yourself.

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On Day 12 of this Block (May 6, 2025), the Associated Press reported that Congress is considering a tax on endowment returns of 21%, in line with the corporate tax rate. For the purpose of this exercise, we will assume the tax applies to any college with an endowment greater than $200,000 per student (CC's endowment is currently approximately $447,000 per student). There are many other specific details to consider (e.g. the tax may apply differently to returns from some investments than others), but again for the purposes of this exercise, we will assume that the tax of 21% will be applied to the market value returns of the endowment. For example, CC currently has an endowment of $1 billion. If the market increases at a rate of 7%, our returns this year will be 7% * $1 billion = $70 million. The 21% tax would apply to those returns, so our tax bill would then be 21% * $70 million = $14.7 million.

How should Colorado College adjust its budget if this new large endowment tax goes into effect?

I've made this mocked up spreadsheet of the Colorado College budget using publicly available information from IPEDS (AY23-24), the CC Financial Statement (AY23-24), and CC's 990 tax returns (AY22-23). I adjusted the staffing categories to reflect the current composition of the President's Cabinet (i.e. the VPs) and made some assumptions about how those changes likely affected average compensation for executives and managers. These numbers are not perfectly accurate, but they do reflect the broad realities of the finances of our college.

In the Clean Copy tab, you will find a projection of our budget into AY25-26 with no endowment tax. These figures assume that we will maintain the same levels of staffing we had in AY23-24 (the latest year for which I have data). These figures also assume that prices increased 5% between AY23-24 and AY24-25, and a college wide 4% increase in prices/wages will apply to every facet of the AY25-26 budget.

The Clean Copy tab is meant to show our base scenario. Please do not edit this tab; it is provided so that if you change a number in your Working Copy and later decide to go back to the Base Scenario, you have a Clean Copy to reference. You can also refer to the Clean Copy when writing up the changes you made in your Working Copy.

In the Working Copy tab, I've added the proposed 21% endowment tax. Your goal is to adjust the cells highlighted in yellow to bring the budget as close to balanced as possible, certainly within a $3 million shortfall. (We do have some cash on hand as a buffer.) As you can see, without adjustment the budget is currently in a $7.4 million shortfall.

There are three ways you can adjust the budget. First, you can change the prices/wages for any item by adjusting its rate of increase. Currently the default is set to an increase of 4% (i.e. 1.04; expected inflation of 3% + 1 percentage point). You can reduce any item to a 0% increase so the real price falls (i.e. change the number to 1) or even a 10% nominal decrease (i.e. change the number to 0.9). Second, you can change the number of any item by adjusting the quantity. If you choose to reduce the number of employees, you must provide a list of specifically which employees you will layoff (as close as you can anyway; I want something more specific than "fire 5% of all professors;" which departments will you trim specifically?). Third, you could choose to reduce retirement benefits for all employees (cell P27 shows our current retirement benefit of 11% of wages) or reduce other benefits (like health insurance; cell P29 shows our current benefits' estimated cost of 19% of wages).

To make things more interesting, there is some remaining uncertainty in the scenario. You cannot set the size of your student body; you can only admit a certain number of students and hope for the best. On Day 18, I will tell you what numbers to fill into cells C14 (yield rate for full pay students) and C15 (yield rate for financial aid students). You also do not know the rate of return of the market; on Day 18 I will tell you what number to fill into cell B18. You should make your choices to account for this uncertainty and get as close to a balanced budget as you can even if yields and returns don't turn out as you expect.

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Next year, I’m planning to make several adjustments to this project.

• This year I introduced the project on Day 16 and it was due on Day 18. That was a mistake. It was too rushed, and backloaded with other major assignments. Next year, I’ll introduce the project late in Week 1 or early in Week 2 on the day when either the CFO or other budget related speaker comes to visit. Then we’ll discuss as a class at the end of Week 3, before the Consulting Project heats up.

• Ask the lead of Institutional Research to be a guest speaker! They have answers to all the questions about who and what fit where in the IPEDS data.

• Ask our CFO and Institutional Research department for more detail on how much of non-wage spending is operating budgets and optional maintenance and how much is necessary spending like electricity and insurance. Allow students to choose to defer maintenance.

• Separate out enrolled students by class so students are choosing the size and composition of of the first-year admitted class, not the whole student body.

• Separate out room and board from tuition and fees so students could choose to allow juniors to live off campus and increase the size of the incoming first-year class.

• Mock up the return on adding staff in Advancement to generate additional gift revenue.

• Aspirational goal: make this a multi-year mock up so students can see the medium run impact of choices like changing the size of the student body or increasing the endowment payout percentage, and also see how uncertainty about yields and endowment returns should affect their choices about how much of a buffer to leave in their net operating revenue.

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I would love to hear what choices you readers would make to balance our budget in the worse case scenario.¹ And what other adjustments you would make to this project. Feedback is welcome!

Up next, our final assignment: The Policy Memo

1. The worst case scenario for Colorado College is not what ended up in that One Big Beautiful Bill. As you can see in this summary from the Ways and Means Committee, under the OBBB Colorado College would not be subject to an endowment tax because our endowment per student is under the $500,000 per student limit (although on second thought, I’ve only calculated our endowment per student using the size of the full student body, while the OBBB changes the rule to apply to the endowment per domestic student. Hmm… We may be over the line with that adjustment). When we do cross that line, we would be taxed at a rate of 1.4%, not the 21% worst case scenario.

The proposal in the OBBB is however very bad news for liberal arts colleges Amherst and Pomona (who will be in the 21% bracket, according to this NYTimes article), also quite bad for Swarthmore, Grinnell, Williams, Bowdoin, and Wellesley (14% bracket), and not great for Claremont McKenna, Smith, the University of Richmond, Washington and Lee, Bryn Mawr, and Davidson (7% bracket). CC is set to join Earlham, Trinity, Hamilton, Carleton, DePauw, Middlebury, Mount Holyoke, Reed, Whitman, Berry, Hillsdale, Vassar, Colby, Wesleyan, Haverford, Harvey Mudd, Wabash, and Denison in the 1.4% bracket any year now. Note that under current law, all of these schools (with endowments greater than $500,000 per student) currently pay a 1.4% tax on endowment returns.

It could be worse, but the OBBB is not good news for liberal arts colleges.