Will Slack ’11 took an amazing set of notes on Morty’s recent presentation of the College’s financial situation. Read them. Below are the first part of my comments/questions. Record reporters should use this as guidance in writing this week’s story on the event.

Morty started off with the presentation he made to the staff and faculty chairs

Surely, this presentation must either have associated Power Point slides and/or be backed up by written material. Make those documents public.

The magic number to target, spending wise, is to draw on 5% of the endowment each year. This allows the endowment not to get behind inflation, as long as its being well managed. The idea is to balance the needs of current students against those of future students.

True, although I have always been skeptical of this calculation. Basic idea is that we expect the endowment to, on average, grow at 8% in nominal terms. Assuming 3% inflation, means that we have 5% of real growth. The rule of thumb is to average 5% in spending. That means that the endowment does not grow in real terms over time unless new money is put in, but that’s why we have capital campaigns.

The first problem is that the 8% and 3% numbers are, more or less, pulled out of the air. They aren’t unreasonable in isolation, but neither are other choices. The problem is that the pressure will always be to spend more. We need the President/Trustees to resist that temptation and think long term. Will they?

Second, and more importantly, these numbers are in contradiction when considered together. 8% nominal growth is reasonable and 3% inflation is reasonable, but you can’t simultaneously believe both numbers. Why? If the College’s endowment were to grow at 5% in real terms forever and world GDP growth were to be at 3%, then, eventually, the College would own the whole world. Since that outcome is unlikely, there must be a flaw in the assumptions.

A more careful steward would assume 3% real growth. Almost no one does that because spending money is so fun. If Morty and the Trustees had made this more reasonable assumption for the last 8 years, then they would not have been able to spend so much money. Who wants to be the bad guy and tell the students/faculty that they can’t have X?

Last year, the investment return was a negative 1%, but the additional draw of 5% caused an over drop around 100 million dollars. This year, the best guess is that the endowment is down about 25%. In the past year and half, then, we’ve gone from 1.9 billion in the bank to about 1.3, which is a pretty massive change. In fact, all of Morty’s trips for the capital fund for the past five years were probably neutralized last month.

This is in-line with the estimates that I have provided. I also fear/expect that these are underestimates of the actual damage.

Recall that the College has 50% of its endowment in equities. One nice thing about equities is that there is a market price each day. So, when the College’s equity managers say that their positions are worth X, then they are telling the exact truth. The problem comes when there is not a market price for the underlying securities. The College has 25% (at least) of its portfolio in investments that may not have a market price.

Consider a venture capital portfolio that is made up of investments in 10 companies. You own 5% of company A, 80% of company B, 33% of company C and so on. How much is that portfolio worth? No one knows! The venture capitalists know how much they invested to buy those stakes, but, because companies A, B and C are not public, there is no obvious answer to how much they are worth.

In normal times, that isn’t much of a problem. Venture capital funds have a long life and aren’t wound down until companies A, B and C have either gone public or been acquired. At that point, the fund has cash so the College knows exactly how well it has done. In between the start of the fund and the finish, the venture capitalists don’t worry too much about being able to say that the College’s investment is worth exactly X because a) there is no real way to do so and b) it doesn’t matter since the College (along with the other investors) is locked in for the life of the fund.

So, right now, is the College’s endowment really worth $1.3 billion? I doubt it. That figure probably does not include the real (albeit unmeasured) falls in the value of the College’s illiquid investments.

However, we’re still the 10th richest in endowment size/student. The plan, then, is to jump to a 7% draw. This is what happened in the early 1980s, when the college went to 7% for three years. However, a board member fears that we’ll have 10 years to recovery, like Japan in the 90s. The question is, “Is this a sea change?” and if it is , “It’s going to be a different Williams.”

Which board member said that? Buy that Eph a beer! She is right to be concerned. Moreover, even if there is only a chance of this scenario, the College needs to plan ahead. It needs to make some cuts now so that, if the Japan-scenario occurs, Morty’s successor is not totally hosed. If the College were really being managed by “careful stewards,” it would go to 5% now, at least for planning purposes.

After all, either we have the Japan-scenario (say, no growth in the endowment for 10 years), in which case getting down to 5% is the minimum of what we need to do, or markets bounce back, in which case we will be spending 5% of a much larger endowment. Either way, 5% makes sense. Spending 7% is just a cowardly way of avoiding hard choices. (And, by the way, not giving raises to people whose total compensation is over $100,000 does not count as a “hard choice.”)

There is so much fat to cut at Williams that we do not need to worry about whether such cuts, intelligently made, will lead to a “different Williams.” Will it be a Williams at which we don’t, say, hand a check for two million dollars to MASS MoCA? Yes. But such boondoggles are not what makes Williams Williams.

More to come.

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