Strategic Plan: School assesses, evaluates finance, endowment to plan for future budget

By Alex Handy, Arts Editor

During the current construction of this year’s strategic plan, the finance and endowment committee will continue to help fund and support the school’s future operating budget.

In this year’s plan, the goal of the finance and endowment subgroup is to provide resources to support the goals of the three other subgroups, program, faculty, and facilities, and to ensure the school’s financial stability for the future. The subgroup is chaired by Rick Andrew, board member and development committee chair, and staffed by Melissa Orth, Chief Financial Officer, and Julie Diaz, Chief Advancement Officer.

Ms. Orth said that it is difficult to plan the finance and endowment aspect of the strategic plan until the funding needed for the other three directed areas, program, faculty, and facilities, have been determined.

“Much of the work of this subgroup comes after the others, once new programs and initiatives have been determined,” she said. “As such, the finance and endowment subgroup has focused primarily at the point on endowment growth.”

According to Head of School Scott Griggs, the endowment and annual fund are essential to the operating budget of the school.

“Tuition funds only so much of what it takes to run this school,” he said. “Eighty-seven percent of tuition goes straight into the school’s operating budget. The other 13 percent has to come from other revenue sources, or else you have to cut your spending. The endowment is a big part of this for the school, and the annual fund is the other. Without those two pieces, tuition would be even higher. Tuition is never going to decrease, but we want to slow the rate of increase [as much as possible].”

Ms. Orth said that an average gap of approximately 2,800 dollars per student exists between what is charged in tuition and what it costs to operate the school. This gap is funded through annual giving, endowment and investment income, and net income from other programs like Summer on the Hill and facility rentals.

“In order to determine how much endowment earnings can be used to help support operations each year, we calculate an average market value of our endowment based on the previous 12 quarters,” she said. “We then apply a 4.5 percent spend rate [to that average]. Our current plans call for a 10 basis point reduction in the spend rate over the next five years, so for fiscal 2009-10, the spend rate will be 4.4 percent.”

Michael Legacy, head of the math department and member of the current strategic planning sub-committee for finance and endowment, said that he thinks one of the most important elements included in the current plan is focusing on the preservation of the endowment in today’s economy.

“Preserving our endowment in the face of the current economic downturn is a priority,” he said. “The sub-committee recommended we move toward a lowering of how much we draw from the endowment each year. If we are drawing 4.5 percent and only getting a return of three percent, for example, it doesn’t take long to realize that we are eating the nest egg.”

Mr. Legacy said that this move is already part of the board’s current five-year plan, and as this draw is lowered, it becomes important to add to the endowment to make up for the reduction in money flowing into the current budget.

Currently, the finance and endowment subgroup is considering the possible methods to grow the endowment.
“Obviously, we can have a campaign to raise endowment dollars, or secondly, we can reduce the amount we take from our endowment each year,” Mr. Griggs said. “Right now we are recommending that we decrease that draw.”

When donating money to the endowment, the donor also specifies where the money will be used. With endowment gifts, the principle remains intact through perpetuity, and the school spends only the earnings on the gift. The strategic planning subgroup is also looking at the school’s policies regarding restricted gifts and named funds to ensure that existing policies that are in place reflect the current needs of the school.

“When donating to the endowment, the donation can be made to the general endowment, which helps fund the operations of the school, or it can be designated to help support a specific program or purpose, such as financial aid, faculty salaries and support, technology, or building maintenance,” Ms. Orth said.

The school raises funds in a variety of ways, including major and planned gifts, capital campaigns, and board-designated funds. As a part of the last strategic plan, completed in 2002, the school established and formalized endowment policies.

“Prior to our last campaign, we did not have a stated endowment requirement for all capital campaigns,” Ms. Orth said. “Now all capital campaigns funding new facilities are required to include a minimum endowment equal to 30 percent of the underlying construction costs. Without these additional funds, the increased costs relating to maintaining the expanded facilities put a tremendous strain on the annual operating budget.”

These policies also help contribute to the increased ongoing maintenance costs of new buildings.

“The most recent campaign [we did], Great Expectations, included 20 million dollars in building project costs and five million dollars in new building endowment,” Ms. Orth said. “[With our current] 4.5 percent spend rate, the five million dollar addition to the endowment generates 225,000 dollars per year to help maintain the new buildings.”
According to Ms. Orth, the recent declines in the stock market have impacted the school’s endowment as well as the strategic planning process.

“While the value of our investments has significantly declined, the draw policy helps reduce the impact on the school’s operating budget,” she said. “Additionally, we are moving forward with completing our strategic plan, though the implementation timeline will consider what is happening in the current economy.”

Mr. Legacy said that he considers his experiences working on the strategic plan to be very enlightening.

“Since I always read through the Annual Giving report, I had a decent idea about the workings of the endowment and the number of named funds, but didn’t realize how much it costs to manage those funds,” he said. “I also came to more clearly understand the implications of reducing the draw [of the endowment] and what it would take to maintain the cash flow. I have a better understanding of how expensive it is to run Greenhill and am impressed with the care and thought given to keeping this school on a firm footing.”