On College Finances, and the Future
Mead Chapel, February 12, 2010
President Ronald D. Liebowitz
Welcome and thank you very much for coming today.
I don't do these addresses all that often. In fact, this is the first time I have given an address like this in my six years as president. But these are unusual times, and we have been through an exceptionally difficult period, trying to address the worst economic downturn in 75 years and how to carry out our mission and aspirations in its aftermath.
In short, here is the challenge we sought to overcome: as the worldwide recession hit full stride, the College lost approximately $350 million of wealth, mostly from our endowment, leaving us with the equivalent of our 2004 resource base on which to fund our 2009 institution's cost structure, which, over that five-year period, increased by $60 million.
"I am happy to say that, barring any unexpected deep decline in the economy—and I mean a really deep decline—staff layoffs are now off the table."
We recognized the magnitude of the budget deficits that were looming and we acted swiftly. We began freezing vacant staff positions in the summer of 2008 and decided, from the early stages of the financial crisis, that we would be as transparent as we could, providing regular updates, hosting open meetings, and sharing more information on expenditures, revenues, and our decision-making process than is likely to have ever been done on this campus. Our goal was and remains to inform and educate all of our constituencies about the College's finances so the challenges we face collectively, and the changes we implement, would be understood by the College community, if not agreed upon universally.
Through regular correspondences, numerous open meetings, and a retreat that included the board of trustees, students, faculty, and staff, we identified the challenges brought about by the recession and tried to explain how we found ourselves in the position we did. Due to the worldwide recession, coupled with the aggressive planning assumptions we had used in our financial model for a long time, especially regarding projected endowment returns and gift income, we found ourselves facing budget deficits of up to $30 million by 2015 if we did not change our cost structure in significant ways.
The aggressive planning assumptions were rooted, in part, in the unprecedented run-up in the financial markets in the 1990s, which brought sudden wealth to many colleges. At the same time, easy access to low-interest financing for non-profit academic institutions with strong credit ratings, provided yet more resources for colleges to invest heavily in new buildings, new programs, and, with each of these, additional faculty and staff. An unbridled competition among colleges and universities to attract the best students and faculty created an "arms race" in a number of areas of operations: the breadth of academic offerings; physical infrastructure; competitive salaries for faculty and staff; amenities for students; and more generous financial aid packages to attain greater diversity on campus. We were not immune from the so-called arms race; we invested heavily in all the areas just mentioned, as we sought to establish Middlebury within the very highest tier of liberal arts colleges in the country.
Our aspirations were admirable, and the College was successful in raising its stature and establishing its reputation as one of the leading colleges in the country, but the model under which we operated for two decades is no longer sustainable. The major assumptions upon which our revenues and expenditures were based are no longer valid, and the non-tuition sources of revenue—endowment and annual gifts—can no longer be expected to make up the $30,000 difference between what it costs to educate each student at Middlebury—about $80,000—and the price we charge—$50,250.
Since we rely on endowment income and annual gifts to cover more than 30 percent of our annual operating budget, the steep decline in the value of our endowment, and the concomitant decline in large capital gifts to the endowment, means the deficits we projected are not a one-time occurrence: it will take a lot of time for our endowment to recover to generate the level of funding it once did, and for our donors to regain their wealth and confidence to be ready and willing to contribute as they had prior to the recession. With the price of a Middlebury education already beyond $50,000 a year, we could not replace the lost revenue by raising our comprehensive fee much higher.
It was clear, relatively early on, that we needed to bring our expenditures in line with our reduced levels of revenues, and so we established a Budget Oversight Committee, or the BOC. The BOC, comprised of students, faculty, staff, and administrators, met weekly for the better part of the year, and forwarded recommendations to me and to the president's staff on how to solve our $30 million deficit. I want to thank the committee publicly for all the time, effort, and thought they put into their deliberations, and for playing such a significant role in getting us to the better place we are today.
