The Trustees are meeting this week-end. Let’s make some predictions!

1) There will be a letter to the Williams community early next week from Morty about the financial crisis.

Those who thought that Morty’s initial letter was overly alarmist will be in for a shock. Williams is in real trouble and the tone of the letter will highlight this fact and, I hope, explain it more thoroughly.

2) That letter will highlight some specific belt-tightening measures, including a salary freeze (perhaps for just those making above $X), perhaps for two years.

Thanks to HWC for pointing to similar moves at Bowdoin. We are a richer school than Bowdoin, but not that much richer. Rule number one in belt-tightening is to take aggressive action fast. If you go with a three year salary freeze, you can always review the decision in two years if things are looking better. Doing one year salary freezes for three years in a row is much more painful.

3) The letter will re-affirm Williams commitment to need-blind admissions, including international, and to a no-layoffs policy.

4) The letter will make explicit the decision to increase the number of students. My guess is 15 a year for a total addition of 60.

Those are the only four predictions that I would bet a lot of money on. Other possibilities (all of which would be good ideas) include:

5) A more detailed presentation of the budget situation. The College does not have a history of transparency on these issues and I don’t expect that to start now. How can any of us offer informed advice/opinion on where the College should cut if we don’t know where the money goes?

6) News on major changes. WNY has been closed, at least for the next year. (See the not-online yet Record article.) The letter will probably mention that. It might also mention (I can dream, can’t I?) the closing of the Boston Investment Office. (If WNY isn’t worth $300,000 per year, then why do we spend twice (?) as much on an Investment Office?) I can’t think of any other big ticket items that are, plausibly, already on the chopping block.

7) The formation of a committee (including students) to come up with a plan (perhaps only to be implemented if the market does not bounce back) for major cuts. It is not hard to look at the Williams budget and find millions of dollars to save. If it incredibly difficult to find tens of millions. Why not start thinking hard about that problem now?

8) A more serious discussion of the avail rate. Recall that this is the percentage of the endowment that the College spends each year. There are two major problems with the College’s current thinking on this, problems that will lead to major difficulties in the years to come unless the market bounces back.

First, we must subtract the College’s outstanding debt from the endowment. You spend money out of your net financial assets. Morty gives lip service to this idea, but still, the official number just uses the endowment. A fair market value for the endowment today is, at best $1.25 billion. Given that we have around $260 million in debt, we should be calculating the avail rate as a percentage of roughly $1 billion in actual financial wealth.

Second, the 25 year bull market in everything has made many people stupid. Consider Bowdoin’s assumptions:

Over the past five years Bowdoin’s endowment has achieved top decile performance with annualized 5, 10, and 20 year returns of 14.8%, 10.1% and 11.9% respectively. We are coming off a strong base. For the year ending June 30, 2009, we are assuming that we will have an investment return of -20%. We are conservative in predicting future investment returns on the endowment; in subsequent years we have assumed returns of 0% for fiscal year 2010 and fiscal year 2011, and 7% for fiscal year 2012 and thereafter. We believe these assumptions are prudent given the economic advice we have received from members of our investment committee and investment professionals we have consulted.

Assuming 7% nominal growth (call it 2% inflation and 5% real) forever is ludicrous, no matter how many idiot “investment professionals” tell you otherwise. How many times do I need to go through this? If the Bowdoin endowment could grow at a 5% real rate of return forever (while world GDP growth is around 3%) then Bowdoin would eventually own the entire world. Maybe I need to turn in my “investment professional” secret decoder ring, but when my assumptions lead, mathematically, to a ludicrous result, I re-examine them.

Williams needs to do the same. Assuming 5% (some Williams material even mentions 6%!) real rate of return over the long term is a fantasy. It can not be done. Sure, if you have a 20 year bull market (and lever up with debt and via items like private equity), you can do fine for a while. But reality enters in at some point.

So, Williams should use a more plausible estimate for long term growth. I would recommend 3%. Since the avail rate is supposed to be based on a reasonable estimate of the real growth in the endowment, it would be “prudent” for the trustees to devote 3% of the $1 billion in net financial wealth toward operating spending in 2009-2010 and going forward. That’s $30 million. In 2007-2008, Williams spent $79 million.

We have some serious problems.

What do you predict for Monday?

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