Buoyed by high endowment returns, this past spring the University conducted a historical financial analysis and upped its projected rate of return on its investments from eight to nine percent, a number used in spending decisions. Meanwhile, this year it instituted a $3 million budget cut across the board and reduced the endowment draw by over $6 million.
These steps are components of a complex strategy being implemented in the next 10 years to balance the competing needs of endowment growth and maintaining high institutional quality.
“We need to be very careful,” said Vice President and Chief Investment Officer Thomas Kannam. “In fact, we had a very strong debate over raising [the projected endowment return] from eight to nine percent. We have to be conservative in how we plan for the future in our spending formulas.”
Although the endowment has performed well in the past three years, generating above 15 percent return each year, finance officials do not expect the trend to last in the face of market pressures.
“We need to generate [growth] in the double digits to keep up with inflation and other expenses,” Kannam said. “There is an absolute standard we’re cognizant of in our planning.”
Additionally, they fear encouraging excessive spending that would put the University even further behind its peer schools.
“You look at who you’re competing with—you’re competing with [peer schools] for students, for faculty, for staff—it is good to know what your competition is doing,” said Kannam, who has introduced new and more aggressive financial strategies since becoming director of investments in 1998. “If we want the best students to come here, you need to have a nice University Center, nice dorms.”
Although Wesleyan regularly places within the top 10 in the U.S. News and World Report liberal arts college rankings, its peer institutions have vastly larger endowments, in many cases twice as large. For example, while the University’s endowment currently stands at over $630 million, as of June 2005 Williams had $1.5 billion.
“Many of the schools we like to compare ourselves to, in all the different categories we care about, in student life, financial aid, and other things, have two times, three times, even four times the endowment per student,” said Vice President of Finance and Administration John Meerts.
For the University to maintain its position, this means increased financial pressure to compete with schools that are far richer.
“It’s a constant battle of our ambitions versus our constraints,” said Professor of Economics Gil Skillman. “Our need-blind admissions policy implies a large, and as it turns out, highly volatile, annual commitment to financial aid, and our desire to maintain a strong faculty means we need to keep up with compensation levels at our peer institutions.”
Skillman, who served as faculty representative to the trustee Finance Committee from 1999-2004, added that the University will have a hard time meeting its strategic goals in the medium term as it works to keep the endowment growing on track.
The University professes its dedication to fixed benchmarks that define its mission as an institution of higher learning, regardless of its financial wherewithal.
“We set goals that fit our circumstances,” Kannam said. “Things like financial aid,?that’s who we are and something we believe in deeply and believe in supporting.”
Skillman believes that the University is banking on the currency of its academic reputation to keep it afloat, even as compensation for faculty is lagging. If the issue of faculty salaries and by extension morale is not addressed, he argues, it could ultimately compromise the University’s ranking—which would lead to other negative effects.
“The main thing keeping us in the top 10 [of U.S. News and World Report rankings] is our academic reputation,” he said. “The main thing dragging us down is our faculty resources rank.”
He envisions an “Institutional Priorities Committee” bringing together faculty, students, and administrators to transparently design an understanding of the University’s goals and emphasis.
The result of conflicting needs is a tension between spending now and saving for the future, with a historic inclination toward spending. Since 1981, when a cap on how much the draw from the endowment could grow was instituted, the trustees have routinely authorized additional spending.
“Extra draws happen a lot,” Meerts said. “Wesleyan is a very ambitious school. Unfortunately, we don’t have quite the resources that are necessary to achieve all of the great things we want to do.”
This year’s $3 million budget cut spared only staff and faculty salaries and financial aid, which grew by $500,000 this year. The decrease has meant not replacing 30 staff positions, delaying portions of the “Strategic Plan” for campus development, such as the hiring of eight faculty members, and not increasing the budget for inflation this year.
According to Kannam, while the University drew 7.4 percent of the endowment last year for operating costs, peer schools spent around 3 to 4 percent of theirs—an equivalent amount in dollar terms. Next year, the University will take 6.4 percent and by 2010 that number will dip to the target of 5.5, according to Meerts.
The endowment number used to calculate the withdrawal amount is based on what is called a 12 quarter rolling average, or the past three years of performance.
“It smoothes out the ups and downs,” Meerts said. “It was the third year out [from the recession of the 2000s] that it really impacted us. It has taken six years after the market crash to recover in our endowment and budget calculations.”
There is indeed a historical perspective to the thinking of the top finance officials, who put the University’s dilemma in the larger story of its decisions over the past decades.
“We used a 40-year historical analysis to determine our projections,” Kannam said. “We rely on historical analyses more heavily than other schools.”
There is an almost palpable aversion to overspending among finance officers of the administration, which they say is a consistent failing in the institution’s history.
Kannam noted the disparity between the high rate of return on the endowment in the last three years and the endowment’s actual real growth after accounting for spending.
“We have a fiduciary responsibility to the current generation but also to everyone who will need to benefit from the endowment,” Kannam said.