February 22, 2008
The Honorable Max Baucus, Chairman
The Honorable Charles E. Grassley, Ranking Member
Committee on Finance
219 Dirksen Senate Office Building
Washington, D.C. 20510-6200
Dear Senator Baucus and Senator Grassley:
I am pleased to submit the following information on Smith College’s endowment, tuition and financial aid trends and practices in response to your letter of January 25, 2008. I have arranged our response by topical area, which corresponds as closely as possible with the organization of your questions.
Smith enrolled 3,233 students for 2007-08, based on fall headcount plus the summer enrollment for the master’s and doctoral programs in social work. The level of enrollment has remained fairly consistent over the past decade, ranging from a low of 3,214 to a high of 3,337. Smith’s enrollment positions it among the largest liberal arts colleges in the nation. The student body consists of women at the undergraduate level, while the graduate programs enroll women and men. The enrollment counts include students at the Northampton campus as well as undergraduates studying abroad on Smith-approved programs.
Smith increases its comprehensive fee (tuition, room and board, and student activities fee) to meet the growing costs of providing the high quality academic and extra-curricular experiences found at Smith and peer colleges and universities. A Smith education costs the college more than $55,000 annually per student enrolled, which is comparable, if not somewhat lower, in cost to similar liberal arts colleges. This means that even students who pay the full comprehensive fee received a discount of approximately $12,600, or 23%, in 2006-07. The average student, including those on financial aid, pays about 50% of the comprehensive fee price.
The board of trustees, which includes the two most recently graduated student government presidents, approves changes to the college’s comprehensive fee annually by vote of the full board. Their decision is informed by a recommendation from the college president, with counsel from the Advisory Committee on Resource Allocation, a standing committee chaired by the president and comprised of faculty, staff, and the student government president. The student government provides a specific recommendation concerning annual growth of the student activities fee.
The discussion of increases to the comprehensive fee considers cost increases at the college, growth in household incomes, particularly for those families paying the full comprehensive fee, and the college’s market position relative to price. Price increases are typically absorbed into the aid package for students receiving financial aid per the college’s financial aid policy of meeting the full demonstrated need of enrolled students. The trustee vote on the comprehensive fee typically occurs in February or March, and is announced publicly shortly thereafter through letters to students and parents, press releases, and Web site announcements. The college does not engage the general student body, parents, or the general public in its discussion about tuition rates, but instead uses the Advisory Committee on Resource Allocation as the primary forum for the discussion on campus. Following the Department of Justice’s investigation of college and university tuition and financial aid processes in the early 1990s, Smith has developed its annual comprehensive fee rate through a confidential on-campus process until the final decision is reached.
Over the past ten years, Smith’s comprehensive fee has increased at an annualized rate of 5.0%, as indicated below in Table 2. Given the high proportion of students receiving financial aid at Smith, a 5.0% increase in price yields only about 3.5% growth in net revenue available to support operations.
The college considers comprehensive fee increases in the context of the growth in household income for the top tier of family incomes since only they will be expected to pay full price. Families in other income bands will generally receive a financial aid increase offsetting the fee increase. This allows for a comparison of comprehensive fee increases to families’ ability to pay, employing a measure of affordability rather than comparing college costs to the general market basket of goods in the overall economy offered by the Consumer Price Index. Incomes at the top end of the distribution tend to increase more rapidly than the average for all households, according to data from the U.S. Census Bureau (Current Population Survey). Over the most recent three-year period for which data are available (2003-2006), the average household income for the top five percent of families increased by 5.5% annually—the same rate of increase as for Smith’s comprehensive fee over the same period. Over the past ten years (1997 to 2006), incomes for these families increased by 4.0% per year versus 4.7% for Smith’s price. Smith’s comprehensive fee has grown by 5.5% annually over the past twenty years compared to 5.1% growth in average income among top five percent households. This suggests that the college has largely maintained affordability for full-pay students through price increases that correspond to growth in household income and for other students through financial aid packages that meet full demonstrated need.
