Dartblog

A good friend who is an experienced financial analyst with CPA and CFA certifications, a Dartmouth alum and parent, and a strong financial supporter of the College (upper six figures over the years), has thoroughly reviewed the College’s audited financial statements and unearthed some sobering facts. His report:

While we all know that the endowment dropped from $3.66 billion in 2008 to $2.82 billion in 2009, here’s a lesser known fact: the College’s total indebtedness rose from $288 million in 2001 to $950 million at the end of fiscal 2009. That’s a jump of $662 million.

Much of this increase came from the $400 million bond offering that the College had to make last year when it got caught in a cash crunch. The rest came as a result of an investment strategy that had us borrowing to pay for operations so that we could invest other money in high-return plays. A gutsy move, as long as the markets don’t turn against you.

College finances are not far from family finances: your investments minus your debts is a good measure of financial wellbeing. By this measure, the College is worse off today than it was in 2001.

Today, two thirds of the endowment is invested in illiquid, hard-to-value “Level 3” assets (as defined by accounting standards), i.e. private equity partnerships and hedge funds which incurred $526 million in unrealized losses last year. Under its contracts with these funds, the College could potentially be called upon to pay in another $823 million of capital commitments to its private equity portfolio. (In fiscal 2009, the College had cash calls in the amount of $312 million — see the cash crunch mentioned above.) The timing of these capital calls is not clear, nor is their likelihood, but if a significant part of them comes to pass, the College would either need to liquidate other assets or borrow heavily again in the markets. Liquidating assets might be tough, given that only about 25% of the endowment is in unrestricted pools that can be applied to any institutional need.

Over the past decade, Dartmouth has been on an unsupervised spending spree: since 1998, in a low-inflation environment with stable student enrollment, compensation and benefits (excluding sponsored research compensation) rose at an annual rate of 8.4%. During the same period, gross tuition increased by 5.6% annually. However, because the College provided increasingly generous financial aid to its students, the net tuition increases have only been 3.6% since 1998. That is a 4.8% per year gap.

(Joe Asch writes: For you non-quants out there who don’t feel passionate about the implications of a teensy-weensy 4.8% difference between the growth of revenues and costs, you should. If you start with $100 and grow it by 3.6% over 11 years, you end up with $147.56; grow the same $100 by 8.4% and after 11 years you have $242.84. What began as a balance ends as a serious imbalance. That’s one of the ways you can end up with a $100 million structural deficit.)

Conclusion: Over the past decade, the Board of Trustees have approved a debt binge and unfettered spending that has brought the College close to insolvency. As a group, the Trustees are women and men with distinguished careers and accomplishments. However, it appears that they have failed to ask critical questions and say no at the appropriate times during their service on the Board.

Note: Pray that those private equity cash calls don’t come to pass. If they do, we could really find ourselves in a deep hole.