Friday, January 23, 2009

Endowment faces losses at Stanford

Stanford is expecting an “unprecedented” endowment decline of between 20 and 30 percent, Provost John Etchemendy told the Faculty Senate yesterday afternoon. Since 1964, only eight fiscal years have had negative nominal returns, the largest of which was an eight percent decline in 1974.

Still, the provost emphasized that this endowment decline only puts Stanford back approximately three years.

“We were a strong university then,” he noted, “and we will emerge from this a strong university.”

Consolidated Funds

One reason the negative investment returns have had such a severe impact is the composition of the University’s consolidated funds — investment income is the largest single source of revenue, according to the provost, who is Stanford’s chief budgetary officer.

To minimize the short-term impact of market volatility, however, Stanford budget officials utilize a smoothing formula that controls payout of the endowment. What this means is that any given year’s payout is actually affected by three to four years of past investment performance.

Etchemendy put this in context of the current budget.

For fiscal year 2009 (September 2008 through August 2009), the payout is already fixed, meaning a set amount of endowment funds will flow into the school’s budgets. Fiscal year 2010, however, will take the brunt of the crisis.

“Assuming a 25 percent drop in endowment value, continuing funds for fiscal year 2010 will see a drop in income of negative 7.2 percent,” Etchemendy said.

If, then, investment results return to normal, continuing funds will still see a further drop of 6.8 percent, according to the provost. But Etchemendy was quick to note that “the drop will be more severe” if investment returns do not climb.

And while the words “good news” were rare at yesterday’s meeting, they did arise when discussing the second-largest source of revenue — grants, contracts and other sponsored research. Etchemendy said revenue from these areas is projected to be “level or slightly up.”

Regarding tuition, room and board, Etchemendy foresees a 3.75 percent increase in tuition and a 2.5 percent increase in room and board, ultimately resulting in a total student fee increase of 3.5 percent. Still, the provost emphasized these numbers must be discussed and ultimately approved by the University Board of Trustees, which will next meet on Feb. 9 and Feb. 10. Also, as already reported independently by Etchemendy and Financial Aid Director Karen Cooper, Stanford’s current financial aid policies will remain in place.

“If tuition goes up, your grants and coverage go up,” Etchemendy said yesterday.

The provost also noted that gifts to the University, especially annual giving, are expected to decline significantly, while clinical revenue is projected to be up 12 percent.

General Funds

The $800 million general funds budget pays most faculty and staff salaries, core administrative operations and other non-research expenses. Budget officials are asking the University to brace for a $100 million cut from general funds over the next two years.

More specifically, Etchemendy is projecting a $62.7 million drop for fiscal year 2010 and a total $89.3 million shortfall by fiscal year 2011.

Right now, budget officials guarantee a 5.5 percent payout of endowment funds to the School of Medicine, the Graduate School of Business and general funds. When returns on investments float above 5.5 percent, which was almost always the case before the nation slid into recession, some funds are channeled to what are labeled Tier I and Tier II channels, funding general funds and the president’s funds, respectively.

Assuming a 25 percent hit in investment returns, Etchemendy said, the Tier I buffer will be emptied, resulting in a $40 million vacuum in general funds.

Immediate Steps

Last month, Etchemendy announced that he, President John Hennessy and each of Stanford’s deans will take a 10 percent salary reduction. A recent report by The Chronicle of Higher Education found that Hennessy brought home a total compensation of $701,501 during the 2006-2007 year.

The provost also asked each departmental unit of the University to submit reduction scenarios for three percent, five percent and seven percent cuts for fiscal year 2010, but he emphasized that units will be given flexibility to tailor individual salary programs for tenured faculty and lower-income employees.

“The faculty and staff are our most precious commodity,” Etchemendy said. “We want to make them stay; we want them to be paid competitively.”

As Harvard budget officials did in November, Etchemendy has instituted a hiring freeze on staff positions and a request to reduce faculty searches. Stanford officials also announced an enhanced severance plan last month and are considering an enhancement to the faculty retirement incentive program.

“This is not a good time to lose your job,” the provost said to scattered laughter that quickly dissipated, “so we wanted to do [layoffs] gently.”

In addition, the vacation accrual cap for university employees will be reduced from 480 hours in three stages — it will be 400 hours in January 2010, 320 hours in January 2011 and 240 hours in January 2012. In addition, business class travel has been prohibited.

Etchemendy said the process is not only being implemented gently but is also taking place slowly and cautiously.

“If we were a company and our major revenue source had just dropped, effectively zeroed out, we would be done with major layoffs back in November,” he said. “So this is happening rather slowly, but we have plenty of time and are doing plenty of planning.”

The provost also addressed the concern that Stanford is sinking deeper and quicker than other institutions.

“We are not being hit as hard as most universities,” he said. “Given what we’re doing here and the scale of our cuts, we’re probably in the 98 to 99 percentile of universities

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