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Remarks as delivered
Good afternoon, everyone. Thanks for joining us at the Fall meeting of the General Faculty. As I think you all know, it is Dartmouth tradition that the President give a State of the College address at this fall meeting of the General Faculty, and I do so today with great enthusiasm and pride in both the positioning and the trajectory of the college.
Before I launch into that, let me make a couple of important observations. First, Dartmouth is a human institution, and as John Sloan Dickey so eloquently put it, "You are the stuff of this institution. And what you are, it will be." And human institutions, like humans, at times soar and at times disappoint. So, when I look at the state of the college, I'm really asking myself two questions.
And for Dartmouth, at this moment, I would say that the answer to both questions is an emphatic "yes."
We do have our challenges, for sure. And in terms of challenges, Joe just provided an update on C3I, one of the areas where Dartmouth is working to improve. And later in my remarks, I'm going to spend a little bit of time on financial sustainability, another critical area I think for future challenge.
The second remark I want to make by way of context is that change comes slowly to large complex institutions, especially institutions of higher education. So, when we evaluate progress, I think it's always important to look at multi-year trends rather than just term to term or year to year trends. You'll see me throughout this try to take a longer view of how we're progressing.
Before I launch into that though, I want to make a few comments on our research activities, in particular, the external recognition of your impressive accomplishments as faculty. One of the trends I certainly see in my six years here is that the recognition of your research accomplishments has been accelerating. Again, this year, there is a lot to celebrate.
I know that that's not an all-inclusive list and that there are many others who have received recognitions for your many scholarly and creative contributions.
The well-deserved recognition that you as individuals are getting is being replicated at the institution level. Just to give you a few examples of that, if you look at the USNews rankings, and you look at the input which is "peer assessment" – so that's what do Presidents and Provosts say about your institution, which I think this is generally an indicator of research quality – ours has gone from 4.2 to 4.4 out of 5 in the last three years. You probably know that the Carnegie Foundation returned Dartmouth to the "Research one" category in its most recent classification based, in part, on a 50% increase in research expenditures over the past six years. And Tuck catapulted to #2 in the recently released Bloomberg rankings of MBA programs, which is very welcome news.
And just last week, we hosted our Re-accreditation Site Visit Team, which is chaired by Vince Price, the President of Duke. And I want to give kudos to Jon Kull and Alicia Betsinger who led this effort from our site. I would say the Site Visit team was lavish in their praise of the materials and organization of the visit. Thanks to any of you who joined one of the Open Forums hosted by the Site Visit Team, as well.
I would say that Re-accreditation, having been involved myself in these things, Re-accreditation is probably the most comprehensive external evaluation that any campus receives. In its final read-out, the Site Visit Team was literally effusive in its recognition of the commitment to students that they experienced consistently across our campus, as well as the significant progress being made at Dartmouth in so many areas – research excellence, financial stability and campus climate.
I mention all these because to me, these recognitions from outside our campus are important because they serve as external validation that Dartmouth is delivering on the teacher-scholar model. That we are able to maintain an unwavering commitment to the education of our students while at the same time delivering path-breaking scholarship that pushes the frontiers of our field. And I know how difficult this is. To excel at teaching asks a lot. To excel at research asks a lot. To excel at both is truly remarkable. Congratulations to you as a faculty for pulling it off in a way that our peers outside our campus so appropriately recognize. I'm really moved by what I've heard by way of external validation of our effort to pull off the teacher-scholar model, so I hope you all feel really good about that.
I think the indicators and evaluations of our research, they are important also for our teaching, because as we inspire and we excite young minds by pulling them into our research with the prospect of knowledge creation, we need to be sure they're working at the forefront by working at the forefront ourselves. We are very much their role models, and our ambitions to understand and better the world through our research, that serves as a beacon for them, not only during their time at Dartmouth, but for years to come.
And what young minds we have to work with these days! Over the past five years, our yield – that's the fraction of students we admit who eventually enroll – has risen dramatically from 50% five years ago to 64% this year. To put this in perspective, I know of campuses that will brag about a 2% increase in yield. So, to have a 14% increase is really breathtaking.
In lockstep, we've seen a dramatic rise in the academic credentials of the incoming class whether you measure those by GPA, by test scores, by number of valedictorians and salutatorians, by percent of the incoming class that were in the top 10% of their graduating class in high school, and so on. And we have done so while achieving much greater diversity. So much praise goes to Lee Coffin and his team for their game-changing transformation of our admissions efforts. But I hope you can see that all this together leaves me really optimistic and impressed by Dartmouth's current positioning and trajectory.
