03/26/09: Memo from the president on College finances
Dear Staff and Faculty Colleagues,
The current financial downturn presents great challenges for all members of the Middlebury community. As we discussed at the March faculty meeting, I will continue to keep all of our constituencies apprised of the budget adjustments we will be making, along with any material changes in the College’s financial capacity.
At the faculty meeting, I underscored how the challenges we face are all the more difficult, because we still do not know when the economic downturn will hit its bottom. Until then, we will not know for certain its impact on our endowment or on the ability of our families to pay the comprehensive fee next year and beyond.
As I have said since September, we will be guided in our budget cutting by some basic principles that reflect the institution’s mission and core values. We will protect first and foremost our academic program; we will maintain for as long as we can our need-blind admissions policy for U.S. students and meeting the full demonstrated need for all students who matriculate at Middlebury; and we will pursue staff layoffs only as a matter of last resort.
I thought it would be helpful for those who were not at the faculty meeting, and for those who were there and would like further elaboration on what I covered, to receive a detailed review of our financial situation, which I have included below. And while the current financial situation presents great challenges, it also allows us to think about new approaches to how we do things, including some new ways to raise revenue for our operating budget. In that spirit, I provide toward the end of this communiqué a discussion of new opportunities for expanding our revenue base. I list three possible approaches and seek your reactions and feedback on these ideas and any other items addressed here. As always, I look forward to engaging you at any of our monthly faculty meetings, or at one of the open meetings that we will hold in the coming months.
At the March faculty meeting, I explained how our three major sources of revenue for the operating budget—the comprehensive fee, endowment income, and gifts—have reached their upper limits, and cannot be expected to provide the levels of support they did in the past, let alone increase significantly in the short-to-middle term.
The comprehensive fee, our first major source of revenue and by far the largest, provides 64 percent of our operating budget, and had been projected to increase in our financial model by 4.9 percent next year and in subsequent years. However, given the financial situation for current and incoming students and their families, the annual increase this coming year will be 3.2 percent. As I reported at the faculty meeting, for each percentage point we reduce the comprehensive fee from what was in our long term financial model, there is an $850,000 loss in expected net revenue. Thus, by setting the fee at 3.2 percent, we will have $1.4 million less in revenues than we expected next year and in years thereafter, which means greater than expected cuts in our operating budget.
Our second major source of revenue, the amount we spend from the endowment each year, which now accounts for 23 percent of the operating budget, is based on an assumed 9 percent return on endowment investments each year. Although we have, over the past 25 years, averaged about 9 percent return on our investments each year, last fiscal year (July 2007 to June 2008) we witnessed a 1 percent decline, and we project a negative return for the current fiscal year ending June 30, 2009—down between 25 and 30 percent (-25% to -35%). The 9 percent expected return is based on the goal of covering our annual 5 percent “spend rate,” 3 percent annual inflation, and 1 percent “real” growth in the endowment. The objective of setting the spend rate at a 5 percent maximum is to ensure that future generations of students benefit from the generosity of donors as current and past generations have; a spend rate higher than 5 percent will, over time, erode the principal of the endowment, which would reduce the support it provides to the College budget.
Because we rely on the endowment for almost a quarter of our operating budget, the recent departures from the expected 9 percent return create significant budget gaps for several years into the future. We calculate the amount of funds we draw from the endowment to support the annual operating budget by averaging the endowment’s value over the past three years in order to reduce the volatility of endowment support from year to year. The past three years have seen a +22 percent return, a -1 percent return, and the currently projected -25 to -30 percent return. This means that come next year, the endowment’s average value will be calculated with two negative years in the formula, which produces a sizeable deviation in the level of funding available from the projected 9 percent annual return that we initially envisioned. On June 30, 2007 our endowment was valued at $936 million; 20 months later, on February 28, 2009, it was approximately $660 million. Needless to say, the level of funding to be drawn following such down years will decline significantly for at least the next several years. The currently projected -25 to -30 percent year will be in our formula for the next three years.
