Thanks to ’10 (who really ought to join us an anonymous author) for posting the all-student mailing from Morty about the College’s financial situation. My Talmudic analysis was too long to add in a comment to Will’s post. Let’s go line by line!

From Morton O. Schapiro
to WILLIAMS-STUDENTS@williams.edu
date Sat, Oct 18, 2008 at 5:53 PM
subject The Effects of Economic Uncertainty on Williams

This message seems to have gone to all-students but not to all-faculty/staff. Surely they will be getting an update as well. Alumni/parents received (exactly?) the same e-mail a few hours later. Are we sure that faculty/staff got the same one? If not, perhaps a reader could post it in our comments? On past occasions, similar e-mails have included the WILLIAMS-FACULTY@williams.edu (or something similar) in the “to” field. My assumption would be that faculty/staff will be getting a lot more details, even if they have already received this same e-mail.

UPDATE; Faculty, staff, parents and alumni all seem to have received the exact same e-mail. (Thanks to anon in the comments below.) I expect that faculty/staff will, at some point, receive more detail. Please share it with us.

To the Williams Community,

As you would expect, much of our just-ended meeting of the Board of Trustees focused on current economic uncertainties and how they might affect the College and its members.

Recent swings in financial markets have been dramatic and no one knows how long it’ll take them to settle. Some things are clear, though. One is that well-endowed institutions like Williams are in a relatively strong position.

True. Second and third tier liberal arts colleges are in huge trouble. The academic job market is going to turn even more ugly (if that is possible) than it has been for decades. Batten down the hatches.

Among the benefits of a healthy endowment is that it helps us weather difficult economic times. We’re fortunate that Williams leaders over the decades have been careful stewards of the endowment growing it with reasonable risk and saving money when economic times were good. We benefit, too, from having such strong support from alumni, parents, and friends.

Transparency, please. There were a bunch of handouts at the Trustee meeting. Almost none of them contained secret or meaningfully proprietary information. So, how about sharing the handouts with the rest of us? At least one trustee lives in Williamstown. The Record ought to knock on his door and ask to see that material.

Also, who were the “careful stewards” who thought it was a genius idea to go $267 million into debt in order to lever up the endowment’s returns? How is that working out? (Yes, you.) Paying off that debt two years ago would have saved the College over $50 million. (Full analysis assigned to Purple Bull.) Leverage kills. Moderate leverage (borrowing $267 million on an endowment of $1.8 billion) still wounds.

It’s also clear, however, that, despite our relatively strong position, our situation has changed. The College’s three main sources of revenue are endowment income, gifts, and student charges. When setting the College’s annual budgets, we project that the endowment will return over the long term at an annual rate of eight percent. In the last fiscal year, though, its return was minus one percent and since June 30 all world markets have dropped precipitously further.

How bad are things? Tough to know for sure, but I was shocked at the tone of Morty’s letter and the actions proposed. I need a smart student from Purple Bull to help me update this analysis, but I would be surprised if the endowment were not down at least 20%. A better estimate would probably be 30%, and 40% is not out of the question. You can be sure that the Trustees were told the exact number. How come the rest of us don’t get to know? My analysis showed that the College has already lost around $300 million in the equities portion of the endowment. My best guess would be that total losses are around $600 million.

With luck, that will snap back somewhat. Yet counting on luck is no way to run a college. Williams should start planning now for life with a $1.2 billion endowment. We are not as rich as we thought we were.

While we haven’t yet seen a substantial effect on giving to the College, it’s reasonable to expect that global economic uncertainty will dampen it for some time. Finally, as unemployment rises, some of our families will find it harder to pay student charges.

Really? I have my doubts about this. Although the recession is here and unemployment will rise, the number of parents who will lose their jobs is very, very small. And, the vast majority of those who do will quickly find other work. I just don’t see the recession as having a major impact on tuition payments. And, whatever impact it does have will be dwarfed by the hundreds of millions that the endowment has already lost and the tens (?) of millions that annual giving will decline.

Also clear are the institutional values we must use in planning how to weather this storm. Our first priority will be to protect current and future Williams families. We’ll maintain our financial aid programs and extend help to those whose changed circumstances reduce their ability to pay. Second, we’ll remain committed to current faculty and staff. We foresee no layoffs and we understand the importance to Williams of competitive standards of compensation.

