"Dartmouth's Financials" Part 1 - Dec. 1, 2009


Uploaded by Dartmouth on 03.12.2009

Transcript:
Welcome. Good afternoon. Welcome to the information session on the Dartmouth financials. I'm Traci
Nordberg, I'm the Chief Human resources Officer for the College and I want to explain a little
bit about what you will be seeing and hearing today.
We'll have about a 45 minute presentation on the College financials, and after President
Kim's presentation he'll be joined by Acting Provost Carol Folt, and Dean of Faculty, and
Senior Vice President Steve Kadish. They are partnering with President Kim to lead the
strategic budget reduction and investment process. Their panel will take your questions
until we wrap up at about 1:30. The session is broadcast live to the web and will be archived
for later.
There are media members present in the room, and there are a couple of ways for members
of our community to ask questions. If you're here in Alumni Hall we have microphones at
the front of the room, at the left and the right. You can line up at the end of the presentation
to ask your questions. If you're in Collis or in another remote location you can send
an email in. We'll actually be collecting those questions and bringing them to the panel.
In Collis there are computers in the back of the room. You probably all have your handhelds
so you can send your emails that way. The email address is budgetquestions@dartmouth.edu.
We welcome questions from the Dartmouth community, including students, faculty, staff, and alumni.
We won't be able to get to each and every question today in the time that we have, but
please do send them in and keep coming to our Frequently Asked Question site on the
Budget site.
Now, let me introduce President Jim Kim. [applause]
Thank you. Let me start by just thanking everybody in the Dartmouth community for the overwhelmingly
warm welcome that you've given to me and to our family. We've become very well adjusted
here, and I was at the Hanover Chamber of Commerce meeting the other night and talking
about how we found just so many wonderful things about this community. So let me start
by thanking you.
Today, we're going to go through an exercise that many colleges and universities are going
through. I think we're going to be quite a bit more explicit and direct than some of
our peers, and I'm going to try to share with you exactly what we know about our current
financial situation and where we think we have to go.
So, to get right to it, what we're going to do today is talk about our strategic framework,
why is it that we're doing the things that we're doing, give you a pretty clear, I hope,
view of what our financial situation is and what we think it will be in years going forward.
And then to talk about how we're going to manage this process as we go forward.
So, we have significant gaps starting next year. There are simplistic ways of understanding
it. Our endowment dropped. Of the endowment that we have left, we have to be extremely
careful and cautious and prudent about the way we spend the remaining endowment. But
no matter how you look at it, our financials are unbalanced. We are spending more than
we're bringing in. And we've got to get on top of that situation right away.
We have made some changes in the way we look at the next five years compared to where we
were in June. And those changes have been based on what we think are more realistic
assumptions about the endowment. I think you will see that the assumptions we're making
that get us to the number that was announced a few weeks ago, are not doomsday assumptions
at all. In fact, they are relatively positive assumptions about what is going to happen
in the economy.
We have to get to what we think is a more sustainable endowment distribution. In fact,
we have to get to an endowment distribution that is much more like where we've been historically
and in a range that all colleges and universities see as appropriate and good stewardship of
endowments.
But I have to say, nobody knows what's going to happen with the economy. And so it's a
very real possibility that things will get worse before they get better. What I can promise
you is if things do get worse, we're going to be right back here and talking to you again
about how we have to adjust one more time if, for example, our endowment drops again.
So, we share the same fate with almost all the major colleges and universities who've
been more or less endowment dependent. You can see that there's been a big drop. I mean,
Dartmouth's actual endowment rate drop was 19.6 percent. But if you add on to that what
we've spent from the endowment, the overall reduction in endowment comes out at 23 percent.
So, we're about in range. We're not in as bad a position as others, but clearly every
college and university across the country is trying to respond in some rational, reasonable
way. Many of you may have heard that the University of California's system just announced a 32
percent tuition increase, which has students up in arms taking over buildings in Berkeley.
They take over buildings in Berkeley a lot anyway, but the 32 percent was quite a shock.
But that's simply what they need to do to get where they have to be in terms of just
making their budget.
So we're in a bit more difficulty than some schools, we're in a better situation than
others, and at another time if you're more interested, we can talk about how the other
schools are doing because we're watching them carefully, and I suspect they're watching
us as well.
So, everyone has done something and done some things that are really quite significant.
Everyone has enacted expense cuts, with more planned. I think what you saw is a first wave
of cuts and then another wave of even greater cuts. Princeton, which has three times our
endowment per student thought that they might not have to go through layoffs, and of course
now they are. And so, everyone's been impacted as we have. Almost all of them have reduced
their workforce. Almost all of them have frozen staff and faculty salaries. They've slowed
or frozen hiring and also salaries, and many institutions have halted capital expansion
in some way.