Our third major source of revenue, our annual fund, is projected to meet its goal for the year, and provide about 7 to 8 percent of this year’s operating budget. This is a remarkable achievement, as our annual fund is among the largest, if not the largest, of all our peers, and the results this year reflect a great commitment on the part of our alumni and friends toward the College during extremely challenging times. But fundraising also includes securing pledges for major gifts that mostly go to the endowment and which provide future revenue for our operating budget. That aspect of philanthropy is significantly down, not only at Middlebury, but across higher education and throughout most of the philanthropic world. One bright spot, however, has been that payments on past pledges are on schedule with few, if any, delays. These pledge payments help enormously, and we are very grateful for those donors who have been able to make payments this year.
Our anticipated budget deficits in the next few years, then, are the result of our falling short on the amount we projected we would be able to spend from the endowment and, to a lesser degree, on a reduced comprehensive fee increase. These issues, plus a pause in our receiving significant new pledges to the endowment, magnify our projected deficits over the longer term. The annual fund which again looks to be on target for this year, has likely reached its peak for the next several years, given the state of the economy. Unfortunately, this one financial bright spot does not have a large “up side” to cover for the other areas in decline, and is unlikely to sustain its current level if the economy does not improve.
What makes things even more difficult is that we will not be able to estimate the extent of our projected deficits until we see a bottoming out of the economic downturn. If our endowment continues to decline we will obviously have less revenue to support the operating budget; if the recession continues, we will be even more constrained in terms of raising our comprehensive fee because of the extra burdens such economic conditions will place on so many families; and if the economy does not pick up, we can confidently predict that donors will not be making the long-term pledges to the College as they were doing at record levels before the downturn.
Leaving aside the liquidity issues plaguing many institutions (I will address this issue in some detail at the April faculty meeting and future open meetings), the greatest challenge for us, and indeed for all private colleges and universities, is that all of our major sources of revenue have reached their upper limits, and we cannot plan on the annual increases in each stream that we have in the past and have come to expect when setting long-term plans. Our only alternative, at least in the near term, is to reduce expenditures significantly to close the gap between declining revenues and existing budgets—budgets that were constructed based on what are now dated assumptions regarding available revenue.
We are fortunate that we began the budget cutting process relatively early with the freezing of open staff positions last summer, and have made what amounts to about $10 million budget cuts from next year’s budget. We have at least $10 million more to go based on economic projections from the late fall. We will need to revisit those projections and include new assumptions that take into account the latest information about our revenue stream at the end of this fiscal year (June 30). Depending on when the economy turns around, we might need to cut more than the $20 million originally projected last fall.
Not all the news is doom and gloom, however. Unlike many colleges, we have the potential to address our current budget challenges and strengthen the College’s long term financial underpinnings by developing “a fourth revenue stream.” Liberal arts colleges are rarely viewed as “leaders” in higher education in any particular discipline, yet Middlebury is in the rare position to take advantage of its leadership role and reputation in two related areas: study abroad and language pedagogy.
Our leadership in study abroad has, rather quietly, become an important revenue source to the College. Over the course of the past decade, we have complemented our established sites in major cities, with new ones in vibrant provincial cities where English is spoken less widely and where there are fewer American hangouts that can divert a student’s immersion in and study of the local language and culture. Our focus has been to provide students who study abroad at one of our programs with an intensive, immersion, and direct-enroll experience at 30 different sites in 12 countries. Most relevant, about ten years ago, we opened up our Schools to students from other colleges and universities who have the necessary linguistic competency to study alongside Middlebury students and who will not reduce the rigor of the program.
Today, 42 percent of the 450 undergraduates and 34 percent of the combined 555 undergraduate and graduate students who enroll at our Schools Abroad are non-Middlebury students, and contribute more than $1.5 million to the College’s budget (net of the additional expenses for staffing, instruction, and other costs associated with increasing space for non-Middlebury students). Our Schools Abroad rely on renting and not owning real estate at our 30 sites, which allows us to expand or contract our Schools to meet programmatic needs with little risk. We have, over the past decade, closed sites that did not prove successful for one reason or another without significant consequences, and opened new sites to accommodate the changing curricular interests and needs of our students. Ours is an innovative and flexible model that has drawn the attention and admiration of many other institutions.
