Restoring Equilibrium to the College’s Budget

Restoring Equilibrium to the College’s Budget

Restoring Equilibrium to the College’s Budget

January 29, 2004

Over the last three months, the senior staff and I have focused on developing a financial plan for the college that will restore equilibrium to the budget and support a strategic vision for Smith in the decade ahead. Throughout these discussions, I have maintained several core values: the preeminence of the academic program, a continuing investment in initiatives that not only sustain but advance Smith’s academic excellence, and a strong commitment to access and affordability.

Following is a summary of that plan, which we are presenting to the campus for discussion across the college in the course of the spring semester. Let me emphasize at the outset that this is a preliminary plan, not a finished product. It represents our best thinking after carefully weighing competing priorities both among ourselves and in consultation with the Advisory Committee on Resource Allocation (ACRA) and the Committee on Mission and Priorities (CMP).

The plan seeks to achieve two things: it restores financial equilibrium to the budget, and it provides for a number of critical investments in Smith’s future. These include competitive salary increases for faculty and staff, a financial aid budget that continues to meet the full demonstrated need of all enrolled students, and a bond issue that will finance capital improvements, including part of the cost of a new science and engineering building.

As you will recall, I have written twice before -- in March and in September of 2003 -- to provide information about budget matters and to alert you to the seriousness of the fiscal challenges we are facing. Although we have made several important adjustments to our planning assumptions since September, reflecting the improved financial markets and revised projections of the financial need of our students, we still project significant deficits emerging in the near future, of about $3 million in 2004-05 and rising to about $7 million in 2006-07. In the absence of appropriate action, the deficits would continue to increase by more than 10 percent thereafter.

The projected operating deficits stem largely from pressures on the college’s three primary revenue sources -- net comprehensive fee income, endowment income, and current unrestricted gifts. Significant increases in the proportion of students receiving grant aid coupled with larger than expected average grants have decreased our net revenue from comprehensive fees. While the recent strengthening in the financial markets has softened the downturn in endowment income, income from that source will still fail to keep up with the projected growth in expenditures. Under these changed circumstances, the college cannot sustain its current level of expenditure, much less identify funds for new needs.

I am committed to restoring financial equilibrium to the college’s budget. Such equilibrium means more than balancing the budget. It involves ensuring that spending and revenues will not grow at disparate rates over the next several years, creating future deficits. It also means investing adequately in the physical plant to avoid the greater cost of deferred maintenance. Finally, it requires that the college maintain a competitive level of compensation for faculty and staff and continue to invest in initiatives that will strengthen the institution.

The financial plan that we are presenting for discussion achieves the following:

  • It gives priority to financial aid, projecting a budget that continues to meet the full demonstrated need of our students while moderating its rate of growth.
  • It builds in salary increases for faculty and staff that will keep our compensation competitive in the years ahead.
  • It allocates expenditure cuts disproportionately across college operations from 11.9% for administrative services to 5.3% for academic programs and 6.1% for student services. It thus seeks to minimize cuts to academic and student service areas relative to reductions in other areas of the college’s expenditure, with the exception of the reduction in faculty positions that we propose to achieve through the faculty retirement plan. The reduction in faculty positions will return the faculty to its size of the late 1990s.
  • It allocates approximately $1.2 million for new initiatives, in order to fund current or new priority needs. Among the proposals currently under consideration are funding for classroom technology, a retirement health plan for faculty and staff, and an increase in the level of academic support for departments. The curriculum review now under way will certainly be a source of other new and creative ideas. Decisions about any of these initiatives would occur only after general discussions and after consultation with the appropriate campus committees.
  • It allows $2.5 million for debt service in order to support a bond issue to fund renewal and replacement needs as well as a portion of the cost of construction of a new science and engineering building. A bond will allow us both to build the teaching and research laboratories necessary for our programs in chemistry, biology, computer science and engineering as well as to fund other critical capital needs, including, among others, renovation of student houses, the replacement of the mechanical system in the library (which, in its current condition, is compromising our ability to preserve our collections adequately), and efficiency upgrades in our heating plant that will allow us to realize energy savings.
  • It reserves $1.1 million to apply to one of two purposes: either to increase funding for the renovation of facilities (to further close our funding gap in this area) or to make the transition to an endowment spending rate formula that would result in less volatility in the annual contribution from this source to the operating budget.
  • It makes permanent the funding for a portion of our current campaign budget in order to maintain our overall gift levels at $45 million annually. (The campaign is currently supported by one-time funding sufficient only for expenses through December 31, 2004.)

The financial plan achieves the objectives described above by the following reductions in expenditure:

  • It reduces operating budgets across the college, through differentially allocated cuts. These cuts decrease non-faculty staffing levels by 8.6%, for a net reduction of 81.5 FTE. Through the enhanced severance plan, elimination of vacant positions, and lay-offs that have already occurred, we have achieved about half of this reduction. The proposed plan involves the elimination of 37.2 additional FTE, affecting 54 positions. We hope to place some of these people in the positions we have banked this year.
  • It eliminates 25 faculty positions over the course of five years, through the retirement program, for a savings of $2.8 million by 2006-2007. This represents a reduction of 8.7% to the current size of the faculty.
  • It proposes changes in the dining system, reducing the number of kitchens and dining rooms, while expanding meal options, for a savings of approximately $800,000 per year.
  • It moves student loan levels over two years to amounts consistent with those of our closest peers, increasing revenues by approximately $1.1 million. (Loan levels will remain the same for entering students, but they will increase by $300 for sophomores, $1,000 for juniors, and $600 for seniors by 2006.)
  • It achieves approximately $1.6 million in savings by eliminating the general contingency fund and structural surpluses, reducing discretionary funds managed by senior staff, and shifting some expenses from unrestricted funds to restricted endowments.
  • It achieves approximately $550,000 in savings from conservation measures, including new utility contracts and a paper reduction initiative that would move a significant number of paper publications to the Web.
  • It identifies other revenue enhancements of about $600,000.

The plan is meant as the starting point for campus discussion. ACRA and CMP, the two committees charged with responsibility for advising me, respectively, about resource allocation and about the college’s mission and priorities, have already begun intensive discussion of the detailed plan. Members of the senior staff and I will be meeting with various constituencies over the course of the spring semester to hear their responses to elements of the plan. When I have gathered advice from all of these quarters, I will make a recommendation to the Board of Trustees in May, which will vote upon it at that time.

We know that these changes and reductions will be difficult not only for the individuals involved but also for the community as a whole. For the future health of the college, however, we must develop and implement a financial plan that restores fiscal stability to the budget, sustains funding for the most important priorities of the college, and invests in the resources to respond to current and new needs. We must not only balance the budget; we must make strategic investments that will keep Smith strong in the future.

Sincerely,

Carol T. Christ