Prepared by the Office of Budget and Financial Planning, February 26, 2004
A. The current budget challenge for Smith is really a revenue issue. Revenues are not increasing fast enough to sustain even a modest rate of increase for our current expenditure budgets. From 2003-04 to 2006-07, revenues are projected to increase by only 1.4 percent per year. Expenditures, by contrast, are expected to increase by 2.9 percent annually -- a modest increase, but still twice the rate of growth for income. The difference between these two growth rates takes us from the current balanced budget to a $3 million deficit next year and a $7 million deficit by 2006-07. The lack of equilibrium in the college’s budget stems largely from challenges facing its traditional income streams: endowment income, gifts, and comprehensive fees. Combined, these three streams account for more than 80 percent of all operating income.
Endowment income. Volatile financial markets reduced the value of the college’s endowment from its high of approximately $927 million to $758 million last March (the last quarter used to calculate 2003-04’s contribution to the operating budget). This declining value will reduce the amount of endowment income available to the college’s operating budget over the next several years. Given the lagged component of our endowment spending methodology, we did not experience the effect of the market declines until this year, and the declines will remain with us for some time even as the market recovers. After peaking in 2002-03 at $46.7 million, we project that the endowment contribution to the operating budget will decrease by $2.4 million or 5.2 percent over the next two years before beginning to increase again slowly for 2005-06.
Unrestricted gifts. Each year, the college receives unrestricted gifts (gifts not earmarked for a specific program or purpose) from alumnae and friends to support the operating budget. Since peaking at $11.7 million or 9 percent of the operating budget in 1999-2000, unrestricted gifts have decreased to $9.2 million received for 2002-03, supporting 6 percent of operations. The decrease coincides with the weakening economy over this period and to an increasing propensity of donors to direct resources toward restricted purposes. Current giving is recovering, but may take several years to return to its peak levels. While the amount raised through the alumnae fund has decreased over the past three years, participation has remained high with 50 percent giving rate among alumnae. Unrestricted gifts to the operating budget represent approximately one-fourth of total giving to the college each year, including current restricted gifts, unrestricted bequests, deferred life income gifts, gifts to the endowment, and gifts for building projects.
Comprehensive fees. Spending on financial aid has doubled in the past eight years, increasing at a much faster rate than other areas of the college’s operations. At 61 percent, Smith’s proportion of students receiving aid is the second highest among our comparison group. Over the past three years, grant aid has increased twice as fast as student charges as both the proportion of students receiving aid and their average need have increased. The share of the budget covered by comprehensive fees, after financial aid, has decreased from nearly 50 percent to approximately 41 percent over the last decade. The increasing claim of financial aid on the operating budget entails tradeoffs against other priorities, such as compensation and new initiatives. We have begun to identify short-term strategies to stabilize the financial aid budget while exploring longer-term strategies to ensure that financial aid does not claim a share of our resources inconsistent with its standing relative to other priorities in the college’s budget. Smith continues to meet the full demonstrated need of all admitted students through a combination of grants, loans, and student employment.
A. The plan not only includes cuts, but also revenue increases and new spending in priority areas. Overall, by 2006-07, we expect to reduce spending by $5.1 million, or 3.2 percent, and to increase revenues by $1.7 million, or 1.1 percent, over what is in the current financial plan. However, the relatively small cut in spending masks a significant reallocation of resources. In reality, we will reduce existing budgets by $10.9 million, or 6.8 percent, to free up $5.8 million to reinvest in priority needs.
A. Restoring financial equilibrium involves more than balancing next year’s budget. It also involves ensuring that spending will not outpace revenue growth moving forward, leading to future deficits. It involves investing adequately in the physical plant to avoid, or at least minimize, deferred maintenance. Financial equilibrium requires that the college maintain the quality of the experience for faculty and students and continue to invest in initiatives to strengthen the institution.
The proposed “financial equilibrium plan” discussed in the President’s January 29, 2004 letter to the campus restores a balanced budget for 2004-05, while also ensuring sustainability moving forward. It is comprehensive in scope and approach, focusing not only on expenditure cuts but also incorporating notable investments.
Earlier this fall, the president held budget hearings with each senior staff member to discuss potential budget and staffing reductions in their areas, the implications of the proposed cuts, and the need for additional investment in selected areas. This information was used to construct a proposed budget plan for the college to be used as the basis of discussion this winter and spring. Reflecting priorities raised by senior staff and other planning groups, the proposed plan allocates budget reductions differentially across campus, protecting core activities, such as financial aid and academic programs, while taking larger reductions in administrative areas. The cuts range from 5 percent for academic programs and related areas such as the library and museum to 8 percent to 13 percent in administrative areas, dining, and physical plant.
