February 16, 2009

• How has the global economic downturn impacted the College and its community?
  The College and the members of its community have been negatively impacted by the global economic downturn. The College has seen its endowment decrease by 24.4 percent between June 30, 2008 and December 31, 2008 and has also experienced volatility in its use of short- and long-term credit. Members of the campus community have seen declines in home values, savings values and have experienced volatile credit markets. These same declines are likely to affect our current and prospective students as well.
• How can the College formulate operating budget assumptions and projections in such uncertain economic conditions?2.
  Economic uncertainty makes it difficult, but not impossible, to develop budgetary assumptions and projections for next year and the subsequent four years. Economic uncertainty also means that it is likely that the College’s budgetary assumptions and projections for the year and years ahead will need to be closely monitored and adjusted monthly based on changing circumstances.
• How did the global economic downturn and an uncertain economic outlook influence and impact the operating budget assumptions and projections?
  The economic downturn and uncertainty greatly influenced the formulation of the budget assumptions and projections. It was clear that the undergraduate tuition rate increases that had averaged 7 percent over the past decade were no longer tenable. In addition, our undergraduate student applications for fall 2009 are down by 9 percent. The budget assumptions and projections were guided by institutional priorities including: enhancing academic excellence by continued investment in faculty development and sabbatical; identifying more efficient and effective practices in the delivery of service; maintaining momentum on strategic initiatives such as a comprehensive campaign, supporting the library and improving student retention through advising; ensuring that the student experience is not compromised by maintaining existing class sizes and offering courses students need to graduate; and keeping the College affordable for students.

  The budget assumptions and projections are based on both reductions in undergraduate revenue (resulting from lower new student enrollment, a modest 2 percent increase in tuition, no increase in room rates and continued support for financial aid) and reductions in expenditures. Since approximately two-thirds of the College’s operating budget expenditures are related to employee salary and benefits, significant expenditure reductions are proposed in these areas as well as in non-salary budget lines. The budget assumptions and projections for future years gradually restore many, but not all, of the expenditure areas reduced. The College can therefore expect to have fewer undergraduate students, faculty and staff in FY 2013-2014 than it does in the current fiscal year under these budget assumptions and projections.

• How were the budget assumptions and projections formulated?
  The operating budget assumptions and projections were developed with input and recommendations from the College Budget Committee. The Budget Committee is comprised of 19 members who are representative of the campus community. The Budget Committee held semi-monthly meetings between September 2008 and January 2009 to review various aspects of the College’s operating budget and overall finances. They also considered many different budget scenarios that quantify the financial impact of the interaction between changes in key budget assumptions. The president used the input and recommendations from the Budget Committee to submit a budget proposal to the Board of Trustees for approval at their January 2009 meeting.
• Were the operating budget assumptions and projections adopted by the Board of Trustees the same as those submitted by the President?
  No. The Board of Trustees expressed concern over the affordability of a Saint Mary’s College education and therefore reduced the rate of increase in undergraduate tuition and included additional expense reductions. The Board of Trustees also focused primarily on the operating budget assumptions and projections for FY 2009-2010 due to the global economic downturn and an uncertain economic future.
• What were the key operating budget assumptions adopted by the Board of Trustees?
  • Total fall 2009 undergraduate student headcount enrollment of 2,395, which is 4.7 percent or 119 students lower than the actual fall 2008 headcount of 2,514.

  • New undergraduate students of 680 (550 freshmen and 130 transfers) for fall 2009, which is 14.9 percent or 119 students fewer than the 799 (675 freshmen and 124 transfers) new undergraduate students who enrolled for fall 2008. The lower projection for fall 2009 reflects current application trends and concern about the state and national economies.

  • A 2 percent or $660 increase in undergraduate tuition and fees from $33,250 to $33,910. This rate of increase is significantly lower than the 7.0 percent rate of increase in FY 2008-2009 and represents the lowest increase in the last four decades.