But for us, I think we have to start with a really clear set of principles. Now, in
presenting you these principles, I'm not telling you that we've decided what the answer to
these questions are, or for example, what the Dartmouth experience is. That's a conversation
that we're having. But what the board told us when we met in November was that the experience
for students, the unparalleled educational experience for students, the ability of our
faculty to continue to do the highest quality research, as well as bring that research into
the classroom and teach the students, the ability for all students, regardless of financial
status, to attend Dartmouth, to provide a workplace that respects the contributions
of staff and pursues administrative efficiencies, to invest strategically.
In other words, they weren't just saying, "Here's a budget number; go find it and make
the cuts." That's not what they were saying. They were saying, "We've got a structural
gap. Revenues are not keeping up with expenses. We've got a structural gap, and a statistical
gap happened because of this unprecedented drop in the endowment. And we've got to respond."
They didn't say, "Just cut, cut, cut, that's what you're going to do." They also said,
"This is also a time to invest strategically to achieve distinction and take advantage
of opportunities." There are some really wonderful opportunities right now for us to grow our
work in some areas, and they were clear that we should not back away from those opportunities
because of the current budget situation.
They also want us to continue to innovate in emerging fields, and they've also suggested
that this period could give us an opportunity to improve the collaboration across departments
and across schools. So this is not simply a budget-cutting exercise. We've said all
along that there are three ways that we're going to do what we need to do to get revenues
and expenses in line. And that is we're going to have to make some cuts, there's no question
about it.
But we're also going to have to raise funds and find new sources of revenue. Are there
innovative ways for us, for example, make the Dartmouth experience open to more people?
A distance learning? There's all kinds of suggestions that are coming out that I think
are very exciting and could potentially help us out of this situation. So this is not an
across the board exercise.
In the meantime, as we think about the different ways of responding to this particular situation,
I think we also have to think ahead. When I accepted the Wentworth Bowl from Jim Wright,
I was fully aware that I was taking over as President of a 240 year old institution. And
board members and others have been asking me, "What will Dartmouth look like in 2019,
at our 250th anniversary?" And so with a number of us, especially senior staff and we've talked
this over with faculty and some students and others, here is what we'd like to see Dartmouth
become by the 250th anniversary.
It's hard to do better than to be ranked number one. And we all know that U.S. News and World
Report gets it wrong a lot of times. But when they get it right, we should point it out,
right? [laughter] So they deemed us the number one graduate education among what - the category
was national universities. It's hard to build on that, but we will. We'll be even better.
More people need to know about what a fantastic undergraduate experience we have here. And,
our professional and graduate schools are going to continue to get better in terms of
their ranking. We know we can do that, it's within our reach.
We have leading faculty. Our faculty are among the most widely cited of faculty throughout
the United States. We have an outstanding curriculum. We are offering really unparalleled
opportunities for undergraduates to do research. We have world renowned professional schools,
and our global educational experiences are unparalleled. We have three times the number
of undergraduate students taking advantage of study abroad as any other of our peers.
So those things that we do well, we have to do even better.
We have an opportunity here at Dartmouth for interdisciplinary research that is also unparalleled.
It's the size of our community that I don't think there is another place that has so much
concentrated excellence in which the walls between departments and schools are so low.
They're still there, but I think they're much lower than at other places, and we feel we
can break them down even further to do very exciting things. Even in the four months that
I've been here, we've had some of the most exciting discussions about the possibility
for the professional schools, the faculty of arts and sciences, and so many, to begin
looking at new areas that frankly I think - to look at new areas and to make advances
that perhaps only we at Dartmouth can achieve.
We want to be truly the Big Green. I think that there's a lot of room for us to make
Dartmouth the most sustainable campus in the United States. And as we do that, as we've
learned again and again, that if we do that, we will also save money. I think it's a great
goal. I think we have a great tradition of being green here at Dartmouth in every sense,
and I think we can continue to grow.
We also want to be the institution of choice for the brightest and best faculty, students
and staff. I think that Dartmouth, as I've said many, many times, is a really well kept
secret. We have to make it not such a well kept secret. We have to make this the place
to go to take on certain areas of study, the place absolutely to go as a young high school
student looking for the best possible educational experience.
And most importantly, we do three things here. We're very lucky that we can do three things
here. We teach students. We generate new knowledge through research, and we also have a direct
impact on making the world a better place through our medical school, through our business
school, through our engineering school. We actually have been able to directly affect
the world in a positive way. We do all those three things. But at the end of the day, we
have to make sure that Dartmouth graduates are the most sought-after young people of
anyone in the world. They have to be learners and scholars and problem solvers, and all
these great things that you can see, leaders, communicators.
You know, graduates of the Tuck School of Business are known as great team players.
You ask somebody in the business world, "What is Tuck known for?" "They produce great team
players." And I think part of it is because Paul Danos has said that so many times to
people, people now repeat it back. But it's true. And Paul's a very skilled person, and
I think that is related to Hanover, I think that's related to this environment, I think
it's related to Dartmouth as a culture. So we want our graduates to be known as the ones
you want on your team, the ones you want to join you in your workplace or in your graduate
school because they've had the best experience that they could possibly have. We have to
be there. We will accept no less than this at the 250th anniversary, and that's what
our board expects. That's what our alums expect, that's what all of you expect.
