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Dear Students, Faculty and Staff:
A few weeks ago I updated the campus community on the
college’s financial planning. Since then, we held a joint retreat of our planning
committees and engaged the group in a detailed discussion of strategies the college
may pursue to adjust our budget in light of the current economic conditions. We have
identified a number of options and we would now like to create opportunities for
campus discussion of those areas.
The steep decline in the value of the college’s
endowment this fiscal year due to the recession and grim economic forecasts requires
that the college plan for a prolonged period of reduced spending. As noted in my
recent letter, the combination of lower endowment income to support the operating
budget and potential other adverse trends such as an increase in the financial aid
budget or a decline in annual giving indicates that the college may need to reduce
its budget by 10-15 percent (or more) over the next three years. This would require
downward adjustments in the range of $20-30 million. Fortunately, the college entered
this difficult period in a strong financial condition with reserves on hand, which
gives us some timing flexibility in our budget planning. We also have considerable
advantages to draw upon. One of the most significant is the resource that the Five
Colleges represent. In academic, administrative, and student and academic support
areas, we can pursue more aggressively opportunities for joint programming among
our campuses. To make the most of these opportunities, we will need to think imaginatively
and strategically, creating a vision for the Five Colleges a decade or more from
now.
This memo addresses potential strategies for achieving
cost reductions or revenue enhancements that could be made within the next three
years as well as possible actions that may require more time to implement, and that
would need to be paired with shorter-term savings to ensure that our expenses will
be covered by available revenues. While in the current year we held back 2 percent
of departmental budgets (and will continue to make some across-the-board reductions),
we cannot build a sound or effective long-term strategy to achieve the magnitude
of necessary savings through across-the-board cuts. The specific areas identified
here are intended to spur discussion of the key financial planning question we have
framed: what is the sequence of actions the college should take if it is necessary
to reduce expenditures by $20-30 million, or 10-15 percent over the course of three
years? Each of the strategies listed holds the potential for savings in the range
of $1 million to $7 million and taken together, they would enable us to adjust the
budget to our new economic circumstances. All would require detailed analysis
and a thorough understanding of the implications of making such changes. The strategies
listed are intended to convey the magnitude of change necessary to reach the targeted
level of budget adjustments. In considering each of these options, we need
to consider how it can support the strategic goals of the college.
Should we reduce near-term salary increases?
It is important that the college maintain competitive compensation to assure our
success in recruitment as well as retention. In the current economic conditions,
we can anticipate that salary increases in higher education will be much lower
over the next few years. Some colleges and universities already have announced
salary freezes.
Should Smith increase its student-to-faculty
ratio modestly, from the 9:1 range to the 10:1 range?
The high level of competition among liberal arts colleges in the past 20
years is most apparent in two factors: the investment in student life enhancements
and the declining student-to-faculty ratio. The student-faculty ratio at the most
competitive colleges, such as Amherst and Williams, was 13 to 1 as recently as the
1980s. The addition of new programs, more generous sabbatical policies, growing prevalence
of research, reduced teaching loads, and more course releases have led to a persistent
downward pressure on this key ratio. Smith’s current ratio (using definitions
from the AAUP survey for faculty and IPEDS survey for student enrollment) is 9 to
1. One could argue that a student-faculty ratio of 10 to 1 is educationally sound
and would still uphold the core principles and characteristics that define a residential
liberal arts education. Any reduction in tenure track positions would require a careful
academic plan and time to implement such a plan, eliminating positions only as they
become empty through retirement or resignation and necessitating fewer searches in
the transitional period. In addition, temporary and replacement hires will require
careful scrutiny going forward.
Such a reduction would necessitate a careful consideration
of the curriculum—a consideration already begun in the recent retreats that
academic departments and programs have held. We need to give particular attention
to ways in which departments can collaborate on course offerings. We are fortunate
to have significant opportunities for planning and coordinating curricular needs
on a five-college basis, and we will want to explore such opportunities aggressively.
Should we reduce benefits as a percentage of
base salaries?