Now, for the remainder of my remarks, I want to turn from people and programs to the actual infrastructure that supports our work – and by that I mean facilities and finances. And in both cases, for both of those subjects, I have the same three-part take-away:
Let me sort of address those three things in order, and I'm going to start with what we've been able to accomplish over the last six years. Without a doubt, we have made tremendous strides on Dartmouth's finances over the past six years, putting us on a much more stable footing than they were when I first arrived as President. We've achieved this by taking a series of proactive steps together as a campus to lower costs and increase revenue while introducing greater rigor into our institution's financial practices pretty much across the board.
Let me begin with one of the most fundamental areas, and that's that we've made notable strides in transparency. And I don't mean just with the few of you who happen to serve on the relevant committees, but also the many of you who have taken the Dartmouth Budget Course. You'll have a head start in what we're about to talk about today.
And let me return for a moment to the topic of external recognition because the Budget Course has been recognized as a national model of financial transparency in Higher Education. For example, Mike Wagner was asked to brief the COFHE Assembly on the budget course last year and the Dartmouth's Budget Course was the cover story in a recent issue of Business Officers, the trade publication of NACUBO, the National Association of College and University Business Officers. The point is, the word's getting out about this budget course, and Mike Wagner and Trish Spellman deserve great kudos for putting together such an outstanding course. And I would urge anyone who leaves today's meeting wanting to know more about the finances of the institution to sign up for the Budget Course next spring.
Let's turn to some of the other areas where we've made progress in our budgeting over the past six years. You may know that one of the most significant challenges we face is dealing with the impacts of historically under-funded depreciation. Many of you who are living in aging buildings are experiencing the effects of this under-funding.
To help address this, we have been systematically adding $1.5 million recurring dollars to this budget line item each year, steadily chipping away at a shortfall which is in the tens of millions of dollars. This is part of a larger effort which we've undertaken to be sure that we are covering recurring costs with recurring revenues and not trying to cover recurring costs from a one-time source.
We've also instituted a culture of reallocation as part of the annual budgeting process. And probably the signature initiative of our reallocation effort has been an ambitious four-year initiative to reallocate $17 million in annual administrative expense and move it to support academic priorities. To date, we have achieved 85% of this reallocation. We're well on our way to complete that in four years.
To help prepare Dartmouth for the next economic downturn, because Dartmouth was hit really hard in the last recession, we've established a $50 million revenue stabilization reserve that can help us bridge through a couple of down years of gift funding and endowment pay-out, which is one of the things that happens when you have a recession. We know $50 million is not going to be the full effect of a major recession, but we do believe that it will blunt the worst of the impacts and we will, of course, be further helped by creating a culture of prioritization and reallocation. I feel that we're much better prepared for the next recession whenever that comes our way.
In addition, we have opened up some headroom on tuition. Specifically, we've contained tuition growth over these past six years to the lowest six-year percentage increase since the 1950s. In doing so, Dartmouth has dropped from the second most expensive in the Ivy Plus group, when I arrived, to the eighth most expensive today. If you want to see our comparison group that we usually look at on tuition, you can see that when I arrived, Columbia was the most expensive – we were right on their tail – now what we have is a bit of headroom between us, and it's now Chicago who win the prize for greenest institution. This reserve, this headroom gives us something that in case of dire need we're able to tap. We were the second most expensive – no one wanted to be the most expensive, so we had very little room to move up on tuition. Now we have, in case of dire need, some headroom.
Turning to another topic, I'd be remiss if I didn't mention all of the great work that's going on at Geisel. Tremendous credit goes to Duane Compton and his team for a truly remarkable turn-around there. When I first arrived at Dartmouth, Geisel's deficit was coming in close to $20 million per year and projected to rise to almost twice that; it's now in the $8-10 million range, and we're committed to figuring out how to close that remaining gap. What Geisel's been able to accomplish is simply extraordinary and proves that it is absolutely possible to restructure our programs to be both academically stronger and more financially sustainable. I give great credit to Duane and his team.
When I talk about how we've reintroduced fiscal discipline, I'm also talking about things like stricter adherence to our sustainable endowment distribution formula and again, if you look back at the years just before I came, we were dipping into the endowment at a pretty good clip. We have now leveled that out and have been no more than 5% for about the last five years. What you want to think about is the endowment payout plus inflation should not exceed the investment return. You don't want to lose buying power. So, if we're able to hit an 8% return, which has been our history, then 5% is about the right number, so we are in the safe zone again.
We've also made a commitment to achieving funding milestones as part of our capital project approval process, and we do not move forward unless the appropriate funding is in place. While all of these actions individually may not seem so significant, they have contributed collectively to much greater stability that we are experiencing today from all of this discipline.