Smith’s stated mission is “to educate women of promise for lives of distinction.” The admission staff seeks to identify and generate interest in Smith from talented women with the potential to succeed in a rigorous academic program -- without regard to their ability to pay. While many of Smith’s peers have begun to consider and implement new strategies to increase the enrollment of lower-income students, Smith has a well-established position of leadership in this area, as evidenced by the proportion of students receiving federal Pell grants (23% of the student body and 39% of aid recipients in 2006-07); the proportion of students receiving need-based aid of any sort (60%); and financial aid spending as a percentage of tuition, room and board revenue (37%). A 2006 study by The Chronicle of Higher Education found that Smith had the second highest proportion of students receiving Pell Grants among private institutions with endowments of $500 million or more.
Financial aid staff members actively participate in pre-college financial aid informational sessions at public and private secondary schools in the region. In recent years, outreach visits to public secondary schools in urban areas and to agencies that serve disadvantaged students have accounted for approximately 20% of the total number of visits by admission staff. The college regularly hosts student groups from these agencies on our campus individually or in partnership with other colleges. Staff visit 40 to 45 community colleges each year to reach out to potential transfer students. Smith’s Ada Comstock Scholars program enrolls 175 women of non-traditional college age, many of whom are low income. Additionally, faculty from the college’s education department have developed programs with several New York City secondary and middle schools that include Smith students teaching in the classroom and on-campus programs for students and guidance counselors. Because recruitment of low-income students is fully integrated into all admission activities we are unable to isolate the amount spent specifically recruiting this population. While we have used Pell Grant recipients as the basis of reference for the discussion above, there is not a specific income level goal guiding the college’s outreach efforts.
Smith meets the full demonstrated financial need of all enrolled students who apply for aid by the stated deadlines. Need is determined using the College Board’s PROFILE application and the Free Application for Federal Student Aid (FAFSA). The college uses a widely endorsed needs-analysis methodology to determine a student and family’s ability to pay for a college education. This methodology takes into account not only family income but also home equity, savings, and family situation such as the number of children attending college. Staff members are available to counsel families at all stages of the application process and enrollment. There is an appeals process for unusual circumstances and all policies are available to students and families on the college’s Web site.
Smith spent $40.5 million on institutional grant aid for undergraduates in 2006-07. This amount excludes pass-through grants from federal and state government sources, such as Pell Grants. Approximately 98% of undergraduate institutional grant aid at Smith is awarded solely on the basis of demonstrated need, with the remaining 2% allocated through the college’s merit aid programs, such as the STRIDE program, which pairs entering students with faculty to explore research for which the students receive a stipend. Endowments restricted for undergraduate financial aid covered $16.5 million, or 41%, of the total spent on institutional grants. The remaining $24 million was funded by a combination of general operating revenues, unrestricted endowment income, and gifts.
As noted in Table 3, undergraduate grant aid increased by an annualized rate of 8.0% between 1997-98 and 2006-07. This is significantly higher than the 5.5% rate of growth for comprehensive fees. As a result, the college’s discount rate (institutional grant expense/gross comprehensive fee revenue) for undergraduates increased from 29% to 37% over the past decade. At 45%, Smith’s undergraduate tuition discount rate was the second highest among its peer group of thirty-one colleges and universities for 2006-07. The college provided need-based aid to approximately 60% of undergraduate students and non-need grants to an additional 7% of students. The average grant among undergraduate students with need-based grants was $26,400 for 2006-07. Table 4 summarizes the distribution of undergraduates by grant level (as a proportion of tuition and fees). Almost one-third of undergraduate students received grants covering more than 75% of tuition and fees. This is roughly the same as the proportion that pay full price.
Smith’s endowment totaled $1.36 billion as of June 30, 2007. Table 5 summarizes the growth of the endowment over the past ten years. Over that period, the endowment increased by $678 million, 7.1% annually. This increase reflects the contribution of new gifts, transfers and appreciation minus spending and management expenses. Gifts and transfers have accounted for $144 million of the overall growth, or the equivalent of 1.6% of the beginning-of-year market value annually. The period witnessed considerable volatility, with four of the ten years resulting in growth of 2.5% or less, including a 7.2% decline in 2001-02 offset by four years with growth of 12% or more.
