- EphBlog - http://ephblog.com -

Budget Update

Provost Bill Lenhart provides some background on the budget.

The $205M budget mentioned [in Morty’s letter for FY 2010] is our “total current expenditures” number which, in addition to employee compensation, financial aid, and managers’ budgets, also includes certain expenditures on our physical plant (so-called capital renewal), interest on debt, and some miscellaneous expenses such as community support.

The $205 would be comparable to a figure of $200M (budgeted) or $197.5M (actual) for FY2008. A slightly longer answer is: Our cash-flow-based internal financial planning model provides a different (but useful) view of our finances than does our audited (accrual accounting based) financial statement, although as part of our year-end “closing of the books”/external auditing process the two are reconciled annually. Both approaches have strengths and weaknesses.

The differences between the two are many, including how financial aid, gift revenue, interest on debt, gift pledges, the value of the physical plant, reserves to cover “liabilities” such as owed vacation time, sick leave, workers’ comp, et cetera are accounted for.

Record reporter Yue-Yi Hwa ’11 adds these details.

According to Jim Kolesar, assistant to the president for public affairs, an approximate breakdown of last year’s operating budget is: 50% compensation, 25% managers’ budgets, 20% financial aid, and 5% capital renewal. Those numbers — particularly financial aid and capital renewal — differ slightly, but not drastically, for the $205 million operating budget of 2009-10.

Thanks to both for permission to print their comments.

Summary: There are two ways to view the Williams budget for FY 2010 (which starts on July 1):

First, one could claim that Williams has accomplished meaningful belt-tightening. We are planning to spend much less next year than we did this year without changing financial aid or engaging in lay-offs. Since other costs, like health care, continue to rise, we have been forced to make significant cuts elsewhere. Therefore, Williams is acting with appropriate frugality in response to the economic crisis.

Second, one could claim that Williams, while having made some cuts, has done nowhere near enough given the magnitude of the crisis that it faces. In FY 2008, Williams was a very rich school, with a starting endowment of over $1.9 billion. If we are (at least!) 1/3 poorer now, how can we afford to spend even more in FY 2010 then we did in FY 2008? The short answer is that we can’t. And, by avoiding hard choices now, we make the inevitable cuts to come even more painful than they otherwise would be, all so Morty can ride off to Northwestern as the nice guy.

Further details and commentary below.

1) Always believe content from HWC. Throughout this debate, HWC and I have gotten into a series of (friendly, I hope!) disputes about various aspects of the numbers. He was right and I was wrong. See previous threads for all the messy details, but the take-away is that the College’s audited financial statements are the best source for information. The College’s Form 990s are also useful (and are based on the same accounting methodology), but they are much less timely and somewhat confusing. The College’s reports to alumni are also useful, but they bear no necessary connection to the audited statements. Use them with care.

2) My key error was to assume that, because the total operating expenditures/budget numbers in the financial statements and alumni reports were so similar, and because they both used the “operating” terminology, they must refer to the same thing, that any differences between the two were small and due to obscure accounting conventions. After all, the totals were almost identical, year after year. But that assumption was wrong. The financial statements to not include financial aid in their summary of operating spending (instead it is a discount to revenue) while the alumni reports do include financial aid. The totals are just similar by coincidence, because the some of the items (probably total interest and depreciation) excluded from the alumni reports equal the dollars spent on financial aid, which is included in the alumni reports. Mystery solved!

3) Would the Record please print a simple table of the key numbers from, say, FY 2001 through FY 2010? That is the only way to get an understanding of the issue. We need to know endowment, total spending (broken into components like financial aid, capital projects, and so on), tuition revenue and avail over time. Right now, I can only guess at these time series because the numbers that the Administration discusses (like $205 million for FY 2010) include and exclude different sub-accounts from the published financial statements. Last week’s Record article was excellent in many ways, but it only gave us numbers for this year and next year. Without more context — especially in looking at the ratio of spending (in various categories) to tuition revenue and the endowment (the two largest sources of funds) — it is very hard to have an informed opinion about whether or not the Trustees and Administration are acting in the best long term interest of the College.