So most of that was about the cost side, let's turn to the revenue front. We've achieved record-breaking fundraising results over the past six years, as you probably know. Just to give you a sense of the progress, if you look at the first 245 years of Dartmouth's existence, the record fundraising year was $164 million in 2010, I believe.
Over the next four years, we almost doubled that. This is in the quiet phase of the campaign, and as the campaign was being formed, and with public launch, we've gone to new records. We're really pushing fundraising to a new level, which is great and very helpful. You're beginning to see the results on campus: the Hood being renovated, the big holes down at the west end of campus, new faculty that are joining us through the academic clusters, it goes on and on, so it's beginning to have an impact on campus.
I'm going to take a quick look at all of these steps taken together. This is a compilation of the things I've been talking about over the last six years, let's talk a little bit about the effect that they've had.
Five years ago, in the Spring of 2014, our budget team modeled projected growing deficits, and they modeled that the deficits would reach $36 million by fiscal year '19. So they were projecting that in the year that closed last June we would have ended up with a $36 million deficit. Because of these steps, here's the actual results we've seen in the last three years – you can see that in fact we've had a surplus in each of the last three fiscal years, and a $21 million surplus in fiscal year '19, as opposed to the projected $36 million deficit. So we have bettered the projection by $57 million because of the steps that I was outlining earlier.
On top of that, we've done so while investing in a whole bunch of new initiatives. So that $57 million improvement comes at the same time when we were investing in all of these things.
It's a welcome story, it's an important story, it's put us in a place of much greater financial stability. I wasn't here, but I know that the SBRI years were difficult and challenging, and I want to compare to those. So, SBRI was a reactive initiative that said, oh my god we've got a crisis and we have to do a whole bunch of things to correct in reaction to that. I know they were really painful and I've heard many stories about that. The steps since 2013 have been proactive, so they've been saying, let's look ahead, let's see what we can do to try to get ahead of the financial challenges that we're facing. Again, I wasn't here for SBRI so I can't make the comparison but I hope that many of you have felt that in the last six years, you did not feel the steps we've taken as much as you felt the SBRI steps.
Let's talk about facilities. Some of you may remember that in my first State of the College address in November of 2013, I laid out a set of ambitious new initiatives – what I'd like to see after 10 years. One of the cautions I got back that day from the collected faculty was that we didn't have the facilities infrastructure to pull that off. Five of our academic buildings had an FCI – that's a Facilities Condition Index – that exceeded .5. If you don't know what FCI stands for, you just need to understand that an FCI beyond .5 means really worn out. So, we had five of our academic buildings that were really aging. Other critical buildings were aging, as well, including Dartmouth Row, the HOP and many of our residence halls. Most of our athletics teams were crammed into the Leverone Field House during the winter months, requiring many to practice at all hours of the evening. Our power plant was and still is burning #6 fuel oil. Our steam tunnels were inefficient and deteriorating. And our IT infrastructure needed an upgrade.
So, that was a tall set of challenges, and I just want to report on what progress we have been able to make in the past six years.
So, a lot of progress that we can point to on the facilities side, as well, towards modernizing and right-sizing the facilities infrastructure for the ambitions of our campus.
So that's the last six years, a six-year period of, as I said, a lot of progress on the facilities and finances side. So, let's now look ahead at some of the challenges that we're facing.
If you take our current activities and you apply reasonable inflation estimates to our revenues, and to our costs, we remain pretty much in balance over the next decade or so. You can see at the end there's one point where we're project a $9 million deficit, another where we're projecting an $8 million surplus, but to put that in perspective – we're talking about $8 million out of a budget which is going to exceed $1.4 billion at that point, so this is a rounding error, essentially. We are in balance if we just do exactly what we're doing today for the next 10 years, we're in balance.
Unfortunately, we have some new costs coming our way. So, what are these new costs that leads to this $72 million projected annual deficit in 2030? They include the operating costs for the expanded space that I was just talking about. We're building new buildings, expanding our square footage so we have offices to expand faculty and so on, but we have to operate these buildings, and that costs money. This includes our best estimates for the additional funding needed to maintain competitive faculty salaries, we are committed to that. They include the cost of modernizing our IT systems, which have fallen behind. They include the costs to transform our power system to convert from #6 fuel oil to a sustainable fuel source, and to complete the hot water energy delivery system for our campus. They include the ongoing costs of C3I, which is temporarily being funded through reserves. And they continue progress on renovating our academic and residential buildings that are most in need. So, when you add these new costs which are not currently part of our activities, not currently funded within our budget, you end up with a projected deficit of $72 million.