The 7.1% annualized growth rate in endowment market value exceeds the 4.5% annual growth in operations at the college during this period. The proportion of the operating budget covered by the endowment increased from approximately 20% in the mid-1990s to its current 30% level. By contrast, net revenue received from comprehensive fees after financial aid increased by only 3.5% annually during the same period, decreasing its share of operating revenues from about 50% to 42%. As the college drew larger amounts from its endowment as market values increased, the obligation to pay for a Smith education continued to shift from students and their families to the college’s endowment.
Table 6 summarizes Smith’s investment returns for the ten-year period ending June 30, 2007. Following four years of weaker returns ending 2003, Smith has benefited from four consecutive years of unusually high returns, including 23.2% for 2007. The average return since 1998 is 10.7%.
Smith’s endowment provides a critical funding stream that allows the college to provide financial aid to students with need, shape the composition of its faculty to meet curricular objectives, maintain and expand facilities, develop new initiatives and programs to respond to current societal and intellectual challenges (such as the recent establishment of the first engineering program at a women’s college), and keep pace with technological changes integral to today’s teaching and learning. At Smith, the endowment has grown to provide approximately 30% of operating revenues by employing a spending rate approach that seeks the largest responsible annual contribution to operations while providing adequate downside protection against periods of declining returns.
Smith’s Board of Trustees revised the college’s endowment spending rate policy effective for 2005-06. The new policy provides that the income distributed per share from the endowment will increase by 4.0% annually as long as the resulting amount is more than 4.0% and less than 6.0% of the preceding December 31 market value per share, setting the initial distribution per share at 4.75% of market value. While this policy provides long-term direction, the full board of trustees continues to review and approve the spending rate each year.
Determining an appropriate spending rate is a primary and important fiduciary responsibility of trustees, and requires striking a careful balance between maintaining the real value of the endowment over time and funding annual priorities that meet the institution’s competitive and programmatic needs. Adopting a spending rate that is too aggressive could lead to an erosion of the purchasing power of the endowment over time and damage the long-term financial health and consequently the educational program of the college. The goal of intergenerational equity would not be met because we would spend too much on today’s students and faculty at the expense of future generations. Conversely, adopting a spending rate that focuses solely on limiting the risk of loss will likely provide inadequate current resources toward meeting institutional needs for financial aid, facilities, and other programs.
The decision to adopt a new spending rate policy for 2005-06 followed a year of extensive study by the trustees. The discussions focused on smoothing the effect of market volatility on the operating budget, minimizing the likelihood of substantial loss in endowment value, and achieving intergenerational equity. Extensive scenario planning, including Monte Carlo probability simulations of thousands of investment market conditions, provided a useful lens through which to examine the balance of risk and reward, based on the college’s endowment asset allocation and inflation expectations. In determining the appropriate policy, trustees were particularly interested in the likelihood of maintaining purchasing power and the extent of principal erosion at the 25th percentile scenario. The analysis suggested that the college’s current spending rate policy carries a one-in-four risk of losing at least 20% of the endowment’s value over a ten-year period and 28% over a twenty-year period while having a slightly greater than 50% chance of maintaining purchasing power. The trustees concluded that the new spending rate collar of 4% to 6% of market value with an initial value of 4.75% inflating forward by 4.0% annually represented a reasonable balance between risk and the need to support current operations through the endowment.
As the committee is probably aware, policy discussions five years ago centered on whether colleges and universities should lower endowment spending rates based on a growing consensus emerging from the market corrections of 2000-03 that 5.0% to 5.25% spending rates were unsustainable and placed the fiduciary health of institutions at risk. Now, after a few years of unusually large returns, the discussion has shifted toward increasing spending rates. The shift may suggest a short-term perspective on endowments that belies their role in college finances. The current call to increase payouts may also stem from the fact that many of the colleges and universities with the largest endowments have transitioned to asset classes (e.g., alternative equity funds, private equity, natural resources, etc.) that have further diversified their portfolios while offering potentially higher returns at lower volatility. In the event that a longer track record with these non-traditional asset classes proves favorable, institutions may need to adjust their long-term return assumptions accordingly. This may, in turn, argue for slightly higher spending rates. However, we believe the brief period in which Smith has been invested to any marked degree in these asset classes is too short to warrant such an adjustment at this time.