Proposed Spending Reductions by Area
(Excludes misc. central budgets and major new investments)
|Physical Plant/Botanic Gardens||12.8%|
|Academic Programs & Support||5.1%|
Senior staff have also identified several areas where the college should invest additional resources under the proposed plan, including funding for new construction and renovation of existing facilities, technology, academic support, and competitive compensation increases. In some areas, such as advancement and academic programs, these new investments will offset a part or all of the proposed cuts shown in the chart above.
The proposed plan is under discussion in senior staff, the Committee on Mission and Priorities (CMP), and the Advisory Committee on Resource Allocation (ACRA). Both CMP and ACRA include faculty, students, and staff. In addition, the plan has been discussed at faculty meetings, at smaller meetings of various staff groups, and with student groups. The plan was presented to the trustees for feedback at the February meeting. The trustees will approve the final budget for 2004-05 at their May meeting.
A. The proposed plan includes a reduction in faculty and staff positions. Under the plan, the college would reduce the size of its faculty by 25 positions over the next five years, achieving the savings through retirements and other attrition. This reduction will return the faculty to its size of the mid- to late-1990s.
Under the plan, 93 full-time equivalent (FTE) staff positions, or 10 percent of the total staff workforce, would be eliminated or reduced. Through last summer’s enhanced retirement plan, eliminated vacancies, and a few mid-year layoffs, the college has already achieved 39 FTE of the targeted reductions, leaving 54 FTE to be cut. Of these, 17 are currently vacant or are positions for which we expect a retirement or voluntary reduction in hours. This leaves 37 FTE requiring an involuntary action (either layoff or reduction in hours). Given that some positions are part-time, we estimate that these 37 FTE of involuntary cuts will affect 54 individuals.
Proposed Staffing Reduction
|93.3 FTE||Proposed for reduction|
|- 39.4 FTE||Achieved earlier this year|
|53.9 FTE||Cuts still needed|
|- 16.7 FTE||Expected through attrition|
|37.2 FTE||Requiring involuntary action|
To minimize job loss, the college instituted a hiring freeze last fall. Under the freeze, several vacant positions are being reserved to accommodate some of the individuals displaced by position eliminations later this year. In addition, the “new investments” component of the budget plan identifies 12 FTE of newly created positions, some of which may be filled through internal transfer.
The proposed financial plan restores balance to the college’s budget. At this point, we do not envision the need for additional layoffs in the next few years beyond those already in the plan. That said, the college regularly reviews positions as they become vacant to determine whether that position is still needed or should be reallocated to a higher priority area. This type of position review will continue regardless of the college’s financial outlook.
A. Indeed, Smith’s endowment totaled $824 million as of June 30, 2003, ranking seventh highest among liberal arts colleges. In determining an affordable amount to spend from the endowment each year, the college balances the need to provide adequate support for the current budget with its commitment to protect the long-term purchasing power of the endowment. We assume that over time, the endowment will earn 7.5 percent annually and that we will receive new gifts to the endowment equal to 1.0 percent of the value of the endowment, for total annual growth of 8.5 percent. From that, we expect to distribute approximately 5.0 percent to the operating budget. This allows us to reinvest 3.5 percent (8.5 percent growth minus 5.0 percent distribution) back into the endowment to cover the rate of growth in operating expenditures. Increasing the distribution rate would therefore erode the long-term purchasing power of the endowment. Our current rate of spending from the endowment is already among the highest in our peer group, as is our reliance on the endowment as a share of total operating income.
A. Absolutely. We had projected a 2 percent return on our investments this year expecting a slower recovery to our long-term return assumption of 7.5 percent per year. Through December, we have already returned more than 11 percent. The recent strengthening of the financial markets has softened the downturn we can expect in endowment income to the operating budget. The last two strong quarters have reduced the projected deficit for 2006-07 by $3.4 million, or 33 percent. At $917 million (December 2003), the investment pool is $84 million higher than we projected entering the year. However, even with these gains, we still face the reality of endowment income that not only fails to keep up with spending increases but will actually decrease by $2.4 million from its 2002-03 high and will not return to its 2002-03 level until 2007-08.
In light of the recent gains, some have asked whether we should delay cuts to determine whether continued growth in the financial markets might “solve” our problem. The current financial plan assumes a 5 percent return for next year before returning to our long-term return rate of 7.5 percent. Moving immediately to 7.5 percent improves our situation by approximately $1.0 million for 2006-07 -- a notable improvement but certainly not enough to meet the overall challenge. While the higher returns may persist, it is also possible that a portion of the strong returns in recent quarters represent a “false recovery” and that the markets will stagnate or even retreat a bit as they stabilize moving forward. We view our current assumptions about endowment returns over the next five years as a moderate course for planning purposes.
