During last Friday's presidential debate, Senator Barack Obama pronounced that Americans currently face "the worst financial crisis since the Great Depression." Now, after the Dow Jones industrial average plummeted to its biggest single-day drop in history and a proposed $700 billion bailout package failed to pass in the House, this analogy has taken on even greater meaning. Americans are struggling to imagine what a worsening financial crisis might mean for themselves and their communities.
BLACK TUESDAY AT BROWN
Experts argue over whether the nation's economy will soon emerge resurgent or continue to sour. But if America is in fact perched upon its greatest economic depression since the '30s, the entire Providence community shares a stake in the shape that Brown will take in a financial meltdown. Examining how Brown survived the Great Depression provides an instructive look at what's at stake today for the University's students, staff and a surrounding community deeply invested in its livelihood.
Endowments, together with philanthropic gifts and students fees, are universities' major revenue sources. When the Depression hit, Brown possessed a healthy endowment of $10.2 million. However, for the four years before financial crisis struck, the University was sustaining an annual operating loss of $40,000 in anticipation of a sweeping '30s endowment campaign that would raise millions for faculty salaries, staff additions, department appropriations and graduate fellowships. The Depression struck before the campaign could begin, sending the University scrambling to slash expenses to catch up with its declining income. According to a 1935 emergency assessment of the University's financial situation, the school drastically cut funding for equipment, teaching positions and building projects. Additionally, the University slashed all staff salaries by 10 percent.
Thanks to such cuts, the plummeting deficit finally stabilized in 1933, but not without serious cost to the University's academic stature and financial future. The 1935 report noted that "the administration is already beginning to feel the pressure of cumulative deficiencies in equipment and supplies and the strains of retarded recognition in the faculty," adding nervously that it was also "already noticing competitive interest on the part of other institutions in some of the important members of its staff." Evaluating its financial situation, the committee anticipated more significant "operations of amputation" unless "either a substantially raised income or a reshaping of the institutional organization" was enacted.
In 1936, following the report's recommendation, the University instituted a corporation-approved "cultivation program" designed to dramatically increase the university's resources. It did so by aggressively harvesting donations from alumni and their families, foundations and the general public through the Corporation and Alumni Fund's cross-country networks of influential people. These far-flung "friends of the University" formed local committees to disseminate publications praising the University's virtues and personally exhorted alumni to accept financial responsibility for the school's fate. The report also highlighted the need to raise income from students from either an increase in enrollment or from a decrease in financial aid. An increase in enrollment was achieved through heavy recruitment, plugging Brown to youth with enticing film clips of happy students and promises of new features like a yachting program.
As the touted yachting program would suggest, part of the University's tactic in increasing income from students lay in "attracting a larger number of well-qualified students who (could) meet the financial requirements of the University." The National Youth Administration (NYA), a division of the Works Progress Administration, helped many poorer students pay for school by paying them to work for local philanthropic organizations and on campus, ensuring that students could stay enrolled while also remaining active contributors to the Providence community. This state-run program, combined with alumni contributions and other emergency funding, prevented the University from having to reduce financial aid to its students. However, its interest in admitting more wealthy students suggests a willingness to resort to policies that would seriously challenge the University's emphasis on 'need-blind' admission if drawn upon today.
THE CURRENT SITUATION
Similar to the onset of the Depression, when the University was planning to add positions and raise salaries, Brown is now in the process of adding 100 new faculty members and is in the middle of numerous building projects such as the new Creative Arts Center. But unlike in 1929, when the financial crisis preempted the school's plan to build its endowment to realize these plans, in 2008, the University has already mostly completed the much-touted Boldly Brown Campaign for Academic Enrichment. Although two hundred million remain to be raised towards the $1.4 billion goak, the Development Office has said that even in light of the current financial storm, they plan to meet and possibily exceed this amount by 2010.
The real vulnerability to the University may lie not in its ability to raise money, but in its ability to keep the money it already has. Today, the University is largely funded by a $2 billion endowment, $130 million of which served as the school's operating budget this past year. The endowment has already dropped this year due to the worsening economy, and the University has had to tap into special savings that act as safety cushions for the University. "We are not operating break even," Brown's Chief Financial Officer Elizabeth Huidekoper told the Independent. Real problems would occur if the endowment dropped by, for example, 25 percent. Considering the S&P 500 has already dropped more than that in the past year, such a drop is alarmingly plausible. This sort of hit to the endowment would reduce its payoff by more than $25 million. "If it dropped by that amount it would be terrible," Huidekoper said. "That's a 25 percent drop, that's not unheard of."