  • A 0 percent increase in room costs and a 5 percent or $260 increase in board costs from a total of $11,680 to $11,940. These rates of increase can be compared with the 5.5 percent increase in room costs and 5 percent increase in board costs that occurred in FY 2008-2009.

  • A $3,089,000 or 14 percent increase in non-athletic institutional financial aid that should allow the College to continue to pursue its strategic goal of enrolling an undergraduate student body with 25 percent of students eligible for Pell grants. The increase also provides funding to cover a proposed $1,386 reduction in Cal Grants for new students from $9,708 to $8,322. Finally, the increase results in a new student discount rate of 34.5 percent, which is lower than the record new student discount rate of 37.8 percent that occurred in fall 2008.

  • A $1,434,000 or 31.6 percent increase in net income from adult and graduate programs that reflect continued growth in Graduate Business Programs and in Leadership Programs.

  • An increase of $201,000 or 2.9 percent in endowment income that reflects the impact of declines in endowment market values when averaged over the past 12 quarters. Endowment income also reflects the continuation of a 5 percent spending rate.

  • A $24,000 or 1.5 percent increase in unrestricted giving that reflects changing economic realities.

  • A 3.1 percent or $750,000 decrease in the faculty salary pool and a 5.7 percent or $1,500,000 decrease in the staff salary pool for FY 2009-2010. Routine annual salary increases for faculty and staff are not anticipated for FY 2009-2010. Routine annual salary increases in future years are expected to be made after the start of the fiscal year rather than prior to the beginning of the fiscal year so that more information is known about operating budget revenues and expenditures at the time salary commitments are made.

  • A 14.9 percent or $2,308,000 decrease in employee benefits for FY 2009-2010. This level of decrease reflects a reduction in the College’s employer contribution to its defined contribution retirement plan with TIAA-CREF from 8.25 percent of salary to 2 percent of salary as well as a freeze in the College’s employer contribution for health insurance (current average $740 per employee per month).

  • A decrease in funding for sabbaticals from 21 to 17, which represents a return to more typical levels. The number of sabbaticals funded in
  FY 2008-2009 represented a one-time increase that was based on the number of approved sabbaticals.

  • An allocation of $582,000 for strategic initiatives comprised primarily of increased library support ($120,000), increased support for the comprehensive capital campaign ($201,000), and increased support for alumni and advancement efforts ($204,000).

  • An 8 percent or $1,614,000 decrease in most non-salary expenses in FY 2009-2010. It should be noted that $747,000 in non-salary expense savings were identified in the FY 2008-2009 operating budget. It should also be noted that these non-salary expense savings from FY 2008-2009 were restored before the 8 percent non-salary expense reductions for FY 2009-2010 were calculated.

  • A 5 percent or $86,000 increase in the cost of utilities to reflect possible energy inflation.

  • A 35.7 percent or $500,000 increase in major maintenance of facilities funding for a total of $1,900,000. This level of funding is still short of the goal of $2,676,000.

  • Elimination of the $750,000 appropriation to partially fund depreciation expense (funding goal is $4,461,000) which is used for the improvement of campus facilities. It should be noted that the appropriation for depreciation expense will not be restored until FY 2012-2013 and will be enhanced in FY 2013-2014. It should also be noted that the Board of Trustees suggested that the funding of depreciation expense be a priority for the use of operating surplus funds generated at the end of FY 2008-2009 as well as at the end of future fiscal years.

• What are the operating budget projections for FY 2009-2010 that result from the assumptions adopted by the Board of Trustees?
  • A total revenue budget projection of $96,692,000 that represents a decrease of 4.4 percent or $4,453,000 from the $101,145,000 working revenue budget for FY 2008-2009. The decrease in the total revenue budget can be primarily attributed to decreased net tuition revenue from undergraduate students ($5,449,000 or 10 percent), decreased revenue from auxiliary services ($825,000 or 5.0 percent) and offset by an increase in revenue from adult and graduate programs ($1,564,000 or 7.9 percent).