We also sought input from individuals by inviting them to send recommendations to the BOC through the College's Web site. We received more than 1,000 suggestions, some of which have been implemented over the past year. I thank all those who took the time and effort to submit their ideas for consideration.
And finally, we administered a survey to get a better sense of priorities among students, faculty, staff, and alumni that we used to guide our thinking about where, among few good options, we would make cuts to reduce our deficit. The response rate to the survey was excellent—73 percent of faculty, 73 percent of staff, and 39 percent of students responded, which translated into more than 1,900 survey respondents. Thanks to all of you who contributed to the process and provided us with valuable input into the decision-making process.
Now, 18 months after freezing those first open staff positions, I am pleased to report that we have made significant, and I would call it remarkable progress in tackling the large budget deficits we were facing less than a year ago.
We projected a budget deficit that, if left unattended, would reach more than $30 million by 2015. With a budget of slightly larger than $220 million, a deficit greater than $30 million is very difficult to close, especially when so much of our budget is consumed by salaries and benefits (52 percent), and financial aid (18 percent). One can see how little there is to cut in the budget before we begin affecting people directly—salaries and benefits for faculty and staff, and financial aid for students.
As we contemplated how best to tackle the large deficits that were projected over the next five years, we quickly accepted recommendations from the Budget Oversight Committee and the president's staff: a reduction of 5 to 10 percent in non-academic department and program budgets; a salary freeze for those earning more than $50,000 per year; a reduction in our renewal and replacement reserve, which funds the maintenance of our buildings and campus infrastructure; and a reduction in financial aid for incoming international students. These recommendations, once implemented, will account for about $12.5 million of the $30 million deficit we are trying to close.
It was clear, however, given the College's cost structure, that if we were going to address the full impact of the global recession, and not simply spend down the endowment, which has subsidized and enriched the educational experience of generations of Middlebury students, we would need to address the largest component of our expenses: compensation, which means the size of the work force.
In open meetings we chronicled how, with the growth in the size of the College's infrastructure—a remarkable increase of 68 percent in square footage between 1990 and 2005, or the equivalent of adding more than four Bicentennial Halls to the campus—the College had little choice but to increase the size of staff simply to clean and maintain the new infrastructure. Add to that the programmatic growth that, over the past 20 years, included a number of new academic majors, 30 new faculty positions, 350 additional students (a 17 percent increase), two new Language Schools, 30 new sites abroad, and the unrelenting increase in mandatory federal compliance regulations, and it is no wonder why our staff FTE count (full-time equivalent) had grown from 584 FTE in 1996 to around 1,000 in the summer of 2008 when we began to freeze positions—an increase of 72 percent.
The growth in our staff since 1990, then, was more about institutional aspirations and administrative decisions than anything else. This is not to justify or excuse all of the growth in staff that could have been done more thoughtfully or efficiently. The work done by a good number of the new positions might have been taken on by existing staff if our staffing allocation processes were stronger. Similarly, while adding new programs and positions, we could have been more willing to eliminate some of the things we were doing that were no longer as vital to the College as they had been previously. And, as some staff rightly pointed out at our open meetings, it was not the staff's fault that our FTE count grew to what it is; it was the result of administrative decisions that were guided by overly optimistic projections of our financial capacity to support such growth and the College's aspirations.
With the sobering experience of the recession, we knew we had to reduce the size of our staff significantly. After consulting with multiple groups and committees, we charted a deliberate course that we knew would be drawn out and inevitably create anxiety along the way, but we hoped would allow us to reduce staff fully voluntarily. We offered two early retirement programs and a voluntary separation program for staff, and then a parallel program for senior faculty. These programs were implemented as part of the SRC's institutional staffing analysis, which gave us a good, though not perfect, approximation of the size of the staff we needed to run the institution and not jeopardize our mission or compromise the quality of our students' education.
