The decline in the financial markets in FY2001 was but a prelude to the shock and dislocation that followed the attacks of September 11. In FY2000, we enjoyed a 46 percent increase in the endowment. The following year, the endowment saw a decline of under 1 percent. In FY2002 we suffered a 5.7 percent decline. Our investment team has done a superb job in the face of a great deal of uncertainty, and the Board of Trustees is confident that we are appropriately diversified in our holdings and that we are not taking any unnecessary risks. But recovery and the resumption of growth will take time, requiring patience and adjustments in some of our assumptions and expectations.
Revenue at Dartmouth normally derives from a number of sources. The College-only budget for 2001 illustrates this:
- Tuition provides 44 percent of our College-only revenue. We continue to have applicants who are eager to attend, and, as a selective institution, we are fortunate to be able to choose from among the very best students in the world.
- Income from the endowment provides 30 percent of our annual budget. It is the portion of our revenue stream that has grown significantly over the last decade and the one that is most directly at risk from economic downturn. We draw from the endowment each year using a complicated total-return formula that works out at the present at between 5 and 6 percent of the endowment value. Just as our revenues benefited from the extraordinary bull market of the 1990s, recent downturns in the market will have a significant and sustained negative impact on future spending potential.
- Alumni/ae giving and other current use gifts, such as the Dartmouth College Fund and the Parents Fund, provide 11 percent of our revenue. Despite the economic downturn, we are gratified that our graduates and parents continue to make Dartmouth a priority in their philanthropy.
- Sponsored activity accounts for another 10 percent of revenue. Thanks to the extraordinary success of our faculty, research funding across the institution has increased significantly over each of the last two years. Between 2000 and 2001 sponsored research increased by 26 percent, and between 2001 and 2002 it increased by another 19 percent.
- Finally, a further 5 percent of the College-only budget derives from miscellaneous sources, such as fees. 
While private colleges and universities are not like other enterprises, we have clearly been hurt by the general economic downturn. Assumptions regarding growth in revenue for our operating budgets and our long-term financial plan have softened. We have been forced to think creatively about how we might maximize our financial resources. The administration, the Finance Committee of the Board of Trustees, and finally the Board as a whole have all been involved in this process. We have looked at the endowment and at the formula we use to distribute endowment income, and we have considered whether we are using the endowment as aggressively as we should while maintaining a prudent regard for the future. We have analyzed our debt capacity and whether we can take on more debt to finance some projects.
As a consequence, our strategic planning process carefully reviewed our priorities and reassessed what we can realistically accomplish. This required us to take a hard look at our current expenses. We concluded that we can only assume incremental expenditures when they further a clear priority and when we have identified a revenue source to support such a priority. As we prepare for a capital campaign to support our current needs and to fund new initiatives, we must acknowledge that our fundraising outlook in the near term may be complicated by events over which we have no control. The world does not always march to our schedule.
Be that as it may, we cannot afford to lower our aspirations for Dartmouth. Let this be a challenge for us to become more imaginative and more patient in accomplishing the things we seek. But we must seek no less. Our strategic discussions have reaffirmed our fundamental vision and a sense of basic priorities. History is on our side. Now into its third century, Dartmouth has endured and flourished despite shocks and changes in the world around it. We have responded and adapted to these changes while proving true to our own purposes and principles. Dartmouth has more than endured through difficult times it has excelled. Our charge is to continue to flourish in a changing and challenging environment. This will require imagination, patience, and discipline and a willingness to choose among priorities as Dartmouth seeks to be forever new.