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Understanding $100 Million

Cost Reduction.jpgYesterday’s anonymous gift to the College of $100 million dollars should be put into financial context. The administration will not put this money into an account and use it as needed; rather, it will go into the endowment, be invested, and then funds will be drawn off of the endowment at the usual draw rate of about 5%.

As a result of the $100 million gift, the administration will be able to increase its annual operating budget in perpetuity by about $5 million.

Similarly, when a donor gives $5 million to endow a scholarly chair, that money is invested in the endowment and each year it throws off the sum of $250,000 — the same 5% as above — enough to perpetually fund the salary and other expenses of a senior professor.

The point of this post is to shed light on the virtue of cost reduction. If the administration reduces, say, the bloated cost of the College’s employee benefits package by $5 million — which should be easy to do given that the cost of benefits at Dartmouth is currently $30 million more than the cost at Brown, even through the College and Brown have the same number of fulltime employees — then each year into the future an extra $5 million will be available for our operating budget to use for other, more productive functions.

Such a saving would be the exact equivalent, at least in the short term, of receiving another gift of $100 million, though it would not make headlines.

Addendum: Yes, Virginia, there is a Santa Claus, and your math is correct, too. If the administration could cut our benefits package by $30 million to make it the equivalent of Brown’s, that savings would be the equal of receiving an alumni donation of $600 million.

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