As many colleges and universities rethink their commitment to their programs abroad because of the current financial situation, our 60+ years of experience in this area (we opened our first School Abroad in 1945) gives us an opportunity to take advantage of the demand from other colleges and universities to matriculate the very best students from across the country. At our faculty meeting, I read aloud the list of the schools that send the largest number of students to our Schools Abroad and the roster is impressive—in order of the number of students in our programs: Pomona, Tufts, Wesleyan, Amherst, Brown, Kenyon, Williams, Whitman, Harvard, Columbia, Bowdoin, Bates, Tulane, Macalester, and the University of Michigan.
As we open two new sites at our School in China next year (in Kunming and Beijing) and begin the process of selecting a second site for our School in the Middle East because demand has outstripped the number of places available in both Schools, we need to consider expanding the capacity at our other Schools Abroad and increasing the matriculation of non-Middlebury students. Our proven record in providing excellent programs abroad should serve to provide the College with additional revenue without affecting the undergraduate experience on our campus. Students who attend our Schools Abroad, whether our own undergraduates or those from other institutions, are known for increasing their linguistic competency beyond expectations and more than in other programs. This track record of excellence should serve to create greater demand for our programs, and the opportunity for increased revenue.
The College’s stellar reputation in teaching languages and language pedagogy is international and undeniable. This reputation is based on the excellence of both our unique summer intensive Language Schools, which began operating in 1915, and our undergraduate programs offered during the academic year. In the past, many have questioned the impact on the College’s overall academic reputation of having such a recognized curricular strength. The major concern was that Middlebury might be known only for languages when it has so many strong academic programs. I have always believed that “rising tides raise all boats,” and that national recognition in one area should not only be celebrated and a source of pride across the institution, but should also be to the benefit of the entire College. I recognize that this perspective is not shared by all. Yet I believe it is time for us to take advantage of the College’s exceptional comparative advantage in the area of languages and language pedagogy to add, and possibly quite significantly, to College revenues. Additional revenues would redound to the benefit of the entire institution and ease the pressure on the established, but now constrained, three revenue streams.
Our Middlebury-Monterey Language Academy (MMLA), which was born out of our expertise in languages and enabled by our cooperation with MIIS, where much of the original curriculum was developed, is entering its second summer, and was a huge success in year 1. The program offers a four week summer intensive language academy based on our Language Schools’ intensive immersion pedagogy for students in 7th to 12th grade. It currently offers students four languages of study: Mandarin, Arabic, Spanish, and French. We partnered with Johns Hopkins University (JHU) to combine our language teaching expertise with JHU’s four-decades-long experience working with middle- and high-school students in its “gifted” academic programs, so we could provide a quality academic experience in a summer camp-like atmosphere. The 450+ student and parent evaluations of the program that we received after the first summer session were overwhelmingly positive; they exceeded our expectations.
More than 600 students studied at MMLA last summer, and we anticipate the same number this year. Despite the economic slump, inquiries and applications are up significantly from last year, and we expect to break even financially this summer—a full two years ahead of our initial projections. If demand for the program continues to grow, we need to consider expanding MMLA to other areas of the country, perhaps by partnering with high school districts or franchising the program. We can do this better than anyone else because of our known expertise and reputation in language pedagogy, as well as the extensive network of potential teachers from among the former 40,000 Language School attendees (11,000 of whom earned Middlebury graduate degrees). The network not only represents potential teachers and content contributors to the program, but also a great resource for student recruitment to the program, since the majority of degree holders from the Language Schools are secondary school teachers.
A well-thought-out expanded MMLA program could provide incremental revenue to the College’s annual budget, while also greatly expanding our visibility among middle and high school students, the population from which future applicants to Middlebury College emerge. Even after the first summer, and with a fairly small student base, this kind of recruiting bonus has already started to happen, with a number of highly qualified high school students applying to Middlebury College, because their experience at the MMLA put the College on their radar screen in a very emphatic way. Many of these students have expressed an interest in academic fields across the liberal arts curriculum, but also recognize the importance of learning languages in order to succeed in the wider world.
