Tufts and the Economy

October 6, 2008

Dear Friends,

The past several weeks have been unlike any I have ever witnessed in the financial markets.  We have seen extraordinary volatility in the equity markets and a virtual freeze in the credit markets.  No doubt, many of you are wondering how all of this affects Tufts and how, in turn, it might affect you.  While I am not in a position to offer you investment advice, let me try to review the immediate impact of recent events on the university.

First, the headline:  Tufts has never been in a stronger financial position.  Even with recent declines in the stock market, our endowment is more than twice what it was just six years ago.  We carry only a modest amount of debt on our balance sheet, and last year our credit rating was upgraded to AA-.  We manage the university quite conservatively.  Last year virtually every school did better than its budget, which means that each of them retained additional reserves that can be used to cushion a downturn.  That said, we are not immune from the immediate effects of either a credit freeze or a general downturn in the economy.

Like many other institutions, we have been touched by the lack of liquidity in the credit markets.  In the normal course of events, the university finances short-term borrowing needs by issuing 7-day tax-exempt commercial paper.  The interest rate on this paper rose from 1.6 percent in mid-September to a high of 7.7 percent ten days ago.  It came down to 5.3 percent last week and appears to be dropping more.  But even with this recent decline, short-term borrowing costs have increased.

We dodged a bullet last week.  As you may have read in the New York Times, the bulk of the assets in the Commonfund Short Term Cash Fund were frozen last week as a result of the decision by its trustee, Wachovia, to terminate the fund.  Many institutions have used this fund as a sophisticated money market fund to invest their short-term working capital.  With the fund frozen, over 900 colleges and universities do not have full access to over $9.3B of their cash.  We had approximately $130M of our working capital in this fund until late August when Darlene Karp, our Assistant Treasurer, got nervous about its liquidity and transferred almost all of our funds into Treasuries.  If you see Darlene, you might thank her for her foresight.  I can assure you I have already done so on behalf of the university.

We had planned to issue $85M in bonds this fall to finance a number of capital projects, notably the vertical expansion of the Dental School tower.  Given the state of the bond markets, this bond offering is now on hold.  We have adequate resources to finance the Dental School expansion through cash flow.  However, if the credit markets remain frozen and a recession adversely affects fundraising, we will have to delay other major construction projects.

One major potential impact of the downturn in the economy is on our financial aid budget.  We guarantee to meet the full financial need of every undergraduate we admit.  If unemployment rises, we can expect to see additional demand for financial aid from our current students as well as from those who will apply for admission to the class of 2013.  We have a moral obligation to continue to meet the full need of all undergraduates currently enrolled at Tufts, and we will do so.

Obviously, the decline in the stock market affects the value of our investment portfolio and is also likely to create a challenging environment for fundraising.  Fortunately, we just completed our best fundraising year in history.  We raised $243M last year, including $220M in cash, so we should be able to weather a decline in fundraising with only a modest impact on our operating budget.  Major capital projects that require additional fundraising, however, are likely to be affected immediately.

In 2001-02 we experienced a sharp decline in equity values following September 11th and the bursting of the tech bubble.  At that time, many of our peer institutions instituted hiring and salary freezes.  We did not.  While it is too early to predict where the economy will go, I believe we are once again in a good position to weather this storm without resorting to either of those measures.

Economists are fond of giving forecasts without time horizons.  I can guarantee you that this market will turn, but I cannot tell you when.  For now, we will continue to monitor the situation closely and to manage the university prudently.  We will need to tighten our belt a bit, but I do not foresee major changes to our day-to-day operations.  If things should change, I will be back in touch with you.

Best regards,

Lawrence S. Bacow
President