So how are we going to go through this process? Well, we have to plan for the next five years.
And in addition to being very much aware of the budget gap, we have to be aspirational.
We want to save costs, but we also want to improve quality. Now, I've had a lot of experience
working in quality improvement and health care, and health care is one of these places
where the notion that quality is free seems to be true. That as we improve quality in
health care, costs seem to go down. Can we do the same thing in a higher educational
institution? I hope so. It's something that we have to shoot for. And if we can achieve
that, I think that we will set a standard that other higher educational institutions
will be struggling to follow.
The most difficult part is we have to restructure now to enable rapid recovery, to minimize
risk and reduce volatility. You know, endowments were created to reduce volatility. In other
words, the endowments were the way that we got through the rainy day. But what happened,
and again, at all colleges and universities, is we began relying more and more on the endowment
as endowments grew. So now, rather than endowments being our hedge against volatility, they have
become the source of our volatility. All across the United States, colleges and universities
are facing the fact that they've relied so much on their endowments that when there was
an unexpected 20 percent plunge, everything had to be rethought. Well, that's where we
are. It's a lesson we've all learned together.
The good news is that we are still here and we are still strong. Lehman Brothers, Bear
Stearns, they aren't here anymore. Who would have thought even five or ten years ago that
those institutions would not exist? So this is a problem that's hit us, but what we need
to do now is to respond effectively and quickly.
Everything's on the table. That doesn't mean that everything's going to get cut. But everything
has to be looked at. Every single part of the budget has to be looked at and we have
to make strategic decisions. Some things will get smaller, some things will get bigger.
If we don't continue to invest for the future, we're going to be in big trouble. You know,
some colleges and universities, perhaps, that were less endowment dependent, that have had
particularly good fundraising years, who've had major gifts coming in recently, they're
looking at all of us who are looking at making cuts and thinking that we'd be a great place
from which to poach faculty. We can't let that happen. We've got to retain our best
faculty. This is a very important value for me, but it's also the absolutely most important
value that we share across this campus and across the board and across the alums, what
I hear all the time. We have to make sure that we retain the very top notch faculty
and support them in a way that they will see Dartmouth as the place to be if they want
to have great scholarship, do their scholarship and have a wonderful experience teaching young
people.
We've got to seek new revenue sources. Again, we've already been talking about this, and
I have to say that we've been very encouraged by the suggestions that have already begun
to come in. I think there are a lot of innovative ways that we can find new revenue sources,
new ideas, and grow the revenue base in a way that will allow us to get even better
in this time of difficulty.
And we want to have a discussion with all of you. As many of you may know, I've already
been talking to a lot of groups; the faculty of arts and sciences, student groups, even
last night I talked to various student groups about the situation. We're very committed
to open, respectful and constructive debate. But it's going to be a debate. We're going
to have to look at each other's value propositions, look at the way that we are all contributing
to Dartmouth College, and find a way forward that makes the most sense for Dartmouth College.
So here we go, let's take a look at the numbers. What I'm going to share with you today is
our revenue, what's known, where's the risk, look at our endowment pretty carefully and
describe it for you and describe our thinking about how we want to move forward with it.
What our expenses are. Want to give you a little brief snapshot of what's been happening
over the last seven or eight years in terms of our personnel. And then take a look at
the gap that that leads us to.
So here's all our revenue sources. Now, let me just point out a couple of things. One
of the things you'll notice is the endowment distribution from 2008 to 2009 went up $40,000.
So that's a 25 percent jump in - Excuse me?
From audience: ... (correction from 40 thousand to 40 million)
PRESIDENT KIM: I wish it were that. So a $40 million increase in the endowment distribution.
And that's an increase of 25 percent, which seems like a lot. And that's not even the
entire distribution, because the entire distribution was $26 million more, but that was actually
put back into the endowment. Now, why did we do this? So, it made perfect sense. Some
of you will remember that Senator Charles Grassley of Iowa was putting intensive pressure
on colleges and universities with large endowments to spend more. He made the argument that this
is not fair in terms of intergenerational equity. In other words, he argued that hoarding
your endowment now to benefit future generations of students is not fair. You should let the
current generation of students also benefit from the rapid growth of the endowment. So
spend more, spend more, spend more. And so in the name of intergenerational equity, in
order to make use of the growth in the endowment for today's students, we distributed more.
Now, if you look at the other revenue sources, there's tuition, there's sponsored research,
which is completely fixed. Those are for very specific things, we can't do anything with
it. Look here, the Dartmouth College Fund and unrestricted gifts, 49 million. That's
not a lot. That's the most unrestricted part of our revenue other than a big chunk of the
endowment. So the point is, the revenue sources are fairly limited. Endowment's a huge chunk
of it. And recently, we went up fairly quickly in the amount of the endowment that we spent.