4) I sure wish that the College would be more transparent. Morty sends a letter to all of us specifying a budget of $205 million for FY 2010. But it is impossible for any Eph (other than Trustees) to place that number in context because it uses an accounting methodology that is different (includes some items and excludes others) from ever other published document that the College provides. Think that you can compare that $205 million number to the audited financial statements or the Form 990 or the alumni reports? You can’t.

Sometimes I feel like a historian trying to reconstruct the spending of a 14th century Irish monastery. I have some documents. I have some testimony. But there is no place to find out the “truth,” so I stumble about as best I can. Alas, Williams could prevent all this stumbling by giving the rest of us access to the same data that the Administration uses every day.

For those who want to join me in the reconstruction, consider the $197.5 million number from Professor Lenhart for the “total expenditures” in FY 2008. According to the audited financial statements (pdf. page 5), Williams spent $176.5 million on “operating expenses” and awarded $29.3 million in “financial aid.” But those two numbers added together equal $205.8. Why the $8.3 million difference?

5) I am still very, very concerned. Although the greatest sucker’s rally market recovery in 75 years is continuing today, I still see a woods full of wolves.

For those who want to see the source documents, below is my original e-mail to Lenhart followed by his reply (which is reprinted with permission). Thanks to Professor Lenhart for his time and willingness to explain these issues to we befuddled alumni and parents.

Hope all is well. I hate to bother you with these minor questions but
Keli Kaegi suggested that you were the person to speak to. If there is
someone else in the Provost’s Office that I should send these
questions to, please let me know.

Anyway, could you clarify $205 million budget number that Morty
mentioned in his letter this week. My understanding is:

1) That this is for the operating budget.

2) That this number is comparable to the $177 million amount that the
College reported in its financial statements for FY 2008. That is, we
can compare the $177 million and $205 million amounts on an
apples-to-apples basis, at least to a first approximation.

I realize that budget numbers are complex. For example, although the
financial statements on the Provost’s website reported $177 million
for FY 2008, “A Report From Williams 2008” cites $174 million for the
same year. (I expect that the differences are due to issues like
depreciation and other non-cash expenses.) I just want to make sure
that there are not major categories of spending that are included in
the $205 million but excluded from the $177 million.

I suspect that the answers to the above two questions (perhaps
obviously) are just: Yes and Yes. I hope that I am not wasting your
time. But, like any good (former) Record reporter, I like to get the
details correct.

Thanks,

Dave Kane ’88

Reply from Lenhart to me.

David,

The $205M budget mentioned is our “total current expenditures” number which, in addition to employee compensation, financial aid, and managers’ budgets, also includes certain expenditures on our physical plant (so-called capital renewal), interest on debt, and some miscellaneous expenses such as community support. That’s the answer to question 1.

The short answer to question 2 is “no”: The $205 would be comparable to a figure of $200M (budgeted) or $1975M (actual) for FY2008. A slightly longer answer is: Our cash-flow-based internal financial planning model provides a different (but useful) view of our finances than does our audited (accrual accounting based) financial statement, although as part of our year-end “closing of the books”/external auditing process the two are reconciled annually. Both approaches have strengths and weaknesses.

The differences between the two are many, including how financial aid, gift revenue, interest on debt, gift pledges, the value of the physical plant, reserves to cover “liabilities” such as owed vacation time, sick leave, workers’ comp, et cetera are accounted for.

I hope the above gets to your questions.

