[H]ANOVER — With its blue-chip roster of alumni, 10-figure endowment and annual high-school senior scrum for admissions, Dartmouth College seems stable and on course. But as 2016 comes to a close, the leaders of Dartmouth find themselves navigating some rough financial waters.
The college, which was founded 247 years ago, posted a net operating loss of $112 million during the fiscal year that ended June 30. A year earlier, the college experienced a $15.2 million loss.
That wasn’t necessarily the result of bad decision-making by those at the helm, said Rick Mills, the college’s executive vice president and top financial manager, who was interviewed in his office overlooking the Dartmouth Green.
Instead, Dartmouth — as is the case with its distant relation, Dartmouth-Hitchcock, the Lebanon-based health system — happens to be in a sector that is “undergoing really transformational change,” Mills said. “It’s not mismanagement at these institutions that are making us anomalous poor performers.”
Both institutions are “trying to tack and … find the course that gets them through those changes,” Mills said. “Whether we get the right answer or not, I don’t know, stay tuned, but that’s what we’re grappling with.”
The Past Year
Dartmouth’s financial story in fiscal 2016 was a bad one. Revenue sagged about 2 percent from the previous year, to $859.6 million, while spending went up 3 percent, to $918.1 million. That translated into a $58.5 million operating loss.
And there was more bad news. The college posted $53.5 million in charges to account for measures taken to stem the flow of red ink at the Geisel School of Medicine. It also saw the value of the investments in its endowment decline by $99.5 million.
Budgetary shortfalls at nearby Dartmouth-Hitchcock set off a scramble for more immediate savings. But with a $5 billion trove of accumulated wealth and, as Mills noted, an “Ivy League brand (that) is a national brand,” Dartmouth moved more deliberately to assess its financial position and chart a response.
The college also flexed its financial muscles. In April, it raised $250 million by selling bonds to investors, which brought its total of long-term debt to $1.25 billion.
Credit raters seemed unconcerned. Moody’s Investors Service gave Dartmouth’s new bonds an Aa1 rating, signifying their “high quality” and that they “are subject to very low credit risk.”
Credit raters like Dartmouth’s “revenue balance,” according to Mills. “We don’t overly rely on any one segment” of revenue, he said. “It’s a happy coincidence.”
Moody’s noted the college’s “excellent academic reputation, superior fundraising, and strong cushion of wealth and liquidity” and said those factors would help “mitigate expectations of modest operating deficits through” the fiscal year that will end in June 2019.
Moody’s concluded that Dartmouth had the financial strength to absorb operating deficits and pursue new undertakings.
And that matters to the Upper Valley. As Mike Wagner, Dartmouth’s chief financial officer, said in an interview earlier this month: “Ultimately, I think the best thing for this community … is for us to be really financially strong.”
Cutting and Shifting
The college’s audited financial statement for fiscal 2016, which was issued in November, lays out in detail the complex financial framework that supports Dartmouth’s 10,000 employees and vast array of operations. Yet the financial squeeze confronting the college is disarmingly simple.
Dartmouth’s three main revenue streams — tuition, outside support (mainly from government), and past and present giving — have either stopped growing or lagged behind what is needed.
Meanwhile, expenses have been rising — up 37 percent in a decade — and can be expected to continue to rise, driven higher by inflation and by the cost of the programs and people the college is counting on to compete with peer institutions.
Not everyone shares Mills’ assessment that the college’s budgetary situation is the result of forces beyond its control.
Frank Gado, a 1958 Dartmouth graduate who returned to the Upper Valley after retiring as a professor at Union College and who has been an outspoken critic of Dartmouth administrations, believes the current squeeze was predictable. He suggested it was largely a result of Dartmouth’s drift away from its focus on undergraduate education.
The rising tide of financial support from outside sponsors, profits on endowment investments and rising tuitions allowed expensive new graduate programs to grow up alongside traditional liberal arts, Gado said.
That made the whole college vulnerable when funding slowed, he added, so that there was “no incentive to take a look at the economics of college operations.”
“Dartmouth was primarily an undergraduate college with a very small graduate program,” Gado said. “The current problems are the result of the decision, or drift, (toward) being a university.”
Moody’s approves of the college’s plans to invest to develop new undergraduate programs and housing communities, create multi-disciplinary academic clusters and fellowships for students with doctorates, and expand the Thayer School of Engineering.
