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Facing the Financial Crisis

Prudent endowment management has given the College more flexibility—and the benefit of time—but contingency plans are being made for significant cuts if economic conditions don’t improve.

On Dec. 10, President Alfred H. Bloom sent an e-mail to alumni outlining “a sequence of measured courses of action” that will be undertaken by the College in the face of the decline in financial markets. He wrote that despite the College’s good record of investment success, Swarthmore “has not been immune from the effects of this decline,” having experienced an almost 30 percent drop in the endowment from its June 30, 2008, value of $1.4 billion. Bloom said that in order to “to conserve for the future the resources that past generations have so carefully conserved for us,” the College would take the following steps:

• Effective immediately, the College will pull back from all nonessential construction work, refrain from initiating any new programs, and stringently evaluate any faculty or staff hiring.

• In developing the annual budget for 2009–2010, to be submitted to the Board of Managers in February, we will shape recommendations on enrollment, tuition and fees, and compensation in ways sensitive to the financial environment and set guidelines on spending across departments that ensure tighter management of our resources.

• Over the coming semester, we will develop a contingency plan for more significant reductions in the budget, which the College will begin to implement if by this time next year the College’s financial situation has not improved.

Bloom also stated that “the College will adhere fully to its current financial aid policies for all students presently enrolled as well as for those admitted to the Class of 2013.” He concluded by expressing his confidence that “by acting together and by maintaining educational quality and regard for the people who make up this remarkable community as our priorities, we will weather this environment with the distinctive excellence of this college undiminished."

(Bloom’s e-mail to alumni was printed in the winter issue of The Garnet Letter and may be found online at Similar messages were sent to parents of current students and to members of the faculty and staff.)

Following the release of President Bloom’s message, Bulletin Editor Jeffrey Lott sat down with Vice President for Finance and Treasurer Suzanne Welsh to further clarify the College’s financial position and the impact of the world financial crisis on Swarthmore’s endowment, budget, and program.

Bulletin: How has Swarthmore’s endowment been affected by the financial crisis?
Welsh: We’ve seen the largest downturn in financial markets since World War II, so the impact on Swarthmore’s investments, like those of every one of our peers, has been significant. On June 30, 2008—the end of our last fiscal year—our endowment had a market value of $1.4 billion. Although the value fluctuates daily, we estimate the overall decline from June to December will be around 30 percent, or about $400 million. This estimate takes into account an allowance for write-downs of some of our private investments. We will not know the exact value of these write-downs until early 2009.

Has the value of Swarthmore’s endowment followed market indices such as the S&P 500?
In downturns, we typically perform better than the indices, and this market decline has been no exception. Although our equity investments have declined, our 15 percent allocation to U.S. Treasury bonds has preserved value in the endowment.

Was Swarthmore prepared for such a decline?
No one was prepared for the magnitude of recent losses, but Swarthmore entered this crisis—which really began in summer 2007—in a relatively strong, risk-controlled position. The bond allocation provides stable income during a downturn. We also converted our variable-rate debt to fixed-rate notes before the credit crisis became severe. Our equity positions were well diversified, and the majority of assets in the endowment are readily sold, so that there is ample liquidity. All of this has given us flexibility and the benefit of time.

How much does Swarthmore depend on its endowment?
In recent years, more than half of the College’s annual budget has been derived from the endowment. Our long-term strategy is to preserve these assets and protect them from inflation while providing a constant, predictable stream of income to the budget, including to financial aid. We’ve pursued a prudent spending strategy in good times so that we can increase our spending rate in down markets. Based on current endowment values, the Board anticipates for next year the highest spending rate in the College’s history—six percent. The previous high was 5.4 percent.

Will this translate into additional dollars?
Not really, because the overall size of the endowment has declined so much. The spending rate is actually a little misleading because, in actual dollars, endowment support of the budget will not change much from this year—and may be lower.

Will the endowment continue to provide the same level of support?
We have some flexibility for the next year, but the magnitude of the decline is beyond what our policies will enable us to tolerate over the long term. With a prudent approach to spending, including a construction moratorium and close evaluation of hiring to fill vacant positions, we can weather the current fiscal year. The following year, 2009–2010, the budget will also be very lean, but because of our stronger position going into the crisis, we can put off more significant measures until we see what develops a year from now.

Why not increase the spending rate further to meet the College’s needs?
We can’t sustain a higher rate of spending without eroding the underlying value of the endowment for future generations. I call it “intergenerational equity.” Generations of philanthropy and historically rising equity markets have provided today’s Swarthmore students with significant advantages. Excluding financial aid, we spent more than $80,000 per student during the 2007–2008 fiscal year—an expenditure that provides for a low student-faculty ratio, outstanding facilities and services, and first-rate academic and laboratory resources. In addition, half of our students currently receive loan-free financial aid awards that meet all of their demonstrated need.

If we were to dip further into the endowment during these difficult times, we might be able to sustain the current level of expenditures for a few years—but not for what we must think of as the infinite life of this institution. This generation would have taken more than its fair share of our resources, leaving future generations with a diminished College.

Are there other pressures on the budget?
It’s hard to predict what will happen, but on the income side, we may experience a decline in philanthropic support both from individuals and institutions. Many nonprofits are seeing this, although we think that Swarthmore’s supporters will do everything they can to keep this college strong. As President Bloom indicated in his message, it’s especially important to keep up our Annual Fund, because those dollars go directly to the operating budget.

On the spending side, we expect to see an increase in financial need among our families. The Board has committed to maintain our current financial aid policies—including the recently instituted loan-free financial aid awards—for current students and the next entering class. Thus, we will likely need more funds to meet the demonstrated need of all our students.

Tell us what you can about creating the contingency plan.
We’ve committed to the Board that by April, we will go back to them with a set of plans for the 2010–2011 fiscal year that will reduce spending to levels that will be sustainable long-term and protect the endowment for the future. In developing this plan, we will welcome suggestions from faculty, staff, and students—and we always welcome ideas from alumni. We will be looking for savings large and small. Whether we have to put these plans into effect will depend on the global financial situation at the end of 2009, but we want to be ready.

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