  • A total operating expense budget projection of $96,692,000 that represents a decrease of $4,988,000 or 4.9 percent from the expense budget of $101,680,000 for FY 2008-2009. It should be noted that the expense budget of $101,680,000 for FY 2008-2009 was recently modified to reflect $1,729,000 in one-time non-recurring savings that were identified through the cooperative efforts of College budget managers.

  • The decrease in the total operating expense budget projection for FY 2009-2010 can be primarily attributed to salary and benefit pool reductions of $4,558,000, non-salary expense reductions of $1,614,000 and the elimination of the $750,000 appropriation for depreciation expense. These reductions also offset several major increases in expenses including the appropriation of $582,000 for strategic initiatives, the $500,000 increase for the major maintenance of College facilities and the expenses related to the growth in graduate programs of $472,000.

• Why do the operating budget assumptions freeze or decrease employer contributions to employee benefits programs rather than reduce some other operating budget expense?
  Approximately two-thirds (64 percent) of the College’s operating budget expenses are related to salaries and employee benefits expenses. As such, salary and benefit expenses must be reduced in order to balance the operating budget. Non-salary expenses are being reduced but cannot be reduced enough to avoid reductions in salary and employee benefits pools.
  Reductions in employee benefits pools minimize the number of positions that need to be reduced in order to balance the operating budget. Reductions in employee benefits pools also can be restored relatively quickly if operating budget performance exceeds projections.

  By order of magnitude, the $2,308,000 reduction in the College’s employer contribution to the retirement plan is the equivalent to the average salary of 28 full-time faculty members or the average salary of 46 full-time staff members. It is also the equivalent of a 5 percent decrease in the current salary of all faculty and staff members.

