President Helm's Message on the Economy
October 13, 2008
Dear Members of the Muhlenberg Community,
Most of us have watched the recent stock market decline, credit crunch and damage to our country’s financial infrastructure with deep concern. While it is, obviously, impossible for any of us to predict the future in such a volatile economic environment, I thought it might be reassuring to brief you on what the current crisis means for Muhlenberg, how we have responded so far, and how we intend to respond during the coming days and weeks.
Admissions: On the admissions front, interest in Muhlenberg remains strong. Dean of Admissions Chris Hooker-Haring '72, P'08, P'10 reports that his staff are seeing students at most of our high school visits during fall recruitment travel, our campus visitor volume is strong, and first-year applications are arriving at a pace that virtually mirrors last year's record total. At the same time, we are hearing much more anxiety from many families about whether they can and how to afford Muhlenberg. We will probably need to offer more financial aid to enroll this first-year class, and we are planning for that as we enter budget deliberations for the upcoming year. We are also spending more time in counseling and reassuring families about how to manage college costs at a time of economic constraint.
Student Loans: For many families, educational loans have been a part of how they manage college costs. Unfortunately, in this market, home equity values (one frequent source of college funding) are down, and now a number of educational lenders – including some of the major players – are abandoning the educational loan business. We are continuing to track which lenders are still in the game so that we can counsel families effectively. We have also registered for the Federal Direct Lending Program as a back-up plan. We won't implement this option unless absolutely necessary, because it requires more administrative overhead and software enhancement, but it provides a lender of last resort in the event that other sources of educational funding evaporate. We are confident that we will be able to continue helping Muhlenberg families find the college loans they need when they need them.
The Budget and the Budget Model: Muhlenberg balanced its FY’08 budget, as it has every budget for the past 52 years. The College’s Strategic Plan is linked to a budget model that we monitor regularly before making the next series of investments in strategic initiatives. Since 2004, when the plan was approved, our financial performance has stayed close enough to the model’s projections (i.e. positive variances have more than offset negative variances) to permit us to proceed with planned investments in facilities, programs, faculty and staff. The budget model contains ample reserves and contingencies for unexpected costs, and we fully intend to finish the current year with another balanced budget. Furthermore, we designed the budget model so that some investments could be deferred or curtailed if needed. While that has not been necessary (and we hope it won’t be in the future) it is reassuring to know that we have a fallback plan if we need one.
Capital Projects: The College's Strategic Plan calls for a bond issue in summer 2009 to fund necessary capital projects on campus including phase 2 of the expansion and renovation of Seegers Union. Later this month the Finance & Investment Committee will be meeting with our investment banker to review these plans in light of current market conditions. Currently the College enjoys an A1 rating from Moody's Investors Service and an A+ from Standard & Poor's.
Debt: Earlier this year the Auction Rate Security market collapsed and Muhlenberg (as well as many other large institutional borrowers) suddenly faced a tripling of our debt service cost (from 4% to 12%). We were able to refund our 2005 and 2007 Auction Rate Security bond issues with a Variable Rate Demand Note (VRDN) issued on April 8, 2008. Up until mid-September the College was paying less than 2.5% on these VRDNs. Since then we have seen anything from 4% to 7% due to the liquidity problems in the market. The excess interest cost will be covered by the annual operating budget contingency fund.
Liquidity: You may have read recently about the liquidity problem with the Commonfund for Short Term Investments brought on by the resignation of the Trustee, Wachovia Bank. The Commonfund is used by many educational institutions for both short term cash investing and endowment fund investing. Wachovia, fearing a run on the bank and in an effort to be equitable to all investors, originally placed a 10% limit on cash redemptions. Fortunately, Muhlenberg had moved most of its short term investments out of the Commonfund last summer. At the time of Wachovia’s announcement, the College had $3.7 million in non-operating funds in the Short Term Fund. As of October 10th we had been able to liquidate 41% of this investment and we expect to receive all monies by the end of 2010. Our operating funds, used for payroll, vendor payments and debt service, are spread among several large, conservative money market funds. We will have no trouble paying our bills this fiscal year and at this time we have no reason to expect any material liquidity issues for the College.
Endowment: The endowment fund has experienced declining values as almost every major asset class has declined this month, the previous quarter, and this calendar year. Kent Dyer, our Chief Business Officer, is in contact with the College’s endowment consultant on an almost daily basis. Our investment policies are being followed in terms of asset allocation and rebalancing.
The Trustee Finance & Investment Committee will be meeting with our endowment consultant this month to determine if any changes in policy are needed. The College’s endowment spending policy is 5% of a five-year average market value – a more conservative approach than the three-year average used by many colleges. The longer average more effectively smoothes out the bumps in endowment contributions to the operating budget and serves us well in tumultuous times like these.
Fundraising Performance: Muhlenberg launched its most ambitious comprehensive campaign ever last April with a goal of $105 million. By the end of June, we had raised $89.5 million and The Muhlenberg Fund broke the $2 million mark for the first time. Despite the current economic challenges, our efforts continue to succeed. While Muhlenberg Fund donors are understandably concerned about the economy, we are encouraged by early returns and optimistic that the Fund will set another record this year. The College has received two seven-figure commitments over the summer and conversations with potential donors about major gift commitments have been upbeat. Higher education philanthropy has, counter intuitively, increased during recessions in recent decades, and everything we know about educational fundraising teaches us that we must not retreat, but redouble our efforts in the face of strong economic headwinds. Now more than ever, it is critical that we build our capacity to support financial aid for our students, to maintain our beautiful campus, and to provide competitive compensation for our dedicated faculty and staff.
Values and Priorities: Muhlenberg’s core values have always included frugality and a strong sense of community. Those values have served us well, and will be particularly important as we face the current challenges together. We will, of course, continue to be vigilant for opportunities to cut costs while preserving and even enhancing our most important priorities: our high academic standards and the quality of the student experience. First-rate teaching, faculty/student relationships, research opportunities, co-curricular programs and extra-curricular activities are at the heart of our strategic plan, and will continue to drive our funding decisions.
Thanks to the loyalty and generosity of our alumni, the extraordinary support of Muhlenberg parents, the dedication and wisdom of our Trustees and the hard work of our faculty and staff, our College is in good shape and I am confident we will continue to thrive if we all pull together. Thank you for your commitment to Muhlenberg, and please don’t hesitate to get in touch if you have any questions.