But again, for reasons that I think are very clear, that are linked to a particular time
in history where there was pressure to spend more of the endowment, and it was based on
the, I think, entirely understandable desire to let the students of today benefit from
the endowment growth.
This is what it looks like in a pie chart, these are our revenues in a pie chart. So
again, tuition is a huge piece of it, endowment distribution is the next largest part. Now,
25 percent is for the entire Dartmouth College, the entirety of Dartmouth College including
professional and other schools. But if you exclude the professional schools and look
at just the college of arts and sciences alone, endowment distribution is 32 percent of the
overall revenue. So if it's 32 percent of the revenue, you can see that fluctuations
in the endowment are going to have a huge impact on what we spend.
So, first of all, there are people in the room who know so much more about this than
I do. Q [Samuel Belk] and Julie Dolan are sitting up here in case I make a mistake.
But as a simpleminded doctor anthropologist, I have worked very hard to try to understand
this. And I'm going to do my best to explain to you the pieces of it that are relevant
for us as we think about the budget situation.
First of all, this is what our investment portfolio looks like. Now, public equity is
sort of day-to-day, what you buy and sell on the market. On any given day, you'll know
what that stock is worth because every day, the value of it goes up and down. The reason
that the public equity is 27 percent, but our goal traditionally has been around 40
percent. The reason it's gone down is because this is the part of our endowment that's most
easily converted into cash. So, if we need cash to pay for operating expenses, often
what we do is sell public equity. So in the process of selling public equity to raise
cash, the percentage of our overall endowment that was made up of public equity went from
40 percent to 27 percent. That's a concern because right now, as the stock market recovers,
the portion of our endowment that is most likely to grow along with the stock market
is the public equity.
So, the conundrum is that part of the endowment which is most likely to grow quickly with
the economic recovery is precisely that part of the endowment which we've had to sell because
it's the most easily converted to cash.
Now down here, marketable alternative equities are basically hedge funds. These are more
complicated instruments. We can turn them into cash, but not on a day to day basis.
And also, it's hard to know on any given day exactly what some of these funds are worth.
So these are more complicated, and therefore a little bit more difficult to turn into cash.
Private equit[ies] are a different kind of investment that is the least, the term used,
is liquid. In other words, it's the most difficult to turn into cash, is private equity.
Now, there are some institutions that have lost so much public equity that they've had
to try to sell private equity. And it's often very hard to do. In fact, some institutions
have tried to sell private equity in the past at a fraction of its original value and weren't
able to sell it. So, we don't want to get into a situation where we're all in these
relatively more difficult to sell, more difficult to turn into cash instruments. And what we
want is a balance.
Now, the problem with only 27 percent public equity is if the endowment doesn't grow at
all, one scenario is that we're going to have to keep spending public equity. The other
alternative, of course, is we have lines of credit. We could take lines of credit and
that would give us cash, but then we're incurring debt. So, right now this is where we are.
I think we'd like to get to a position where we have a bit more public equity. We hope
that the hedge funds in the private equity, rather than being what they call under water,
which means that they're worth less now than what we bought them for, and therefore not
giving us any dividends, we hope that the private equity and the hedge funds will now
rebound. They're going to rebound more slowly than public equity, but we're hoping that
they'll come back.
But the difficulty is, if we don't have any growth, if the economy continues on a flat
line or even goes down again, we could find ourselves in a position where we're going
to have to spend public equity much more quickly than we'd like; or alternatively, taking out
more debt.
All this to say that the events of the last year and a half have changed everyone's thinking
about how to manage endowments. You may have read a story in the Boston Globe about how
Harvard lost $1.8 billion in cash from taking too much of their working capital and putting
it into the endowment fund. Complicated stuff, but we didn't have that situation happen to
us at nearly the scale. But everyone's thinking about this anew. This is very complicated
stuff. The point, though, is there is much more volatility than any of us would like.
And we've got to find ways of decreasing the volatility based on whatever the endowment
may do on any given day. Q, Julie, am I okay so far? All right.
The next thing I want to look at is what we're assuming about endowment returns and how we
are calculating the distribution formula. So that means these following things. One,
what do we think our endowment's going to do over the next five years? Because in order
to plan, we've got to make our best guess of what the endowment's going to do. The next
issue is what's the distribution formula going to be? How are we going to calculate in any
given year how much of our endowment we spend on that year for operating expenses?
So in June, and again, this is the time when we had much less information, in June the
assumption was that we wouldn't grow at all this year. We might grow 5 percent in FY ╘11,
and in FY '12, '13, and '14, we'd grow 10 percent. Now, with the full understanding
of what our returns were for this past year, we calculated that our ten year performance
of the endowment was, on average, 8 percent a year. So, the point I want to make there
is that if you look at that particular mix of instruments that we had from that, this
particular mix of instruments and that particular investment strategy, it actually worked really
well. So an 8 percent average growth over the last ten years puts us in the 95th percentile
of all endowment performances.
