June 5, 2009
Since last fall I've written to the Dartmouth community periodically, often in collaboration with Provost Barry Scherr, to update you on College budget matters.
Today I'm writing to address in one place a number of recent financial developments you are probably already aware of, in hopes of giving you a current overview plus some perspective. In general, I am reporting that even in these difficult financial times worldwide, Dartmouth still maintains great financial strength in comparison to most higher education institutions and we continue to advance our academic standing, remaining a leader in higher education.
The recent developments I want to review are as follows:
Bond Issues: Dartmouth has recently completed sale of two bond issues authorized by the Board of Trustees, which together are worth $415 million: $165 in new non-taxable bonds to support key capital projects including construction of the Class of 1978 Life Sciences Center; and $250 million in taxable bonds, to provide additional liquidity to the institution, if needed in the current financial climate. We obtained excellent terms for this debt with our tax-exempt bonds yielding 4.93% over 30 years and our taxable 10-year bonds yielding 4.96%. The taxable rates had the lowest spread over treasuries of any college or university in the country. These low rates and the strong demand for our bonds demonstrate the confidence that investors have in the vitality and financial health of Dartmouth. This is our first new bond issue since the 2006-07 academic year, and will provide us financial flexibility and protection as Dartmouth continues to pursue its mission.
Credit Ratings: In preparation for issuing bonds, the College sought new credit ratings from Standard & Poor's and Moody's Investors Services. S&P downgraded Dartmouth's rating slightly from "AAA" to "AA+." Moody's subsequently issued a parallel downgrade (using different terminology), from "Aaa" to "Aa1." Both agencies gave us a "stable outlook." News coverage of such developments tends not to point out that these are still very strong ratings that continue to place Dartmouth among higher education institutions regarded as being particularly credit-worthy and financially strong. The new S&P and Moody's designations represent the highest level of that firm's AA class, which they define as applying to organizations with a "very strong capacity to meet financial commitments." For instance, we share AA/Aa with a number of peer institutions including Brown University, the University of Pennsylvania and Duke University.
We are not surprised about either of these ratings. When we had our last full review by the rating agencies, we were told by S&P that drawing additional debt would likely result in a downgrade. It is important to recognize that we are committed to managing our finances to achieve our mission, not to maintain our credit rating.
Endowment Value: According to our projections for the most recent fiscal quarter (ending March 31, 2009), the current market value of the Dartmouth endowment is approximately $2.6 billion. The decline from the $3.66 billion as of June 30, 2008 is comprised of a negative 24% endowment investment return, a decrease due to planned distributions from the endowment for operations and an increase due to gifts and transfers into the endowment. In the current financial circumstances worldwide, this represents strong continuing stewardship of our endowment. The S&P report noted, for instance, that the decline in market value between the end of last fiscal year and the end of calendar year 2008 was "in line with market trends." More recent comparative data suggest that we are doing better than the majority of our peers.
Departure of Chief Investment Officer David Russ: Credit Suisse, a leading international bank, announced on June 2 that it has appointed David to head a new Investment Strategies and Solutions Group created by the firm's Asset Management Division. As I said in a message to the President's Administrative Forum, anyone familiar with the financial world will realize that David's recruitment for this new position reflects extremely well not only on David professionally, but also on the work done at Dartmouth. Under David's management, the value of Dartmouth's endowment grew $1 billion before the current worldwide recession set in. During those years our endowment investments posted gains as high as 23% as David's strategy and handling maximized the opportunities of a well diversified portfolio. That positioning has greatly lessened the negative impact of the difficult financial period we are all now going through. Students, faculty and the entire Dartmouth community have benefited from David's excellent management and leadership. That said, I think David would agree that with the extraordinary investment management team he assembled in the Investment Office -- a team that remains in place -- the endowment is in extremely good hands even in this volatile environment. I expect that we will conduct a national/international search for David's successor.
Dartmouth Medical School Budget Announcements: On May 27, DMS announced its budget reconciliation measures for the coming year, which include elimination of 12 staff positions and reductions in hours for another 40 positions, out of a total employee base of more than 1,160. While it was as painful for DMS to go through this process as it was for the rest of the institution, all of us have tried hard to hold the impact on faculty, staff and students to the minimum level possible while taking measures that will allow us to meet budget goals for Fiscal Year 2010 and FY 2011, and preserve a positive trajectory into the future.
Financial Outlook for Dartmouth: Given the impact of the recession on all organizations, each of these developments attest to Dartmouth's continuing financial strength, and to careful and strong management at all levels, of Dartmouth's resources.
For instance, while it might seem counter-intuitive to issue bonds with even a slight credit-rating downgrade, this move has allowed us to refinance $35 million in bonds at a more favorable interest rate. And by issuing taxable bonds, Dartmouth will also now have larger reserves to be able to reduce dependence on its endowment if necessary, depending on the pace of the recovery of the economy. A time may come when we choose not to be selling endowment assets in order to provide operating capital or to meet calls on investment capital.
The S&P credit rating also noted:
We are prepared to weather the current financial storm and remain in a strong position to focus support on all parts of our mission including educating the most promising students and preparing them for a lifetime of leadership.
Our continuing financial strength is due to the support of the entire Dartmouth community, many of whom have rallied to contribute to the budget reconciliation plans instituted this winter and spring to reduce expenditures and others who have generously contributed financially during a time of particular need. We will remain focused on introducing operating efficiencies (the "X Projects") to identify potential savings through inter-departmental collaborations as well as on identifying funding for new academic initiatives that advance the College. While we continue to be vigilant about the size of the Dartmouth workforce, we have made a particular effort to give priority to staff whose positions have been eliminated as a result of the Budget Reconciliation Process. I am pleased to report that 16 staff members have been rehired into open positions at the College as of today.
We have put in place a $72 million plan to balance our operating budget for the next two years. Now, we need to be looking into the future to develop a stable, long term financial plan for the College. This will engage the campus and cause us to reexamine how we operate; how we plan for the future; and what things are most important to us.
While our endowment has declined over the last two years, our assets have grown when we consider College assets more broadly to include human capital, our physical plant and the intellectual assets that serve as the foundation of the College. We have strengthened and advanced the institution in numerous ways. Had we foregone those investments over the past years, we would not be such a vibrant institution that has attracted a remarkable group of students entering next fall and a distinguished faculty, passionate about teaching and scholarship.
As we continue to work on management of our budget, our endowment and other financial resources, I will continue to update you from time to time on our status. I look forward to continuing assistance from all members of the Dartmouth community to help advance the distinctive nature of Dartmouth, to enhance its contribution to society and to keep our College at the forefront of higher education.
