Planning for Smith’s Financially Sustainable Future

March 31, 2017

​Dear Staff, Faculty and Students:

I am writing today for two reasons: first, to provide information about Smith’s finances, and second, to share changes we will be implementing in the coming years to ensure that our budget model remains strong and sustainable in a changing economic climate.

Thanks to many years of strong endowment returns, prudent expense management and consistently balanced budgets, Smith is in a stable and strong financial position. We continue to experience record-high demand among high-achieving applicants. Our credit rating is strong. Our recently concluded fundraising campaign set a record for a women’s college.

From this position of confidence and stability, we are taking proactive steps to ensure that our financial outlook remains robust in a new and more uncertain financial context. Over the last six months, my senior leadership team and I have been working in collaboration with the board of trustees to adapt our budget model for greater sustainability over time. The board of trustees has ultimate fiduciary responsibility for the college, partnering with me and other administrators to ensure we are stewarding our resources wisely. My team and I have responsibility for managing the budget. The Advisory Committee on Resource Allocation (ACRA), made up of faculty, staff and student members, advises me on budget and financial issues.

The need to adapt our financial model arises from three factors:

• First, we need to prepare for lower endowment returns. Investment industry analysts—including McKinsey and Callan—are anticipating lower investment returns in the coming decade, which impacts our endowment payout (the amount the endowment contributes to our operating budget). Where Smith once experienced a 10-year average return of more than 8 percent, we are now expecting returns in the range of 6.5 percent. To preserve the purchasing power of the endowment, we will need to lower our payout rate from 5 percent to about 4.5 percent over the next five years. One-third of our annual operating budget is funded by the endowment. Lower investment returns require moderating growth in our expenses from levels we had previously anticipated.
• Second, we must work to contain the cost of college. We cannot—nor would we, given our commitment to education access—use excessive tuition increases as a means of addressing our anticipated decrease in endowment returns.
• Finally, we need to continue to invest in our mission. Strong colleges are always innovating. As you know, we have a new strategic plan, Lives of Distinction and Purpose: A Plan for Smith to guide us. Developed from ideas that hundreds of you proposed, the plan builds on what Smith already does well, while envisioning investments in emerging fields, experiential opportunities, access to education and more.

An additional, near-term consideration is the fact that our endowment returns last year were -5.9 percent. After taking into account new gifts to the endowment and distributions to support operations, this resulted in an overall decline of $150 million. Although Smith was not the only college to experience endowment decreases, ours were more significant than most.

After careful study, we have determined that we will need to close a projected $3.4 million budget gap in FY 2018. We will balance the FY 2018 budget by reducing our capital plan, holding department budgets flat, reducing discretionary spending, and offering modest staff and faculty salary increases this year. It is important to note that staff and faculty salaries and benefits represent approximately 60 percent of our annual operating budget.

The measures outlined above are the first step in a budget planning strategy that calls for lowering expense growth from previously projected levels by $10-15 million over the course of five years. This fall, we will present a multi-year plan to the board of trustees. It will reflect the immediate, tactical measures outlined in this letter, as well as strategic initiatives for improving our operating efficiency and effectiveness over time.

The changing economic environment will affect many universities and colleges that rely on endowment income, including Smith. We have a responsibility to address this set of financial challenges and I have every confidence we will do so strategically and thoughtfully.

Three key principles are guiding me in this process.

First, it’s important to keep the community informed. Strong communities rest on strong communication. My team and I will continue to respond to your questions as they arise. In addition, we have presented more detailed financial information in the FAQ below.

Second, we will benefit from the knowledge and expertise of the campus community. Vice President for Finance and Administration Mike Howard and I have been meeting with students, staff and faculty, in various forums, presenting this information, answering questions and hearing your ideas.

The third and most important principle is that every decision and action must support Smith’s mission: educating women of promise for lives of distinction and purpose. By preparing now for changing economic times, we ensure the power of the Smith experience for generations of students to come.