It has now been a full year since we introduced the first early retirement program. It has been a long year, one in which many staff offices have given a lot of thought to how we might function with fewer staff, and many staff have been asked to think about how they might serve the college differently. I am pleased to report that all of our efforts have been extremely successful—so successful that I will be submitting to the Board of Trustees next week a set of planning assumptions that shows a balanced budget through 2015. I am happy to say that, barring any unexpected deep decline in the economy—and I mean a really deep decline—staff layoffs are now off the table.
We owe a great amount of gratitude to members of the Budget Oversight Committee, the Staffing Resources Committee (SRC), and the entire staff for their hard work in putting forth recommendations and exhibiting great patience as we worked our way though the tedious process to get where we are today. As I said in public before, we knew there would be some pain experienced by staff regardless of how we arrived at where we are today: We chose the slow, and perhaps somewhat tortuous, path of offering those who were ready to retire or try another career some financial wherewithal and security to do so, and then working through a time-consuming staffing analysis to help guide us in covering the responsibilities formerly done by those who participated in the voluntary separation programs. We chose not to take the fast and unsettling approach of eliminating 100 to125 or so staff positions through immediate layoffs as some of our peers have done, and I believe we are better off as a result.
But our success the past 18 months does not mean we can go back to business as usual. We can't. We must weigh the costs and benefits of major policies that determine resource allocations, and must also adjust some of the major assumptions in our long term financial planning model. Here is an overview of what I will share with the Board of Trustees next week, which reflects many hours of discussion with various groups on campus, listening to members of the community at open meetings, reading and re-reading the results of the financial survey, including the 200-plus pages of comments many of you submitted, and taking into account the larger, external context and the new fiscal realities of the day.
On what I would call the policy front:
- I will recommend to the board that we retain our current approach to financial aid—that we remain need blind for domestic students, that we continue to be need aware for international students, and that we also continue to meet the full demonstrated need for all accepted students. We will also retain the admissions goal of having international students represent approximately 10 percent of our student body; the current percentage is just under 11 percent.
- I will recommend that we increase the size of the student body to 2,450 students. Though for many years I have been an advocate of reducing the size of the student body, I believe a slight increase in the number of students, which has exceeded 2,400 students the past two years, will bring more benefits than problems. It is no surprise that many colleges are adding students in these challenging times, as the marginal cost of an additional student is far less than the marginal revenue he or she generates.
- I will recommend that the College set aside less each year from the operating budget to fund our reserve for the renewal and replacement of our physical plant. We pride ourselves on our superb campus infrastructure, and its limited amount of deferred maintenance, which is the result of its relative newness and the consistent setting aside of ample funds to keep it maintained. Middlebury is one of the few institutions that has set aside annually significant funding for the upkeep of its infrastructure, and what I propose is a reduction of 14 percent of funding per year for the next five years. In 2014-15 we will evaluate this level of funding and determine whether we need to increase its level given the state of the campus and College finances.
- I will recommend that, because the essence of a Middlebury education involves small classes, and strong and frequent student-faculty collaboration and interaction, we retain a student-faculty ratio of 9:1. This means we will retain the current size of the faculty and preserve what many students and alumni consider the most essential aspect of their Middlebury experience.
- I will recommend that we maintain a staff count of approximately 850 fulltime equivalents, and that we consider each new staffing request with far greater scrutiny than in the past. We will avoid redundancies within our staff when approving positions, and we will seek position and departmental consolidations as part of the Staffing Resources Committee's charge.
- I will recommend that we extend the increase in the contingency line in our operating budget to provide a greater buffer against unexpected changes in revenue or expenditures. We increased this line from approximately 1 percent of our overall budget to 2 percent, which helped us meet the more than $2 million dollar unplanned increased in financial aid that continuing students needed this past year.