So one can say, "Well gosh, we were in a position and we fell 19.6 percent. Isn't that terrible?"
Well, actually over a ten year span, even with that drop of 19.6 percent, our average
increase was 8 percent, 95th percentile. We have done really well. That strategy has worked
for us. Our investment office has done a great job, okay?
But what we thought we should do is actually base our projections on the evidence that
we have in hand. So the evidence we have in hand is that our ten year performance is 8
percent; therefore, instead of thinking that we were going to grow at 10 percent in these
'12, '13 and '14, we've brought that down to 8 percent. That is an evidence-based assumption
about how we're going to grow. We also think instead of 0 percent, we're actually going
to grow some this year, 5 percent. And we're hoping that we get 3 percent positive growth.
Now, the point that we have to remember is that this projection here, even though it's
lower than what we thought in June, it still pegs performance at a track record that was
in the 95th percentile. So some people worry that this is too optimistic a projection.
From our perspective, this is simply the best evidence-based projection we can make. That's
what we did. We still have a lot of the great people who were in our investment office,
are still there, and we think that we'll be able to do that going forward.
This is all very important, because the way you make these assumptions has everything
to do with how we think about our spending going forward. So this is an evidence-based
presumption of what's going to happen.
Now, in terms of the distribution formula, this will seem like rocket science to you.
I had to look at it 20 times before I actually understood it myself. There were really two
different ways of approaching the distribution that are out there today. And in June, we
were looking at this model. So this model just says that 70 percent of the distribution
is going to be based on the prior year dollar distribution plus an inflation factor, in
this case plus an additional 1 percent. So this particular model, the one that we were
thinking about in June, simply says that we're not going to peg a particular percentage.
What we're going to do is get to a point and then for each following year, we're going
to look at what we distributed the year before, and make that 70 percent of the number and
then 30 percent of the number would be the four quarter average market value of the endowment
times 6 percent.
So, that way of doing it says that each additional year's distribution will be based on the previous
year's dollar distribution, not percentage. So, what could happen with this particular
model? Here's what we fear the most. If you're saying that last year we distributed $200
million, so 70 percent of the number will be based on the $200 million. And then, what
you're going to get to is if your endowment then drops another 20 percent, the percentage
of the endowment you have to spend to get to $200 million goes up. So we're at 7 percent
this year, in 2010, which is quite high. We could be at 9 percent or 10 percent next year
if the endowment drops again.
So, while people think that there are advantages because it sort of smoothes more or you have
the same amount of dollars coming out every year, the danger is if the endowment drops
again, then you're spending huge chunks of your endowment on any given year. And that
will begin to get you in trouble, especially with the public equity, the part of our endowment
that you can turn into cash. So that's one model. Just base it on the previous year's
dollar distribution.
Another model, which is the one that was recommended to us by the Board of Trustees is to bring
the rate down to our historic range right away. In the first year, go to 5.4 percent
from 7 percent, then to 5.3 percent. In other words, pegging the distribution at a percent,
not at the previous year's dollar distribution. And then to use the 70/30 formula up here
after that once we get down to a manageable range. So those are the two models. One is
to simple peg it to what you spent the year before; and the other is to get it down to
the range that we have normally been in.
Now, it shouldn't be surprising to you. So the color, I'm sorry for so many colors, but
the one that the board has recommended to us, of course, is the green one. And then
you'll see, though, what the others look like in terms of distribution rate and in terms
of the dollars given out. It shouldn't be surprising to you that this green line, which
is what we've called the sustainable rate, which is to get down to 5.4 percent right
away, in what we have talked about as a positive economy, gets us back to where we were at
the high water mark sooner than any of the other scenarios.
Now, let me just make a point. Getting to the high water mark is not the concern. That's
not our priority. Our priority is to manage the endowment effectively, turn it into something
very positive for our budget, as opposed to allowing it to remain the source of volatility
for our budget.
Now, colleges and universities are now using 4.5 percent to 5.5 percent as the target range
for endowment spending. That's what's considered normal, best practice. And you can see historically
from 1995 until 2008, we were very much, and even below, that range. That's what we had
always wanted to do. This spike is because of what we said. We took seriously the notion
of intergenerational equity and thinking as everyone else was that our endowment will
continue to grow. We thought it would make sense to do things for the students of today
instead of waiting and giving all the benefit to the students of tomorrow. So we went up.
Now, there are two ways, the two different models. This is assuming what we call the
positive economy; 5 percent growth this year, 3 percent next year, 8 percent every year
afterwards. What happens is that if we use the first model, the model which says that
endowment distribution will be based on the previous year's endowment distribution, we
don't get to the target range for endowment distribution until 2016. And so we're going
to be here, but we could be up here. If the economy drops again, we could be higher. So
basing it on the previous year's dollar number is worrisome in that we could have a lot of
volatility out here and we won't reach, even in a positive economy, we won't reach our
target distribution rate until well after 2015.