Sincerely,

Kathleen McCartney
President

Frequently Asked Questions

March 31, 2017

I thought Smith was in great financial shape. Why do we need to make changes to our financial plan?
The college is in a stable financial position thanks to many years of strong endowment returns combined with careful expense management and record-setting fundraising results. The college has a strong credit rating and continues to experience high demand as a first-choice school for applicants. At the same time, Smith, like all institutions, is affected by changes in financial markets as well as other external factors. As a result, we are entering a new financial context that will require us to make changes in the way we make budget decisions in the coming years.

The imperative for change is centered around three issues:

• Projections for significantly lower endowment returns in the future
• Growing national pressure on the cost of college
• The need to invest in our strategic plan

How does the recent performance of the U.S. stock market affect Smith’s long-term financial prospects?
U.S. financial markets have recently been trading at record high levels, generating hope that portfolios might rebound quickly. This is good news. If our endowment returns exceed expectations we may be able to adjust our 4.5 percent takeout rate target in the coming years. We will continue to actively monitor our endowment performance in collaboration with the investment and finance committees of the board. It is important to note, however, that our endowment portfolio includes more than U.S. investments and our payout is based on performance across multiple years.

Can’t we just spend more from the endowment to address budget shortfalls?
No. The endowment is meant to last in perpetuity, to ensure that future generations of Smith students receive the same quality of education as the current generation. Spending too much now will hinder the ability to maintain the purchasing power of the endowment in the future. Further, much of the endowment is restricted and can only be spent according to donors’ intended purposes.

How did the college’s endowment perform in fiscal year 2016?
The annual return on Smith’s endowment for FY 2016 was -5.9%. Taking into account new gifts to the endowment and distributions to support operations, this resulted in a decline of $150 million. While the endowment experienced a decline in FY 2016, the average annualized return over the past 10 years was 7.3%. This 10-year return is above the average for our peer institutions. While we do look at the one-year return, we manage the endowment over the longer term. Almost all of Smith’s peer institutions experienced declines in their endowments last year. The median return among endowments of similar size to Smith was -2%.

Your letter says Smith's endowment return last year was -5.9 percent. But this table from NACUBO references an 8.7 percent figure. Why the difference?
Our investment return was -5.9% for the year. We also draw about 5% per year from endowed funds to support operations. This is the portion that is expended to support various programs, scholarships, professorships, etc. These reductions in the market value of the endowment are partially offset by new gifts to the endowment, which tend to add between 1% and 2% annually. These three factors contributed to the -8.7% change in market value in FY 2016 noted in the NACUBO table.

Will the 2016 endowment performance cause Smith to change its investment strategy or hire new advisers?
Like most colleges and universities with sizable endowments, Smith invests its endowment in a diversified manner across a variety of asset classes in the U.S. and internationally. Some of these classes performed better than others, which impacted overall performance.

Smith continues to have a strong relationship with Investure, its outsourced investment management firm. The investment committee of the board of trustees closely monitors Investure’s investment activities and performance to ensure the long-term financial success of the college. We invest for the long term.

Will there be layoffs?
We are not anticipating any reductions in the overall size of our workforce at this time. However, we face the same economic uncertainties as other institutions and cannot make promises about decisions and actions we may need to make in the future.

Why are we talking about budget reductions at the same time that we are celebrating the most successful fundraising campaign in women’s college history?
Revenue raised through the campaign over the course of the past seven years is already factored into our budget planning. Moreover, many of the gifts were designated for specific priorities like the academic centers or new academic initiatives. Some $130 million was raised for financial aid.

Should we scale back our library project and dedicate those funds to our operating budget?
No. The library represents Smith’s single largest deferred maintenance need and is being funded primarily from a combination of bond proceeds and gifts. Those resources cannot be reallocated to other purposes.

How will staff and faculty be kept informed about financial matters going forward?
On a regular basis, President McCartney and Vice President for Finance and Administration Mike Howard will meet with students, staff and faculty, in leadership groups and at large. We will review financial information, take questions, and seek your insights toward a sustainable financial model for Smith College.