Liebowitz unveils bold financial model

In a heavily attended speech in Mead Chapel on Feb. 12, President of the College Ronald D. Liebowitz unveiled a bold new financial model that would rely more heavily on alternative funding sources like the summer Language Schools and the Monterey Institute for International Studies (MIIS) to support the College’s annual operating budget.

The proposal aims to limit the annual increase of the student comprehensive fee to one percent over inflation. Liebowitz’s remarks reflect growing fears in the liberal arts community that the existing financial model is, in his words, “no longer sustainable.” The Board of Trustees is expected to approve the proposal at its coming meetings this weekend.

The announcements made in last week’s address have garnered attention from several national media outlets, including the New York Times and Inside Higher Ed.

Historically, the College relied upon the annual growth of its endowment, along with generous alumni gifts and the tuition of students to fund a large amount of its annual budget.

But high expectations for gifts and endowment performance, along with little preparation for an economic disaster, left the College unprepared.

Strategic shift in financial model

Under the new plan, the College will downgrade its expected returns for interest on the endowment from 9 percent to 5 percent annually. Additionally, the College will reduce its goals for the current fundraising initiatives by 15 percent over the next four years.

In order to make up for the decrease in revenue from traditional sources, Liebowitz will lead the College in exploring alternative funding sources like the summer Language Schools, a potential language software partnership with an online company and the MIIS.

Liebowitz and President of MIIS Sunder Ramaswamy expressed optimism about the potential expansion of the graduate school when it legally joins Middlebury in July 2010 during an open meeting on Feb. 15.

When the College acquired Monterey in 2005, the California school was on shaky financial ground.

Since then, the school has continually remained in the black and generated $10.4 million in surpluses.

In the coming years, the College hopes to promote a “4+1” joint degree program between the two institutions, increased faculty exchanges, study away programs for Middlebury undergraduates that would send them to Monterey for a semester and MIIS collaboration with Middlebury schools abroad.

Monterey has over 800 graduate students, an operating budget of $39 million for the coming year and real estate holdings valued at $43 million. Ramaswamy emphasized the desire to create a community between the undergraduate college and MIIS.

As evidenced by top-ranking programs at Monterey and in Vermont, Liebowitz hailed the College’s superiority in language education over all peer institutions and challenged the community to utilize these assets.

“The idea that we could find a way to take advantage of this strength is not the corporatization of Middlebury College,” he said. “It’s a smart use of our developed strengths and advantages.”

Though he cautioned that the College might not see the benefits of these alternative funding sources for three or four years, Liebowitz stressed the community’s history of taking risks.

“The College has always been willing to take risks,” he said. “People can get complacent and take for granted where the institution historically has been and how it has overcome adversity. It has done a lot to preserve of itself what is most important and to overcome financial challenges that threatened its very existence several times.”

Chief Financial Officer Patrick Norton acknowledged that the administration now looks at auxiliary operations from a business point of view.

“We are known for languages,” he said.

“We are peerless. It’s very important that we use that asset in different ways to make our business model sustainable in the long-term. We’re looking at [alternative funding sources] in a more of a business-type way.   [Language software] could add to the bottom line in the long term as well.”

Complementing an increased emphasis on auxiliary operations for their financial potential, the new financial model would attempt to ease the burden of tuition on students and their families.

He explained the need for change during the address.

“We need to recognize that the demand for a four-year liberal arts degree, while still great, is not inelastic,” he said. “There will be a price point at which even the most affluent of families will question their investment. The sooner we are able to reduce our fee increases, the better.”

Although the comprehensive fee does not cover the estimated costs of $80,000 per student for education, Provost of the College Alison Byerly said that linking the fee to the Consumer Price Index (CPI) shows that the administration recognizes that parents and students hold it accountable for the price of the College.

“Even families that can afford to pay full tuition still feel like it’s a lot of money,” Byerly said.

“The message [the change] sends is that our fee increases will reflect actual increased costs of what we do, not expanded programs or new initiatives. That doesn’t mean that we won’t have new programs or initiatives — it means that new priorities have to replace old priorities and fit within the existing cost structure.”

Norton acknowledged that historical comprehensive fee increases outpaced levels of inflation and called the College’s new financial approach potentially “unique” among its peer group.

“Tuition increases have been outstripping inflation and I think that’s the main issue,” he said. “We need to somehow keep the comprehensive fee at a reasonable level that at least tracks inflation or at least [stays] close to inflation.”

In addition to the sweeping philosophic shift to College financial policy, Liebowitz announced a series of more immediate policy decisions.

Barring an economic disaster, no additional staff layoffs will occur.

Student enrollment will increase to 2,450, but the student-faculty ratio of 9:1 will remain.

The current financial aid policy that is need-blind for domestic applicants and need-aware for international students will continue.

Finally, the salary freeze on employees earning more than $50,000 will end next year.

Evolution of unsustainable model

Liebowitz said the old financial model evolved and flourished because of an ongoing “arms race” between liberal arts colleges. The model forced colleges to create expectations that did not allow for economic crises and led many schools to engage in lengthy periods of continual construction of new infrastructure.

“The prior financial models relied on some exceedingly optimistic, never-go-down-projections,” he said.

“It was like the old Soviet five-year plans — rising expectations no matter what.”

Though forced to participate in the system to remain competitive with peers, Liebowitz said he harbored concerns about the current model for years.

“The old financial model we had used for a long time was always a bit screwy to me,” he said.

“I had always wondered why one would not spend one’s endowment to build a building instead of taking on added debt, meaning wasn’t it better to use existing wealth for some projects than to saddle the institution with long-term debt? This was viewed as a naïve question back in the 1990s, but I don’t know how many people would consider it so naïve today.”

Norton said the College acted quickly in the early months of the recent economic crisis to analyze its business model.

“The changes have been in the works for 18 months to two years,” said Norton.

“We can’t state enough the shock that the economy has had on all colleges. It really did give us a wake-up call as to the sustainability of the business model. We did act very quickly to do different planning models and scenarios to not only get our short-term deficits under control but to look long-term for a sustainable model.  You will only survive if you ensure that you have a model that is sustainable.”

Both Liebowitz and Norton emphasized the incredible progress made by the College in combating the economic crisis. Over the past two years the College has eradicated more than $30 million in projected deficits and eliminated more than 100 staff positions, with an additional 50 to come.

Liebowitz attributed the College’s success to its quick reaction to the initial crisis.

“We were just about the first ones out of the gate, and were recognized as such,” he said.

“There are many peer institutions that are now considering or offering voluntary separation programs to reduce faculty and staff. I’m glad that we were there more than a year ago. I’m a little surprised that some schools waited this long.”

Norton emphasized that the College could not return to the past financial model even after the economic climate improved.

“The key is that we can’t go back to business as usual,” he said.

“If we see the endowment increase, and it will this year, you can’t start handing those positions back.  We’re looking at the model differently now.  The whole boom-bust era of the financial situation at the College needs to come to an end. The boom was good, but you don’t want to go through the bust.”

With the budget balanced through 2015, Liebowitz believes the College can begin to grow and thrive once again.

“I hope we can now look forward and close this chapter in our history,” he said.

“I hope people can have some fun now.”