With the model recommended by the board, we go right to the target area and the distribution
rate goes down to our target of 5 percent by 2015. Now, what if there is a relatively
more unpredictable economy? Let me go back a second. These are the numbers we use for
the red line and the yellow line. Let's say we grow 3 percent this year. But let's say
we drop 10 percent the year after that, and then we have up and down results after that.
Now, one of the things that colleges and universities did not do, and this is across the board,
is that we did not plan for this kind of economy. Nobody did. Very few people really thought,
"Well gosh, what if we drop 20 percent?" Nobody even considered that, including Lehman Brothers
and Bear Stearns, so we are not in bad company.
So we just tried to think to ourselves, "What would happen if you had this kind of jagged
recovery?" And so what happens is that even with a jagged recovery, if we push our rate
down immediately to 5.4 percent, then we stay in the range for the whole time. If we don't
and we base it on the formula of what we spent the year before, we actually never get there.
So, here are the actual dollar amounts, what that means. Now, this blue line, of course,
is the line where I showed you that we don't get to our target distribution rate until
well after 2015. So, this blue line, we think, is unsustainable to begin with because it
just puts so much volatility back into - It introduces the possibility that our rate
of spending, if the endowment drops, could skyrocket up to 8 or 9 percent.
You'll see there's more money coming out earlier, but we're going down in terms of distribution
until 2017. So in other words, we'll be making cuts every year until 2017. And if it's an
uncertain economy, in fact, it never goes up and the amount that is distributed from
the endowment will go down every year out to 2020. The blue line is what's been recommended
for us. And if we do this right away, go to 5.4 percent right away, after two years, the
endowment distribution starts going up and we can get to a point where we can begin to
grow.
Even if we have a slower recovery economy, we get to that point and starting here, the
slope again is upward. So, the recommendation of the board, with which we agree, is that
we've got to take the green path, no surprise. The green path is always the best path. We're
going to take - This is the path that we have to take. We're going with this endowment distribution
model because we think it's consistent with much more realistic expectations of endowment
returns. It reduces dependence on the endowment, reduces volatility in budget planning. We
think it's much more sustainable. And it better withstands risk of another downturn or slower
recovery. Just remember folks, if we drop another 10 percent, we were at 7 percent this
year, it's going to go up. The percentage is going to be higher if we take the other
path. We have to also get quickly to a base from which we feel confident that we can grow.
These are our expenses. So, it's actually not at all a trivial exercise to put all the
expenses together in a chart that's this simple. It's taken us massive amounts of work. We're
incredibly grateful to everyone in the financial group, Julie Dolan especially. We have worked
day and night for a couple of months to try to get these figures which put the entirety
of Dartmouth College together in these columns. It's not a trivial exercise.
What you're going to see, and again this is one of the benefits of being in a college
and university, our expenses are pretty fixed. This is not like a business where sales go
up and down and there's a lot of volatility. In terms of expenses, we kind of know what
we have to spend our money on. So there is a pretty reasonable degree of predictability
in the expenses of a college or university as compared to other businesses.
And what you'll see is there's some flexibility in staff compensation and other expenses.
In terms of sponsored research, this is research money that comes to us from the National Institutes
of Health. That's extremely prescribed. You're told how to spend that money, so there's no
flexibility there. Faculty compensation, one of the great things about being in academia
is we have something called tenure. And tenure frees up our professors to be able to say
and think and do whatever they think is right, which is something we must defend. On the
other hand, it introduces a lot of fixed costs to what we do. So faculty compensation, we
think, has limited flexibility.
Facilities, maybe some. Undergraduate financial aid, graduate and professional financial aid,
limited flexibility. In terms of debt service, we've got to pay back our debt. So, we're
looking at trying to deal with a 50 and then another 50 million dollars in gap that we
have to close with a budget that only has limited flexibility. These are the numbers.
This is what it looks like in a pie chart. So, of course, staff compensation is the highest
number. Sponsored research, we're very happy about this, that it's 17 percent. This is
great. It means that not only are we bringing in research money for our professors, but
it means we also recovery some indirect costs, and it's good. We want more sponsored research.
All of the expenses in travel, that kind of thing, 14 percent, faculty compensation, 17
percent. This is what it all looks like.
Now, I just want to make a point that these are data from 2002 to fiscal year 2010. We
wanted to have a really clear sense of what's growing and what's not growing. And what we
found in the college only, the faculty have grown 2.1 percent. The average compound annual
growth rate is 2.1 percent with an increase in 70 faculty. Non-teaching academics, research
assistants and the like, have actually gone down, as has overall staff.
