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12/07/93

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Provost Condoleezza Rice offers Faculty Senate a budget primer

STANFORD -- It was the last item on the agenda of a meeting that had already gone 2 hours and 15 minutes.

The budget - again.

More than a half hour of it.

Nevertheless, about two dozen faculty - most of them from the sciences and engineering - hung on every word as Provost Condoleezza Rice sprinted through a budget lecture to the Faculty Senate on Thursday, Dec. 2.

It was a warm-up for her Dec. 13 presentation to the Board of Trustees, she said. When it was all over - at 6:10 p.m. - the specialist on Russia's military had proved that she also is an expert on Stanford budget matters.

Flipping through 13 overhead slides, Rice talked about the overall growth of the 1980s. The focus then was on unrestricted operating funds, with little attention paid to the role of restricted funds, she said.

The cost of maintaining existing programs and adding new ones pushed growth in the operating budget, and little was cut in those days. The university thus practiced "cost-plus pricing" in setting tuition and indirect-cost rates (budgeting projected costs first, then looking for revenue to pay for them).

In 1989, "things started going sour for us," she said, citing the indirect cost crisis, economic recession, slowdown in sponsored research growth, the Loma Prieta earthquake and changes in indirect cost reimbursement rules.

Repeating the now-familiar story, Rice recounted that respositioning was designed in 1990-91 to cut $22 million. "We would have been up a creek without a paddle" if then-Provost James Rosse had not had the foresight to tackle the issue when he did, she said.

A year later, plans had to be made to cut another $26 million and add $15 million in income for a total $41 million adjustment, most of it concluding in 1993-94. And university trustees financed deficits of $140 million over five years with reserves, endowment and debt.

Operating budget deficits should not continue to be financed by long-term debt, she said, because that is a burden on future budgets and can negatively affect Stanford's excellent bond rating.

Despite all the cutting, deficits continue because costs are growing faster than revenue. Now, she saId, the university must move to a revenue-driven budget model - determining projected revenues and holding costs to that level.

Also, in their planning and budget process, university officers must take into account restricted funds. This will raise eyebrows, she said, adding that she did not intend to centrally manage restricted funds but needed to understand the role they play in the big picture.

"We will never have money for investment if we don't bring restricted funds into play," she said.

Rice projected an $18 million to $22 million shortfall in the 1994-95 non-medical unrestricted operating budget. She predicted income of $360 million and expenses of $369 million. To that $9 million deficit is added $4.1 million in extra costs relating to the deferred maintenance backlog, earthquake restoration and seismic bracing, and planned maintenance. Another $5 million to $9 million will be needed to cover potential impacts from changes in indirect-cost-recovery rules.

The projection assumes 3 percent inflation and 3.5 percent revenue growth, based on the traditional endowment payout rate of 4.75 percent. A two-year, two-point payout increase to 6.75 percent - designed to cushion the impact of budget cuts - expires this year.

Rice said restructuring was necessary to get away from chronic deficits and to produce new unrestricted funds for academic program investment and academic infrastructure.

She said she hoped to return in the spring with more details on plans for improving financial and information management systems, which she labeled "archaic" and "Byzantine."

Rice told the senate about budget-cutting targets she was seeking from administrative units - 15 percent to 30 percent over three years. Cuts will be selective, rather than across the board, she said.

Academic units have been asked to develop consolidated budgets that take into account both unrestricted and restricted funds.

In a return to past practice, Rice said that units in the future will be allowed to keep their year-end savings. Taking back the money "sets up a reverse incentive" regarding savings, she said.

The provost said she also is working on incentive plans to reward managers for cost savings. Currently, she said, the reward system encourages managers to proliferate staff for them to supervise.

During the question period, Hans Andersen, chemistry, asked whether market conditions would continue to drive salaries, and whether they would have to be covered by revenue.

Any allocation has to be within revenues, Rice responded. Salary guidelines will be set separately from this process, driven by competitive and market issues, she said.

Amos Nur, geophysics, asked if incentives were being developed to make research faculty cut expenses and be more effective.

Rice said the government is creating incentives by setting more rules about what can be charged as a direct expense. That will require researchers to use their funds slightly differently, she said.

Research Dean Charles Kruger is working to simplify contract administration, she said, which will help principal investigators.

Responding to a question about rumors that the National Science Foundation will no longer allow salary offsets during the academic year, Rice and Kruger sought advice from Richard Zare, chemistry, who is a member of the NSF board. A salary offset is charging a portion of a faculty member's salary to a sponsored project rather than university funds.

Zare said the policy varies from one discipline to another.

Robert Simoni, chair of biological sciences, said he thought salary offsets may be discontinued in areas where they are now allowed. "And what's worse," he said, "the National Institutes of Health over the next 10 years may follow suit. Talk about a pending crisis - that would be a disaster."

With changes in how research costs are charged, Rice said, the university will suffer revenue losses even if research volume and indirect cost rates stay up.

Tony Siegman, electrical engineering, observed to laughter that almost no humanities faculty were left in the room. (Many left early to attend an Alumni Association reception honoring fellow senator Ron Rebholz, English, and President Emeritus Richard W. Lyman.)

The humanities faculty, Siegman said, cause expenditures for libraries and other items.

"Perhaps, if they saw those expenditures in a somewhat different way, if they were, in effect, principal investigators on a small appropriate allocation from university funds, they might view this discussion more personally," he said.

At the suggestion of Terry Karl, political science, Rice said she would make available a small packet on how the budget works for faculty who understand it less than their colleagues.

Responding to senate chair Patricia Jones, biological sciences, Rice told the senate she would discuss the budget again during winter quarter and all the way until June.

Trustees in the past generally have approved the budget in April, but this year the schedule is being pushed back to June to allow more time for planning and consultation in the schools and administrative units, Rice said.

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