Editorial: Dartmouth’s Deficit; College’s Fiscal Challenge Persists
It seems like just yesterday that the president of Dartmouth gave a well-attended lecture on college budgeting 101. Jim Yong Kim stood before faculty and staff in December 2009 and explained that the college would have to spend less, save more, and plan prudently for a more volatile economy by protecting its endowment, which had lost $1 billion in the wake of the Wall Street crash.
At the time, Dartmouth faced a projected budget gap that officials said would rise to $100 million within a couple years unless the college exerted more fiscal discipline. Seven months later, Kim and his budgeteers announced that the gap had been closed by making “cumulative changes in hundreds of areas.” Staff positions were cut, employee benefits trimmed, financial aid adjusted, procurement, printing and waste disposal made more efficient. Poof: problem solved.
Or was it? While Kim is gone, concern about deficit spending remains. The college posted a $1.8 million gap for the fiscal year that ended in June, Bloomberg News reported recently. That’s small relative to the institution’s $950 million annual operating budget, but it’s a sign that revenues and expenditures are out of balance. Kim’s successor, Phil Hanlon, has spoken often, if less didactically, about the financial challenges within the institution. He’s asked all academic and administrative divisions to look for greater efficiencies and requested the medical school to cut $13 million over the next three years as the college seeks what officials call a “sustainable budget model.” A college spokesman says that Dartmouth is “committed to a continued cultural shift toward more rigorous financial discipline” based on expectations that federal funding will diminish, endowment growth will slow and tuition must stabilize.
How will the college implement such a cultural shift, if it hasn’t been practicing rigorous financial discipline up to now? And what will that shift mean for students, faculty, staff and the Upper Valley community?
Four years ago, Dartmouth and many of its peer institutions learned the hard way that endowments, which are now heavily invested in high-risk funds, are more susceptible to fluctuations in the financial markets and are thus an uncertain source of revenue. The steep drop in the value of Dartmouth’s investments precipitated an air of crisis and invited caution in the way the endowment is spent.
Dartmouth’s portfolio has rebounded, thanks to robust gains in the stock market, and is now worth $3.7 billion. It currently supports 20 percent of the annual operating budget — a smaller share than previously but still substantial. Nevertheless, budgetary angst persists, and not only because officials recognize that what goes up can and probably will come down. The angst stems from a realization that the current challenges — affordability and sustainability — reflect structural budgetary problems endemic to the financing of private colleges and universities. In other words, the business model appears to be failing.
Last year, Moody’s Investors Service changed its outlook for U.S. higher education from “mixed” to “negative,” citing mounting pressure on revenue sources, including tuition and government funding. Congressional cuts to federal research have had a substantial impact on Dartmouth and larger Ivy League research universities, many of which were also in the red last year. Harvard and Yale, two of the richest colleges in America, posted deficits of $33.7 million and $39.2 million respectively, Bloomberg reported. These deficits emerged despite deep cuts both institutions made in 2009 after their endowments lost a quarter of their value.
Little wonder that so many are biting their nails, anxiously questioning the way colleges and universities conduct themselves. Debt more than doubled between 2000 and 2011 at some 500 institutions rated by Moody’s, while cash, pledged gifts and investments declined more than 40 percent. Tuition as a share of revenue increased at private colleges from 29 percent to 40 percent. Meanwhile, costs continue to rise, notably for employee benefits and for financial aid programs, which are essential to attract students other than the ultra-rich.
For the moment, Dartmouth appears to be in a better financial position than some of its Ivy League peers. The status quo, however, is fraught with obvious risks, and the status novus has yet to be fully articulated.