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10/15/92

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Budget deficit not as bad as earlier thought

STANFORD -- Stanford University's projected budget deficit for the next three years has been adjusted downward from $125 million to $110 million, Provost Gerald J. Lieberman told the Faculty Senate on Thursday, Oct. 8.

"In some ways that's good news, but I don't want you to feel too good about it," he said, referring to the fact that $110 million is still a very large number.

Lieberman, who as provost is the university's chief budget officer, used the first senate meeting of the school year to tell faculty about a multiyear deficit-financing program approved by trustees - and reported in July when many faculty were away.

Lieberman also announced that:

  • Research Dean Robert Byer will step down in December (see separate story).
  • An earlier plan to add a surcharge for expenditures from restricted funds will not be implemented this academic year. The Provost's Committee on Budget Implementation will continue to study how to identify actual costs associated with the expenditures. The charge theoretically would cover those overhead costs.

Implementation this year would have been premature, Lieberman said. Budget planners last year estimated that a 10 percent surcharge could generate approximately $3 million.

  • Starting this year, all research faculty will be eligible for sabbatical leaves, which will be funded through the faculty- staff benefits pool. The policy will not be retroactive - the time clock will start clicking now, Lieberman said.
  • A Committee on Recruitment and Retention of Women Faculty at Stanford has been formed. The 11-member body, chaired by education Professor Myra Strober, probably will issue a report at the end of the academic year, he said.

Financing the deficit

The deficit financing program calls for borrowing, increased reliance on endowment earnings and other measures to cover the shortfall for the three years ending 1993-94.

As part of the program, trustees decided to increase the endowment "payout rate" - for this year and next - from 4.75 percent to 6.75 percent. Several faculty members advocated just such a move during extensive budget deliberations last year. "Payout" is the portion of endowment earnings made available for current spending; any earnings above that are reinvested to guard the endowment's value against inflation.

Increasing the payout rate will generate $58 million for the deficit financing program, Lieberman told his colleagues. Another $17 million will come from borrowing, and $35 million from reserves and other sources.

The projected deficit of $110 million breaks down to $44 million in 1991-92, $41 million in the current year and $25 million in 1993-94.

Stanford's deficit for the recently completed fiscal year was $4 million less than projected in early summer, Lieberman said, because the schools and administrative areas "worked hard at budget savings."

The current year's deficit should be about $3 million less than earlier projected. Part of the saving comes from a temporary infusion of some endowment income and part from revising graduate student tuition income projections, Lieberman said. In recent years, actual tuition income figures have ended up higher than originally estimated, so in the future budget officers will use less conservative projections.

The 1993-94 deficit should be about $8 million less than projected in June, Lieberman said.

The financing program replaces a policy adopted in 1991, when the board authorized use of up to $100 million in reserves to cover university and Medical School deficits for three years. Approximately $20 million of those reserves were used.

The program is intended to give deans and administrators time to implement in phases, rather than immediately, $43 million in budget cuts identified last year. It also will cover myriad one- time expenses, including a staff-early-retirement program and one- time expenses associated with the indirect-cost dispute, as well as new accounting and information systems needed to meet the university's needs and government requirements.

Payout increase

In a preliminary June estimate, Chief Financial Officer Peter Van Etten said that about $44 million of the financing plan might come from the payout rate increase. After additional analysis during the summer, it was revised upward to $58 million, Lieberman said.

The higher figure is based on more detailed analysis of how restricted endowment funds affect the operating budget, and the extent to which the payout increase could substitute for the operating budget.

Lieberman cited as an example graduate financial aid, which is funded both by general funds and restricted gifts to the endowment. The higher payout rate on the restricted endowment will substitute for, not supplement, operating budget funds for graduate financial aid, he said.

In cases where increased payout cannot substitute for general funds, it will revert to "funds functioning as endowment," which are reserves that trustees choose to treat as endowment. These reserves can be spent only at the discretion of trustees.

Lieberman emphasized that the payout increase is temporary. Trustees agreed to change the rate only after a study of the issue by a board committee headed by trustee Herbert Dwight.

Trustees of nonprofit institutions have a generally recognized responsibility to maintain the purchasing power of an endowment. Under the direction of university trustees, the Stanford Management Company's strategy is to reinvest some endowment earnings so that the university's $2 billion "savings account" grows at least at the rate of inflation.

In June, Van Etten said the payout increase was possible because Stanford's endowment grew far above average during the 1980s, due to favorable market conditions and the skill of the late treasurer Rodney Adams.

Trustees in June authorized borrowing up to $45 million for the deficit program, but that has now been reduced to $17 million, Lieberman said. Debt also incurs interest costs in the operating budget, so the lower figure will help the operating budget long term, Lieberman said.

As for 1994 and beyond, Lieberman said that former Provost James N. Rosse's "structural shortfall" projection of $10 million to $15 million per year is still "a pretty good number."

"We have to curb our appetite for expenditures" and bring them in balance with income, Lieberman said.

The budget will remain tight, but barring a dramatic earthquake, "I think we can do it," Lieberman said.

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