An Update on College Finances
September 28, 2009
Dear Friends,
As I continue to settle in as president, I have enjoyed meeting with so many of you to better understand the learning and working environment of the College. It has been wonderful getting to know so many talented and committed faculty, staff members, and students. I look forward to the opportunities we will have to work together, including our ongoing efforts to address the impact of the recession and the decline in the financial markets on the College's finances.
Our Board of Managers met last weekend and spent a great deal of time on financial matters. I want to share with you our current status, but first, I thank you for the hard work you have done to ensure that we are responding thoughtfully to the economic challenges we confront. Your careful spending of departmental budgets; widespread participation in the financial planning process; and faculty, staff, and student acceptance of salary and pay-rate freezes have all been crucial elements in the first phase of our response to those challenges.
Before turning to where we are today, I think it is helpful to review how the "Great Recession," as it is now called, has evolved and affected the College. The College's endowment peaked in summer 2007 when its value was $1.441 billion. Credit markets in the country began to deteriorate at that time. Over the course of the 2007–2008 fiscal year, the endowment declined only slightly to $1.413 billion in June 2008. The significant decline in worldwide financial markets began in fall 2008, and, by December, the magnitude of the historic economic downturn was clear. At its meeting last December, the Board of Managers reviewed a series of financial projections and adopted from them a set of planning assumptions for which we needed to develop a coordinated response. Included in those assumptions were the expectation of a 30 percent decline in the endowment and a significant increase in the financial aid needs of students.
The Board also adopted a timetable for developing a response plan. Fortunately, the College was financially strong and well-positioned going into the crisis. The endowment spending rate was low; the endowment investments included an allocation to Treasury bonds to help protect against declines in the equity markets; and the endowment had ample liquidity to meet investment and budgetary needs. As a result, the Board made the decision to allow a year for the development of the full plan, providing time for thoughtful deliberation and community involvement in establishing our plan of action. This approach also had the advantage of giving us time to watch how the situation would unfold before taking actions that had the potential to significantly damage the College. It has been a remarkable advantage for us to have had the time to craft the response which best maintains our academic excellence.
The Board established the Ad Hoc Financial Planning Group last winter. Comprising Board members, faculty, staff, and senior administrators, this group was charged with developing a plan to return the College to long-term financial sustainability over the next several years—in effect, to adjust the College budget to the realities of a smaller endowment. In the spring, the Board of Managers approved the 2009–2010 budget of $107 million, which included the first phase of the College's response. A salary freeze for faculty and staff, departmental budget reductions, and deferral of facilities capital projects were key components of the College's immediate response. With a responsible budget set for this fiscal year, the Ad Hoc Financial Planning Group was then able to focus on longer-term actions.
As described in a series of community meetings held last spring, the Ad Hoc Financial Planning Group was asked to address a potential $15 million budget gap—a figure derived using the planning assumptions mentioned earlier. This is the amount of new revenues and/or budget reductions needed to return the College to a five percent endowment spending rate over the next three to five years. Historically, five percent is the maximum average annual spending from the endowment that will preserve the purchasing power of the endowment over time and thus our ability to provide equitable support for future generations. The $15 million figure was based on an assumption of a 30 percent decline in the endowment. Over the summer, significant work took place and the framework of the "$15 million plan" was developed by the Ad Hoc Group.
Happily, the summer also saw some glimmers of recovery in the economy and positive returns in the financial markets. The endowment ended the 2008–2009 fiscal year with a value of $1.129 billion as of June 30, 2009. Its investment return was a negative 16.8 percent, rather than the planning assumption of negative 30 percent. Moreover, financial aid needs, while higher, fell within our estimates. The Ad Hoc Financial Planning Group and the Board of Managers have spent recent weeks trying to determine how much of the "$15 million plan" should be implemented in the next phase of our response. Although we are pleased with the recent positive news, the endowment decline remains a fact and we have to adjust our budget accordingly. The volatility in the financial markets is likely to remain for some time, making it even more challenging to plan for the future.
At this point, the Board of Managers has determined that approximately $8 million of the plan should be implemented, over several years, as the next phase in the Colleges response. This next phase will allow us to continue to implement what is necessary to balance the budget while sustaining the academic excellence that is the heart of our mission. It is important to emphasize that the $8 million in this phase of actions includes more than budget cuts. Modest enrollment increases and new fundraising initiatives are also being evaluated.
The Ad Hoc Financial Planning Group is on schedule to make detailed recommendations to the Board of Managers in December for the $8 million implementation, which will inform budget planning for 2010–2011. This set of recommendations would be implemented fully over the course of several years, thereby allowing us to continue to monitor our finances and the economy and make appropriate adjustments. At the December Board meeting, the Ad Hoc Financial Planning Group will also present the overall $15 million plan that would be put into action if the economy worsened. I want to assure you that we will monitor our assumptions and adjust our plans accordingly in order to both protect academic excellence and achieve economic sustainability.
The drop in the College's endowment required us to consider carefully the staffing in all the operations and services of our college. Given our concern for the well-being of each member of our community, we are fortunate to have been able to identify areas in which elimination of some positions can occur through attrition, that is, when a vacancy is created by retirement or resignation, rather than through layoffs. If the positive economic environment persists, we hope to lift the salary freeze for next year and we also hope to continue to avoid layoffs. Even if economic conditions continue to improve, reorganizations of individual departments will occur as usual when doing so enhances efficiency and effectiveness.
Other significant issues will continue to be under discussion as well. The Faculty and Staff Benefits Committee is examining our benefits program, bearing in mind especially the strong feelings of the community regarding the continuation of our benefit bank. Meanwhile, careful review of our financial aid program continues. We are glad to be able to continue our loan-free financial aid packages for all currently enrolled students and a generous, competitive financial aid policy remains a priority for Swarthmore.
As the Ad Hoc Financial Planning Group continues its work, we look forward to holding meetings this semester with faculty, staff, and students to discuss these important financial matters. The first series of meetings will be held later this week, and details will be provided shortly. Then, in mid-November, another series of meetings will be held with the community. We will take the proposal to the Board in early December.
For more information about the College's budget and endowment, and the work of the Ad Hoc Financial Planning Group, please visit the Web site of the Finance and Treasurer's Office. We encourage you to use this site to share any additional suggestions you may have. Please pass additional suggestions on to Ad Hoc committee members as well.
As I end the first full month of the new academic year, I am most grateful to have joined a unified community in which there is an abundance of expertise, talent, and commitment to move the College forward. I am optimistic that with continued vigilance in our approach to budgeting and wise investment strategies, we will achieve budget stability and be able to resume the discussions of new initiatives and directions for the College. Thank you all for your hard work and dedication; it has helped ease the way as we address the most challenging financial conditions in the College's recent history.
Sincerely,
Rebecca Chopp
President