University of Vermont

Office of the President

President's Report to Board of Trustees November 30_2007 President’s Report to Board of Trustees
November 30 2007

Chairman Lisman, Vice-Chair Cioffi, trustees, faculty, staff, students, alumni, and friends, at each of the 21 quarterly meetings of the UVM Board since I assumed the presidency we have moved toward the decision point on debt policy and the Capital Resource Management Plan that we face at this 22nd meeting. A few of you will recall the first of those meetings, in August 2002, when we reviewed performance benchmarks on more than eighty different indicators. Among those were indicators showing that our expenditures per student under various budgetary categories were among the highest in the nation, bearing out the truth of a proposition I had begun to ponder well before I was hired, after a conversation with former trustee Ben Forsyth, who told me that UVM was simply too small to support its extraordinary complexity. Out of that insight, and also under the inspiration of a document dating from mid-year 2001, “The Case for the Next President of The University of Vermont,” which was produced under Bruce Lisman’s leadership, the invest-and-grow strategy we have been pursuing for the last five years took shape. The strategy was formalized in the vision statement completed just before the February 2003 Board meeting. Since then we have followed the course laid out in that period, through the Board’s endorsement of the first version of the Strategic Financial Plan in May of 2004, through the annual reviews and updates of the plan, and through the approval at our last meeting of the Strategic Capital Plan, with its quantifiable metrics for setting priorities.

I want to make two observations on this capsule history. First, as we have laid down, brick by brick, the foundations of enhanced quality and competitiveness at UVM, the process has been the work of many hands–trustees, faculty, staff, students, alumni, and friends. It has been a humbling privilege to have it fall to me to articulate the vision and the strategy, all the more so because I know I have only been framing, focusing, and advocating what have long been the highest aspirations and the best strategic thinking of our community. Second, our lofty but achievable goal—to be among the nation’s premier small research universities—will be the work of decades. The benchmarks that we saw in 2002 are bookends to the Strategic Plan Performance Indicators that you received with your Board materials and that the Educational Programs and Institutional Resources Committee will be looking at later this morning. Make no mistake: our newest Performance Indicators show not only that we have come a long way in the past half dozen years but also, more to the point of our deliberations today, that we have a long way to go.

My belief in the rationality and the attainability of our aspirations and in the urgency and necessity of pursuing them with intense discipline and focus undergirds my determination to do justice to the case for the recommendations we have placed before the Board in the Capital Resource Management Plan. I do not advance this case lightly but with a sober sense that if I fail to persuade you I will have failed in my fiduciary responsibility as chief executive to safeguard the long-term well-being of our University. I am at the same time mindful and appreciative of the genuine concerns that are on the minds of virtually every Board member at this table with respect to issues like affordability and long-term financial health through good times and bad.

As I said in the meeting of the Budget, Finance, and Investment Committee in May, I was not at that time convinced that changing the debt ratio would be appropriate or prudent for us. Like many of you, I just wasn’t sure that this was what we should do. In considering increasing the debt burden ratio—the percentage of our annual operating expenditures devoted to principle and interest payments on debt—from 5% to 6%, I acknowledge, as we all must, that we are taking on additional risk. I have concluded, however, that we must do this under the compelling force of the proposition that it will be risk assumed prudently in order to exploit strategic opportunities, and, conversely, to avoid any erosion of our competitive position.

I know that many of us have nuts-and-bolts questions about the Capital Resource Management Plan and its recommendations. I will not address those now since the Budget, Finance, and Investment Committee later this morning will take up issues and questions arising from the details of the plan. But I do want to highlight for the Committee of the Whole some of the larger strategic issues around the recommendations.

