The turmoil roiling the world’s economy has not left Notre Dame unscathed, but University finances might be a lot worse if it weren’t for Father Ned Joyce, CSC. Twenty-two years after he left office and five years after his death, the former executive vice president is getting credit for introducing a culture of fiscal conservatism that has helped the current administration fend off the draconian cuts many other schools have had to impose in recent months.
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At Notre Dame there have been no layoffs and no salary cuts. New faculty are being hired where needed. Student aid, far from being cut, has increased significantly. No campus construction projects (there are seven under way or just completed) have been put on hold. And as summer arrived on campus with a slight whiff of economic recovery in the air, administrators were breathing a little easier than they were earlier this year. No one was ready to suggest that the worst is over, but for the moment the tension level is down a bit.
John Affleck-Graves, the University’s current executive vice president, is among those who give credit to his legendary predecessor. “This institution is in the position it is because of the foundation laid by Father Ned,” he says. “He established a strong culture of keeping debt low and always putting something aside. I inherited that culture.”
But not even Father Joyce faced challenges quite as severe as those of the last year. At the center of efforts to keep Notre Dame fiscally steady has been a group of central administrators including Affleck-Graves; John Sejdinaj, vice president for finance; and Scott Malpass, vice president and chief investment officer. As they watched the stock market wither and the banking system founder, they responded with a carefully planned set of scenarios to minimize the fallout within the University community.
They acknowledge that the nature of universities gave them an advantage over businesses with inventories to juggle. Faculty salaries don’t vary a lot from year to year. The size of the student body is relatively fixed, and so are the costs of operating the dorms. “These constants,” says Affleck-Graves, “make financial planning easier. We can look out four or five years and know what our commitments will be and how we’re going to meet them.”
Still and all, by last February the picture was bleak, with the Dow Jones tanking, mortgage foreclosures affecting one in 54 American homes, and unemployment levels prompting comparisons to the Great Depression. Other universities were limiting salary increases and freezing new hires, and layoff fears were palpable. That’s when University administrators, together with Drew Paluf, Linda Kroll, Kevin Cannon, Rich Bellis and others in the finance division, decided on a bold and risky move. They embarked on a series of town-hall style departmental meetings in which they laid out the University’s fiscal strengths and vulnerabilities in full-disclosure mode.
This was no vanilla “everything’s gonna be okay” exercise, but a stark assessment of the perils faced by Notre Dame and the country. The goal was to calm fears. The risk was to heighten apprehensions.
The centerpiece of these staff meetings — and similar information-sharing processes among faculty — was a presentation tracing several scenarios involving the University endowment pool. Among Notre Dame’s sources of revenue, endowment income is huge, accounting for 27 percent, or nearly as much as tuition income. But unlike tuition, a predictable constant, the endowment pool’s value tracks, at least in part, the world’s stock markets, and that’s not been a good ride lately. From a high of $7.1 billion in July 2008, the endowment level was down to $5.3 billion late this past winter.
As the fund’s worth went down, the income it generated was approaching 5 percent of market value, a danger point that would mean spending cuts, a search for new sources of revenue, or both.
Given an annual University spending budget of $245 million, for example, a dip in the endowment pool value to $4.75 billion would leave the University $7.5 million shy of meeting expenses. If the endowment were to slide further to $4.5 billion, the books would be unbalanced by $20 million. At that point, cutting jobs would be a likely response. And a $4 billion-even endowment level would put spending $45 million in the red.
Fortunately, a late spring market bump made these scenarios less likely than they seemed in late winter. But Scott Malpass, who nurtures the endowment pool, would be the last to claim that the market nadir is behind us: “In bear markets you can get a major rally of 30 to 40 percent and then see the market backslide by 30 percent. This can happen two or three times. My worry is that the country’s toxic bank debt still has to be restructured, and we don’t know yet where the bottom is.”
If the market and endowment do keep going south, Affleck-Graves says, “We know what our response would be at every 5 percent drop.” Among the steps available to avoid red ink are increasing enrollment to bring in additional tuition revenue; reducing jobs, either through a hiring freeze or layoffs; and cutting the budgets of all operating units by 5 percent.
In fact, the first of those steps has already been invoked to provide some fiscal breathing space. The University plans to admit 50 additional undergraduates for 2009-10, boosting the freshman class size to 2,035. “This will build a little cushion for us,” says Affleck-Graves, adding, “we also have tightened up the budget and cut some expenditures.”
