October 30, 2002
I am writing to inform you about the state of the budget at Smith, the economic factors that we anticipate will affect it in the years ahead, and our future plans. We ended the fiscal year, on June 30, 2002, with a modest surplus of $100,000. Our overall fund-raising continued strong, with gifts of $49.3 million, close to the figure of $52 million that is our all-time high. Furthermore, our participation rate this past year of 50 percent was the highest that we have ever achieved. The budget is in balance for the current year. However, we are facing a number of economic challenges that will have a significant impact on the budget in 2003-2004 and in subsequent years. I will give you a short overview of them here; there will be many opportunities for questions and discussion in the months ahead.
It will come as no surprise to you that Smith, like most colleges and universities, is experiencing a decline in the value of its endowment. We rely on investment income for a substantial revenue stream-about 30 percent of the campus budget. At the end of last quarter (September 30, 2002), the endowment value had fallen to $775 million, down from a high of $927 million in March 2000. Even were the markets to rebound immediately, the recent decline will affect the budget over the next few years because we calculate the draw from the endowment on the basis of its average value over the 12 preceding quarters. Each quarter's endowment value will affect our draw for three years.
In addition, troubles in the economy have had an impact on the financial aid budget. As you know, Smith meets the full need of its admitted students, and students can apply for re-evaluation of their financial aid packages if their families' economic circumstances change. This year we have committed $750,000 to cover the cost of such revisions for the entering class alone, an increase of about five-fold over previous years. (We do not yet have the final figures for revisions for other classes, but we know that they too will significantly exceed sums allocated in previous years.) We expect that this trend will continue as long as the economy continues to be depressed.
Like many organizations, we are also experiencing a sharp increase in health insurance costs -- 23 percent this year, at an additional yearly cost of $1.1 million. All indications are that this trend will continue as well.
Finally, although overall giving remains strong, unrestricted giving, on which we depend for a portion of our operating budget, is expected to be $1.1 million below budget this year. While we hope to reverse this trend, it may be a symptom of circumstances we cannot control.
We are fortunate that Smith is in excellent fiscal health. Its endowment is large for a school of its size, and its budget has been well managed. However, the factors that I have described above, even when coupled with a modest tuition increase, will produce a budget next year that will be flat (unlike some colleges and universities that are anticipating a deficit). We will not have less money, but in contrast to previous years, we will not have more. Thus any increased expense -- for salary increases, or new programming, or inflation in the price of goods -- must be financed with budget reductions in other areas. We are now beginning the process of talking with campus groups to get your advice about how best to meet the fiscal challenges ahead. I will schedule brown-bag lunches in November and December for the campus community to discuss the budget in more detail and get your advice about trade-offs.
I want here to set out several principles that will guide our budget strategy. We will strive for transparency in describing the budget and the choices in front of us. We will seek advice across the campus and try to develop consensus about our direction, depending heavily on groups like ACRA and CMP specifically charged with budget responsibility. I will be asking all of you to give me suggestions -- small and large -- about changes that we can make that will conserve resources.
I believe strongly that, despite the fiscal challenges in front of us, we must not stop doing new things or pursuing new initiatives so that we do not lose the momentum that we now have at Smith. However, I also believe that we cannot ask students and their families to bear the burden, in the form of large comprehensive fee increases, of reluctance on our part to look carefully at what we do and how we do it. Even in the preliminary analysis that the Senior Staff has begun of the budget, we have identified significant economies we can achieve, with little diminution of program. We must be strategic in the choices we make, changing things of lesser importance to preserve resources for our priorities.
As a preliminary measure to create some financial flexibility, I have decided to place a temporary stay this year on some categories of expenditure-small facilities projects, equipment, and discretionary funds. Although some of these moneys have been allocated, I feel it is prudent to delay expenditure now while we develop our fiscal strategy and ask ourselves whether each expenditure is fully merited.
Despite the difficulties of our situation, I look forward to the discussions that we will have over the next several months. My experience in dealing with similar, indeed, even more serious budget constraints at Berkeley has taught me that fiscal challenges sharpen our sense of priorities. I believe that Smith will ultimately be the stronger for the discussions ahead.
Carol T. Christ