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The college entered the 2008-09 fiscal year
with an endowment totaling $1.36 billion. The endowment serves as an important source
of annual support, representing nearly one-third of operating revenues. As U.S. and
world equity markets decline so does the college’s endowment. The
endowment returned -15.3 percent from July through October 2008. We estimate that
the endowment is likely to be down an additional 7 percent through the first few
weeks of November 2008. In addition to the market losses, the college continues to
draw from the endowment to meet current operating budget needs. This means the decline
in endowment market value will be steeper than the negative returns. The value of
the endowment had declined from $1.36 billion in July to $1.2 billion at the end
of October and may fall below $1.1 billion by the end of the current month.
Until economic conditions stabilize, it is
difficult to project what the full impact will be on the college’s budget.
In our budget modeling we have evaluated several possible outcomes for factors such
as reduced endowment income, rising student financial need, and changing patterns
of philanthropic giving. With endowment market value likely to be down more than
20 percent, and taking into account other unfavorable financial trends, we project
that the college may need to reduce its nearly $200 million operating budget by as
much as 10-15 percent or more than $20 million over the next few years.
Per President Christ’s
October 23, 2008 letter, every new position or vacancy will be reviewed by
the senior administrative group to ensure that we only go forward with the most
critical positions. While this will undoubtedly present challenges and stress on
some employees and departments, it will provide important budget flexibility.
Smith continues to meet the full demonstrated
need of enrolling students. As in the past, the Office of Student Financial Services
will review appeals from students for whom family economic circumstances have changed
since the original award was calculated. The college is mindful that an extended
tightening of the credit markets could restrict the availability of loans for students
and their families, and it may consider alternative college-funded emergency loan
options as necessary.
We are fortunate that we have financial reserves
that allow us to be thoughtful and deliberative in in our financial planning process.
To provide even further flexibility, we have put in place a 2 percent holdback on
non-salary budgets in the current fiscal year, and we are reviewing all requests
to fill open positions, granting only those that are most urgent. As a consequence
of all of these steps, we do not anticipate any layoffs in the fiscal year ending
June 30, 2009.
While the college does not maintain a centrally
budgeted contingency or emergency reserve fund, it does maintain and monitor balances
in several other reserves set aside for particular purposes that are available to
meet other needs as necessary. The combined balance of these reserves is in the multiple
millions of dollars. These reserves provide some flexibility in the near-term, allowing
time for thoughtful planning and discussions about potential permanent changes needed
in the budget. The use of reserves may buy some time, but will not likely allow Smith
to avoid difficult decisions about base budget reductions.
The college is fortunate to have a sizeable
endowment as the result of support generations of alumnae and friends and careful
stewardship. However, the purpose of the endowment is not to act as a reserve for
use in difficult times but to support the regular operations of the college, providing
a margin of excellence, and to benefit both current and future generations of Smith
students. With these objectives, the trustees strive for an annual spending rate
that strikes a balance between providing ample resources for current students and
faculty and protecting the future purchasing power of the endowment. Analysis has
suggested that an average spending rate of 4.5 percent to 5.0 percent over longer
periods is appropriate. With the recent declines in the endowment, it is probable
that the spending rate will reach or exceed 6.0 percent for the near-term. To draw
substantial additional amounts from the endowment now would adversely affect the
future value of the endowment available to support the annual operating budget in
future years. The college may consider a modest short-term adjustment to the spending
rate formula to soften the otherwise sharp reduction in endowment income to the budget.
The use of reserves and accumulated surpluses
from prior years provides some measure of flexibility in responding to the current
set of financial challenges. We are seeking efficiencies in the current year’s
budget through careful review of position searches and discretionary spending, as
well as modest holdbacks in operating budgets. We will focus the college’s
regular budget cycle on understanding the effects of the economy on the operating
budget and consideration of a wide range of responses, including areas for savings
as well as areas in which we should increase our investment even (or perhaps especially)
in tough times, in developing a balanced 2009-10 budget. The Committee on Mission
and Priorities and the Advisory Committee on Resource Allocation (ACRA), both of
which include faculty, staff, and students, continue to be the primary committees
advising the president on priorities and budget matters. Senior administrators are
also playing an important role, identifying priorities within their areas for review
and discussion.
At its October 2008 meeting, Smith’s
board of trustees underscored its commitment to securing a vibrant and competitive
future for the college, urging that we move forward with the vision of educational
excellence put forth in our strategic plan The Smith Design for Learning.
Maintaining momentum on key initiatives, even during a period of budget stress, will
remain a critical component of the budget planning process.
Ford Hall construction will continue as planned.
Most of the project is funded through tax-exempt debt issued by the college in 2007.
Critical repairs and maintenance to our facilities will also continue, as will the
Paradise Pond dredging project, soon to be completed. The college has increased the
funding for renovation projects significantly in recent years to ensure that we adequately
maintain campus buildings and infrastructure. Retreating from this initiative would
result in additional deferred maintenance. We will want to balance the needs for
continuing the progress we have made in this critical area in recent years with the
budget flexibility provided by delaying less urgently needed projects, such as programmatic
improvements, for which some $520,000 had been budgeted in the current year. Examples
of delayed projects include a renovated reading room for Neilson Library and a turf
field for athletics, both of which will require continued fund raising from donors.
Certainly, the college is concerned about any
investment which limits its access to funds. The CommonFund Short Term Fund has continued
to make funds available to the college gradually since freezing 90 percent of the
balance in September. Through November 24, the college had access to and transferred
65 percent of the original $46.8 million invested in the fund. The fund’s trustee
will proceed with an orderly liquidation of the investments, thereby continuing to
make additional funds available to the college. Smith's revenues, including normal
monthly operating support from the endowment, are sufficient to cover the college's
anticipated operating expenses. In addition, the college holds short-term assets
outside the CommonFund account, such as endowment investments in U.S. treasuries,
that can be converted to cash should the need arise.
Members of the Smith community are encouraged
to suggest efficiencies and other ways in which the college might reduce expenses,
by
sending ideas to planning@smith.edu.
Updated December 4, 2008. |
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