Over the past ten years, the college’s endowment spending rate has averaged 4.8% and ranged from a low of 4.2% in 1997-98 to a high of 5.7% as recently as 2002-03. The spending rate has been above 5.0% in four of the past ten years, most recently in 2004-05. With the college’s current allowable spending rate range of 4.0% to 6.0%, we expect the rate to exceed 5.0% regularly in the future, as it has in the past. The rate has declined to below 4.5% in the past year given the unusually high returns in recent years. Rather than waiting for the spending rate to reach the 4.0% lower limit of the policy, the trustees voted in 2007 to reset the spending rate per share to 4.75% of the December 31, 2006, market value for fiscal year 2007-08. As a result, the amount of endowment income distributed to operations in 2007-08 is expected to increase by nearly 20%, or approximately $10 million, from $49.9 million to an estimated $59.7 million.
Endowment spending increased by $21.1 million, or 73%, to $49.9 million between 1997-98 and 2006-07. This represents an annualized growth rate of 6.3%. Factoring in the almost 20% increase for 2007-08 raises the annualized growth rate to 7.5%.
Table 8 summarizes the allocation of Smith’s endowment by the asset categories used in the National Association of College and University Business Officers (NACUBO) Endowment Study. Like many institutions with relatively large endowments, the college has shifted gradually away from traditional equity investments (i.e., U.S. equity markets) in recent years toward private equity and alternative strategies. As of June 30, 2007, these types of investments comprised approximately 60% of the portfolio. Looking across all asset classes, approximately 36% of the endowment is invested outside the United States.
Approximately 53.1%, or $722 million, of the endowment is subject to donor-imposed restrictions. Of this amount, 42.4% is restricted for undergraduate grant aid. Unless otherwise specified by the donor (which is very rare among the funds), Smith uses these funds for need-based aid. The board has placed voluntary restrictions on 30.5% of the endowment, or $415 million. These reflect instances in which the college has converted a gift to an endowment or imposed more restricted usage within the donor’s intention.
The top five designated uses of the endowment for 2006-07 were as follows: undergraduate grant aid (33.5%), faculty compensation (20.4%), operation and maintenance of facilities (5.6%), libraries (3.4%), and faculty research support (3.1%).
The investment pool consists primarily of the endowment ($1.36 billion), but also includes donor-funded annuities, the co-invested endowments of the separately incorporated Alumnae Association of Smith College and Smith Student Aid Society, and a portion of the college’s working capital. For 2006-07, these additional funds totaled $91.7 million.
Smith spent $5.27 million on management and administrative fees related to its investment pool in 2006-07. As summarized in Table 9, fees have averaged 0.44% of the end-of-year market value of the investment pool over the last ten years, ranging from a low of 0.28% in 2003-04 to a high of 0.71% in 2001-02. Over the ten-year period ending June 30, 2006-07, the college has awarded a total of $13.2 million in incentive-based performance bonuses to investment managers, as shown in Table 9. The president does not receive an investment-related bonus, nor is presidential compensation otherwise affected directly by investment performance.
The performance-based incentive payments and other fees paid to the college’s investment manager are defined in a contract that delineates the fee schedule. The performance-based incentive fee available to the investment manager is based on investment return in excess of a pre-defined threshold or “hurdle return.” The investment committee reviews management fees annually, although the specific structure defined by the contract does not change regularly. All management and administrative fees are paid directly from the investment pool. The specific responsibilities of the Board of Trustees, investment committee, and investment manager in administering the college’s endowment are detailed in the college’s endowment investment policy.
The size and growth of Smith’s endowment over the past decade has positioned the college well to continue as a leader in providing an excellent education to outstanding students from diverse backgrounds. Through generous financial aid awards and an unflagging commitment to meet the full need of each student, we continue to achieve our dual goals of excellence and access. Careful and judicious use of the endowment as part of a diversified revenue stream can ensure that the close interaction with faculty, superb educational facilities, academic rigor, diversity of curricular and academic support offerings, and financial support for students continue as hallmarks of a Smith education.
Carol T. Christ