Want even more comments on Will Slack’s ’11 excellent summary of Morty’s talk on the College’s financial situation? Of course you do!

Background: Part 1 and Part II.

Will writes:

He doesn’t want Williams to return to a “Prep School” status,

Why the hate on prep schools? You can hardly blame a teenager for where her parents send her to high school. How much choice does she have? Did Morty and his Rutgers buddies have some less then fun interactions with Princeton toffs back in the day? Note that this concern with prepiness is not new for Morty. Consider the 2001-2002 Williams Report (pdf).

[Thanks to Brooks Foehl ’88 and Rob White in the Alumni Office for the copy. At some point, I hope to collect all these and place them all on-line. They are beautifully done and contain a wealth of useful data.]

Public school attending is, of course, not the same as financial aid needing, but the basic point seems clear enough. When Morty arrived at Williams, he thought that we had too many students from rich families, too many who had attended prep school, too many who did not require financial aid. He wanted to change that and he has. (Maybe.) Part of this is purely semantic. Williams didn’t use to give aid to families making $150,000. Now it does. The percentage of students on financial aid has changed, but the composition of the student body is identical.

Morty is afraid of backtracking on these goals. I disagree.

Imagine that, instead of worrying about the number of students from prep schools and/or rich families, Morty was worried about the number of Jewish or Asian-American students at Williams. (Both groups are dramatically overrepresented at Williams relative to the share of the US population, although not relative to their percentages at other elite schools.) Wouldn’t that be, obviously, distasteful? Could you imagine the Admissions Office rejecting highly qualified Jewish students because Williams had “too many” Jews? Assuming that we all agree that this would be abhorrent, then what is the justification for rejecting a student because he attended Phillips Exeter?

In fact, I think that there is a real Money Ball situation that Williams might exploit, given that other elite colleges are also biased against rich/prep applicants. From Wikipedia:

The central premise of Moneyball is that the collected wisdom of baseball insiders (including players, managers, coaches, scouts and the front office) over the past century is subjective and often flawed. Statistics such as stolen bases, runs batted in, and batting average, typically used to gauge players, are relics of a 19th-century view of the game and the statistics that were available at the time. The book argues that the Oakland A’s front office took advantage of more empirical gauges of player performance to field a team that could compete successfully against richer competitors in Major League Baseball.

Rigorous statistical analysis had demonstrated that on base percentage and slugging percentage are better indicators of offensive success, and the A’s became convinced that these qualities were cheaper to obtain on the open market than more historically valued qualities such as speed and contact. These observations often flew in the face of conventional baseball wisdom and the beliefs of many baseball scouts and executives.

Since other elite schools are also focused on socio-economic diversity, rich students at Choate are undervalued compared to middle class students at public high school X. On the margin, the best applicant that Williams rejects from Choate is probably better than the worst applicant that Williams accepts from X. So, we ought to accept more Chaoties. Besides improving the quality of the student body, this would also help out with the College’s finances.

Note the existence and magnitude of the market failure is testable. Consider typical non-hooked students from the classes of 2004 through 2008. Identify the bottom 20 from prep schools and the bottom 20 from public schools for each class using their application data. (AR score might be enough.) Compare the two groups of 100 students on whatever outcome measure you like: GPA, number of tutorials, difficulty of classes, participation in campus life (being a JA, leading a student organization) and so on. If the 100 marginal prep school Ephs are much stronger than the marginal 100 public school Ephs, then Williams should have more of the former and fewer of the latter, even if Morty went to Rutgers. (Needless to say, this analysis would make a great senior thesis, as would this topic.)

Back to Will’s notes.

[Morty] has a plan to knock spending down from 7% to 5% [of the endowment]. It won’t get notices much for this year, but next year will see some changes, with greater change coming in the ‘10 – ‘11 year and beyond.

Good. Williams is lucky to have a president that is an expert in the finance of higher education. But I would like to know more details. Morty has done a great job for 8 years spending lots of money. It’s not hard to be popular when you double the College’s spending.

Click on the image for a larger view. Williams spent $102 million during Mort’s first year. If you believe the Record, operating spending for 2008-2009 will be $216 million. This growth does not testify to Morty’s skill and dedication to budgetary discipline. The key issue is: We need to understand the details of Morty’s spending plans. How many dollars does he plan to spend? Where does he plan to spend it? Talking about a percentage of the endowment depends on the size of the endowment, something that Morty has no meaningful control over.

Right now, construction plans are frozen. Although Morty would have rethought aspects of Paresky (expensive wood and shale, as well as unexpected environmental costs), he wants to wait, especially given the horrible debt markets. Paresky is on a 2% interest rate; the rest of Stetson-Sawyer would have required a 11% interest rate. It’s bad borrowing, and thus the Weston field project, which was to start on Monday, has also been stopped. We couldn’t get the loans.

I lack the energy to dive into the details of the College’s borrowing (page 19 of this pdf), but this sort of talk should make everyone nervous. Williams “can’t get the loans?” Bad news. Now, as Jimmy Lee ’75 will tell you, Williams can always get loans, we just can’t always get them at the interest rate we want. Without being an expert, it appears to me that the College has around $100 million of variable rate bonds. The rates on these will (I hope!) not be resetting to 11% anytime soon, but the rates are definitely going up.

Does everyone now understand why leverage is a dangerous thing?

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