Now, in the professional schools, faculty has gone up. Non-teaching academic staff have
gone down, and staff have gone up 1.9 percent, but that's in the context of an explosion
in research grants. So, we've doubled the amount of sponsored research, a lot of it
in the medical school. And therefore, that increase in staff, a lot of it is fixed and
determined by the grants that we get, right Bill? Yeah. So, we have a lot of staff, but
I don't think there in the last ten years has been any kind of sort of out-of-proportion
explosion. We're trying to look back before 2002 to see what happened before. But in the
last eight years staff, faculty have grown, and staff have grown a little bit less.
So here are our assumptions as we go forward and try to get a sense for what the gap is.
In terms of revenue, we have tuition. Tuition increases annually and we calculate that in.
We're expecting new endowment gifts of around $34 million annually. The Dartmouth College
Fund, our projection is that it would grow 4 percent. I hope it grows more, but the projection
is that it would grow 4 percent. Oh, and by the way, what I hear again and again and again
from alumni is that the Dartmouth College Fund growth, I think, is at least partly dependent
on how well we do this exercise. If the alumni feel that we have looked under every stone
and we have come to a conclusion about what is critical to the Dartmouth experience and
what is not, and we've really done our work, then I personally hope that donations to the
Dartmouth College Fund will go up. But I don't think it'll happen until alums are really
convinced that we've done all the work we're supposed to do.
Endowment, again, we've talked a lot about this. Here are the assumptions: 5 percent
this year, 3 percent next year, 8 percent per year beyond that, which is again the best
we can do in terms of an evidence based number. We're going to decrease the endowment distribution
rate to 5.3 percent and then we hope to 5.1 percent by FY '14. We're estimating about
$145 million endowment distribution beginning in fiscal year '12. The faculty compensation
pool we think will increase. The staff compensation pool will also increase. What percentage that
will increase is what we have to talk about. We have to fund prior deficits and outstanding
commitments by fiscal year '14, and we must have the ability to strategically invest.
Again, this is a discussion that we've had intensively with our board. This can't be
just about cutting. It has to also be about investing to take advantage of opportunities
that are staring us in the face right now.
So the overall educational expenses, these are the things that we'd always been considering.
Goes from 828 to 971. And mostly this is just annual increases. This is what happens to
any college or university. You have annual increases, it goes up. We had prior deficits,
about $46 million worth, that we now are committed to paying off very quickly in this fashion.
We think you need a contingency. You know, this is not a 1.5 percent contingency in fiscal
year '14 is very small. We're talking about potential fluctuations in oil prices. That's
really what we're talking about. This is what best practice is to build into your budget
some contingency so that if something happens, like oil prices go up, we can pay that off.
It's not much more than that.
We feel very strongly that a strategic faculty retention and recruitment fund has to be included
in our projections. Again, the thing that worries me most is we've got great faculty
and there are lots of jobs open out there, and I think we also have a very unique faculty,
faculty that can do both research and teach well. So, we're a very, very fertile ground
for poaching from other colleges and universities, and I think we simply have to commit to keeping
our outstanding faculty here in Hanover, at Dartmouth College.
And strategic investments, by FY '14, these two together make up 2 percent of the budget,
faculty retention and strategic investments. And by strategic investments, we're talking
a very small amount for opportunities that all of you will identify and it happens every
day. People come up to me and say, "Hey, there's this great opportunity where we could bring
in more resources, bring in great people, but we've got to put some money up front to
take advantage of that opportunity." I hear that every day. All of us have aspirations,
and we want to set aside a little bit of money so that when you come to me or to Carol or
to Steve, we can respond positively. This is, again, this is 1.2 percent of the overall
budget. We think we just have to have it.
But it's more than that. We think that we can gain great efficiencies, not the whole
thing, but we can gain efficiencies, if we invest a little bit in improving our business
processes.
And finally, I don't think we can get out of campaign mode in terms of our development
activities. The campaign ends as of the end of this year, but we can't quit campaigning.
So we're going to have to make more investments in development. I tell you, our investment
in development pays back extremely, extremely well in terms of the donations that come to
Dartmouth College. So we think that this is what - Let me put it this way. This is our
best guess at what the budget's going to look like over the next five years. Who can know
what anything will look like in five years, but this is our best guess and we've been
asked to do this. And again, we've worked very hard to try to get rational approach
to these kinds of numbers.
So we're going to be a billion dollar institution by 2014. But, what you saw in terms of endowment
distribution is that if we're going to be a billion dollar institution by 2014, we will
have over that time decreased our reliance on the endowment. So rather than being 32
or 25 percent of our budget, it's going to be more like 15 percent. And I think that's
going to be a much more manageable number going forward.
So these are the gaps; 2.5 million this year, 50 million next year, 96 [million] after that.
Now, of course, if we get there and we can find 50 million in reductions, that's not
still 96 million, that goes down. So when we talked about 50 million this year, and
an additional 50 million next year, that's what we meant. If we do nothing, these are
the deficits we're going to have every year, and those will compound and add up.
