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Update on Finances

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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#1 Comment By JeffZ On June 15, 2009 @ 7:11 am

(1) Five percent is not unrealistic. Assuming the real world grows at three percent, Williams’ investments will grow at three percent. But the real world, unlike Williams, doesn’t have a pool of unusually rich (relative to the rest of the country, let alone the rest of the world) benefactors from whom the college can raise 500 million dollars in the period of five years, every 10-20 years. I think two percent growth from alumni giving plus natural three percent growth is hardly unreasonable.

You are an economist, right? Why don’t you look at Williams’ historic growth rate over, say, the last 40 years. I don’t know the numbers, but I’d be pretty shocked if it wasn’t, on average, a LOT more than three percent annually (even taking into account where we stand now due to a historic crash, which is a debatable starting point) — and this was during a time period, recall, when Williams doubled the size of the student body and far more than doubled the square footage of the campus, requiring enormous capital expenditures. Once the library is completed, there are very few other major capital expenditures on the horizon. Plus, the far larger alumni classes beginning in the late 1970’s are only now beginning to reach their peak giving years, so you’d expect historic gains from alumni giving, which generally reflect a much smaller body of alumni in peak giving years, to UNDERpredict future capital gifts to Williams.

(2) I don’t understand why five dining halls is a sacred cow. It is great to have, but seems like a luxury to me. I mean, recall, Amherst has ONE dining hall, which isn’t even as nice as Paresky. If Amherst can survive on four less than us, can’t we survive on three less than us? Not that I WANT to see this cut, but I don’t put it on the same level as, say, financial aid or cutting faculty. Williams could easily survive w/out Dodd, which is close to both Mission and Paresky in any event.

(3) I agree that if Williams’ endowment was indeed 1.1 MILLION in March, even I would have been panicking :).

#2 Comment By lgeorge On June 15, 2009 @ 7:25 am

I, too, was perplexed that having five dining halls was considered a sacred cow. I would have hoped Winter Study might be a sacred cow, however.

#3 Comment By JeffZ On June 15, 2009 @ 7:27 am

My only hope there, Larry, is that WS is too sacred to even mention — like, for example, no need to mention that we “won’t cut the art history major.”

#4 Comment By JeffZ On June 15, 2009 @ 7:33 am

OK, I found this chart:


hard to see but it looks like the endowment was about 100 million (or maybe less) in 1978. Going from 100 million to 1.4 billion in 30 years is a 9.2 percent growth rate. David, shouldn’t we at least be considering this historic performance in making future assumptions? The “without new gifts” calculation looks a lot closer to three percent annual return. I think this is what you are forgetting in your analysis of this issue.

#5 Comment By lgeorge On June 15, 2009 @ 8:06 am

[Not to hijack Jeff’s train of thought, but re:3 — I sure hope so as it doesn’t take much to see how cutting a month out of the calendar and having a schedule more like many other LACs’, to the great diminution of the experience that is a Williams education, could slice off operating costs.]

#6 Comment By frank uible On June 15, 2009 @ 9:13 am

Au contraire, going to a year around academic calendar, a la Dartmouth, might merit examination.

#7 Comment By lgeorge On June 15, 2009 @ 9:33 am

[Continuing the aside, …

Re 6: A year-round calendar could also save money (but has serious drawbacks of its own). That doesn’t mean that shutting down the campus for a month more in the winter wouldn’t create savings, as an alternative, not that I would be for eliminating WSP unless it were a dire necessity.]

#8 Comment By hwc On June 15, 2009 @ 10:13 am

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.

Right now, Williams is discriminating heavily against US students in favor of international students, both in terms of percentage of students from each group who receive aid and the size of the aid packages. I believe that it is wrong for US colleges to discriminate against US students and that it would be reasonable to reduce the benefit of tax-free status funded by US taxpayers accordingly.

#9 Comment By JeffZ On June 15, 2009 @ 10:16 am

I don’t think discrimination means what you think it means, HWC. (For the record, it means applying different criteria to similarly situated people, NOT applying, as you refer to above, the same criteria to differently situated people, leading to a disparate result). If anything, as DK has often chronicled here, Williams discriminates against international applicants.

#10 Comment By rory On June 15, 2009 @ 10:19 am

discriminating…oh this is all too, too rich.