First, we should all keep in mind that we are nearing the end of the aggressive enrollment growth that has been, in this first multi-year lap of a long race, the engine of success in our Strategic Financial Plan. Have we been successful? You bet! We are more than a year ahead of our undergraduate enrollment growth target, and our trajectory today is very positive, with applications for next fall up 21%—Early Action apps alone were up 35% on November 27, and we already had in the hopper, by mid-November, more than 10,000 applications, well over half of last year’s final applicant pool. But we will not keep growing like this, nor would we want to: we are intent on maintaining the human scale and close student-faculty interactions of what will remain the nation’s smallest Land Grant institution with a medical school. There may be slow organic growth in later years, but the long-planned end of our growth spurt is in sight.

May I suggest, therefore, that we begin to reframe our understanding of what we mean by grow in the Invest and Grow strategy? It will not, in a year or two, be about growing numbers of students and faculty, but about continuing to grow nationally recognized academic quality and long-term fiscal strength, and about doing so prudently, within our means. And indeed we are doing just that, not merely by building programmatic quality through innovations ranging from the Honors College to the National University Transportation Center to the Vermont Integrated Curriculum in Medicine, not just through growing levels of philanthropic support, but also through prudent and cost-effective management of the University, including a 14% reduction in thermal energy consumption measured in BTUs from FY 2000 to FY 2006 while the campus grew in total square feet by 13.4%, including significant cost savings through reengineered procurement operations, and including material cost avoidance, as exemplified by an increase of only 6% in our Blue Cross Blue Shield premiums this year compared to trends for double digit premium increases regionally and nationally. So we are growing quality, we are containing and avoiding costs, and we are also growing financial strength: our endowment has grown by more than 95.8% since the fall of 2002 (from $180.1 million on 9/30/02 to $352.6 million on 9/30/07) both through market activity and, perhaps more significantly, through tens of millions in gifts from our extended community. Our net expendable assets have also grown beyond expectations: in the actuals shown in the all-but-signed-off-on 2007 audit, net expendable assets stand at $410.8 million, $55.4 million or 16% above the growth projected in the first annual update of the Strategic Financial Plan (SFP 3.0, in May 2005) just two-and-a-half years ago, and $23.6 million or 6.1% above the growth projected only last year (SFP 5.0A).

The Strategic Financial Plan is one of the key building blocks we have laid down together, and I think the many ways in which our actual performance has outstripped the projections in that plan—from enrollment targets to asset growth—is ample testimony not only to how handsome the return on investment of our strategy has been but also to how prudently conservative we have been in developing the plan, always taking care to err, if we have erred, on the side of understating revenues and of overstating expenditures, of understating our prospects for building private resources through high investment returns and fund-raising, for example, and of overstating what fringe benefits were likely to be in the years ahead. That cautious construction of the SFP is one of the foundations of my confidence in the recommendations we are bringing to the Board in the Capital Resource Management Plan, including the recommended alteration in debt policy. I would argue that we have developed together a financial planning tool second to none in higher education in its complexity, power, and value. And, by the way, in answer to a question that has been raised recently, the SFP does attempt to account fully, in its projections of increased expenses, for the costs attendant on new facilities (salaries, operating costs, utilities, and the like).

Another of our key building blocks has been the Strategic Capital Plan, and in particular the ranking tool that we as a Board unanimously endorsed in September. Now if we are going to take on the risk of increased debt, it is important for us to be clear that we are doing so in order to meet vital strategic needs that will allow us to make significant advances in quality. I would submit that the Strategic Capital Plan with its ranking tool should assure us that the projects we are proposing—$11.5 million a year in baseline funding primarily for deferred maintenance plus demonstrably critical projects like the Given Courtyard infill, the Greening of Aiken (more than half of which is deferred maintenance beyond the baseline), and the recuperation of Terrill (again deferred maintenance) to make it habitable again for one of our strongest academic departments after its evacuation in mid-semester this fall--all belong under the category of vital strategic need.

