February
13 ,
2004
Demystifying
the Budget: A Q&A with
Mary Jo Maydew
|
Photo: Todd M. LeMieux
Mary Jo Maydew, the College's
vice president for finance and administration |
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. About 70 percent of the College’s
budget is salary and benefits costs. The largest components
of the remaining 30 percent are utilities, supplies and materials,
and facilities and equipment reserves.
Q: The economy appears to be improving, so why are we still
cutting back the budget?
A: The College has three primary sources of revenue: gifts for
current purposes; endowment distribution; and student tuition,
room, and board income net of financial aid. 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: 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: Why can’t we just
spend more of the endowment?
A: The College’s endowment currently supports about 25
percent of the budget. Increasing the spending above 5 percent
(of a 12-quarter average market value) is unwise for two reasons.
First, overspending reduces the endowment’s ability to
support the College in future years. And second, Mount Holyoke’s
endowment, although large compared with most liberal arts colleges,
is significantly smaller than that of many of the College’s
peers. In order to continue competing successfully, Mount Holyoke
must build rather than diminish the endowment.
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.
As part of the planning for reductions, managers have been asked
to discuss the impact of their proposals, so that we have the
best possible information with which to make decisions about
reductions.
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. We will also be communicating with the community
during the upcoming months as decisions are made that visibly
impact the larger campus 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: 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: Why don’t we offer
less financial aid to ease the pressure on the budget?
A: The College does spend a significant amount on financial assistance
to students. The budget is developed with great care and with
attention to the financial implications of aid policies. Simply
offering less aid to students, however, is problematic for a
number of reasons. First, our applicant pool is less affluent
as a whole than those of many of our peer institutions, so on
average our students need more financial aid. Second, financial
aid is an important component of how we shape our classes of
students to insure that we have the most diverse and gifted possible
classes. And third, Mount Holyoke is deeply committed to access,
making it possible financially for highly qualified applicants
to attend.
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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