CLAREMONT MCKENNA'S ENDOWMENT LOSES 14% IN FIRST QUARTER

November 10, 2008

In an e-mail to students, faculty and staff, President Gann wrote that "the College has experienced a reduction in its endowment value this fiscal year of approximately 14% during the first quarter (July 1 – September 30, 2008), and we anticipate another, significant reduction in the endowment value for the month of October." She goes on to list reductions that will be made in the College's budget such as holding off on faculty salary increases and new capital projects for a period of time.

November 10, 2008

Dear Members of the Claremont McKenna Community,

The continuing upheaval in the world’s financial markets and the weakened state of our economy overall are matters of significant concern for all of us, and I am writing to update you on how these developments are affecting Claremont McKenna College. At the outset, it is important to highlight that CMC enters this difficult period in a strong financial position.  CMC’s financial strength is a direct result of its long-term adherence to principles of “financial equilibrium,” as they are commonly referred to in higher education and which include such elements as:

•    Maintaining balanced operating budgets;

•    Monitoring and managing budget forecasts to ensure that growth in income is equal to or greater than growth in expenses;

•    Providing for ample liquidity;

•    Ensuring that spending from the endowment is at or below the level necessary to preserve its real purchasing power; and,

•    Providing for the renewal and replacement of physical plant and equipment.

At the same time, it is also clear that the current economic environment presents unique challenges to all of higher education, including CMC.  The principal reason for CMC’s concerns derives from the fact that CMC’s three primary revenue sources – tuition revenue (net of financial aid), endowment income, and gifts – are all experiencing significant pressure due to the economic crisis.

With respect to tuition and financial aid, we certainly are sensitive to the impact from a weakened economy on our students and their families, and our most important priority will be to ensure that CMC is affordable for all students irrespective of financial need.  In this respect, it is important to also highlight the recent step we took last spring to eliminate student loans from the financial aid packages for all CMC students.  These packaged loans were replaced by grant aid, bolstering CMC’s already competitive financial aid program, which provides need-based aid to more than half its students.  Nevertheless, we expect to see current CMC students have higher need for grants, and we may have a new freshman class with increased demonstrated need.  These anticipated changes in the total financial need of the CMC student body mean that we will need to increase our financial aid budget and lower our net student revenue projections.

With respect to the endowment, during these volatile times in the market, Claremont McKenna is fortunate to have important expertise on the Investment Committee of the Board of Trustees.  In the past several years, the Investment Committee has undergone a comprehensive governance and policy review process.  We revised our investment policy to adopt a more diversified asset allocation structure, which maintains the potential for strong returns while minimizing the downside risk of the market.  The results of this strategy and the vision of our committee have been impressive: for the five-year period ending June 30, 2007, CMC has ranked in the top five percent of colleges and universities in terms of performance, as reported by the National Association of College and University Business Officers (NACUBO) in its most recently published annual survey of investment performance.  Although our investment returns for the most recent 2007-08 fiscal year were generally flat, with an increase of 0.68%, this performance was still solid in an environment in which the vast majority of comparable funds and benchmarks experienced negative returns.

Notwithstanding this strong relative investment performance, the College has experienced a reduction in its endowment value this fiscal year of approximately 14% during the first quarter (July 1 – September 30, 2008), and we anticipate another, significant reduction in the endowment value for the month of October.  Many other colleges and universities have indicated similar challenges in this area.  While the College’s endowment provides approximately 30% of our revenue support, we have adopted an endowment spending rule that mitigates against the effects of short-term volatility in the College’s investment portfolio.  Nevertheless, given the recent reduction in endowment value and the significant uncertainty looking forward, we must takes steps now to prepare for spending policy income reductions that we will likely experience during the next several years.

In addition, the external economic environment could also affect our ability to raise annually the amount of current unrestricted gifts, which have historically provided approximately 10% of our revenue support.  This represents therefore a third area of pressure on this year’s budget revenues.

In a period such as this, it is clear that we must be conservative and prudent with respect to our modeling and forecast of revenues, and be prepared for a decline in all three areas of revenues.  As a result, I have determined, in consultation with the Board of Trustees and the Senior Staff, that it is important to take steps at this time to reduce the level of the College’s operating budget for this academic year, as well as the projected budget for 2009-10.  Currently, my goal is to reduce the College’s level of expenditures by at least $1.5 million.  This represents approximately 3% of our general operating budget, which covers most faculty and staff salaries, and general operating expenses within the College.  I plan to implement these reductions within the following framework:

•     Students:

o    Our primary objective is to secure our need-based financial aid program, and the Office of Admission and Financial Aid is taking steps now to adjust its current budget to secure our need-based aid program.

•    Faculty and Staff:

o    Effective immediately every open position in the administration and staff will be re-evaluated to determine whether the position will be held open, terminated or filled.  Clearly, some of these open positions will not be filled.

o    With respect to faculty searches, the Dean of the Faculty is evaluating each open faculty search this year to determine whether we will complete, close, or defer the search.

o    Although it is too early to predict salary increase levels for next year, it is clear that we will need to anticipate low to no salary increases for the next academic year, or potentially limiting salary increases to lower-paid employees.  At the same time, we remain committed to providing a competitive fringe benefits package for our faculty and staff.

•    Capital Projects:

o    We remain on schedule to complete the Biszantz Family Tennis Center this winter, and we also plan to continue our two, previously approved capital projects:  The Kravis Center Project and the East Campus Land Purchase.

o    Although longer-term planning will continue, we do not anticipate authorizing any additional significant construction projects for at least the next 12-24 months or longer. 

Given the magnitude of the economic uncertainty and the need especially for the best possible fiscal management, the Board of Trustees has also appointed an ad hoc Financial Planning Committee to work with the administration in monitoring the current environment and in developing financial models and forecasts that will guide our future planning.  While it is too soon to predict the outcome, additional budget reductions and policy adjustments may be necessary.  It is important that, while we are managing this future planning, we make decisions that protect the core values and strategic objectives of CMC. 

I will continue to consult with and update the members of the CMC community as we work through this process.  I will go over these matters with the faculty at their next meeting on November 14, 2008.  I will also schedule a time to discuss these matters with our employees and our students.

Despite the downturn in the economy, it is important to highlight that we will continue to work to advance CMC during this period.  In this respect, I will continue to work with the Board of Trustees on achieving the goals set forth in The Campaign for Claremont McKenna.  We have raised $416 million toward our goal of $600 million, with over four more years to go.  We know that alumni and friends, even in difficult times, are willing to invest in higher education, and they recognize that a CMC education is a transforming experience.  Our alumni and friends also realize that the future health and stability of the economy are inextricably tied to education.  As we look ahead and search for solutions to our economic issues and to future economic stability and growth, higher education will be ever more important.

Working together, we will endure these challenges while also continuing to pursue building an even greater Claremont McKenna College.

Sincerely,Pamela B. Gann President