Related to MMLA, but representing another potential source of new College revenue, is technology assisted language materials. One of the questions raised by several foundations from which we sought initial support for MMLA was, “what happens to students following the intensive summer session to ensure they keep up the linguistic competency they attained in the program?” This is an excellent and relevant question, because many MMLA attendees reported jumping two levels in their language and could not find a course at the appropriate level at their high schools. Finding a way for students to retain all they gained during the MMLA session, then, and build on it, is an issue we need to resolve, and the best way would be to use content-rich educational technology.
Coincidentally, or not, the College has been contacted this year by several educational technology software companies who are eager to partner with us to provide those materials for MMLA participants and, perhaps eventually, a wider audience. Some of these companies have been working on educational software for 10-15 years and, while they have “content” that is far better than what was available when the College first began work in this area in the 1990s through Mellon Foundation support, it is still some distance in terms of the quality they and we believe needs to be achieved.
We will engage the educational technology companies who have contacted us to see if we can structure a partnership that makes sense for the College—one that leads to the development of the best possible materials for language learning, beginning with our MMLA program, and can then possibly be tailored for a number of other learning cohorts. Students who attend our Language Schools, many of whom are diplomats, journalists, humanitarian workers, and in other careers, would benefit greatly with excellent language materials following their Middlebury summer sessions. Such materials could also be of interest to the general population wishing to begin study or improve their competency in a number of languages: the “market” for such materials, if easily accessible and better than all others available, is virtually unlimited.
I recognize there was skepticism more than a decade ago when discussion began about this kind of opportunity, and there will likely be a number of good questions still today. “Isn’t this mission creep?” “Aren’t we a residential liberal arts college?” “Won’t this tarnish our ‘brand’?” To answer these briefly: I don’t see this as mission creep, but rather as part of our core mission (education) in one of our prime areas of expertise that also happens to serve one of the country’s critical needs: expertise in languages and the ability to interact with foreign cultures on their own territory. It uses to our advantage the expertise we have developed over the past century to the good of the entire enterprise. We would be looking to capitalize on our institutional intellectual property. Yes, we are a residential liberal arts college, but we have developed an educational model that includes a number of special programs that enhances our undergraduate liberal arts mission and provides new opportunities for our students. If successful, this kind of project can increase significantly knowledge of Middlebury’s reputation beyond the academic community as well as the College’s resource base.
Taking a risk to create a so-called fourth revenue stream would hardly be new to the College, and in fact would represent just another chapter in Middlebury’s history. The College’s decision in 1883 to become a coeducational institution was not motivated solely, or even primarily, by the desire to provide equal opportunities in education for women. It was viewed in large part as a way to help the College grow out of a financial crisis, become more financially solvent, and, perhaps most importantly, as a way to differentiate itself from many other New England small colleges. Looking back 126 years, it was no doubt the right decision, though at the time, the decision was not without its risks and critics.
Similarly, the decision to host the first language school (German in 1915), set up and directed by a professor of German from Vassar College, was done not because it deepened the existing academic offerings of the College, or because it was a unique idea that President Thomas liked. It was done in order to fill beds, to generate income for a growing college, and to experiment slowly with a program outside the framework of the undergraduate curriculum that could have long-term positive consequences for the institution. The decision to establish the School of German, which some Middlebury faculty members not only questioned but protested, was crucial in eventually establishing the College as the premier place to study languages in the United States. It also provided significant incremental resources, which helped the undergraduate program to prosper and grow through the availability of significant new resources.
The new technological initiative we are considering, in conjunction with our existing MMLA intensive immersion summer programs, has the potential for revolutionizing the way languages in America are taught at the middle and high school level, both in terms of quality and scope. We would be addressing a critical national need, while simultaneously providing a solid and stable additional revenue source for the College for decades to come.
The College has evolved significantly and often over its 209-year history, and so the notion of trying to preserve it in any one era would run counter to its history and would limit its vitality. More important, and relevant to the opportunities before us today, significant changes over the years helped the College through difficult financial times and, at the same time, enhanced its academic programs. In these challenging times we should remain true to our history and find ways to take advantage of our recognized strengths to the benefit of the institution.
As always, I look forward to your thoughts and reactions, along with ideas for other ventures or partnerships that can help the College.
Ronald D. Liebowitz
President, Middlebury College