As Princeton, like every other university, copes with the perilous economic climate, I find myself hearing the lyrics to the Shirelles’ song, “Mama Said There’d Be Days Like This.” I’m not sure mama had anything quite this dire in mind, but the song is a reminder that universities do have to plan with an expectation that there will be challenging financial times, including times like these.

Fortunately, this is exactly how Princeton has planned, and so while we certainly are affected by the turmoil that has afflicted the world’s financial, housing, credit, and other markets, we are better positioned than most to weather these storms. Princeton has a well-deserved reputation for skillful investment of its endowment and prudent oversight of its resources, and these practices are serving us well. PRINCO, the office that manages the University’s endowment, outperformed the markets and most of our peers last year with a return of 5.6 percent, and it continues to outperform its benchmarks in this very challenging economic environment under the strong leadership of its president, Andrew Golden, and the very capable and committed members of the PRINCO board.

Nevertheless, we are now witnessing unprecedented declines in the value of the endowment, which will affect our financial picture, given that endowment income supports almost 50 percent of our operating budget and a substantial fraction of our ambitious 10-year capital program. As we review our current spending and plan for the year ahead, we are looking hard at areas where we can reduce administrative costs, and we almost certainly will have salary increase pools next year that are smaller than in recent years. We also are thoroughly reviewing the timing and scope of our capital plans to identify construction projects that can be scaled back or deferred. At the moment, we do not see the need for more drastic measures that other universities have reported, such as hiring freezes or budget reductions in this academic year, but the full impact on Princeton of these extraordinary and difficult financial times will depend on the depth and duration of the economic downturn and the skill and thoughtfulness of our response.

To give you an idea of how the value of the endowment affects our spending each year, our spending policy calls for the amount of income distributed per unit of endowment to increase each year by 5 percent. We calculate our spending rate by dividing that income by the market value of the endowment on June 30 of the previous fiscal year, with the objective of spending between 4 percent and 5.75 percent. When the income as a percent of the endowment falls outside the target range, we make budget adjustments such as the multiple spending increases we approved over the last several years as the markets performed exceptionally well. Our spending rate for this year is 4.76 percent, well within the range, but as that rate rises next year because of the decline in the endowment’s value, we will be carefully identifying ways in which we can adjust our future spending so that we preserve the purchasing power of the endowment. One of the first signs that the economic outlook had changed for the worse was the number of students who arrived on campus this fall with reports that their families had experienced serious financial setbacks. The provost, Christopher Eisgruber ’83, and I quickly agreed that one of our highest priorities is to provide our students with any additional financial aid they may need as a result of changed circumstances. This includes families who now qualify for aid for the first time as well as those who qualify for additional aid. Our policy is to meet the full need of all students with need, and that is what we are doing. We anticipate that meeting this additional need will increase our financial aid budget this year by $3–$4 million. At this point, more than 56 percent of our freshman class is receiving aid, and their average grant is more than $33,000.

The record-setting performance of Annual Giving last year has put us in the position to meet these additional requirements for financial aid and to protect our most precious human capital—our stellar undergraduates, graduate students, and faculty. It is essential that we continue to recruit and retain the very best faculty and students, as they go to the heart of what makes this University such an important institution to the nation and the world. The flexibility that unrestricted Annual Giving funds provide to the provost is invaluable at a moment like this. We also have benefitted enormously from the exceptional performance of the Aspire campaign, which has already passed the half-way point in its five-year effort to raise $1.75 billion to help address some of the University’s highest priorities.

With the active engagement of our trustees and the help of all Princetonians, we will do everything we can to come through these challenges having not only sustained Princeton’s core strengths, but having provided capacity for Princeton to meet its aspirations even more fully in the years ahead.