I don't show you this with the goal of frightening you in any way. We can put this in a little context: $71 million is about .5% of the estimated budget in 2030. It's not like it's a huge dislocation.
But I do view this as a call to action, and an opportunity, because those of you who have been involved in budgeting will realize that to correct $71 million in recurring cost is a heavy lift. We've been working really hard to move $17 million out of administration operations, so $71 million is a heavy lift. I think it would be incredibly painful for us to achieve this by trying to get it out of our current operations, so to try to take our current revenue sources and grow them or take our current costs and expenditures and reduce them.
So let me amplify the revenue point a little bit. So, why we can't just grow our current sources of revenue to close this $71 million gap? Our current sources of revenue, our largest ones, are tuition, they are philanthropy, and they are sponsored research. I said earlier, there is some headroom on tuition if we really want to tap it, but it's limited, and our obligations to our students and families limit how much we can raise tuition, realistically. There is some room on tuition, but you can't get anywhere close to $71 million in annual resources.
What about philanthropy? Well, these projections already include $400 million in new subvention-relieving endowment that's part of the Call to Lead Campaign. We can, and we will, always prioritize subvention-relieving and unrestricted gifts, but to be realistic, those opportunities are limited. The way to think about this is, if we get a gift that's subvention-relieving, the donor has to be willing to fund something that we're already paying for. For most prospective donors, that's not an inspiring proposition. Most donors want to pay for something new, something transformative, something cool. So again, we will always pursue philanthropy to try to correct this but there are limitations.
How about sponsored research? Well, as those of you who are involved in the lab sciences will appreciate, growth in sponsored research comes with growth in indirect costs. And, in fact, the Indirect Cost Recovery that we achieve through sponsored research does not actually cover our growth in indirect costs. So, we will continue to seek external funding for research because it allows us to better serve our mission, but it comes with a needed subsidy. I'm reminded of the quote that one of the GM executives made as GM was going down, he said "Gosh, we're losing money on every vehicle, but we'll make it up on the volume." It's just not gonna work to think that growth in sponsored research will solve our budget problems.
To me, this slide is really a call to action to generate new sources of "net revenue," and by the term net revenue, I mean revenue net of costs. It's a call to open our minds about our cost base, especially outside of our core academic operations. And it's a call to harvest the best ideas and wisdom from our faculty, staff, students, and alumni, and to keep all of you abreast of the progress and challenges as they arise.
So, something I wanted you to know is that at my request, the Senior Leadership Group is launching something called the Dartmouth Budget Project. It is really a concentrated effort to develop recommendations for our campus in three areas.
First of all, how might we generate new kinds of net revenues? You know, virtually every one of our peers enjoy significant sources of net revenue outside of the ones that we do, that we enjoy. Some of these come from intercollegiate athletics, some come from highly profitable clinical partners and some come from effectively monetizing their brand. Part of this project is to look at what kinds of new programs or services could we offer, that are of value to the participants, and net of costs generate a surplus?
Second, how can we rethink our cost base in fundamental ways? Do we need to operate all of the functions we currently own and operate: housing, dining? Should we run our own power system? Can we gain efficiencies through further consolidation of administrative functions? We need to always be taking a look at our cost base, but also challenge some of the fundamental assumptions that we're currently operating under.
And finally, the third thrust of this project is how can we engage with campus, and keep campus informed as this work moves forward? The Budget Committee is planning to take on some of these questions, particularly the cost questions, in the year ahead. But we need all of your wisdom and ideas as we explore the actions we might take and the opportunities we might pursue that would be a good fit for our campus.
I want to emphasize that the Dartmouth Budget Project is about anticipating the challenges ahead and acting proactively. It's not reacting to a crisis. Right now, we're stable, we're in good shape. But we know there are challenges ahead, so how can we get ahead of them? And I'm confident that if we stay focused on the challenges ahead and take the steps necessary to keep us financially strong, we will have the resources to invest in excellence and innovation and quality of our academic programs.
Returning to the beginning, as I take a clear-eyed look at Dartmouth today, I think the one word that comes to mind right now is momentum. In teaching and research, in the talent we attract to campus, in the external recognitions of our work, I see strong upward trajectory. And I think that's a testament to you, our faculty, who in partnership with our staff, our students, and alumni are believing in what we can do as a community. Collectively, as John Sloan Dickey said, you are the stuff of this institution, and you are delivering.
So, congratulations to each and every one of you for that. Thanks a lot for your attention this afternoon and for coming. And now let me open it up for any questions you may have. Thank you.