So, in the end, we have got to make sure that revenue is greater than expense. I mean, even
a simpleminded doctor can understand that business principle. And we have to make sure
that the growth rate of our revenue outpaces the growth rate of our expenses. And if we
solve this $100 million problem by FY '12, then revenues will outpace expenses.
Where are we going to look? Well, as we've said, everything is on the table, but that
doesn't mean everything is going to get cut. We have to look at everything. Lots of people
have told me about the things that they hold most dear, and that absolutely can't be cut.
So, everything has to be on the table, we have to look at everything. More than anything
else, when we decide that we're going to keep something or grow something, I have to be
really, really clear as to why that's important so that we can explain to the board and everyone
else why, "Look, we might have to cut back in some of these other areas, but this critical.
In fact, we have to grow it." We have to think about everything.
You know, can we do better with administrative restructuring and reductions? We think so.
Non-compensation savings? You know, we've got to look at it. Compensation and benefits,
again, we have to look at everything and we have to do tough work in terms of figuring
out what the different kinds of changes will give us in terms of overall expense savings.
Financial aid savings; I've said again and again and again, this process will not lead
to a single student not being able to afford Dartmouth. That's not going to happen. On
the other hand, we have to look at financial aid. Are all of our packages, do they all
make sense? Are there ways of gaining savings that won't hurt our need-blind approach?
Capital project savings and new revenues. We're very committed to the life sciences
building and the visual arts center. Are there ways of saving money and bringing in new donations
so that these things, the critically important new buildings, are less of a strain on our
budget going forward? We have to look at it.
Each division department at school will be asked to look for savings. Again, we're not
going to give you a number across the board. It's not a number across the board. Some programs
will grow. And, we have to look at new programs and revenue. There are lots of different possibilities
that we've already talked about that could garner lots of new revenue, we hope. We've
got to keep thinking.
So here's what the process will look like. Between now and February, what we're doing
right now is defining the process. We don't have all the committees set up, but we've
been talking to a lot of people. Steve Kadish and Carol Folt have been leading that process.
This is one of our discussions, an open forum. We're going to launch the website where already
people have given us a lot of good feedback. We have to analyze all the savings and revenue
for both fiscal year '11 and '12. We have to put a preliminary budget together and we've
got to prepare to implement.
February 10th, the reason we talk about that is that's a Board of Trustees meeting. It's
not to say that some sort of finality, that things will happen on February 10th. It's
just to say that that's the next milestone for us in terms of presenting to the board
our findings. From February to April, we're going to be implementing the first set of
savings and revenues, finalize the budget for the next year and being drafting the fiscal
year '12 to '14 budget. And, of course, it's going to be critical to get input from everybody.
From April to September, we will have launched a lot of the initiatives. We'll continue to
analyze what we're getting. We'll continue to monitor our financial situation, of course.
We'll continue to have information sessions and to communicate. And the fiscal year '12
budget process will continue.
By September, though, what we're going to do is to evaluate how well we've done. We're
going to make sure that the savings that were suggested or the savings that were promised
actually happened. We're going to hold ourselves, and of course, everybody else at Dartmouth
accountable for actually achieving the kinds of savings that we know we need to achieve.
You know, this is not what I thought I'd be doing in my first four months as president
of Dartmouth College. But I have to say that I am more convinced now than I've ever been
that this will all happen by 2019. I'm convinced of it. That this place is so special, the
relationships here are so unique, the people we have here, staff, faculty, students, are
so unique, that there is no doubt in my mind that we'll get there by 2019. There's going
to be some tough going in the next few months to probably a couple of years, but we've got
to keep our eyes on the prize. This is a 240-year-old institution. Unbelievably, there have only
been 16 presidents before me. This institution will be around for a very long time. And the
question for us is what will be the nature of our stewardship over the next few years?
You know, at my inauguration, my sister sang the song, "Take Care of This House," and it
was very emotional because I sat there emotionally thinking about what a huge responsibility
I've just taken on. And while this is not what anyone would have wanted for Dartmouth
College today, I am extremely hopeful. Your contributions to the website have already
given us a lot of energy and hope that we can figure this out together. There will be
layoffs, and I've said that before. But just take one particular piece of data. We laid
off 60 people in the last round, 25 are back working at different parts of Dartmouth that
are growing.
Now, when I say we've got unbelievable opportunities in front of us today, I really mean it. Unbelievable,
wonderful opportunities based on the outstanding work of faculty and staff here at Dartmouth
College. So, whatever layoffs we make, we hope that our best staff will simply be coming
back later and working in another area which has grown over the next few years. But I don't
think we can get there unless we make the tough decisions. In fact, the decision the
board has already made for us at our last meeting.
So let me stop there. Let me ask Steve and Carol to come up to the front and we'll take
your questions and comments for the next 45 minutes or so. Thank you. [applause] So people
can come up to the mic or submit their questions in the form of note cards. Maybe we have some
questions already.