February
6 ,
2004
Demystifying
the Budget: A Q&A with
Mary Jo Maydew
Many members of the Mount Holyoke community have been involved
in discussions about cutting the College's operating expenses
in the next several years in order to balance the budget. We
asked Mary Jo Maydew, the College's vice president for finance
and administration, to explain the budgeting process and what
lies ahead as the College plans its budget over the coming years.
Q: How does the budgeting process work?
A: The budgeting process begins in the late fall,
when all budget managers receive their budget materials and instructions
for completing their budget requests. These requests are completed
in January/February. During the winter and spring, budgets are
discussed within departments, within divisions, and by the senior
staff as the revenue and expense sides of the budget are brought
into balance. The budget is completed in mid-April for review
and approval by the board of trustees at its May meeting. To
put things in perspective, last year's budget was about $85 million.
Q: The economy appears to be improving, so why are we still
cutting back the budget?
A: While it is true that the economy and the financial markets
appear to be strengthening, the College is still feeling the
economic problems of the past three years. Current giving is
recovering, but has not yet rebounded to the pre-recession levels.
Endowment spending is based on a 12-quarter rolling average of
market values and will take several years to reach its 2001 level.
In addition, unemployment continues to be high, causing continued
pressure on our families. This, in turn, increases financial
aid costs and reduces net revenue from tuition, room, and board.
As a result, all of the College's revenue sources are still under
pressure.
Q: In simple terms, what is a deficit, and does the College
have one? How large?
A: A deficit occurs when operating expenses are
larger than operating revenues. The College was able to balance
its budget (and therefore avoid a deficit) in 2003–2004
only by using almost $1 million of bequests--money that in most
years goes directly into the endowment--in addition to making
a number of changes to reduce costs. The upcoming year is even
more challenging.
Q: What is the College doing to address the deficit?
A: This year's budget instructions asked administrative budget
managers to develop plans for expense reductions of 15 percent
and 7.5 percent over a three-year period. These plans are currently
being developed. The goal is to encourage departments to think
structurally about the services they provide rather than to reduce
at the margins. This work will provide the information for determining
which reductions will actually be made for the current year and
begin the implementation for future years.
Q: Will the College be laying people off? How will these decisions
be made?
A: It is never possible to guarantee that no layoffs will occur,
but we are trying our best to avoid them. A three-year planning
horizon provides time to take maximum advantage of position vacancies
rather than reduce existing staff.
Q: Are cuts uniform in every department across the campus? If
not, why not?
A: While we've asked every administrative department to plan
for reductions at the 7.5 percent and 15 percent levels, we do
not expect that across-the-board reductions will be made. Where
reductions are made will depend on several factors, including
the impact of the reduction on the College's highest priorities
and how the reduction affects other parts of the institution.
Q: Where will the cuts be greatest?
A: It is too early in the process to determine the pattern of
reductions. We'll be talking more about this later in the spring.
Q: Will budgeting for faculty be cut?
A: We haven't asked faculty departments for explicit reduction
plans; however, all areas of the budget are being examined for
opportunities to cut costs.
Q: When will the budget be finalized?
A: The budget will be complete by the middle of April and will
be presented to the trustees at their May meeting. Shortly
after that there will be an open forum on the budget to share
the results with the community.
Q: Will further reductions be needed after next year?
A:While it is too early to tell with any certainty, we are expecting
that the need for cost reduction will continue past next year.
Q: The College just announced that the Campaign for Mount Holyoke
College raised $257,033,729. Why can't the capital campaign
funds be put toward the deficit?
A: The fundraising campaign that was recently completed raised
money in four categories. The first was annual funds, which
are spent as they are raised each year for the operating budget.
Second are program funds, which are raised primarily from foundations
for specific purposes (scientific equipment and facilities,
for example), and most of which are not part of the ongoing
operating budget. Third are building funds, which are spent
for particular facilities projects and, again, are not available
to relieve the operating budget. Fourth are endowment funds,
which become part of the College's invested assets. A larger
endowment does provide more endowment distribution to the operating
budget over time, and we use that as it becomes available.
Apart from the availability of campaign proceeds to be used
in the operating budget, it is also important to recognize
that all of the money raised isn't available right now. As
of December 31, 2003, $46 million of the total represents
pledges to be paid off over the next five years and $51 million represents
deferred gifts and bequests that will become available for use at some time
in the future.
Q: How could the College afford to spend so much money on new
buildings like Blanchard and Kendade when it was facing operating
deficits?
A: Many building projects are funded with gifts for those particular
purposes, not from the operating budget. The operating budget
does support some facilities projects, either directly through
operating reserves or indirectly through borrowing. There are
significant levels of deferred maintenance and modernization
in the College's facilities, and reducing those levels over time
is a high priority.
Q: How do you see the College's financial situation in a broader
context, both historically and compared to other colleges?
A: Although we are in challenging times, the College is in a
strong financial position relative to other academic institutions.
This is due in large part to our financial vigilance over the
past several years as outlined in the Plan
for Mount Holyoke 2003, which has made the College less vulnerable to external
economic forces. Over time, the College will continue to invest
in facilities projects and in other new initiatives, sometimes
even as we reduce spending in other areas. To remain a strong
and competitive institution, we must keep refocusing our resources
in areas that are the most important for the College. We will
all need to continue finding ways to work more effectively and
use the College's resources most wisely.
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