#11 Comment By hwc On June 15, 2009 @ 10:36 am


Winter Study doesn’t cost Williams additional money. Instead of 14 weeks of classes per semester like other LACs, Williams reduced the length of each semester by two with only 12 weeks of classes. The four “saved weeks” are used for Winter Study. It’s really just the trade-off between 14% less coverage during the eight courses taken in the fall and spring semesters versus the value of the 9th course taken in January.

#12 Comment By hwc On June 15, 2009 @ 10:43 am

It’s not the same criteria. Williams College has an international financial aid budget and a domestic financial aid budget. The per student financial aid budget for interntionals is roughly double the per student financial aid budget for US citizens. I have no problem with that to the extent that US taxpayers are not funding it with tax-exemptions.

Williams admissions has stated that they could bring international aid more in line with domestic aid, simply by adjusting the schools are areas they target with recruitng outreach — just has they do in the United States to maintain the desired percentage of aid veruse full-fare students. By not doing that, they are treating the two groups differently.

#13 Comment By JeffZ On June 15, 2009 @ 10:48 am

Actually, at least in Amherst’s case, it seems like Amherst has only one more week each semester, even accounting for the longer in-semester breaks Williams has (September 4 – Dec 15 at Williams, Sept. 8 – Dec 22 at Amherst (but I think Williams has a few extra reading period days built in, making the difference one week), and Feb. 4 – May 25 at Williams, Jan 25 – May 14 at Amherst (although Williams has a two week Spring break making the difference one week). Maybe Amherst also has a week less than its peers, not sure about other schools …

#14 Comment By hwc On June 15, 2009 @ 10:50 am

If we exempt as sacred cows no layoffs, international financial aid, sports teams, and dining halls, I would be very curious to know what is being cut. The size of the required cuts seem to suggest that cuts must be made in academic and student support programs.

#15 Comment By lgeorge On June 15, 2009 @ 11:21 am

I won’t argue it further because I don’t want WSP (or certain of my own other sacred cows) to be dropped, but cutting the length of the school year, however it was done (including taking away WSP without “restoring” some or all of the weeks to the calendar; cutting out some of the reading periods; halving spring break; or eliminating some other days off from the calendar) would save money, especially if it were done in a way that added to the number of days in the colder, darker months when the campus was actually shut down (as opposed to there being no classes). Thank you, though, hwc, for pointing out the difference in the length of the semesters vs. those of some other LACs and how WSP was created. I think I knew that once but I had certainly forgotten it.

#16 Comment By Parent ’12 On June 15, 2009 @ 11:48 am

My comment has nothing to do with finances, but with the length of the semesters vis a vis WSP. (btw, the difference between Amherst’s Fall ’09 semester & Williams is 4 days of classes, counting Mt Day, reading periods, other breaks, like Thanksgiving & finals periods as days off. And, based on the catalog, Williams seems to consider 36 hours/semester as a course or 3 credits.. extra hours in lab-based courses or weekly supplemental conference hours are “extra” without more credit)

I would imagine that even if the trade-off between WSP & the number of class meeting hours occurred, the actual work demanded of the students remained the same. As I recall, there was a time when there might have been grade deflation. Is it possible that this time coincided with the early history of WSP?

#17 Comment By frank uible On June 15, 2009 @ 3:42 pm

The College has dropped its patronage of the Williamstown Jazz Festival – which, of course, means the Festival has now folded. This action is in general a cultural loss for the Williamstown community and more specificall the loss of an appearance opportunity for the well put together College Jazz Ensemble.

#18 Comment By jeffz On June 15, 2009 @ 10:34 pm

I think I’ve now rebutted DK’s point about three percent growth on at least two occasions, without any rejoinder from DK. As he is never shy to issue one, I take that to mean he won’t be making this fallacious “if we assume more than 3 percent growth then we are assuming Williams will own the world” argument in the future, especially in light of the fact that Williams’ past rate of endowment growth has, in fact, far outstripped that level.

#19 Comment By David On June 16, 2009 @ 8:53 am

I do not think that “rebutted” means what you think it means.

#20 Comment By Larry George On June 16, 2009 @ 11:40 am

Re 17 – RIP, Williamstown Jazz Festival. I am sorry to hear that one has gone. Even though I cn see the financial necessity, I just want to acknowledge and grieve over the loss.