Whoa! Faculty/staff just spilled their coffee. Who said anything about layoffs? That just comes out of nowhere. Perhaps it is meant to shock everyone into paying attention. When was the last time that Williams engaged in widespread layoffs?

Also, can you read between the lines? Not only will none of the faculty/staff lose their jobs, not only will none of them face salary cuts, but the College is going to keep on raising faculty/staff salaries in the midst of the worst financial crisis of the last 50 years. Priorities, please!

Why not an across the board salary freeze, if only for a year or two? I hope that there is someone on the Board of Trustees willing to ask these sorts of hard questions. Another topic for Record reporting. Former EphBlog author David Nickerson ’97 reports that

The academic job market is absolutely brutal this year (thankfully, I am not on it). Most state schools have a hiring freeze. Even among well endowed schools, much of the hiring is replacing faculty who left or retired.

There is no need for the College to maintain “competitive standards of compensation.” It is not as if the English Department is going to be hired away by Yale. The Record should find out how much faculty salaries are going up this year. (I think that there is a standard formula of some sort, i.e., everyone gets a raise of 4.5% or whatever.)

If it were me, I would implement a five year salary freeze for all faculty/staff making more than $100,000.

However, spending at current levels in the face of reduced income would be irresponsible.

Let’s review Williams current spending and its sources. In the fiscal year ending June 30, 2007 (pdf, page 5), student revenue was $59 million. Total spending was $164 million. Since there was $5 million in revenue from “Auxiliary enterprises,” we can make the math easy and just assume that the College spent about $100 million more than it took in. Where does that money come from? Mostly investment income and new gifts. (I am making a lot of assumptions here and don’t understand the messy details myself, but I think that this is mostly right. Comments welcome!)

Before the financial crisis, the College viewed this as a reasonable budget. For many years (?), the policy (pdf) has been that:

Williams allows itself to spend approximately 5 percent a year out of the endowment for operations, against an 8 percent expected return. Our recent annual returns have been higher, but from 1965 to 1982 the ten year moving average was below 8 percent and by being conservative in our forecasts, we can support strategic initiatives through negative financial markets.

Time to test that theory! So, in June 2006 the College, with a $1.5 billion endowment would have planned on spending 5% ($75 million) in fiscal year 2007. Throw in $25 million in alumni/parents giving (?), and you make up the $100 million shortfall in the difference between what students pay and the College spends. More math to come. Back to Morty’s e-mail.

We need to protect the endowment so that the students of the future can experience the same quality of education as the students of today.

Exactly right. Williams faculty/staff have an incentive to spend the endowment today because they won’t be here 100 years from now. We need the trustees and the President to take the long view. Spending must be cut. But how much? Surely Morty and the Trustees discussed that. Details, please.

Also, how about some transparency on the College’s budget? Show us the line items and the crowd of Ephly wisdom can kick in. There is much fat to be cut.

With this background and with these principles as guides, here are the steps the College has decided to take:

1) Postpone for a year the renovation of Weston Field and the remainder of the Stetson-Sawyer project. This will preserve capital, put off additional debt interest payments, and provide time to better understand the depth and breadth of the economic downturn.

Agreed. And, yes, you did read about these ideas on EphBlog first. I am somewhat confused on the “debt interest payments” issue but save that for another thread.

2) Reduce spending on other facilities renewal by around $3 million. We have very little deferred maintenance, so pushing some of this work off to the future makes sense when times are tight.

Agreed. And I hope that this means we can stop wasting money on goo-goo green projects. Still, this is not a large dollar item. I worry that the College is reluctant to make the cuts it needs to make because no one wants to be the bad guy. The longer we wait, the worse the pain.

3) Not fill newly open positions except those deemed most essential. The Committee on Appointments and Promotions will review faculty searches that had previously been authorized. As new faculty openings occur, the CAP will determine which few, if any, should be filled immediately. Likewise for staff openings such recommendations will be made to Senior Staff by the Human Resources Office and Provost’s Office working together. How long these positions remain open will depend on the time it takes for the College’s revenue to stabilize. That’s likely to be many months and in the case of some positions it could be years before we’ll be confident enough to fill them.