• Were reductions in the salaries of existing faculty and staff members considered as an alternative to reductions in employee benefits pools?
  Yes. Reductions in existing salaries were considered but not chosen since many faculty and staff members, especially those in lower salary grades, may not be able to sustain a decrease in their pay. Also, faculty and staff members that may be able to sustain a reduction in pay can do so in a tax efficient manner in order to supplement the College’s contributions to the retirement and health insurance programs.
  A mandatory reduction in higher-level salaries ($120,000 plus) was also considered and not chosen. There are very few positions at these salary levels so a 10 percent salary decrease would not yield much in savings. These positions also tend to be paid at or below market levels for comparable positions at peer institutions.
  Cabinet members and academic deans have pledged to donate 5 percent of their current salary levels in FY 2009-2010 to the College to support the operating budget.
• When will the College be able to increase faculty and staff salary pools in the future?
  We hope to increase the faculty salary pool by 1 percent in FY 2010-2011, 2 percent in FY 2011-2012, 5 percent in FY 2012-2013, and 6 percent in FY 2013-2014. We also hope to increase the staff salary pool by 1 percent in FY 2010-2011, 2 percent in FY 2011-2012, 5 percent in FY 2012-2013, and 5 percent in FY 2013-2014.
• What can benefits-eligible faculty and staff members do to limit the impact of flat or decreased levels of employer contributions to employee benefits?
  Benefits-eligible faculty and staff members can enter into salary-reduction agreements to make tax-deferred contributions to their retirement accounts. Generally, the maximum tax-deferred contribution limit for calendar year 2009 is $16,500 ($22,000 for faculty and staff age 50 or over).
  Benefits-eligible faculty and staff members can also make pre-tax contributions to Section 125 flexible spending accounts. Contributions are based on elections made at the end of each calendar year and take effect at the beginning of the subsequent calendar year. It should be noted that these elections have already been made for calendar year 2009. New elections may be made in December 2009 for calendar year 2010.
  The Section 125 flexible spending accounts may be used to fund dependent care and/or eligible medical expenses not covered by insurance and not reimbursed by any other benefit plan. The employee share of group health insurance premiums is also deducted on a pre-tax basis.
  The impact of these strategies on individual benefits-eligible faculty and staff members will vary based on their current contribution levels and ability to increase contribution amounts.
• When do longer-term operating budget projections begin to increase funding levels for employee benefits?
  We hope to increase the College’s employer contribution to its defined contribution retirement plan administered by TIAA-CREF to 4.13 percent in FY 2011-2012, 8.25 percent in FY 2012-2013 and 10.31 percent in FY 2013-2014. We also hope to increase employer contributions to health insurance premiums by 5 percent in FY 2011-2012 and beyond.
• Can individual faculty and staff members elect a reduction in salary rather than a decrease in employee benefits?
  No. Due to anti-discrimination laws and regulations that apply to employee benefit programs, it is not feasible for the College to offer such an option. As noted previously, faculty and staff members do have the option to individually reduce their pay in a tax efficient manner to supplement the College’s contributions to the retirement and health insurance programs.
• Based on the projected reductions in the College’s employer contribution to the retirement program, can individual faculty and staff members revoke their election to participate in the Emeriti Health Solutions Program?
  The election to participate in the Emeriti Program was considered to be irrevocable, so the answer to this question will require further research. As an alternative to leaving the Emeriti Program, it may be possible to amend the program to address faculty and staff concerns.
• Will funds be available for step increases and promotions for faculty and for promotions and reclassifications for staff members in FY 2009-2010?
  It is not yet clear if additional savings or revenues can be identified to fund these potential changes in salaries.
• How and when will the College implement the reductions in the faculty and staff salary pools for FY 2009-2010?
  Reductions in faculty and staff salary pools will be achieved through the management of vacancies, reductions in adjunct faculty and lecturers, reductions in staff hours, staffing efficiencies, a small number of targeted staff reductions and other strategies. These strategies will be finalized and implementation will begin no later than March 20, 2009. Also, any adjunct faculty, lecturers or staff members whose positions are targeted for reduction will receive notice no later than March 20, 2009.
• Will separation packages be offered to adjunct faculty, lecturers and staff members if their positions are eliminated?
  Separation packages will be offered to staff members and the packages will be modeled after those offered during the closure of the School of Extended Education. Separation packages will not be offered to adjunct faculty and lecturers based on provisions in the Faculty Handbook and in accordance with their letters of appointment.
• What vacant faculty and staff positions will the College fill and when?
  The president and his cabinet will continue to determine what faculty and staff positions will be filled based on institutional priorities.
• What longer-term projections for undergraduate enrollment are included in the budget model?
  Although the number of new undergraduate students is projected to gradually increase between FY 2009-2010 and FY 2013-2014, total undergraduate enrollment is projected to gradually decline to a low of 2,318 in FY 2011-2012 before growing back to 2,378 in FY 2013-2014.
• Can the College spend its “Board Reserve Endowment” rather than decrease operating expenses in the year and years ahead?
  The College’s Board Reserve Endowment is part of the College’s overall endowment investments and the largest component of the College’s unrestricted endowment. As such, it has declined in value by more than 24 percent between June 30, 2008 and December 31, 2008.
  The decline in value of all endowment investments put the College in the position where it is close to being out of compliance with credit covenants that are based on financial ratios, especially those focused on the College’s unrestricted resources. The spending of the Board Reserve Endowment, the issuance of any new long-term debt by the College, or the further decline in the market value of the endowment would cause the College to be out of compliance with its credit covenants. The expenditure of the Board Reserve Endowment would also decrease the amount of endowment income available to support the FY 2009-2010 operating budget and future operating budgets.
• Will departmental budget managers be able to request to have unspent operating budget funds carried forward into the next fiscal year?
  Yes. As in past years, departmental budget managers may request to have unspent operating budget funds carried forward into the next fiscal year. Also as in past years, there is no guarantee that requests will be approved since this is dependent upon many factors including the overall financial position of the College.
• What expense portions of the College’s operating budget have grown disproportionately in the last five years and are those areas the focus of expense reductions?
  Portions of the operating budget that have grown disproportionately, for the most part, are reflective of institutional strategic priorities. These include increased expenditures for technology, library services, advising and student support services, faculty development, graduate programs, admissions, fundraising, communications, institutional research, debt service, recreational sports and athletics, and the maintenance of facilities. All of these areas were considered for expense reductions and reductions were identified in some of these areas.
• How can individual members of the campus community help the College weather the global economic downturn?
  Members of the campus community can offer suggestions and support through their normal organizational structures. There will also be a website blog and
  e-mail address for sending suggestions to the Budget Committee.
• Are the Board of Trustees, president and Budget Committee willing to listen to alternative expense reduction and/or revenue enhancement proposals in lieu of those in the adopted operating budget assumptions and projections for FY 2009-2010?
  Although the Board of Trustees has given the president limited flexibility in achieving the financial results contained within the adopted operating budget assumptions and projections for FY 2009-2010, the president, cabinet and Budget Committee are open to suggestions to further reduce operating expenditures or increase operating revenues.