#21 Comment By JeffZ On June 16, 2009 @ 12:03 pm

So David, why don’t you then explain why my argument is wrong? Why, according to you, we should not consider either (a) alumni donations or (b) the historic growth rate in anticipating a growth rate for Williams’ endowment above and beyond a natural rate of increase from investment proceeds? I would LOVE to hear this.

Agreed re: post 20.

#22 Comment By hwc On June 16, 2009 @ 1:51 pm

There was a call upthread to consider historical returns when attempting to predict future endowment returns. That’s a good suggestion. Along with the boom years, we also need to consider the recent history, which is two consecutive years of negative endowment returns (somewhere in the 25% to 30% range overall. It takes years of growth just to offset that negative return.

Also, keep in mind that endowments require significant growth just to offset inflation. Complicating that is the fact that college budgets are so heavily weighted towards labor. They must use an estimate of inflation plus 1.5% to calculate their anticipated real inflation in operating costs. Conservatively managed colleges have been figuring historical inflation at 3% and real inflation for college budgets at 4.5% per year. Thus, to spend 5% a year from endowment requires average returns on the order of 9.5% annually to not spend down the endowment purchasing power over time.

#23 Comment By JeffZ On June 16, 2009 @ 3:09 pm

I should have said earlier than I know far less about finance than many of the posters here (certainly DK) so it is quite possible I am confused or mistaken on these issues. But I attempted, in my rudimentary way, to calculate the historic rate of return (using an online calculator so who knows if I was even using the correct tool) over the last 30 years to the endowment as it stands now (1.4 billion) which includes the 25-30 percent drop from its peak value of 1.9. I think that figure ends up right around 9.5. I’m not sure why future years should be different (especially when we are ending at a relatively low point), but even if they are, going from 9.5 to 3 seems like a dramatic, dramatic difference. It just seems to me that DK is expecting Williams’ growth to mirror that of the economy as a whole, ignoring the fact that the economy as a whole doesn’t have a slew of rich benefactors eager to give it money on an annual basis. Basically, there is wealth transference, in addition to natural investment growth, that must be considered. I also think we have to consider that Williams’ massive outlays on capital expenditures of late make future such massive outlays far less likely, at least for the next 20-25 years before some of the newer buildings start to require massive upgrades / renovations. Other than the remaining 50 million for the library project and, I’d expect, a far smaller outlay for renovating the athletic complex, I don’t see a lot of capital needs on campus. Compare that, for example, to Amherst which needs to soon embark on massive upgrades to its science, student life, and library facilities, just to catch up to where Williams already is (or soon will be in the case of the library).

#24 Comment By hwc On June 16, 2009 @ 4:13 pm

Colleges like Williams are supposed to preserve the real spending power of the existing endowment in perpetuity, even if all future gifts ended today. That is the definition of an endowment. Conservatively managed colleges never include future endowment gifts in projecting return and spending levels. Future endowment gifts allow growth. The current endowment return is intended to preserve the status quo forever.

One big endowment college has been using a figure of 8.75% for their calcuation of historic return on investment. Of that, an average of 4.5% is reinvested to offset inflation and the remaining 4.25% is spent on operations (on average).

Even if you assume that the 8.75% rate will again become reasonable, you still have to dramatically cut spending to get back down to 4.25% spending from a smaller endowment.

#25 Comment By hwc On June 16, 2009 @ 4:30 pm

BTW, in scenario in #24 above, the “real growth rate” is assumed to be 4.25% – the amount that can be spent while fully preserving the buying power of the current endowment in perpetuity.

I believe that colleges are re-examining their assumptions about real growth rates and long term investment return. For one thing, they are shell-shocked and justifiably concerned about the disregard for liquidity. It is reasonable to assume that investment strategy is going to become decidedly more conservative. Beyond that, I don’t think endowment managers feel they have sufficient data to model future growth rates at this point.

#26 Comment By Vermando ’05 On June 17, 2009 @ 2:21 am

There are some real curmudgeons here when it comes to estimating the endowment’s future returns. Not saying who is right or wrong, but crimey, who uses 3% when estimating future returns? I’d assume that we could just turn over the entire endowment to David and he could do better than that, or at least I’ll assume that he projects more than that to his clients.