- I will recommend that we lift the salary freeze after fiscal year 2011, as recommended by the BOC, and that we address, first, the absence of salary increases that accompany significant career achievements, starting with the earning of tenure and the promotion to full professor status. I will also recommend that we disband the current method we use to monitor faculty salaries. I will appoint a small committee of faculty to work with Provost Alison Byerly to propose ways to ensure that our total compensation packages are competitive, while remaining mindful of our inability to compete with institutions whose endowments and overall wealth are twice that of ours. Since one of the major challenges for faculty and staff remains the spousal or partner employment issue, or unemployment issue, I will engage the town in how we might together create incentives to attract to Middlebury the kind of businesses that rely on a well educated population. A small investment in such an initiative could go a long way to improving the overall compensation picture at the College. I will also ask the Staffing Resources Committee to review our current compensation program for staff, assess what works, what doesn't, and what it recommends that we change to ensure both a fair system and one that rewards performance appropriately.
- And I will recommend that we retain our current benefits package for faculty and staff. As many of you know from the presentations of the financial survey results a few weeks ago, there was nothing more important to faculty and staff than protecting their benefits, and I will make that recommendation to the board. We have a benefits advisory committee that, following a recommendation from the Budget Oversight Committee, is looking at ways to reduce the administrative costs of our current benefits program while leaving the actual benefits as they are.
In addition to these policy recommendations, I will recommend to the board changes in three major assumptions we use in our long-term financial model. All of these changes are intended to reduce the level of expected revenues we derive from our three main funding sources—the comprehensive fee; fundraising; and income earned on our endowment.
- I will recommend that, for the purposes of planning future expenditures, we reduce the expected annual growth in the endowment from 9 percent to 5 percent. We have used 9 percent in our financial model for the past ten years, and 11 percent for the five years before that. During the last decade, admittedly an uncharacteristically bad one, our endowment averaged 6 percent growth per year. This recommendation is intended to dampen our expectations regarding the revenues generated by our endowment so that we will plan more conservatively. When the endowment earns more than 5 percent, we will build our reserves that will serve as a cushion when the economy falters and our endowment performance lags expectations.
- I will recommend that our gift projections reflect the current philanthropic environment, which, while certainly better than last year, is still cautious compared to the first three years of the College's current major fundraising campaign. We have reduced for the next four years the amount we expect to raise for endowment support by almost 15 percent, which, combined with earlier reductions to the model, means we are likely to require additional time to make our original campaign goal of $500 million dollars.
- I will recommend that we reduce projections for our comprehensive fee increases so they are within 100 basis points, or 1 percentage point, of the annual Consumer Price Index (CPI) as measured each December. Coming out of our strategic planning process, we used a 4.9 to 5.0 percent increase in the comprehensive fee each year for a decade. This increase was lower than the average increase in tuition at private colleges during the previous decade, but it was also often more than 2 percentage points, and sometimes as high as 4 percentage points, greater than the CPI. Last year, just to underscore this point, our comprehensive fee increase was 3.2 percent, which was the second lowest increase among our 21-school peer group, and the lowest increase for Middlebury in 37 years. Yet it was still more than 3 percentage points, or 300 basis points, above the CPI. The prolonged greater-than-CPI increases in our comprehensive fee have ramifications for the College both internally and externally. We need to recognize that the demand for a four-year liberal arts degree, while still great, is not inelastic: There will be a price point at which even the most affluent of families will question their investment; the sooner we are able to reduce our fee increases the better.
And finally, I will recommend that we recalibrate our planning model to account for a freeze or delay on recommendations coming out of the strategic plan that require significant and ongoing resources. The major change in this particular recommendation will be removal of the 25 incremental faculty positions that were to enable us to offer universal senior work and reduce the amount of in-class teaching for the faculty in order to provide additional time for their mentoring and advising senior projects. Though there was a clear link between the new positions and the senior work proposal, following discussions with our Educational Affairs Committee (EAC), and numerous faculty over lunches this fall, I am optimistic that we could still implement senior work for all students and thereby add a significant component to our students' overall educational experience through re-thinking the curriculum in many departments, and how we allocate teaching resources. As the staff has already discovered, the post-recession era will require some changes in how we have done things in the past; the faculty is not immune to change either.
These policy recommendations and recommendations that reframe our revenue assumptions within our financial model will have a clear impact on our projected revenues. But in addition to these changes, there are other changes—changes in how we operate as an institution—that need to happen and will be as important as all the changes I will be recommending to the board.
