Update on the Economy
I write, first, to express appreciation for everyone's continuing efforts to address the challenges presented by the economic downturn. Because of your efforts and the careful financial decisions made well before the downturn, we avoided the serious disruptions faced by many other colleges. But as I noted last year, our relative strength did not mean that we could avoid forever some of the difficult long-term adjustments required by the worst economic shock since the Great Depression. It meant only that we had the time to make our choices strategically.
As we begin the new academic year, I confess that one of my own challenges is to help us find the balance between complacency and anxiety. We are indeed a strong institution, and I would rather be facing this economic downturn at Washington and Lee than anywhere else. But no company, no nonprofit, and certainly no college or university is immune to the fundamental changes in the economy. We cannot be complacent. I will be asking everyone to bear some of the burden, knowing that the continued strength of the community requires each of us to do his or her part. As we proceed, I will provide as much information as I can about our financial situation. We need a high level of understanding within the community, so that everyone understands the choices and generates ideas and suggestions.
At this point, let me address the planning and adjustments we must undertake this year in preparation for 2010-11.
Our Assumptions About the Economy
Amidst the uncertainty, we have to make reasonable assumptions about the future path of the economy. We believe the recovery will be slow and, as a result, the 16.7% decrease in our endowment last year will take some time to recover. The world has clearly learned the danger of relying on overly optimistic projections. We are anticipating an investment environment framed by caution and awareness of risk.
We are also assuming that the economic downturn will have a long-term effect on how individuals make major financial decisions in their lives, including decisions about personal consumption and investments-and the college they will attend. "Affordability" will be a dominant theme even after the economy recovers, along with "quality." In higher education, the days of being all things to all people and providing every amenity are clearly gone. Such an environment will favor institutions that have a strong sense of their missions.
In short, this economic downturn is not a normal one, and we will not return afterwards to what we had before. There will be a "new normal," still to be defined. The task for us is to make short-term adjustments to weather the storm, as well as long-term adjustments in anticipation of a different context for higher education, in general, and private liberal arts colleges, in particular.
The Impact on Washington and Lee
With the drop in endowment and with tuition increases less than we had planned, we will have $15 million less revenue for 2010-11 than we had projected. Some of that loss will be mitigated by the Board's willingness to forego the planned allocation of $8.6 million to the reserve funds, primarily the Trustee Reserve Fund. Still, we will have to rectify a budget deficit for 2010-11 of approximately $6 million in a total operating budget of $108 million. With few opportunities for additional revenue, we must do that primarily by decreasing expenditures.
Throughout the summer, the senior administration and members of the President's Council have been analyzing the choices and the challenges. We have been guided first and foremost by our commitment to providing our students an exceptional liberal arts education. We remain committed to our core mission and to the priorities of the strategic plan, especially our financial aid goals and our work-life initiative. Our core strength is our people-the faculty and staff, and the students.
While much remains to be done in the coming months, here is a summary of steps we have so far decided to take:
1. We remain committed to at least the current levels of financial aid for students for 2010-11, and we will seek additional funds through savings elsewhere and reallocation.
2. With very few exceptions, we will defer hiring for permanent faculty positions that were to start in 2010-11. We are not eliminating these positions, but they will remain vacant or temporarily filled by adjunct faculty.
3. We will seek a permanent 2.5% reduction in the baseline compensation budget for administration and staff, not through layoffs or pay cuts but through attrition and normal assessments of positions and changing needs. We project a 5% turnover in our staff and administration in the year ahead, which is slightly less than the 7% turnover in a typical year. Not all those vacated positions will be filled.
4. We will consider the sale of certain assets or properties not essential to the core mission or not cost-effective to maintain.
5. We will reduce our energy usage by 25% over the next four years. You will be hearing more about the specific steps all of us can take. If we each do our part, this can be a significant savings.
6. We will make several targeted adjustments in certain areas. Examples include elimination of printed copies of the University catalog; reconsideration of the scope of travel for the admissions office; and the reduction in the publication of the Alumni Magazine from four issues a year to three.
7. I have asked the provost to work with the vice-president for finance, the deans, and the dean of admissions to analyze the impact of a small increase in the size of the student body, taking into consideration the costs (in areas such as student quality, faculty-staff workload, and impact on services) and the benefits (of additional revenue).
These cannot be the sum total of the changes we must undertake, and, in fact, senior administrators have already begun working with individuals in their areas to explore several other possibilities. In the weeks to come, we will be working with virtually everyone on campus to explore savings in other areas, and your own suggestions will be invited and welcomed. We will also, of course, be working with the Trustees as they exercise their fiduciary duty on our behalf.
One additional note: We remain committed to the capital projects in the strategic plan, following the principle of not undertaking construction until we have raised the necessary external funds. The Colonnade and Hillel House, for example, are funded by external gifts that donors gave specifically for these projects. The sixth sorority house will get underway as scheduled. This project, while not externally funded, fulfills a commitment the Board made two years ago.
The Future of the University
The strength of the economy in the future and our ability to find savings throughout the University will determine the rate at which we can achieve our strategic goals for financial aid, compensation for faculty and staff, programmatic development, and capital projects. I see no reason to question the priorities in the strategic plan. In many important respects, the strategic plan is even more appropriate for the new set of conditions facing private liberal arts colleges. What is new, however, is that in order to achieve our priorities, we will not be able to continue business as usual across the University, and it will be impossible to divert scarce resources to areas not essential to our core mission and strategic plan.
If there is a silver lining in this new environment, I find it in our fundamental strength, certainly compared to many of our counterparts. We could rest upon that strength, and use it to avoid difficult decisions in the year to come. But that would eventually put us in the same position as everyone else, facing choices even more difficult than the ones we face now. The other option is to leverage our strength in prudent and carefully considered ways by taking this opportunity to assess our operations and to plan for a different future. In the end, this approach will allow us to emerge from the downturn even stronger. That's clearly the path I prefer, and I look forward to working with you in the year to come.