Such initiatives would help Dartmouth, which is distinguished by its rural setting, meet the challenge of providing “social, cultural, and networking experiences more easily found in urban areas,” Moody’s said.
In addition, college trustees committed themselves in September to pursuing “a faculty compensation strategy that provides appropriate, fair, and competitive salaries.” A 2015 survey by the American Association of University Professors found that the average salary for tenure-track faculty at Dartmouth, at $177,000, was about 8 percent below the average for the eight elite schools that comprise the Ivy League.
The trustees endorsed a plan by administrators to measure faculty compensation using a “benchmark against the mean faculty salaries at comparison schools.”
The administration has looked for new ways to finance such initiatives. It has asked each department to budget by redirecting toward new initiatives an amount equal to 1.5 percent of the previous year’s non-salary expenses.
That approach hasn’t impressed Joe Asch, an alumnus and blogger who has frequently criticized Dartmouth administrators. The across-the-board 1.5 percent shift shows an “acceptance of the egregious waste in some areas (that) is disheartening,” Asch said in an email.
More recently, the administration set a target to raise the level of annual spending on academic programs by $20 million. About $3 million of that revenue is expected to come from new fundraising, while the balance will come from either cutting or slowing growth in spending on administration or lower-priority academic programs, according to Mills.
“It is going to be a big lift,” Mills said. “It’s a pretty big number.”
While details have yet to be worked out, according to Mills, about 60 cents of every dollar spent at Dartmouth goes for pay and benefits. So reining in expenditures inevitably raises the specter of layoffs.
“There probably will be some positions as part of this process that exist today that don’t exist in two, three, four years,” Mills said at a town hall meeting in November, according to a report by the Dartmouth Office of Communications. In November 2015, the college had 1,066 faculty and 3,496 full- and part-time staff employees, according to Dartmouth’s Office of Institutional Research.
Some critics welcome the prospect of trimming the college’s payroll.
A petition posted last spring on the change.org website by student leaders blasted the college’s “lack of fiscal discipline” and the “unchecked growth of extraneous services and unnecessary support offices” at the college. The petition got more than 1,600 signatures.
Revenue Streams
While Dartmouth and other top tier colleges have often attempted to avoid painful cuts in jobs, salaries, services or other expenses by focusing on revenue growth, that option can entail its own pain these days — or just be out of the question.
Tuition hikes are not palatable to the current administration, Mills said: “I think (Dartmouth President) Phil Hanlon came in with a commitment that we can’t keep increasing tuition at the rate that history has shown that we have.”
The college’s list price of direct costs — tuition, fees, room and board — was just under $58,000 when Hanlon took the helm at the end of fiscal 2013. That tab has risen to $66,200.
In June 2014, Hanlon said in an interview that he would limit future tuition increases to no more than 1 percent above the rate of inflation.
Hanlon came to Hanover in the wake of a three-year stretch when tuition rose at an annual rate of about 13.7 percent. During his first four years in office, the annual rate of tuition gain has been about 3.4 percent.
“We need to hold the lid on that growth,” Mills added.
Meanwhile, outside support for research and other programs, mainly from the federal government but also from corporations and foundations, has lagged. That revenue stream rose only 10 percent over the last nine years, and at $183 million, it trailed, by $16 million, tuition and fee revenue of $199 million.
That was a dramatic change from fiscal 2008, the last year before a financial crisis savaged the balance sheets at Dartmouth and its peers, when Dartmouth’s revenue from outside sponsors was $166.3 million — about $34 million more than came from tuition. In that year, outside support covered 23 percent of expenses while tuition covered 18 percent. Last year, the burden shifted: tuition revenue covered 22 percent of expenses, while the amount covered by outside funders fell to 20 percent.
Lagging government support for research, especially from the National Institutes of Health, has been a factor in the financial woes at Geisel, the college’s medical school. Over the past year, college officials set out to rein in the growth of annual deficits at Geisel — one estimate put the figure at $30 million. That unsettled faculty and staff, and led to some painful changes, including 30 announced layoffs.
The college’s restructuring of Geisel included the creation of a new department of medical education and reorganization of basic science departments.
The medical school was transferred to Dartmouth-Hitchcock, which has its own governance and financial structure, of “employment, finances, and operational support” for Geisel’s clinical research and psychiatry programs. Hundreds of employees found themselves working for Dartmouth-Hitchcock instead of Dartmouth.