First, we will operate differently as we plan and budget for the future. In addition to lowering what were bold projections for revenues that were to cover our hoped for future expenditures, we will amend our current resource allocation process. I already mentioned how our Staffing Resources Committee will, for the first, time, manage our staff FTE count to a budgeted number, much like our faculty Educational Affairs Committee manages our faculty FTE count, and establish clear, but also flexible, criteria for filling vacant positions and when considering proposals for incremental positions.
The Educational Affairs Committee, which makes recommendations to the provost and president on staffing requests, and recommendations to the faculty on educational policy issues, will be asked to employ a more institutional perspective when considering policy and staffing proposals. What in the past was accepted as decisions made appropriately within academic departments, will now be considered in terms of their institutional implications as well. Decisions on the number of courses required in a major, the number of tracks offered within a major, the flexibility surrounding requirements for the major, and other issues like these need to be considered within the overall allocation of resources across the faculty. While I am not advocating in any way a "one size fits all" model when it comes to providing teaching resources to our vibrant and diverse curriculum, I do believe the EAC, the provost, and the president need to take a more active role in the allocation of teaching resources so as to ensure a more equitable and efficient use of our limited resources.
And second, we need to get comfortable with taking advantage of the remarkable academic assets we have within the institution. Aside from offering an excellent liberal arts curriculum, respected nationally and indeed now internationally, Middlebury is in an unusual, and I would say unique, position among liberal arts colleges. It, singularly among all of its peers, has unique capacity to survive and even thrive at a time when the financial foundation upon which higher education rests has proven to be fractured.
We have an array of graduate and special academic programs that complement our undergraduate liberal arts college, and which have in the past, and can even more so in the future, be a source of greater revenue and recognition, all to the benefit of the College. Each of these programs operates on its own revenue base, operates in the black and, aside from some gift and endowment income they receive from donations that were restricted for their use by the donor, they do not rely on our endowment for any direct operating subsidy; this is significant because our traditional sources of revenue are currently constrained. These programs—the Bread Loaf School of English, the Language Schools, our Schools Abroad, the Bread Loaf Writers' Conference, and the Middlebury-Monterey Language Academy—all generate a surplus that provides revenue to the College's bottom line, and some of these programs can and will increase their revenue significantly in the coming years.
It is time for us to view these entities . . . these valuable assets . . . in terms of the adage, "rising tides raise all boats." I've called upon the College community to do this before: in my inaugural address in 2004, in asking aloud what we needed to do in the coming years to be true to our then-204-year rich history, I said the following:
[To] be true to that impressive history, we must, first, preserve those parts of the Middlebury culture that encourage creativity and foster innovation. To do this, there must be a level of confidence within the institution so that particular successes in one area of the College are viewed as successes across the entire institution—a genuine feeling that all parts of the College community benefit from exceptional work and achievement; otherwise successes born out of innovation and creativity will have little chance of survival.
Perhaps the seriousness of the economic crisis we've been living through will help focus our collective mind on the College as a whole. It is time that we proudly display our institutional confidence. We should embrace all of our parts, each of which has the capacity to bring success to the entire institution. All of the aforementioned parts of the College have achieved excellence in their own right, and such excellence redounds to the benefit of us all. And I include, come June 30, the Monterey Institute of International Studies. Though the institute was on very rocky financial footing when we began our relationship four years ago, the ship has been righted, and has seen not only an effective reorganization and new focus under the leadership of our colleague Sunder Ramaswamy, but it has also been in the black for the past three years, and has added to the College's overall net assets at a time when our own wealth declined considerably. And just as each of the other areas of the College has attained a reputation for excellence, two of Monterey's programs have been recognized as world class: the program in Translation and Interpretation and its Center for Non-Proliferation Studies, which operates in Monterey, Washington, D.C., and Alma-Aty, Kazakhstan.