A. Smith, like most colleges, is a very labor-intensive enterprise. Last year, 62 percent of the college’s operating expenses were allocated toward compensation. The largest remaining components of spending include general supplies and expenses, maintenance of our facilities, utilities, debt service, research grant activity, and auxiliary operations.
It is also useful to look at spending by program or functional area. Approximately $65.1 million, or 44 percent of all spending, goes toward academic programs and support areas, such as the library and museum. The college spends $25.2 million, or 17 percent of the budget, maintaining buildings and grounds, providing utilities, and paying interest on previous bonds used to fund building projects. Student services accounts for 10 percent of the college’s spending.
Like most colleges, Smith does not treat financial aid as an expense. Instead, we treat scholarships as a discount to tuition. As such, financial aid costs are reflected in the net comprehensive fee figures reported above.
A. Smith’s buildings are valued at $600 million -- an asset base second only to the college’s financial assets. As such, the college remains committed to maintaining its facilities not only through annual maintenance, such as painting, but also cyclical renovations to replace major systems and components and to renovate buildings to make them more relevant to our current needs. To avoid deferred maintenance, we should spend $12 million annually on our existing buildings. Colleges that reduce renovation spending to balance the budget tend to spend considerably more in later years addressing a backlog of deferred projects. Renovation projects are typically funded through a contribution from the operating budget, funds borrowed through bond issues, and gifts.
While much of the annual construction on campus falls into the renovation and maintenance category, we occasionally decide to build new facilities to address campus priorities.
In recent years, the college has completed a new Campus Center and a major renovation and expansion of its Fine Arts Center. Both of these projects were initiated before the current financial challenge and were funded largely through restricted gifts. Looking forward, the college is planning to complete a new science and engineering building during the next few years. The majority of the funding for new buildings tends to come from restricted gifts, either from individuals or corporations or foundations, not the operating budget. Since the gifts are restricted to a particular project, they cannot be used to relieve the operating budget. In the case of the proposed science and engineering building, we expect much of the project’s costs will be covered through gifts.
While the construction costs for most new buildings tend to be covered largely through gifts, new building projects can and usually do impact the operating budget. If the college borrows money for a construction project, the interest on the bond is typically paid through the operating budget. Also, as we add or expand buildings on campus, our utility, custodial, and maintenance costs increase.
A. The president and senior staff are committed to developing a financial plan that restores sustainability and equilibrium to the college’s budget not only for next year, but going forward as well. As such, the budget discussions have focused on identifying all of the changes necessary to achieve this goal now rather than spreading the budget reduction discussions over the next several years. The current plan identifies the cuts necessary to restore balance to the budget, hopefully avoiding the need to identify additional cuts in subsequent years. However, some of the cuts identified in the plan will not become effective until 2005-06 or 2006-07, as we phase-in implementation of selected changes over several years. The proposed changes to dining are an example where we plan to make changes over a two-year period.
A: Through March, Smith's fundraising campaign has raised $360 million. While the successful campaign has made possible exciting new initiatives, it has not generated an unrestricted pool of money available to meet budget shortfalls. In thinking about the campaign, it is useful to consider four basic types of campaign gifts:
First, almost $60 million of this amount came through the alumnae and parents funds which directly support the operating budget of the college. We count on a certain amount of these gifts each year in order to balance the operating budget.
Second, we receive gifts to endow or otherwise support activities currently funded in the operating budget, such as scholarships and professorships. In this way, these gifts relieve the operating budget, allowing us to direct unrestricted resources to other priorities. We also plan on a flow of these gifts annually whether we are on campaign mode or not.
Third, a large portion of the campaign gifts are directed by the donor toward a specific purpose or new initiative for the college, such as the Kahn Institute for Liberal Arts, Praxis internships, and engineering. Since the funds are restricted to a specific purpose, they are not available to meet general shortfalls in the operating budget.
Finally, a portion of the campaign gifts have been directed toward building projects, such as the new campus center.
We embarked on the current campaign not with the aim of general support of the operating budget, but to raise sufficient funding to embark on several new priority directions to enhance our academic program, our attractiveness to prospective students and faculty, and to enhance the overall experience for our students. The reality is that the college relies on a steady stream of gifts from alumnae, friends, corporations, and foundations as a regular part of the income flow needed to balance the budget. During a campaign, giving increases but the additional gifts tend to be for specific purposes that add spending to the budget as well.
Also, it is important to recognize that we only have a portion of the gift totals in hand. At this stage in the campaign, we have some outstanding pledges that will be paid over the next few years and a considerable amount of deferred gifts and bequests that we will not likely receive for several years.