A recent comparative study of benefits packages and rates among peer colleges
demonstrated that Smith’s overall investment in benefits is in the middle range
of the group, albeit lower in some areas and higher in others. Despite this current
middle position, the college must review this area of spending carefully. The benefits
rate for full-time positions is 32.5 percent for 2008-09, which represents a 10 percent
increase from a rate of 29 percent just five or six years ago. Perhaps more concerning,
expected trends in health insurance, tuition assistance, and other selected benefits
lead to projections of rate increases of one-half to one percentage point of salaries
per year moving forward. To achieve savings in this area, we could seek strategies
to reduce the benefits rate to a range at or below 30 percent. The most expensive
benefits areas are health insurance, retirement and tuition benefits, so our review
should focus there.
Should we reduce the tuition discount rate?
Smith has a strong commitment to meeting the full demonstrated need of admitted
students. The college has broad socio-economic diversity within its student body
and as a result our discount rate, a comparison of financial aid to tuition revenue,
is among the highest in our peer group. The importance of balancing our commitment
to access with other expenses associated with providing a high-quality academic experience
requires us to regularly evaluate strategies for maintaining the discount rate at
a manageable level. One area for review is the Ada Comstock Program, since growth
in the educational opportunities available to women of all ages, particularly the
expansion of the community college system and shifts in the financial aid landscape,
are reflected in recent declines in applications and enrollment in the program.
Should we reduce facilities space, targeting
a 10 percent reduction?
Smith’s facilities have a replacement value of approximately $750
to $800 million. This figure has been increasing in recent years due to the construction
of new facilities as well as high annual construction inflation. To avoid deferred
maintenance, the trustees have set a goal of an annual budget for renewal and replacement
of 2 percent of the value of our facilities. Benchmarking against other institutions
indicates that Smith has the most square footage per student of any of its peers;
the additional space can be found in both the residential and academic sectors. This
is an expensive leadership position, as it affects the budget not only in maintenance
and renovation costs but also through expenses such as cleaning and utilities. Reducing
the facilities footprint by 10 percent would require discontinuing use of $75 million
of buildings; doing so would likely translate into a reduction of some 300,000 square
feet of space.
Should we reduce the cost of study abroad?
Smith spends approximately $9 million annually (or almost 5 percent of the
operating budget) on study abroad programs, including its four programs in Europe,
consortium programs, and independent programs offered by other institutions. In recent
years, the level of students studying abroad annually has been equivalent to about
430 student semesters or 215 full-time-equivalent (FTE) students. The average cost
of a study abroad program per student FTE exceeds $40,000, and approaches $45,000
if one factors in other costs excluding financial aid. The cost structure alone makes
this a critical area for review and study, with an eye toward more efficient structures
and policies.
Should we consolidate academic support operations
such as libraries and information technology?
By some measures, Smith’s library is the largest of any liberal arts
college in the country. This is an area of considerable historic strength for the
college but also an area of substantial annual expense during a period when the role
of libraries is shifting in important ways. Smith’s library consists of the
main Neilson Library plus three branches and special collections, and the library
is also part of the Five College consortium. Consolidation of Five College library
functions may offer the opportunity for significant cost savings. In addition, we
should consider the implications of an overall reduction in funding for acquisitions,
protecting collections on a Five College basis through greater coordination.
We can also explore savings in the area of information
technology services through Five College opportunities. In addition, we should review
the volume of campus computer equipment to identify efficiencies in our computer
resources.
Should we reduce spending in administrative,
student and academic support areas?
An overall budget reduction of 10-15 percent will require a combination
of several large-scale changes such as those suggested above, as well as careful
review of operational areas which may individually yield savings in the tens or hundreds
of thousands of dollars. A review of administrative, student and academic support
areas might pay particular attention to those areas related to administrative duplication
or inefficiency, or with the potential for shared services or contracting. At the
same time, we should review the potential for increasing programs that generate net
revenues for the college.
Should we focus our upcoming campaign on budget
support for existing needs?
The planned campaign can focus primarily on building endowment for existing
critical priorities rather than on new initiatives. This will most likely entail
a significant emphasis on areas such as financial aid and core academic program support.
Preliminary planning for a campaign suggests that we may be able to achieve $5 to
$7 million of annual budget support beyond our normal gift expectations absent a
campaign.
I invite you to send your comments and suggestions
regarding these budget strategies to planning@smith.edu.
Sincerely,
Carol T. Christ |