Dartmouth spent $8.5 million on restructuring costs during the past year but also set aside an additional $44.9 million to cover future expenditures.
Gifts Past and Present
Dartmouth, like its Ivy counterparts, also relies heavily on gifts, especially from alumni.
The portion of college expenses covered by recent gifts and tapping the endowment has ranged between 35 percent and 43 percent over the past decade.
Keeping alumni checkbooks open is an important part of what a tongue-in-cheek proclamation on the website of the Dartmouth College Fund, the annual fundraising drive among alumni, describes as the college’s “wacky business model.”
How important? The college collected gifts totaling $224.7 million during fiscal 2016, including $87.2 million that went to the operating budget, primarily through the Dartmouth College Fund. Of that total, $71.4 million was funneled into the endowment and $66.1 million floated facility construction, student loans or other non-operating lines in the budget.
Generating that revenue required broad alumni support. About 46 percent of the 77,000 alumni who attended Dartmouth as undergraduates give each year, according to the “Dartmouth at a glance” page on the college’s website.
But some alumni give more. To make sure that the highest givers weren’t overlooked or neglected, the college recently searched for and hired an executive to provide, according to its job search documents, “disciplined management … of 150 relationships with consistent focus and high-touch engagement.”
Which 150 relationships? Those with “Dartmouth’s 150 most affluent” supporters.
The Endowment
The college’s $4.5 billion endowment holds the wealth accumulated from contributions by generations of alumni and by investing those assets.
The college’s official report on the state of the endowment succinctly summarized its performance in fiscal 2016 — it shrank, if “only” by $189 million — and the long-term investment strategy.
An introductory letter from Pamela Peedin, the endowment’s $1.2 million-a-year top manager, noted that “the market environment during this period was volatile and challenging for many investment strategies” but saw that as a good thing.
“It is in these types of tumultuous investing environments that many of our managers are able to sow the seeds of exceptional investments that will be harvested in future years and that drive strong long-term investment results,” she wrote.
Peedin’s letter articulates an alternative investment strategy pioneered by David Swensen, the long-time manager of Yale’s $25 billion endowment. That approach focuses on “a very long-term time horizon that allows it to weather volatility and to capitalize on dislocations caused by the shorter-term orientation of many market participants,” Peedin wrote.
At the end of fiscal 2015, Dartmouth’s endowment was valued at $4.7 billion and was the 22nd largest among all U.S. colleges and universities, according to the most recent annual survey by the National Association of College and University Business Officers.
But extracting a steady flow of cash from the endowment can still be difficult — a lesson learned in the last crisis, when institutions scrambled to find enough cash to pay bills and issue paychecks while avoiding selling investments at historic low prices.
“Post 2009, we’re all paying much more attention to liquidity,” Mills said. The college’s financial managers “spend a lot of time talking to (investment managers) about liquidity analysis.”
That can be challenging, he added, because “liquidity sits in lots of different buckets across” the college’s investment portfolio.
Other buckets — for example, private equity or venture capital funds that profit from timely buying and selling of stakes in companies without publicly traded stocks, or hedge funds that lock up pools of money in complex investing strategies — are especially difficult to tap for cash.
Nearly half of the assets in Dartmouth’s endowment were tied up in such funds at the end of June, according to the most recent annual endowment report.
Participants in such funds also commit to pony up additional capital when outside managers call for it. At the end of fiscal 2016, Dartmouth contracts with outside investment managers included obligations to provide more than $1 billion in additional capital to managers of private equity, venture capital, real estate or commodity investment partnerships.
That’s about the same size as the obligation Dartmouth had on its books at the time of the 2009 financial crisis, and up 91 percent from the obligation on its books only two years earlier.
Justin Anderson, a college spokesman, said that the total of unfunded obligations was normal for the college’s investment strategy. The recent increase was a rebound from levels that were “low as a result of the market environment following the financial crisis,” he added.
Peedin, who works in Dartmouth’s investment office in Boston and recently announced her plans to leave her job at the end of the current fiscal year, was not available for comment.
Basing Peedin and her office of 14 professionals in Boston has helped Dartmouth with recruitment and oversight of outside investment managers, according to Moody’s. “This level of oversight is important as Dartmouth, like its peers, has a large 45 percent allocation of investments to illiquid strategies, such as hedge funds and private equity,” the credit rater noted.
