Letter from the Senior Vice President of Administration and Finance, Chief Financial Officer, and Chief Investment Officer
The COVID-19 pandemic has presented formidable challenges for the Berklee community as it has for the entire world. At the outset of the pandemic in the spring of 2020, with a paramount focus on health and safety, Berklee moved swiftly and decisively to close our campuses, and supported our students, faculty, and staff as they returned to their homes or other remote locations. Recognizing the financial burden on our community, Berklee simultaneously issued credits or refunds to students and provided emergency financial aid in extreme circumstances, such as to students who could not afford to return to the United States from our campus in Valencia, Spain.
Berklee entered the COVID-19 crisis from a position of financial strength. Years of consistently positive operating results coupled with a focus on liquidity increased cash reserves to historically high levels, equal to approximately five months of expenses versus an industry benchmark of three to six months. In addition, just prior to the onset of the crisis, Berklee concluded a multiyear debt restructuring program that lowered the absolute level of the institution’s debt as well as the long-term weighted average cost of that debt, thereby lowering debt service requirements for the foreseeable future. In response to the crisis, after supporting the health and safety of our community and ensuring educational continuity by pivoting to remote learning, Berklee moved swiftly to enhance alternative revenue streams and reduce operating costs to help offset the credits, refunds, and other support provided to our students. These actions supplemented what was otherwise a very strong operating and fundraising year. As a result, Berklee recorded solid operating results in 2020, despite the impact of the COVID-19 crisis and the ongoing challenges facing higher education. In addition to addressing these very substantial challenges, Berklee’s 2020 financial results reflect our continuing focus on 1) improving student success, with a focus on affordability; 2) investing in support of the institution’s vision, mission, and strategic priorities; and 3) sustaining our financial strength.
Berklee ended the year with total operating revenues of $296.0 million and an operating margin of $15.5 million, or 5.2 percent of operating revenues, just ahead of our long-term 2–4 percent target range, with all areas of the institution contributing to the results. Notably, the challenging environment for higher education on-campus operations presented an opportunity for online education, especially Berklee’s award-winning online platform, Berklee Online. Berklee initiated a new investment program in this platform beginning in the spring to better support current and prospective students, and has experienced record-setting growth as a result. All segments of Berklee Online, including undergraduate and graduate degree and non-degree programs (as well as our MOOC-certificate programs) exceeded targets in 2020, and growth is accelerating in the new fiscal year. Four years after the merger of Berklee College of Music and the Boston Conservatory, Boston Conservatory at Berklee continued to make excellent progress toward its new strategic objectives, including improved operating margins. Berklee’s campus in Valencia, Spain, which offers undergraduate study abroad as well as graduate programs, operated at full capacity in 2020 and recorded record operating results. Given strong demand at the campus in Spain, Berklee recently concluded an agreement to extend and expand our agreement with the Valencia regional government for our facilities in the beautiful Palau de les Arts Reina Sofia. Our core operations on the Boston campus continued to perform well, reflecting continuing demand for Berklee’s quality programs. During the year, Berklee invested in the institution’s highest strategic priorities, including the continued development of a new technology platform, Workday, concluding two out of three conversion phases. We also made good progress on two significant capital projects to improve our students’ experience: a new practice room facility at our Boston campus, which will open for the spring 2021 semester, and the complete renovation of our new campus in New York City, which was funded primarily through philanthropy. Located just steps from Broadway, Power Station at BerkleeNYC will reopen its studio operations this fall and will begin to offer exciting opportunities for our music, dance, and theater students in 2021. Affordability was also a top priority in 2020 as scholarship support reached new highs, while tuition increases were limited.
Fundraising continued its positive momentum in the first year following the successful Soundbreaking campaign, which ended in fiscal 2019 and exceeded its $121 million goal by over 33 percent. In fiscal 2020, Berklee posted a total of $21.3 million in new gifts/new pledges focused on scholarship support, the top priority. In addition, Berklee’s endowment continued to generate new highs in support for the institution’s operating budget. The endowment, at $328 million, remains the largest asset on Berklee’s balance sheet.
At year-end, Berklee’s balance sheet reflects our higher liquidity ($118 million in cash reserves) as well as a good balance among assets: total assets amounted to $761.6 million at year-end, with 15 percent in cash and short-term investments, 43 percent in the institution’s endowment, and 38 percent in physical assets. As noted above, long-term debt, while high relative to other A-rated institutions, is lower compared to 2019 due to the January retirement of the remainder of our 2007 debt and the subsequent completion of our multiyear refinancing program, just before the onset of the COVID-19 pandemic. The impact of the COVID-19 pandemic is most visible in two areas of the balance sheet: the ongoing impact on the financial markets in May, 2020 is reflected in the valuation of our endowment ($328 million at May 31, 2020, versus $356 million a year earlier); and the combined impact of lower market values and lower interest rates is reflected in an increased accrued pension liability, despite the plan’s closure to new employees in 2012. However, since May, the endowment’s value has climbed steadily (approximately $360 million as of August 31, 2020) with the general recovery in the markets as has the value of the pension plan’s assets. The combined impact of the temporarily lower valuation of the endowment and pension plan assets (as well as the impact of lower interest rates) lowered net assets from approximately $397 million at May 31, 2019, to $347 million as of May 31, 2020; approximately 67 percent of total net assets are unrestricted.
The following table summarizes key financial metrics for the past five years. (Note that the merger of Berklee College of Music and The Boston Conservatory occurred at the beginning of 2017.)
During the 2020 fiscal year, both S&P Global Ratings (A stable) and Moody’s Investors Service (A2 stable) affirmed their current ratings of Berklee, noting the strength of Berklee’s enterprise profile and reputation. In their reports, both noted the strength of Berklee’s market positioning in music, dance, and theater as well as Berklee’s consistent operating performance.
Looking forward, fiscal 2021 will be a very challenging year as we experience the impact of the COVID-19 pandemic for the full year. In the interest of the health and safety of our entire community, we made the decision to operate virtually through at least the summer and fall semesters, despite the significant adverse financial impact on the institution. In recognition of the financial strains experienced by our students and families, we froze tuition and fees at prior-year levels and, further, issued $2,500 grants to all students that enrolled this fall (along with supplemental benefits if these same students enroll this coming summer). We also continue to provide health and wellness resources and support to our faculty, staff, and students, and have created a COVID emergency financial relief program for those facing COVID-related financial hardships. While these actions provided substantial benefits to our students as well as the rest of our community, they present very significant financial challenges for the institution. As we consider reopening our campus in a limited capacity this spring, the health and safety of our community will continue to be a top priority and will require substantial investment in our facilities as well as other health and safety measures. In response, Berklee has initiated comprehensive revenue augmentation and cost-management initiatives. Our continued investment in Berklee Online is expected to produce a strong increase in Berklee Online revenues and operating margins this year. Cost management across the institution, including a significant reduction in operating and capital expenses, will also help us address the financial challenge. While these measures were initially focused on non-personnel operating expenses, the size of the expected financial gap has necessitated salary reductions for the senior leadership of the institution, the elimination of raises for all personnel, and other related actions, including furloughs of staff (who continue to receive health benefits). These decisions were very difficult and taken only after a very rigorous review, especially in light of the high esteem we have for our furloughed staff. Nevertheless, such actions are necessary to ensure our continued support for our students and the broader Berklee community as we all continue to navigate the COVID-19 pandemic. Finally, we believe all of these actions will help ensure Berklee’s long-term leadership in performing arts education and our long-term financial viability in a very dynamic and challenging higher education environment.
Richard M. Hisey
Senior Vice President of Administration and Finance
Chief Financial Officer |Chief Investment Officer