Operational Finances

Over its forty-five year history, ESR has maintained an admirable record of steady growth and financial stability.  From a budget of practically nothing in 1963, ESR's finances have since grown to the point where, in the fiscal year ending 2004, it had a total annual operating income of $1,250,312 on expenses of $1,222,618.  Since its inception as a seminary, ESR has experienced only two periods of extended financial retrenchment, accompanied by multi-year deficits, as illustrated in the accompanying chart.  The first period of retrenchment occurred in the early to mid 1970s, when ESR was proscribed from conducting fund-raising activities in support of its annual operations, due to the PACE capital campaign then being conducted by Earlham College.

The second period of financial retrenchment for ESR occurred in the mid-1990s, when the income of the School underwent an unexpected decline.  The cause of this second decline may be traced to decreases in two of ESR's major revenue sources: student tuition and donations to its Annual Fund.  The drop in tuition revenue stemmed from a corresponding decline in student enrollment in the early 1990s.  The drop in Annual Fund donations, on the other hand, followed upon the completion of ESR's Making A Difference capital campaign, which concluded in 1989.  A substantial portion of the pledges to that campaign (approximately $1 million) were directed toward ESR's Annual Fund in support of current operations.  Once these pledges were fulfilled, many donors simply did not renew their giving to the Annual Fund at comparable levels.

Since the late 1990s, ESR has become more diligent in its budget planning to ensure that future expenses consistently match projected income.  However, this task has been complicated by several worrying trends in the School's major revenue sources.  Currently, ESR derives nearly all of its operational revenue from three primary sources.  Listed in their order of importance, these are:

  1. Earnings from endowment,
  2. Tuition from students, and
  3. Donations to the Annual Fund.

In 2004, ESR derived fully 64%, or $795,858, of its total revenue from investment income earned on its endowment.  Another 21%, or $265,626, came from tuition charges; and 13%, or $163,636, came from donations to the Annual Fund.  (The remaining 2%, or $25,192, of revenue came from miscellaneous fees and rental income.)  Between 2000 and 2004, ESR also benefited from an extra 1% draw on its endowment.  (Normally, ESR receives a 4% annual draw on the value of its endowment.)  This extra 1% draw provided ESR with approximately $200,000 per year in additional funding over those four years.  These funds were employed to finance various strategic 'repositioning' activities.  One of the more important of these activities was the development of the School's distance and on-line learning programs collectively known as ESR Access.

On the cost side, ESR's two single largest areas of expenditure relate to salaries for academic faculty, which accounted for $381,771 (or 25%) of total expenses in 2004, and administrative support, which accounted for $456,782 (or 30%) of total expenses during the same year.  A couple notes concerning the accompanying chart, which depicts ESR's expenditures between 1989 and 2003.  First, the disappearance of Student Financial Aid as an expense area in 1997-98 reflects changes in how ESR counts student aid in its budget, rather than a decrease in student aid.  A more complete picture of the financial aid provided to ESR students is included in the section covering that subject.  A second note regards the growth and fluctuations in the administration expense area.  In the early 1990s, ESR's administration expenses grew largely as a result of the School creating dedicated administrative faculty positions to perform functions previously handled by its teaching faculty or Earlham College.  Administration expenses can also be seen to have markedly increased immediately before and during the times when ESR was actively engaged in conducting fund-raising campaigns.

Besides being its single largest source of revenue, ESR's endowment is also currently the single largest source of projected budget constraints for the School.  Between 2000 and 2003, the value of ESR's endowment assets plummeted by 21.5%, from $33,097,000 to $25,937,000.  This drop largely reflects the extremely poor performance of the stock market during that time.  Since 2003, the endowment has recovered a considerable portion of this loss, rising to $29,443,000 in 2004.  Nevertheless, the net decline in the value of ESR's endowment assets, in both absolute and relative terms, is having a severe negative impact on the School's projected operational finances, given that the School derives approximately 64 of its operational revenue from this single source.  As a consequence, ESR is having to contemplate severe cutbacks in its educational services it offers in order to avoid massive future deficits.  To this end, ESR's administrative and teaching faculty recently accepted a freeze in their wages for 2005 as a first step toward meeting the budgetary challenges the School faces in the near future.

A second major contributor to ESR's current financial stress stems from recent trends in student enrollment.  Over the past ten years, the number of student full-time equivalents ('FTEs') enrolled at ESR has remained relatively constant, and has even decreased slightly, to 41.7 FTE in 2003-04.  At the same time, though, the School's student headcount has nearly doubled to 100 students.  These trends point to the fact that more and more seminary students are opting for part-time studies.  What this trend translates into for ESR finances is stagnating tuition revenues while costs continue to rise.  For, in many instances, it costs as much to provide institutional support to a part-time student as it does to provide the same services to a full-time student.  This situation of stagnating FTE enrolment, increasing numbers of students and increased costs, has led to ESR having to raise its tuition faster than the rate of inflation to cover the gap.  In the absence of adequate student financial aid, this increased cost may prevent some prospective students from attending seminary; still others may find they have to reduce their course load so as to allow them to be employed in paid work while they pursue their studies.

The third, and final, contributor to ESR's projected budgetary woes relates to fund-raising in support of its operations, which have stagnated and even slightly declined over the past ten years.  Between 1993 and 2003, ESR's Annual Fund raised an average of $194,000 per year; in 2004, though, the Annual Fund received only $162,321 in donations.  Not only is ESR's Annual Fund not keeping pace with inflation, it is losing ground in nominal terms.  While the Annual Fund counts for only a small fraction of ESR's total annual operating budget, usually around 15%, the fact that this decline is occurring against a background of reduced endowment earnings, stagnating tuition revenues and increased costs means that ESR is presently experiencing a financial crunch of extraordinary proportions.  This crunch is not only preventing ESR from undertaking new initiatives, it threatens the viability of recently established and vital programs, such as ESR Access.  If these trends in ESR's operational revenue continue unchecked, they even have the potential to negatively impact the integrity of the School's core academic programming.  Given this situation, it is no exaggeration to state that, unless decisive steps are taken to secure and enhance ESR's financial future now, the quality of education the School is able to offer will be severely impaired.