The recent financial crisis at Tulane University's provides one example of drastic steps that universities can be forced to make in the face of serious economic distress. When Hurricane Katrina hit New Orleans in 2005, Tulane stood as the city's largest private employer. Finding itself in need of $260 million, Tulane's board and administration crafted a "renewal plan" which immediately slashed $40 million from the operating budget, cutting (in addition to numerous academic programs) around 2,700 full and part-time staff positions.
If the country's financial situation were to worsen and such an endowment drop were to occur, what would Brown do? Huidekoper refused to directly speculate but noted that the Budget Finance Committee last spring tested out a number of scenarios to experiment with measures the University would take. She implied that Brown's first measures could be similar to those it took in the Depression when it cut positions and salaries across the board. "When times are tough, (faculty and staff salaries) are things you have a lever on," she said.
However, in contrast to the University's 30s flirtation with the possibility of cutting financial aid and emphasizing recruitment of wealthy students, Huidekoper said financial aid would be a top priority. "I would say that financial aid won't be cut, particularly in a time of need." She also said the University would "delay a building or any projects" and consider leaving staff positions "unfilled" to avoid making any such cuts.
During the Great Depression, the University was able, in part, to ensure that financially needy students could stay enrolled through the NYA's extensive state assistance. In today's political climate, it is unclear whether such New Deal-style intervention would find widespread support.
Furthermore, the University in the 30s was able to increase its income by developing previously under-tapped alumni networks to raise cash, building the more "intimate relations" between the Corporation and the University desired by President Clarence Barbour in his 1934 address to the Corporation. Today, with Boldly Brown already having tapped $1.2 billion through the cross-country networks that were novel in the 30s, the University could face a limited ability to rely further on such gifts to dramatically increase its budget.
"One of the big questions we're facing now is whether the economy is going to affect annual giving," Huidekoper said. "Not all recessions hit everybody."
BEYOND THE IVORY TOWER
The University's anxiety in the '30s over other schools' predatory overtures toward its faculty reflects the serious implications for the school's stature as an institution of higher learning when positions are cut, projects frozen and research underfunded, a prospect that could face the school in a worst-case scenario. However, the fate of Brown's academic prestige has intense practical consequences for the people in its surrounding community.
According to a 2005 independent report assessing Brown's economic impact on Rhode Island, the University in that year accounted for more than 7,500 Rhode Island jobs and $752 million in the state's economic output. Both in the Depression and in its tentative emergency plans for the coming years, the University makes the most immediate and apparent cuts to its direct staff. The University already employs fewer people than it did in 2005, with the number of staff dropping by almost 1000 people from 3,753 to around 2,800 in 2008, according to the University's human resources website. However, the number of jobs that could be lost due to other cuts in University spending balloons when indirect employment is taken into account. For example, construction of University projects, one of the other major areas reduced in times of University financial trouble, accounted for more than $52.7 million spent in the 2005 fiscal year, which translated to around 470 jobs in construction and related industries.
A wide variety of other University spending habits that may face potential slashing would further impact jobs and money flowing into the Providence economy. Brown's purchase of supplies and services from Rhode Island businesses--from large companies like the New England Gas Co. to smaller ones like Lotus Landscaping and Guy Abelson catering--added up to over $64 million in 2005, directly supporting around 660 jobs in Rhode Island companies (which indirectly supported even more jobs at smaller businesses employed by these companies). Cuts to research funding would be no less significant, as between 2000 and 2005 over 22 startup companies were created based on Brown research and over $60 million in research funds went to Rhode Island hospitals affiliated with the Alpert Medical School. A drop in student enrollment would induce a drop in the $40 million that Brown students and visitors to Brown spent at off-campus Providence businesses in 2005--spending that supported around 840 state jobs. More broadly, cuts of any kind would impact the millions of dollars in taxes that Brown pays to state and local government, which in 2005 amounted to $12.8 million.
Such figures reveal the intertwined fates of Brown and the greater Rhode Island community. While the jobs, revenue and cultural ties generated by Brown represent a great economic boon to the community, the measures Brown takes when endowment, alumni giving, student enrollment, and other vitals drop during an economic downturn hold serious consequences for the thousands who rely on its health.
Finding new ways to adapt to old financial problems will be critical. "We're important to this community and there are a lot of people who depend on Brown," Huidekoper said. "We employ a lot of people and I think it's really critical that we be able to stay afloat."
JOY NEUMEYER B'10 looked up and across the barn, and her lips came together and smiled mysteriously.
Michael Gonda contributed reporting to this article.