Hooray! Fewer bureaucrats make for a better Williams. Although I wish that Morty were insightful enough to Remember the Tablecloth Colors without the helping hand of a global recession, I am not complaining. There are 8 people in the Office of Campus Life. With luck, there will be no more than 4 by 2010.

How many non-faculty employees did the College have in, say 1998? How many does it have now? Let’s go from here to there. Time to live within our means.

You’ll notice that these steps are less like switches that are either on or off, and are more like dials that can be adjusted as the economic situation changes.

Winter is coming. Set your thermostats accordingly.

There is a natural human tendency to avoid making hard choices when tough times come, to hope for rescue, to pray for deliverance. And, of course, rash moves are unwise. Yet, being a natural pessimist, I would like to see the College cut aggressively, act as if the endowment decline is permanent, start spending immediately within its newly lowered means. The longer the College tries to pretend that it is richer than it is, the worse for everyone involved.

Hard times call for hard choices. Is Morty a hard man? Are the current Trustees hard Ephs? We are about to find out.

In addition, in the weeks to come there will be many discussions among all parts of the College to focus on other steps we can take. One possible example would be increasing the size of each entering class by a modest amount.

I hate this idea. The College is already to big. The current size of the freshmen class fits perfectly into the Quad and Mission.

But there is nothing wrong with using this as an occasion to stop discriminating against rich students. Right now, the College gives a small but meaningful advantage to students from lower socio-economic status. I thought that this was a silly policy during the bull market. Why continue it if the College is in trouble financially? I am not arguing that the College should discriminate against poor students. I just see no reason to favor them. Let in the smartest, most academically ambitious applicants, regardless of how much money their parents make.

We’ll also need to find other ways to control spending this year and going forward and will use current governance and administrative structures to solicit ideas from faculty, staff, and students.

What about alumni? I am here to help! Start by canceling the Bolin Fellowships. There! I just saved the College $300,000 per year forever. Leave your thanks in the comments. What cuts would you recommend to Morty?

We’ll need to be creative in devising these plans and thoughtful about how they affect individuals. In particular, we’ll need to be sensitive to those among us who may be most directly hit by changes in the economy.

Hope that this includes hedge fund managers! Morty can buy me a cup of coffee when I teach my Winter Study class.

I hope we’ll all be especially aware of how students are affected by changes in their families’ circumstances and be prepared to offer support.

There is no way that Williams will meet the financial aid packages of HYPS in these tough economic times. In fact, I wonder if Morty/Trustees regret doing away with loans, decreasing the reliance on home equity and all the other give-aways of the last few years. Total annual spending on financial aid went from $12.9 million to $31.1 million over the last decade. Sure would be nice to have that $18 million (per year!) back in the revenue line.

Given the resources at our disposal and the intelligence and goodwill of the College community, I am confident that we’ll be able to manage our ride through this turbulence in a way that’s true to our institutional values and that will position Williams to emerge from the other side as strong as ever.

Regards,
M. Schapiro
President

Big picture: Williams spent $164 million in fiscal 2007. $100 million of that spending came from the endowment ($75 million) and new gifts ($25 million). If Williams uses (as it should!), the usual 5% spending rate on the endowment and if (details, please) the endowment is now only $1.2 billion, the College should only budget for $60 million. Assume that new gifts will only drop by 25%, then the shortfall would be “only” $20 million: (75-60) + (25 – 20).

Can you imagine cutting $20 million out of the operating budget of the College? The stairwells of Hopkins will run with blood. This is the greatest fiscal crisis that Williams has faced in my lifetime.

And the math is probably worse than that. We don’t have the data for fiscal 2008 and we are already in fiscal 2009. I bet that the current spending rate is around 12% higher, for total 2009 spending of $184 million. Student revenue has also probably gone up, but by not as much. Total spending cuts needed are probably close to $25 million and possibly even higher. That’s why Morty’s e-mail sounds so serious. There is a real problem.

Leading a college like Williams is never easy. Morty has done an amazing job over the last 8 years. But running a Williams with an ever-increasing endowment is one thing. Just keep handing out money! Everyone will love you. Running Williams during an era of belt-tightening will require extraordinary leadership. Is Morty up to the challenge? Time will tell.

Good luck!

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