In the coming years, these other entities, which do not exist at other liberal arts colleges, can and should play an important role in helping us preserve what we value most about our liberal arts college. That is, if we plan wisely, these programs will not only provide exciting and new opportunities for our students, but will also generate revenue—a subsidy—that will allow us to continue to provide on this campus the human-intensive educational experience that we value so much.
In addition to this great benefit, Middlebury's leading reputation in the teaching of languages, literature, and culture can provide additional ways the institution can thrive as higher education searches for a more sustainable financial model. Through the accomplishments first of our summer Language Schools, and extending now into our undergraduate language departments and our Schools Abroad, Middlebury is recognized as the leader—not a leader, but the leader—in the teaching of languages, literature, and culture. To lay claim to this distinction and not take advantage of it would be foolhardy. To my knowledge there is no other liberal arts college that is recognized as the leader in any academic field of study. Through a potential partnership with an existing online education provider we have the opportunity to use our leadership in language pedagogy to expand access to foreign language learning for hundreds of thousands of primary and secondary school children at a time when this country needs it most; we have the opportunity to ensure our continued leadership in the teaching of foreign languages and culture by expanding what we do in the classroom to a new and exponentially larger medium; and we have the opportunity to supplement our traditional sources of revenue with a new source that could help fund or subsidize so many of the things we wish to preserve and build upon at the College.
This potential partnership to advance language and culture education online is one of any number of initiatives we might pursue that builds upon areas of conspicuous excellence at the College. Most important, we must be open minded about these opportunities and not let some narrowly constructed definition of our mission—as if what we do and teach today has not evolved over the past two centuries—deter creative thinking and squash opportunities. Just think if the trustees in 1883 had argued that the proposal to admit women to Middlebury was "not part of the College's mission." Or imagine if President Thomas in 1915 heeded the advice of his administrative colleagues and decided not to collaborate with a professor of German from Vassar College because summer programs and graduate study were not then part of our mission. Or if just two members of the board of trustees reversed their votes in 1915 and the College decided to sell the Bread Loaf Inn and its surrounding thousands of acres of land when it inherited them as a bequest from Joseph Battell. Or if in 1964, faculty from four different disciplines gave up when their proposal to establish the first major in environmental studies in the country was rejected by their colleagues not once, but twice!
It is easy, especially in challenging times, to pull back, withdraw, hunker down, and see only the risks that come with doing things differently. But what we need most right now is the opposite: to adopt new assumptions and methods of planning our future; to be willing to re-think what we do here as positions are reduced and responsibilities are shifted around; to see success anywhere across the institution as a success for each and all of us; to embrace the programmatic richness of this institution here in Vermont along with the 40 or so other places around the world in which it operates; and to see the possibilities in new opportunities and how they can support and strengthen, rather than threaten, the very best of what we value here on this campus.
Tackling the challenges that lie ahead as a result of the world-wide recession will require us to pull together. All of us—students, faculty, and staff. It can no longer be about "who is sacrificing more" or "who hasn't shared in the pain?" I hope we can officially move beyond those kinds of questions beginning today. It's okay for us to have refreshments at events and not feel guilty, and it is important for us to have reasons to come together on occasion and see one another and share both the good and the challenges of the times.
I am confident this institution will once again rise to the occasion. Despite all the challenges of the past 18 months, we accomplished great things and advanced many important and challenging initiatives. Our faculty and staff worked extremely hard despite the pay freeze, the reduced staff, and general uncertainty, for which I and the board of trustees thank you.
Though there is much to be done in the coming months, I am hoping, and indeed requesting, that we turn our attention now to all the great things that we often take for granted or allow to recede too far into the background in the most challenging of times: the inspirational teaching that has been a hallmark of this College for so long; the deep and meaningful friendships that develop and flourish in this special place among so many students; and the remarkable and unqualified support that our staff provides to our students and faculty, day in and day out.
I look forward to working with you as we re-engage our mission with a renewed sense of accomplishment, pride, and, as has been the case at this College for nearly 210 years, creativity and genuine optimism.