By HAILEY LEE ’14
Last month, the Board of Trustees unanimously voted to reduce the endowment spending rate from 4.5 percent to 4.25 percent. This adjustment will decrease how much income the College draws from the endowment each year to spend in the operating budget.
Every three years, a trustee task force, which includes faculty representation as part of the Budgetary Advisory Committee (BAC), reviews the College’s endowment spending policy. The task force’s analysis this year found that the reduction was timely in order to prevent lower annual investment returns from the endowment.
For the 2012 fiscal year, the College’s endowment investment return was 12.5 percent with a final value of $1.579 billion. The Board of Trustees Investment Committee lowered projections for the endowment’s investment returns. They expect returns to be a little over 7 percent.
The task force presented its suggestion to the Financial and Investment Committees, which voted to approve the endowment spending rate reduction. The two committees then presented the revision to the Board of Trustees for a final vote.
Chief Investment Officer Deborah Kuenstner says the reduction will correct for overspending from the endowment in previous years due to overestimated inflation.
Each year, 20 percent of the total budget from the endowment is based on the average endowment value of the past three years times the target-spending rate. The other 80 percent is derived from last year’s amount of spending, adjusted for inflation.
Until now, inflation forecasting was set at 3.5 percent, although in reality inflation has consistently been lower than 2 percent. This overestimation of inflation resulted in revenue drawn from an artificially high endowment value, ultimately producing overspending beyond the target spending rate.
The reduced rate of 4.25 percent will lead to an initial decrease of $1.2 million in endowment income from the operating budget for fiscal year 2015, which starts July 1, 2014.
Because 80 percent of the endowment’s spending formula is based on the previous year’s spending amount, this decrease will compound in future years. Kuenstner estimates that by fiscal year 2018, endowment spending will decrease by $4.3 million.
As a secondary correction, the Board of Trustees voted to discontinue the fixed inflation rate of 3.5 percent and instead use the previous year’s real inflation rate in the spending formula for the following year.
The Chair of the Budget Advisory Committee, Professor Bryan Burns, is confident that using a past real inflation rate rather than a projected future number will allow for flexibility in the endowment spending that would better reflect market conditions.
“The goal is to protect the value of the endowment in perpetuity. This will preserve the strength of the endowment for future generations of students,” he said.
Despite benefits to lowering the endowment spending rate, the decision comes at an inopportune time when a considerable amount of funding for Wellesley 2025 campus renovation projects will be sourced from the operating budget, 40 percent of which is comprised from endowment income.
The administration is aiming to raise $20 million by fiscal year 2018 through rebalancing of the College’s revenues and expenses, with $10 million specifically reallocated from the operating budget.
The estimated $4.3 million reduction in endowment spending by fiscal year 2018 reflects a significant setback in Wellesley 2025 funding goals.
In the campus-wide town hall meeting on Nov. 18, Provost Andy Shennan, chair of the Provost Budget Committee, and Burns emphasized that these estimated reductions are not an absolute short term cut from the operating budget. Rather, the reductions will reflect a slower growth of income from the endowment in the future.
Vice President of Finance Ben Hammond added that the trustees were very aware of funding challenges to Wellesley 2025 when deciding on the reduction.
“The Board’s primary charge is to make sure the spending rate from the endowment is reasonable. The data is telling us we were overspending for several years. The timing is challenging but we needed to get ahead and not wait to address this,” he said.
In a statement, Margery Lucas, chair of BAC before Burns, specified the steps to re-balancing the budget.
“The College needs to spend less wherever it can. Contraction is painful. The Provost has already announced the need for reductions in faculty and staff,” she said. “As for whether there will be further need for other kinds of difficult spending reductions down the line, I really do not know, although there are efforts underway to help the budget by raising revenue rather than just by cutting spending.”
At the town hall meeting, several administrators and faculty members voiced concerns over cuts in salary compensation and jobs. During the 2008 global financial crisis, the College had to balance the budget through staff reduction. Many questioned whether it was the College’s intention to do the same again when re-balancing the budget for Wellesley 2025.
To afford Wellesley 2025 renovations, the College plans to reduce administrative salaries by $800,000 by fiscal year 2018. This reduction is half of what it was in 2008.