$14m Shortfall? Financial Aid Cuts? Read On…

President Gann offered a talk today in McKenna Auditorium on the financial crisis’ impact on CMC. It didn’t seem that well-publicized; I only received one email about it, and only four students and Dean Huang were in attendance.

The summary: $12-14 million budget deficit in 4 years, immediate budget freezes & cuts, $600,000 cut from financial aid, cheaper food, bigger classes, visiting students, a bit of screwy accounting math, rebidding the Kravis Center project, and the possibility of a summer school and longer pay freezes—all driven by a 32.5% endowment loss so far in fiscal year 2009 and less gift money.

Let’s start with the biggie:
CMC will face a $12m million budget shortfall as early as 2012, and $14m shortfall by 2013. The budget shortfall is estimated to be $10m by fiscal year 2012, and nearly $12m by 2013. However, since the College maintains a $2m budget surplus each year (and inevitably draws down on it, according to Gann,) those numbers grow to $12m and $14m, respectively.

Immediate cuts:
CMC, as you may know, smooths out endowment withdrawals over 12 quarters. This means two things: First, the effect of the recession/depression won’t be fully felt at CMC until the fiscal year of 2013. Second, because of a great FY 2007, in which the endowment rose 27% (as opposed to the now over 32% loss in the past several months,) endowment withdrawals would actually rise over the next year or two. However, President Gann plans to propose at the Board of Trustees today and tomorrow that CMC freeze endowment withdrawals at current levels—and said that the Board may even want “to take more of a gulp now.”

Where money’s (not) coming from:
More cuts would make sense, given that, of the several models she showed of future endowment growth, we’re currently between “Pessimistic” and “Very Pessimistic.” CMC usually provides for 29% of its annual budget from the endowment, and this loss is no small deal. In addition to endowment withdrawals, the other two major sources of funding, net student tuition (49%) and gifts/grants (18%,) are also in question. Gann said that gifts and grants are significantly down, and tuition for the Class of 2013 might go down as well.

Financial aid:
Gann said, “The first thing we did is look at our financial aid,” from which $2.8m has been saved. As the administration has trumpeted, the need-blind and no-loan policies have been ‘secured.’ However, what took a few questions to reveal is that approximately $600,000 in aid will be cut, primarily by determining the “need” in “need-blind” less generously. This is important--CMC, although supposedly need-blind, can alter the formulas it uses to determine how much your family can 'afford to' contribute. The other $2.2m in cuts was avoided through timely capital campaign gifts. Gann said that only four to five kids had asked for financial aid reevaluations for this semester, and claimed, “We had very generous financial aid already.” Also, CMC apparently used to let students keep outside scholarships in addition to the money those students would get from the College. This strikes me as a bit ridiculous, and it’s a good thing that it’s changing.

Job searches, pay freezes:
Gann reminded everybody of the pay freezes in place, and said that if the situation continues to worsen, pay may stay frozen longer. She said that some economists say that pay freezes (or, followed to its logical conclusion, pay cuts) simply reflect the impact of a decreased demand for labor. She acknowledged that wages are sticky, so there probably won’t be pay cuts, but longer freezes are a possibility. Also, only 9-10 of the earlier 15 planned job searches will be completed; Gann said that a further option is to “keep chipping away at the size of the workforce itself.” When asked, she said that this could lead to larger classes in some disciplines, especially in core classes like Gov 20 & Econ 50.

More on cost-cutting :
Each Vice President was asked to trim 2-3% from his budget. Including eight eliminated employee positions, Gann says that CMC has saved $1.5m, mostly by reducing non-employee expenses. She added, “I’d like to see at least another $500,000 come out of lowering costs.” She mentioned “travel, phones, energy, water, grounds, [and] cleaning” specifically, which makes me wonder how strictly necessary a lot of our overhead costs are to begin with. Food was one big non-educational expense. “You might see some things in Collins,” is all Gann said. The Stalinesque ‘Food Committee’ at Pomona has acted to save money by making it harder to get food once you're in a dining hall, and it seems as if we may follow suit in some, way, shape, or form. As a student who regularly exhausts the sixteen meal plan, I’m not too excited about that—but better that than my education, I suppose.

Summer school & visiting students:
Summer school is a possibility, but would require a lot of administrative work to set up, so all plans would be for next summer. What’s more likely to happen sooner is allowing visiting students. Currently, CMC students can study at other colleges, and typically pay full tuition at those colleges to do so. Gann said that inquiries from potential visitors to CMC have been coming in for years, but that CMC used to decline because “we have felt that what was really important was to educate full-time students who become our alumni.” This is changing because admitting visiting students, who will not be eligible for financial aid, is “a pretty easy way to garner some additional revenues.”

Accounting gimmicks:
The changes in accounting could hurt future capital projects. Gann said that CMC usually straight-line depreciates its buildings over 40 years, with a 1.4x replacement cost, but that CMC is looking at depreciating its buildings over 60 years instead of 40, and has already lowered its projected replacement cost to 1.2x. For those who haven’t taken accounting, that means that our buildings (in the accounting world, anyway) are worth 1/40th less each year, until, after 40 years, their supposed value is $0. The 1.2x replacement cost means that CMC expects to pay 120% of the original construction cost to replace a given building, and so we have to put that much money away to replace it. Essentially we’re putting off expenses and diminishing the size of future capital investments. Is this a good idea?

Deflation is a good thing?:
On the bright side, deflation could help the College. CMC attempts to maintain the endowment’s purchasing power, and so recent deflation in some areas means CMC can spend more endowment money and maintain that purchasing power. Parts of the Kravis Center project will be rebid; Gann actually said that the ratio of “supply and demand” of contractors to new building projects had changed.

Well, that's all I have for now. I'm working on getting the PowerPoint used at the presentation, and will post some images if/when I get it.