Among the concerns of the past year on the fourth floor of the Main Building, liquidity of assets loomed large. In September 2008, the financial services firm of Lehman Brothers filed for the largest bankruptcy in U.S. history, and suddenly the nation’s banking system virtually closed down. Although the University was fiscally sound and had an enviable Aaa debt rating, it took several steps to protect its access to cash for day-to-day operations.
“We broadened both the number of banks we use and the amount of assets we can call,” says Affleck-Graves. “We felt it prudent to have the ability to act quickly in case we need to. In a liquidity crisis, the danger is being unable to get cash out of the bank.”
As they plan for contingencies, University officers remain unflinchingly clear about budget priorities. They include academic and student life, faculty and staff salaries, protection of jobs and generous financial aid. The last of these probably wouldn’t have been on the list two decades ago, but times have changed on the aid front.
In a presidential letter to faculty and staff last December, Father John Jenkins, CSC, wrote: “Offering an affordable education for talented and committed students is (our) key priority. We . . . remain committed to maintaining our need-blind admission policy while also meeting the full demonstrated financial need of all our students.”
Joe Russo is the man who carries out that promise. The director of student finance strategies and financial aid fretted a little last fall because early-admission numbers were lagging. A letter from Father Jenkins went out to high school seniors in the University’s inquiry database that said, essentially, don’t forgo applying because you think you can’t afford us. By the end of December, Russo was no longer worried. The admissions office was swamped with the second largest number of applications in history. What’s more, says Russo, “this may prove to be the best quality and highest diversity class ever.”
To no one’s surprise, applications for aid for the year ahead are up by at least 10 percent, and the amounts sought are similarly inflated. But the University is equipped to meet its full-need pledge. In the year just ended, Notre Dame spent $75.5 million on undergraduate scholarships; next year it will spend $83 million. To give those numbers some perspective, in 1990 the amount devoted to aid was $5.5 million. That was the year when the trustees made the commitment to make Notre Dame affordable to all qualified students.
Many colleges cope with financial stress by discounting tuition. At Notre Dame, Russo points out, all scholarship dollars “are real dollars.” The goal, he adds, is for all aid money to come from the endowment; at present 67 percent does. Annual gifts, other unrestricted donations, licensing income and revenue from the NBC football contract make up the difference. For 40 percent of Notre Dame students, loans are another part of financial aid coverage, and some parents take out family loans as well.
No one will be happier than Scott Malpass when the day comes that the endowment pool can shoulder the bulk of the financial aid burden. The University investment officer is a self-confessed conservative, but he has the benefit of a long view of market ups and downs.
“For the three fiscal year quarters through March," he says, "we were down 25 percent in total investment return. We have given back about two-and-a-half years of performance but are still ahead of where we were in June 2006. The S&P 500 had gotten back to 1996 levels in early March, down over 50 percent from its peak. Other top 20 endowments are down between 25 percent and 32 percent for this same period, so we are tracking at the better end of that range on a relative basis. We came into this crisis more diversified, with more hedges, and with the best group of managers we have ever had.
“But the big thing for me,” he adds, “is that the implosion did not affect our operations, though it’s affected most everybody else’s.”
Chief financial officer John Sejdinaj also believes that the past has useful lessons to teach. “We learned a lot from the last downturn,” he says, referring to the dot-com bubble recession of 2000-01. “We learned that it’s good to have reserves, and we put in place a construction policy that requires 100 percent of cost pledged and 75 percent in hand before we break ground. We are now asking all budget units to dig deep and look at their resources and reallocate. We have an incentive plan that allows departments to keep their better-than-budget funds, which means they can self-fund strategic priorities.”
Sejdinaj believes internal institutional communication is crucial in a time of crisis. Unlike 2000-01, he observes, today’s campus climate includes “things that build trust and confidence,” such as the town hall meetings and a staff newspaper. Affleck-Graves, as the architect of the information-sharing strategy, obviously agrees with that. On balance, he is satisfied that the depth of financial data he’s made available to staff and faculty has been a positive.
“We wanted everybody on campus to know what our plans and contingencies are,” says Affleck-Graves, “and that a University-wide budget cut is fairly low down.”
While conceding that communication is a two-edged sword that can exacerbate as well as soothe worries, he refuses to discount the dangers still ahead. “These are very serious times for the University and the country,” he declares, and the all-clear hasn’t sounded yet.
Walt Collins is editor emeritus of this magazine.