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Remarks on the Current Financial Environment

Faculty Meeting
October 6, 2008
Remarks on the Current Financial Environment
Ruth J. Simmons

Good afternoon.

As I have reported before, there have been for some time harbingers of significant economic difficulty; today, the extensive consequences of that difficulty are becoming apparent. I want to discuss with you what we are doing to deal with the effects of the global economic meltdown on the University, what guidelines we might use during this period, and the actions we currently anticipate might be needed in view of this situation.

For the current fiscal year, ending June 30, 2009, we are on a reasonable, manageable trajectory insofar as the operating budget is concerned. The long-term pool produced a total return of 6.3% for fiscal year 2008 (the year ending June 30, 2008). Brown’s return was among the top 5-6 endowment returns in the country. In the fiscal year to date, as of the end of August, we were down about 5% and, given the difficult results for September, we expect the results at the end of the first quarter to be even lower.

I hope it will be some measure of comfort to you that we have been modeling a variety of scenarios for a period of slower growth. These efforts were intended to prepare us for unknown factors on both the upside and the downside. You will notice, too, that, in addition to the work of the planning office under Dick Spies as well as the oversight of the budget and finance process by David Kertzer and Beppie Huidekoper, we have had what often appeared to be an excessively cautious approach to decision making. That is to say, even as we were inclined to build more cost into our budget, we took into account the possibility that revenue streams could weaken. We have also been paying close attention to risk. Russell Carey’s new position as well as a strengthened audit function and committee are signs of the kinds of steps we have been taking to assure ourselves and all of you that the risk parameters in use are fully in keeping with our ability to manage in just such times as these.

Now, we are required to draw upon that extensive planning to cope with an economic situation that is more challenging than any of us expected. The expertise of these individuals and that of members of the Corporation leads us to believe that we are in a good position to deal with this crisis. So, what specifically do we have in place to help us make the right decisions during these difficult times?

Our governance changes of several years ago were meant to prepare us well for such a time. We set up the Academic Priorities Committee to make sure that faculty involvement in priority setting was available in an on-going and meaningful way. The URC was developed with broader community participation to ensure robust oversight from varied segments of the campus in decisions about the ongoing operating budget. The BUCC was created to have the widest spectrum of input in regard to the incorporation of broad community values in our decision making. We therefore anticipate that we will utilize these and other established structures to assist us in making the right choices among the many things we have the opportunity and obligation to do.

It is true that no matter how strong and participatory our governance, we may have to make choices beyond the capacity of such bodies. We are also prepared for situations where consensus is lacking. Last week, a special meeting of the Budget and Finance and Investment committees of the Corporation met in special session to discuss the overall approach that we should take in regard to the budget and our investments, given the evolving economic and financial pressures. Under the leadership of the Chancellor, we had a wide ranging discussion that included our values as an institution of higher education, our dedication to our students and the quality of education we are committed to offering them, and the prospect of having to slow some program development and expansion as a consequence of market conditions. These committees reaffirmed the importance of the Plan for Academic Enrichment and the need to maintain the current course of strengthening the University. They expressed the view that, with prudent adjustments, slowing in some instances our pace, we should be able to continue to make progress toward the Plan’s overall goals.

Now, what can we say about how the University is dealing with this issue on a day to day basis? For the last 6-9 months, we have been monitoring our liquidity and paying close attention to our financial managers and counterparties with regard to both our assets and our liabilities. We are fortunate that, to date, we have not encountered some of the short term disruptions that many colleges and universities have faced. On the other hand, we are not immune to the severe declines in the markets, the rising cost of debt, the potential impact on giving, the real impact on financial aid, and the overall result for our students’ families, our employees and their families, and the Providence community.

It is evident that no one knows how long and how deep this upheaval will last but it is fair to say that few believe that the environment will change dramatically to the upside in the near term. With this in mind, we should expect to see little if any revenue growth in the next year. The URC, which has already begun reviewing budget priorities for next year, are aware that their job will be particularly challenging this year. I expect to receive their FY10 budget recommendations in early December before making my final budget recommendations to the Corporation in February.

All bodies making commitments of Brown resources should bear in mind the following factors as we contemplate the budget and revenue constraints in the coming period:

  • Brown’s principal purpose is to focus on its academic and research mission and we must continue to do so in this period.
  • Our educational mission being paramount, we will maintain a strong commitment to support the continued matriculation of students. This includes adhering to our financial aid policies and standards even though we believe that the financial aid budget will pose great challenges during this period.
  • We have made strides in our market-based employee compensation and we will seek to maintain our competitive position as well as the strength of our work force.
  • In view of the extensive work we have done to establish university priorities, we should continue to focus on programs and activities aligned with the Plan for Academic Enrichment.
  • We will examine all aspects of operations to determine where services and programs could be modified, if necessary, to assure that we can follow through on those priorities stated above.
  • We should use this period to determine what sensible organizational changes could be made at this time to eliminate waste and maximize our effectiveness in meeting our long term goals.
  • We have worked to build structures to improve the input of various segments of the community and to ensure that we maintain open and respectful communication. This is a time when such measures and values will matter more than ever.

In addition, we are taking some initial steps to determine whether there are projects that could be deferred or slowed. For example, we are reviewing our capital plans with particular attention to their funding status. Recognizing that some gifts could be placed on a different payment schedule and that our hope of raising additional funds may be dampened for a time, we might have to change the schedule of projects, based on the capital available. In any case, we are likely to see some projects deferred until we have more certainty about how we can finance them.

There is little more to be said at this time. This is a rapidly evolving situation and we are working to be as attentive as possible to the factors that are emerging. We are in touch with experts on an ongoing basis, working closely with the Corporation and Chancellor Tisch, and pursuing every avenue to support priorities of the Plan. We will do our best to keep you informed about these developments.

I ask your help as well. These are times of great stress for many in our community. If you are aware of personal and familial circumstances that require our help, please let us know. I have asked Karen Davis and Margaret Klawunn to prepare a communication to the campus pointing out any emergency support available to help students and employees during this time.

I would be happy to take questions.