Bill

Facebooktwitter
Comments Disabled (Open | Close)

Comments Disabled To "Budget Update"

#1 Comment By JeffZ On April 29, 2009 @ 9:53 am

Three responses to your “second” way of viewing the budget (and I’ve said all this before, but you continuously exclude it from your analysis). First, tuition revenues will be higher in 2010 than they were in 2008, so that is addition income you are ignoring. Second, there was a ton of criticism of all the uber-rich schools circa 2008 that they were not spending ENOUGH from their endowments; so perhaps the 2008 baseline could well have been higher. Third, quick, drastic cuts to spending are painful, and I’d argue, the pain is marginally increasing the deeper and faster the cuts become as the college has to increasingly turn away from the relatively low-hanging fruit or the most recent additions to the budget. Williams is well-served to spend above its optimal long-term level in the short term, in the reasonable hopes that this downturn will not prove to be permanent, and to give the school time to adjust to a new level of spending. If conditions do not meaningfully improve in a year or two, Williams can make deeper cuts at that time. But the school needs to fall somewhere in between prudence and panic, and it really need not be in panic mode yet. You keep saying that if a school spends [x] percent of its endowment it will be bankrupt, eventually. Well, Williams is not locked in to an expenditure rate 10 years down the line. It is reigning in expenses without completely gutting core programs, while at the same time spending a little more than is optimal next year, taking a wholly appropriate wait and see approach before implementing more drastic cuts.

#2 Comment By David On April 29, 2009 @ 10:09 am

First, tuition revenues will be higher in 2010 than they were in 2008, so that is addition income you are ignoring.

A fair point. Tuition revenues were $61 million in 2008. $65 million would be a reasonable estimate for 2010. So, instead of an $7.5 million increase in total spending, we have just a $3.5 million increase adjusted for the rise in tuition.

But that number is too small to make a major difference to my overall conclusion.

Second, there was a ton of criticism of all the uber-rich schools circa 2008 that they were not spending ENOUGH from their endowments; so perhaps the 2008 baseline could well have been higher.

The people making that criticism were idiots, as events have demonstrated.

Third, quick, drastic cuts to spending are painful, and I’d argue, the pain is marginally increasing the deeper and faster the cuts become as the college has to increasingly turn away from the relatively low-hanging fruit or the most recent additions to the budget.

I agree! I was comfortable with the initial decision to avoid lay-offs and not change financial aid. Indeed, I would be fine with that continuing for next year. I just wanted to see another $10 million in cuts for FY 2010, an overall budget of $195 million instead of $205 million.

Do you really think that these additional cuts, or ones like them, are the same thing as “gutting core programs?” I don’t. Perhaps we have different definitions of “gut.” I am proposing that Williams spend more money in FY 2010 then it did in FY 2007. You call that “panic?”

Also, at what point does “wait and see” end? For me, it was 6 months (i.e., till now) to make some painful but not “core” program cuts. If things aren’t better a year from now, then it will be time to start thinking hard about lay-offs. Isn’t 18 months enough? I want the avail rate to be at a sustainable level no later than FY 2011. What specific date do you have in mind for getting the avail rate to that level?

#3 Comment By frank uible On April 29, 2009 @ 11:03 am

Since I find no personal profit in pawing through the financial details, let it merely be said that I prefer the second view of things – it will tend to produce fewer unpleasant surprises.

#4 Comment By Henry Bass ’57 On April 29, 2009 @ 11:14 am

Jeff,

You are quite right the college needs to steer a middle course between prudence and panic. I would lean farily heavily towards prudence. The business cycle has been with us since Williams became a college. And history suggests it will be around for awhile. Brad De Long of Berkeley has argued convincingly that the current market decline is similar to the last four declines of 40% plus, which some of us have lived through.

There are some industries that may not come back to full glory after the recession, like autos and newspapers. Newspapers may not be able to make a good adjustment to the post print era. I don’t think the long term prospects of the BOSTON GLOBE AND THE NEW YORK TIMES are that great. Autos will be produced by far fewer auto workers. We will have to replace those jobs, even when the recession is over. And that won’t be easy. But, job destruction is part of economic progress. Market economies do cope with that. And if needed we can have the government put people to work building giant sculptures.

#5 Comment By hwc On April 29, 2009 @ 11:59 am

David:

Williams (and Swarthmore) have chosen to view the recession as a temporary blip that requires a one-time adjustment, but otherwise does not change the long-term equation of ever-increasing tuition and endowments supporting ever-increasing budgets.