GENERAL COLLEGE BUDGET & FINANCIAL QUESTIONS
December 29, 2008

• Given the current financial market situation, how is the financial health of Saint Mary’s College?
  Our financial condition is stable. The operating budget for the current fiscal year remains balanced. The College also has adequate liquidity to fund operating activities. Our endowment investments have been negatively impacted by the downturn in financial markets, but remain well positioned to meet the College’s operating needs.
• Does the financial downturn have an impact on the present budget?
  The primary impact on the College’s $101.9 million operating budget for FY 2008–2009 has been a projected $700,000 increase in debt service. In order to accommodate this increase and create an expanded contingency fund, College departments have identified approximately $1.9 million in savings within this year’s operating budget. These savings are in areas that do not negatively impact the College’s academic programs, students, strategic initiatives or plans.

  It is anticipated that the severity of the current economic downturn will impact planning for future budget years. The College is constantly monitoring leading indicators that may hint at the impact of the downturn on current and future operating budgets.

• Are the College’s cash reserves safe?
  Yes. The College has adequate cash and cash equivalents invested in very safe and stable short-term investment strategies.
• With the problems in the credit markets, can the College still borrow funds if necessary?
  Yes. The College has in place a pre-approved short-term line of credit to support operating and capital needs if necessary. The College is also actively monitoring the impact of the current credit crisis on our tax-exempt bonds, and how it is affecting short-term interest rates, liquidity and future borrowing plans.
• Is the College’s endowment at risk?
  Like all investments, the endowment fund has varying risk exposures across its asset allocations, and has not been immune to market volatility and widespread investment losses over the last year. As of November 30, 2008, the endowment had decreased by 26.4 percent from its June 30, 2008 valuation of $151.8 million. This decline in endowment value is similar to the declines experienced by our peers in higher education.

  The actual investment performance of the Saint Mary's endowment for the one-year period ending November 30, 2008 exceeded the performance of the composite index used to measure performance. The -31.5% performance for the endowment for the one-year period ending November 30, 2008 was better than the -33.7% performance of the composite index.

  It should be noted that the endowment does not have any exposure to Bernard L. Madoff Investment Securities. The Investment Committee of the Board of Trustees has steadfastly avoided investing in hedge fund strategies, including those allegedly followed by Madoff.

• Will the College’s ability to raise money be impacted?
  Saint Mary's continues to receive generous gifts from its alumni, parents and friends who recognize that philanthropic support to the College is as important as ever. In fact, for the first five months of this academic year, annual fundraising dollars have increased by 25 percent. However, since the financial downtown is so widespread, we expect some fundraising slowdown in 2009. The College will move ahead purposefully with its comprehensive campaign since new money is critical to support needed facilities, student scholarships, academic programs and endowment growth.
• Will the College stop any capital projects (such as construction and renovations) because of difficult financial markets?
  Funding for capital projects already underway at the College is already in place, so any projects underway will continue through their conclusion. However, it may be necessary to delay some major construction projects that are now in the planning stages.
• How is Saint Mary’s preparing for next year’s budget?
  In this economic environment, the College will be cautious about its own spending plans for at least the remainder of this fiscal year and the next fiscal year. The College is preparing contingency plans beginning with FY 2009–2010 that would enable it to react to a reality that is different from our baseline planning assumptions. The focus of the contingency plans will be to find opportunity areas to save money or cut costs while ensuring that the quality of student experiences remains first rate. However, the College will also continue investing in areas that show potential to increase revenue in the future.

