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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.
Read
the president's January 29 letter to the campus >
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% |
 |
|
|
| Dining Services |
|
11.1% |
|
|
|
| College Relations/Publications |
|
10.1% |
|
|
|
| General Administration |
|
8.7% |
|
|
|
| Advancement |
|
8.3% |
|
|
|
| Information Technology |
|
7.2% |
|
|
|
| Student Services |
|
6.1% |
|
|
|
| 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
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