Both schools are making temporary steps (cancel raises, increase endowment spending rates, and defer maintenance) to buy time for increased tuition and market recoveries to allow a return to business as usual. They are just buying time until relentless price increases balance the budgets.

On the one hand, I think it is too bad that there is so little consideration being given to the big picture and the potential need to “change the model”.

On the other hand, if higher education is going to ultimately continue with business as usual with spending increasing without limit as far as the eye can see, then reacting with short-term bandaids probably makes sense. It’s a testiment to the financial strength of these schools that they can respond without any really difficult budget cuts.

The amazing thing is that students are going to feel the cuts (or lack thereof) in a major way at various schools over the next few years. A school that is cutting back on brie and chardonnay at faculty meetings is going to feel very different than a school that is freezing faculty hiring while increasing enrollment by 10%. Surprisingly, customers don’t seem to be paying any attention.

#6 Comment By Henry Bass ’57 On April 29, 2009 @ 12:40 pm

hwc,

Before the recession William Bowen was saying Grinnell might eliminate tuition in a few years. That is obviously now at least a few more years in the future. But, it can still happen down the line.

Suppose one or two or more of our rivals eliminate tuition.
Uncontrolled costs will not help us in that eventuality.
Derek Bok a few years ago warned colleges that endless increases in tuition over inflation are not necessally sustainable. All would have to happen would be for a rival to cut its tuition drastically for Williams to be in real trouble.

#7 Comment By hwc On April 29, 2009 @ 1:32 pm

I didn’t know Bowen had singled out Grinnell. I’ve suggested several times that Grinnell would be the prime candidate for that kind of move. Huge endowment, low tuition, moderate spending.

The problem is that going tuition-free is the ultimate give-away to the rich. Low income families already pay nothing, so the entire benefit of going tuition-free goes to more affluent customers. It’s one of those things (the ultimate merit aid deal) that sounds great on paper, but is really regressive in practice.

The current trend is just the opposite. Soak the rich for more and more with higher and higher sticker prices while rebating the increases back to low and middle income customers in the form of financial aid price discounting.

Don’t get me wrong. I think it’s fantastic that Williams and Swarthmore don’t have to make any hard budget cuts. Potential customers should be jumping at the opportunity to enroll at schools that aren’t cutting programs.

My disappointment is that I think the schools are missing the opportunity to have a serious discussion of sustainable budget trajectories. We saw it here on EphBlog where a dozen or so major cuts were proposed, most of which would have had zero impact on the core academic program. Most of the proposals were rejected out of hand by this small sample of alumni, parents, and students with no willingness to propose alternative major program cuts.

I simply cannot believe that schools that have nearly doubled their budgets in a decade can’t find a single program that could even be considered for major reductions. With the recent growth rates in budgets, I find it impossible to believe that every program and every initiative and every department is a sacred cow. For example, I have to believe that the combined cost of diversity recruiting, diversity support staff and programs, and diversity-oriented “identity group” studies majors can’t be streamlined a bit. I have to believe there are some major savings to be had in a $6 million athletic budget. Or a $2.5 million college museum budget.

#8 Comment By Rowhard On April 29, 2009 @ 1:46 pm

The market is likely not near its bottom, with a further 10 to 20 percent drop in the endowment a possibility. The college better hunker down, as had we all!

#9 Comment By Vermando ’05 On April 29, 2009 @ 2:04 pm

hwc and David – I greatly appreciate all of the work and insight ya’ll have brought to this project. I found hwc’s final comments on the long-term budget situation very interesting – we should make them the topic of a separate post / thread.

David – I agree with most of your argument. The only problem I’m having is the simultaneous claims that it is imperative that we cut an additional $10 mln this year, and that we can do this relatively painlessly. If it really is so easy to cut $10 mln, what is the dire long-term consequence of doing it one year later? Or rather, in the long-term, what difference would pushing up the cut by a year really make?

If things don’t bounce back and we have indeed made a mistake, we can spread out this effect over the next, say, 5 years – cutting an additional couple of million more each year than we otherwise would have – and we are right where we would have been had we followed your course of action. You’re arguing that we should spend less than 1% less from the endowment than we are this year, essentially an insignificant digit when we discuss the endowment’s total value and only a bit more than the tuition difference that you (quite correctly) dismiss as not being a large enough figure to make a difference.