  In the event that costs need to be cut in a significant manner, the President and the Board of Trustees will attempt to ensure that the adjustments are made in a manner that preserves the mission of the College and maintains the value and affordability of the Saint Mary’s experience for our students.

STUDENTS AND FAMILIES

• How does the current financial turmoil affect Saint Mary’s students?
  The College’s academic programs and campus activities — from athletics to ministry to co-curricular opportunities — are vital, stable and thriving. The biggest challenge for many students and their families is accessing the cash to pay for tuition and living expenses. As banks struggle, lines of credit are harder to obtain. For the fall term, the College did not see an impact on our enrollment or any significant issues regarding students’ ability to get loans. Saint Mary’s participates in the Federal Family Education Loan Program (FFELP), which has helped ensure that qualified students and their families have access to federal loan funds. The Office Financial Aid can provide further assistance in this area.
• What will happen to financial aid packages for FY 2009–2010?
  The College remains committed to keeping the benefit of a high-quality SMC education affordable. Institutional grants will remain unchanged for FY 2009–2010 for students who remain in good academic standing. We will also offer prospective students competitive aid packages very similar to those provided this year.
• What if a family’s financial circumstances have changed significantly?
  Families significantly affected by the economic downturn should contact the Office of Financial Aid. If the change happened during the current academic year, limited funds exist that may help offset these unforeseen events. The College will review each situation individually and respond as soon as possible.
• If the credit markets remain constrained, can Saint Mary’s help families find loans?
  The Office of Financial Aid is available to guide families through the process of finding and identifying a private lender if necessary.
• Will Saint Mary’s increase its tuition for FY 2009–2010?
  The College expects that tuition, room and board charges will increase modestly for FY 2009–2010 to ensure that Saint Mary’s continues to have the resources necessary to provide exceptional academic programs and resources. About 90 percent of the College’s budget comes from student-related revenue, with about 7 percent coming from endowment income and 3 percent from other sources including philanthropy. Ultimately, the full cost of attending Saint Mary’s is on average $4,050 less per student than it otherwise would be thanks to endowment income and other resources. The Board of Trustees will set tuition and fees for 2009–2010 year at its January 2009 meeting.

EMPLOYEES

• Is it likely that employees might not be paid?
  No. This is a very remote risk. Payroll is one of our highest priorities. Current projections indicate that the College should have no issues making payroll for the foreseeable future. If the economic environment changes dramatically, we would postpone other discretionary spending in order to help ensure adequate cash was available to make payroll.
• Will a hiring freeze be put into effect?
  A hiring cap was put in place in October 2008 and will be re-evaluated in conjunction with the January 2009 meeting of the Board of Trustees. The Board of Trustees will review current and future-year budget projections at that meeting, and will also establish tuition and fee rates for FY 2009–2010.
• Are employee retirement funds secure?
  Faculty and staff participate in the College’s retirement contribution plan, which directs College funds and employees’ own savings each payroll period to TIAA-CREF. These funds, held in separate accounts for each participant, are invested at the participant’s direction in a multitude of investment vehicles. In the face of the current declines in the stock market, employees are encouraged to maintain an investment outlook that parallels their retirement outlook and to maintain asset allocations consistent with their retirement objectives and risk tolerance. Employees are also encouraged to consult the TIAA-CREF web sites on a regular basis for timely and relevant information concerning the investment markets.