#27 Comment By hwc On June 17, 2009 @ 9:01 am

Verando. David was referring to the real rate of return. That would be the return after you’ve covered inflation. So, when we return to double digit inflation, you might need nominal returns of at least 13% a year to cover 10% inflation plus earn a 3% real rate of return.

#28 Comment By Vermando ’05 On June 17, 2009 @ 10:31 am

Ah, you’re right, many thanks, my mistake. That’s still conservative – I don’t blame the college for thinking it can do better – but it does make much more sense.

#29 Comment By JeffZ On June 17, 2009 @ 10:45 am

Nice gratuitous dig at Obama HWC — of course, were HWC’s favorite Hillary the President, she’d most likely have the exact same team of economic advisors and the exact same fiscal policy, the only difference being that HWC prefers policy made by a white woman to that made by a black man.

#30 Comment By Whitney Wilson ’90 On June 17, 2009 @ 10:50 am


I hardly see HWC’s comment here as a dig at Obama. I think you are getting a little sensitive here.

#31 Comment By JeffZ On June 17, 2009 @ 11:08 am

Whitney, have you followed HWC’s posting history? There is zero doubt in my mind that saying “WHEN inflation reaches 10 percent” is a completely gratuitous, not to mention totally off-point, shot at Obama’s fiscal policies — HWC rarely passes up an opportunity (or in this case, invents an opportunity) for a snide comment at Obama’s expense, and this most certainly is intended as such. (Had he siad, “if inflation eventually increases, then that would have an impact as well” I would have let it slide — but that is NOT what he said, for a reason).

#32 Comment By hwc On June 17, 2009 @ 11:37 am

It is neither gratuitous nor snide to mention the inflation that inevitably results from unprecedented deficit spending. An endowment manager would be irresponsible to not factor rising inflation into the forecasts of real return over the next decade.

#33 Comment By hwc On June 17, 2009 @ 11:41 am


3% real rate of return may be conservative, but a year ago nobody was predicting a 25% to 30% decline in endowment value. We are in a period of economic instability where it is impossible to know what consistutes a conservative projection.

It’s not really an issue today because the endowment spending rates at most colleges for next year are going to be at unsustainable levels, regardless of real return. Almost everyone is going to be eating their seed corn in 2009-2010.

#34 Comment By frank uible On June 17, 2009 @ 11:44 am

Today’s Globe has a front page story on Harvard’s budget cutting – a lot of public hand wringing.

#35 Comment By lgeorge On June 17, 2009 @ 12:07 pm

The article Frank mentions @34:


Harvard has an operating budget of $3.5 billion. That should give them plenty of places to shave a bit off here and there. Their endowment is expected to be down about 30% for the year at the end of the month, putting it at 2005 levels. The brand and name recognition will continue to rule, however unjustly and despite any cuts in the quality of their programs (which some wags would have said were already over-valued).

#36 Comment By hwc On June 17, 2009 @ 12:24 pm


Harvard has taken a big hit. In addition to dealing with the same endowment declines as Williams, they have been facing severe liquidity problems due to cash call commitments to private equity funds and a disasterous interest rate blunder by ousted president and current Director of the White House National Economic Council, Larry Summers. He incorrectly predicted the bottom of the interest rate curve several years ago and committed Harvard to a portfolio of interest rate swaps sufficient to cover the development of the Allston campus over the coming decades. As the credit markets collapsed over the past year, these interest rate swaps turned upside down and became huge liabilities, resulting in massive cash calls to bring them into balance. This required Harvard to borrow $1.5 billion for operating expenses after they failed to sell off enough of their private equity stakes to generate cash. that’s an additional $60 million or so in interest expense in the annual budget that must be offset by an additional $60 million in spending cuts elsewhere. Summers had already been run out of town, but his legacy of failed economic prognostication will continue to hurt Harvard for years.

Fortunately, Harvard is financially strong enough to take the hit.

#37 Comment By frank uible On June 17, 2009 @ 12:52 pm

You economists humbly should voluntarily retreat to the far end of the line and from there attempt to meritoriously advance in society but for the nonce starting with shovelling, absent the benefit of Wellies or the like, seas of diarhetic elephant manure without surcease seven days a week.