I apologize if I am misstating your argument, please correct me if I have misunderstood you. I am not saying that you are wrong in your recommendation, or that you are not right to criticize the administration for ducking hard choices. I just don’t see how you can be so concerned, how you can write with such conviction that we’re indeed making a mistake, given that you recommend a course of action whose marginal long-term difference is almost nil. Maybe what is underlying this is that you think the college should actually cut much more, say $30 mln, and you’re exasperated that they can’t even come up with the smaller number you are recommending here, that would make sense to me. On its face, though, cutting an additional $10 mln this year just doesn’t seem to be that big of a deal.

I cheerfully await elucidation. Many thanks again for everything.

#10 Comment By David On April 29, 2009 @ 8:04 pm

Vermando,

Excellent questions all.

1) It depends on what you mean by “imperative.” The Williams budget for next year is $205 million. I think it ought to be $195 million. Will Williams disappear if I am ignored? No. Williams is rich. $10 million is not that much money. The world will not end.

2) But, still, $10 million is not zero. Williams has, roughly, $1 billion in net wealth. So, $10 million is 1% of that. Who cares? Well, one way to think about this is to consider your own savings. Assume you have $10,000. Well, $100 is 1% of that. Would you be bankrupt if you lost $100? No! But you probably wouldn’t be so pleased to see it disappear.

A key issue is that this $10 million (or 1%) is not a stock — a one time loss — but a flow, 1% of spending that is never going away unless/until Williams changes its budget. Again, you can go a lot of years spending down 1% of your savings each year, but you can’t go on forever. I don’t think that cutting this $10 million would be “painless,” but I don’t see it as overly painful either.

3) You are correct that, if the debate were just about this $10 million, then it would not be worth getting worked up about. But I think that this $10 million difference is emblematic of a much larger difference about what Williams should be planning on over the next 5 to 10 years. If Williams just cuts that $10 million an extra year after I would have, then it does not matter. But, in that second year, I expect that we will need to do even more cutting. Getting serious now would help set the stage for that, force everyone to look at things much more seriously then they currently are. Leadership is about making the hard choices as soon as possible. Bad leaders avoid making difficult decisions.

4) So, the real difference between me and some Williams leaders lies in the medium to long-term. (And I suspect that there is a faction among the trustees that actually agrees with me. Has anyone else heard rumors about the “hawks” on the board?)

All that goes back to my various rants on reasonable assumptions about the longterm growth rate for the endowment. I think everyone agrees that, if the endowment grows at a real rate (after inflation) of X%, then the College can spent X% of the endowment each year. My two biggest complaints are: a) We must make this calculation on net financial wealth (endowment minus debt) and b) That 3% is a much more plausible estimate than 5%.

So, I look at the College’s net wealth of $1 billion (at best), take 3% of that and think that Williams can spend $30 million a year. When the College plans on spending $78 million next year and $70 million the year after that, I get upset. These rates of spending are not sustainable, barring major market recovery. (Maybe the market will recover. But the best strategy is to only count on what you have now.)

The College says, “Silly Dave! We have an endowment of $1.3 billion. So, $78 million is only 6%, close to the 5% growth rate. Nothing to worry about!”

That logic strikes me as very, very wrong and very, very dangerous. A budget of $205 million for next year versus $195 million does not bother me. But my $195 million is on a path to $175 million (after lots of lay-offs) for the following year and then, depending on how the market looks, even $150 million the year following. The College is on a very different path. And that is my major concern.

#11 Comment By Parent ’12 On April 29, 2009 @ 10:46 pm

Similar to Vernado ’05, I want to express my appreciation for the thoughtful explanations.

#12 Comment By Vermando ’05 On April 30, 2009 @ 1:38 am

That clears things up and makes more sense. I’ll mull it over and, if anything pops into my head, comment on the next thread we have on this topic.

Many thanks again.