Morty shared some numbers/thoughts on the financial situation. [My thoughts in brackets.]

1) Early March was scary. It seemed like the endowment might be around $1.1 million. With a 5% avail, that is only $55 million, which would require major cuts. Would Williams still be Williams? Tough to say. [I cried Wolf in early March.]

2) Fortunately, the market has bounced back dramatically since then. If things are steady for the next two weeks, the endowment should finish the year at about $1.4 billion, down 17%-18%. [I am not sure if that is the actual return on the endowment or also includes the colleges spending as well as new gifts. I think the latter.]

3) The key numbers to watch are the College’s spending from the endowment, which was $91 million this past year and has been budgeted for $78.5 million this coming year (fiscal 2010) and $70 million the following year. Morty promised the trustees that he was going to put those budgets “to bed” so that either his successor or interim president Bill Wagner would be able to use those budgets going forward. Morty insisted that “Williams would still be Williams” even with this necessary belt-tightening caused by these decreases. He promised no change in financial aid, no lay-offs, no team cuts (from 32 varsity teams) and no dining hall closures (from the 5 currently).

4) Morty has spent more time on budget issues over the last year then he did in the previous 8 years put together. The Ad Hoc Committee on Budget Priorities (CBP) has met for hours and hours. Morty has been impressed with the process and pleased with how the community has come together. Although Williams never truly “wasted” money before, there was a lot of spending that could be cut without fundamentally changing the character of the college.

5) The CBP even specked out a budget for fiscal year 2012 that used only $62-$63 million of endowment spending. Basic idea was to plan for a very bad but not totally disastrous scenario. [Although Morty did not go into details, this is a world in which the value of the endowment is around $1.25 billion on June 30, 2011, both because the College has spent over $140 million in avail over the next two years and because investment returns plus gifts have lagged. In that world, the Trustees would expect the College to have, after three years of adjustment, gotten to a sustainable avail percentage of 5%, which would generate $62.5 million of spending a year. Morty feels that the CBP has created a budget for that scenario, one which maintains the key aspects of Williams (aid, no lay-offs, no team cuts or dining hall closing). He is quite pleased to have completed this planning.

6) If the endowment is much below $1.25 billion on June 30, 2011, then all bets are off. [Morty did not cite that date/amount specifically, but just talked about situations in which the endowment was much lower than it is today.] Morty mentioned sacred cows like aid for international students, dining halls and sports teams. He didn’t want to cut any of those things, nor would his successor. But, if the money isn’t there, the money isn’t there.

My comments:

1) Perhaps the only jarring note was Morty making a big distinction between aid for US students and aid for internationals. Is Williams really so parochial as that? There may come a time when we need to cut aid, but we should do so without regard to citizenship. Discriminating against internationals in aid awards makes no more sense today than discriminating against Jews in admissions did 75 years ago.

2) All of the above is perfectly sensible. Morty and the trustees and the folks on CBP are smart and caring Ephs. They are acting in the best interests of the College and making sensible trade-offs.

3) However, they are all wrong about two key assumptions. First, instead of looking at the value of the endowment, they should look at the net financial wealth of the College, which we can safely approximate as endowment minus debt. With a debt of around $260 million, the difference matters. Second, a long term real growth rate assumption of 5% is highly implausible. (If Williams could grow its investments at 5% and world GDP growth is 3%, then eventually Williams would own the world. Unlikely!).

So, the worst case assumption of spending $62.5 million out of a $1.25 billion endowment in fiscal 2012 is profligate. Net financial wealth (in that scenario) would only be around $1 billion and a reasonable real return assumption is closer to 3%. So, in that world, the College ought to be planning to spend much closer to $30 million than $62.5 million.

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