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
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.