‘A Challenging Time’

Solid stewardship gives Dickinson edge to tackle recession

by Bill Sulon

January 20, 2009

Treasurer Annette Smith Parker '73 at her office in Old West. She said the college can come out of the recession "ahead of the pack" thanks to investment policies adopted a decade ago.

"Banks aren't lending; businesses and consumers aren't spending. Let's not mince words: This looks an awful lot like the beginning of a second Great Depression."
—New York Times columnist Paul Krugman, recipient of the 2008 Nobel Prize in Economics, in an op-ed piece published Jan. 4, 2009.

Dickinson College Treasurer Annette Smith Parker '73 has been through six recessions, including the current one, since graduating nearly 36 years ago. Like Krugman, Parker is not a fan of minced words.

"I suspect that this will be a much deeper and much longer recession than any I've seen in my lifetime, certainly my professional lifetime," Parker said in her office at Old West. "The economy has collapsed under the weight of leverage—of multiples of borrowing. As a result, the financial mechanism that normally is part of recovering from a recession is broken."

The 13-month recession has devastated Wall Street, Main Street, retirement plans and endowments.

At Dickinson, the fallout has not been as severe as it has been at other institutions, some of which place greater reliance on their endowments to cover annual operating expenses.

Harvard saw the value of its endowment fall 22 percent to $28.7 billion at the end of October from $36.9 billion four months earlier. About 35 percent of Harvard's annual budget is funded by the endowment income, compared with the 15 percent most private universities draw from their endowments.

Endowment takes hit

Dickinson draws 11 percent of its annual budget from its endowment. So far this fiscal year (July 1 through Nov. 30), the value of Dickinson's endowment has fallen 24 percent to $269 million from $356 million. By comparison, the Standard and Poor's 500 Index, which tracks the nation's largest companies, fell 39 percent during the same period.

"We've been hurt, but we're in a much better position" than many other institutions, Parker said.

And Dickinson is better equipped now to deal with the economic crisis than it was a decade ago, when it ran a $6.2 million operating deficit.

In 2000, the college changed the makeup of the board's investment committee, separating it from the finance committee and asking six investment professionals, all Dickinson graduates, to focus on the college's endowment portfolio. Before that, the subcommittee included 13 individuals who were interested in investments but were not investment professionals.

The college's investment portfolio now regularly ranks among the top 20 percent in endowment returns nationwide and achieved a 29.8-percent return on its investment portfolio in 2006, ranking it 17 out of 782 institutions. Other double-digit gains over the years "helped mitigate a lot of the downside" of recent months, Parker said.

"We have done some incredible work here at the college in the last 10 years—from a financial perspective and working with great people on the board. The outcome for the college has been an incredible strength that we wouldn't have had as a foundation if the current economic situation had occurred 10 years ago," she said.

Losses offset by boom years

In 2000, the college spent 6 percent of the average market value of the endowment calculated over a 12-quarter period, or three years. That rate, Parker said, was "unsustainable" because spending at that level erodes principal at the same time that inflation decreases what the remaining amount is able to purchase.

Dickinson's current annual spending rate is a sustainable 5 percent. Since spending is based on a rolling average of the market value of investments over the prior 12 calendar quarters, the losses of the last two quarters are offset by the gains made during the prior 10 quarters.

But even if the stock market stabilizes in the next year—and that may be an optimistic assumption—the college is looking at a decline in investment returns when compared with the boom years. To absorb the lost revenue expected from declining values based on a stable 5-percent spending rate, the college is looking for ways to cut expenses.

"We will stay at a 5-percent spending rate," Parker said. "Long-term studies show that spending much more than 5 percent over a long period of time erodes the spending power of the endowment. Spending less than 4 percent means that the current generation isn't getting as much benefit from the endowment as it should. Spending between 4 and 5 percent, taking into consideration long-term inflation rates, seems to be the best place to balance the needs of a current generation and future generations."

To maintain the 5-percent spending rate, the college will have to cut an estimated $5 million in spending during the next three years—from an annual gross operating budget of $130 million—to make up for the projected losses in endowment value and income from other sources, such as trust funds and donations to the college's Annual Fund.

Education paramount

"Our plans are to deal with that projected shortfall now by spreading the losses evenly across each of the next three fiscal years," Parker said. "If we don't take as much in fiscal [year] '10, by fiscal '12 there will be no way to absorb the big hit we think is coming. We have to adjust the rest of the budget to deal with these losses to revenue, not only with the endowment. We must maintain momentum and we must protect the core of what makes a Dickinson education distinctive, but we will not allow the college's budget to drop into deficit."

Cost-cutting measures will not come at the expense of education, financial aid, student-faculty ratios or the college's commitment to maintaining a diverse, talented student body, Parker and other administrators said.

Parker said that while Dickinson is prepared to do what is necessary to overcome these challenges, she, like Krugman, is concerned about the nation as a whole.

"Our nation—and actually much of the world—created the current problem by forward-consuming, by taking on too much debt, by wanting to 'have it now' and by borrowing to get it," Parker said. "As a nation, we have lived beyond our means. As this leverage—all this extra credit—is wrung out of the system, we're experiencing a huge dislocation globally. I think what we have to do here at Dickinson is get ready for a challenging time and start thinking about how we 'do business' differently. We have strong leadership–on campus and on the board. Our finances are solid. It's our goal to tackle the issues head-on, so that by the time the nation and the world come out of this, Dickinson will be ahead of the pack."