Beyond the reassurance represented by the ranking tool and the clear strategic merit of such projects, I suggest that we keep in mind three other pressing points. First, we have inherited a massive backlog of deferred maintenance representing years—in fact, decades—when the University did not invest adequately in its physical plant. We all wish it weren’t so, but it is. Second, the vast majority of projects lined up in the current Strategic Capital Plan ranking that could be undertaken over the course of the next nine years at a 6% debt burden address in whole or in part significant deferred maintenance above and beyond the deferred maintenance represented in the $11.5 million of baseline spending. For the Terrill project, the whole $7.5 million project is deferred maintenance; for the Aiken project roughly half of the $13 million total is deferred maintenance; and as we refine the programs for such high priority renovations as the Hills Agricultural Science Building, the Cook Natural Science Building, and the Billings Library project, I am confident that most of the dollars in those projects (probably close to 100% of the dollars in the cases of Hills and Cook) will also be assignable to deferred maintenance. Thus, far from neglecting maintenance of our existing physical plant in favor of new construction, the Strategic Capital Plan ranking would direct the vast majority of the dollars available to deferred maintenance of the existing campus. And, third, if we do not address the upkeep of the campus after decades of neglect our competitive position and our ability to attract, retain, and graduate students will be deeply undermined. Please hear me on this: I am not talking about the fancy bells and whistles that are hallmarks of the higher education “arms race.” I want us to focus on getting our facilities to a place where they all meet basic standards of adequacy, in terms of safety, quality, and accommodating the size and needs of our University community today. We have to meet those basic standards in order to get the maximum benefit from our increasingly competitive situation. And the necessity of meeting basic standards is in my view the very definition of vital strategic need that puts these projects, with their heavy burdens of deferred maintenance, so high on the ranking list.

As we move from enrollment growth to growth of quality and of financial strength, the need to expand campus facilities will begin to moderate, but there will remain a clear imperative to take good care of the precious asset represented by our physical plant and to keep the deferred maintenance backlog from building up again to staggering proportions. As I have said, then, we are moving rapidly toward a new phase in UVM’s advance, a period in which we will continue to build competitive quality and value while at a more or less steady state in enrollment, and while living prudently within our means. I am very much with all of you who wish we could wend our way through to that next phase without taking on additional debt. But I have become convinced that we have to do so to get where we need to be. I also believe, however, that we can prevail in getting within the next ten years to a stage at which we will have taken care of our most pressing facilities needs while reducing our debt burden well below the 6% limit to which we will have to advance in the early years of the decade. I think it would be unwise for us to set specific timetables tied to specific debt burden reductions, but we should be committed—as I am personally and fervently—to devoting ourselves to raising non-debt sources of capital funding beyond the 25% threshold proposed in the Capital Resource Management Plan recommendations and to building endowment resources through the next campaign to a level at which our spendable endowment earnings as a percentage of total operating expenditures will have increased significantly. Those two elements—more non-debt dollars for renewal of the physical campus and more philanthropic dollars directed to long-term endowment growth—seem to me to be prime candidates for top priority in thinking about our current and future fund-raising: these must be key elements in our efforts to bring the debt burden back down toward 5% with all deliberate speed. I believe we can, and we must accomplish this goal without falling into the trap of guessing just how and just when that will happen. No one could want to get there more than I do, and we will be doing everything we can as we prosecute the next campaign to make it so. Keeping our eyes on this goal should be a clear and steady focus of attention in the Board’s annual reviews of the Strategic Financial Plan and the Capital Resource Management Plan and in the recommended tri-annual comprehensive reviews of the capital plan and of our debt position and policy.

Whether we like it or not, the competitive velocity of higher education is accelerating. Fast. In order to deliver a complex research university, with all of its intellectual, academic, professional, social, and economic benefits for our students, faculty, staff, alumni, and the citizens of Vermont, we must produce quality at competitive levels commensurate with our net cost to students and their families, and the principal resource for producing quality must continue to come from the tuition paid by a capable, diverse student body drawn to the University of Vermont for an experience that we simply cannot produce with facilities that do not meet normative standards of quality and currency. Our teaching laboratories, for example, must be of decent quality and must have up-to-date technology. The value equation is particularly critical as we look forward to a period in which the number of high school graduates annually declines both nationally and, regionally, even more steeply. If we become uncompetitive in that severe testing environment we may find ourselves in holes proportionally much deeper than the ones we have been climbing out of over the course of the last few years. This is another way of framing the vital strategic need that underlies our recommendations on the Capital Resource Management Plan.

Moving forward, we will need to be increasingly mindful of the pressure the rising cost of higher education is putting on students and families and ultimately on access to post-secondary education for all but the very affluent. As I said in an email to the Board earlier this week, the questions raised by Jim Betts and Joey Donovan recently about student debt burdens relate to a complex set of pressing issues for our Board and for all of higher education. It is my expectation that the challenges surrounding cost of attendance, access, affordability, debt, financial aid, aid leveraging, and the balance between need-based and merit-based aid will increasingly and appropriately claim our attention as trustees. In this domain, too, however, we operate, as we do with respect to capital budgets, more like a private than like a public institution, with tuition discounts that are shown in the Strategic Financial Plan as rising from thirty-two cents on every dollar of assessable tuition to thirty-eight cents on the dollar. We already spend much more on undergraduate financial aid than our entire appropriation from the State of Vermont, and I believe we have to stick to our plan to increase our aid formula and to use our growing pool of aid dollars as wisely and as strategically as possible to ensure that the increasingly talented young people interested in studying at UVM are able to do so–another key investment for UVM and for our students and their families. The main source of the dollars in our financial aid budget, however, is tuition paid by our students, and that source will be imperiled unless we continue to grow quality and value that attract the enrollment we need to deliver not only financial aid to students with need but also competitive compensation for faculty and staff and a physical plant that will not discourage prospective students and their families in the light of comparisons with peer institutions. We may take some solace at the moment that our net price after financial aid seems to be falling relative to that of our peers. In the latest update of the ranking of the 100 Top Values in Public Higher Education by Kiplinger’s Personal Finance, we have dropped, for instance, from 49th place out of the 100 schools in net cost for in-state students after financial aid to 59th place since last January. This is one of the few national rankings where falling lower is a good thing.

Allow me to close, please, with two quick items that indicate we are in a sound position to make the changes in debt policy we are recommending. First, to repeat, the growth in applications at UVM reflects the enormously powerful impact of the advances and investments we have made in recent years. The 35% growth in Early Action applications, for instance, is radically out of proportion with—and much greater than—the modest uptick this year in the number of high school graduates. Second, our grant and contract awards in the first quarter of the ’08 fiscal year have been very strong, up by $16 million over last year’s first quarter ($44 million compared to $28 million!) and millions of dollars above first quarter awards in the record-setting ’05 and ’06 fiscal years, reflecting the strength and resilience of our vibrant research enterprise during difficult federal budget years.

Meanwhile, since our last meeting, we have had the formal dedication of the Davis Center; a Homecoming Weekend with record attendance, highlighted by a gala celebration of our success in The Campaign for the University of Vermont; recognition of UVM by the Sustainable Endowments Institute as one of only six schools to have earned the highest grade for sustainable institutional practices out of the 200 American colleges and universities with the largest endowments; and a press conference here on campus with Governor Douglas announcing a formal, long-term partnership between the State and the University to address global climate change and the development of a Green Economy for Vermont, precisely the “big idea” that the administration and members of this Board have been advocating for some years. Emboldened by our success together to date, we are nevertheless intent on pursuing a destiny that requires, for its fulfillment, discipline, focus, and unremitting effort over the long haul. The level of investment an altered debt policy will allow us to make will keep us on course for that long haul and aim us toward the point when, as a result of having built competitive quality, we will be able to live comfortably within a regime of much lower reliance on debt than what is required in our necessarily front-loaded plan. Mr. Chairman, here ends the President’s report.

Last modified December 02 2007 08:16 AM