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05/31/94

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University continues to face shortfall in unrestricted budget

STANFORD -- Despite a small surplus in the new consolidated budget proposed for 1994-95, the university continues to face a shortfall of nearly $5 million in its unrestricted budget, Provost Condoleezza Rice told the Faculty Se nate on Thursday, May 26.

In a preview of a report she will make in June to the Board of Trustees, Rice explained that all of Stanford's revenues and expenditures are built into the new budget, reflecting a complete financial picture of the university's operations.

In the past, budget officials focused on the largely unrestricted operating budget, which represented only 40 percent of the university's total.

Revenues in the consolidated budget are projected at $1.287 billion, while expenditures are projected at $1.270 billion. Most of the surplus is in restricted funds and auxiliary enterprises.

The consolidated budget's surplus "does not eliminate the structural problem in the unrestricted budget," Rice said, because restricted funds cannot be spent on general university operations.

In the unrestricted budget, over which the university has more control, revenues are short $4.8 million, based on income projections of $405.4 million and expenses of $410.2 million.

This occurs despite budget cuts of $6 million - the first part of a three-year, $18 million cost-reduction program.

The $4.8 million shortfall in the 1994-95 unrestricted budget is in the Medical School, and relates partly to the indirect cost problem and partly to changes in the general economics of health care. The school is expected to co ver the shortfall from its own reserves; earlier plans called for the university to cover it.

"That is a major accomplishment for the university, but principally for [Dean] David [Korn] and his faculty," Rice told the senate.

The 1994-95 budget calls for staff salaries to grow an average of 2.5 percent and faculty salaries 3.5 percent. "We tried very hard to balance budget considerations with market conditions," she said. Tuition will rise 5 percent , and the base payout rate - the transfer from endowment earnings - will be 4.75 percent. Research is expected to grow at about the rate of inflation.

Rice said that expense growth would be held to 1 percentage point over inflation. University costs traditionally have risen approximately 2 percentage points above inflation annually.

Rice told the senate that she has tried "once and for all" to kill off the concept that departments would be given an automatic adjustment each year - "inflation plus a little" - to cover cost rise. After a detailed examination of the budget, some items have been given an allocation to match inflation, she said, but others have been held flat.

The budget is now "revenue constrained," she said, explaining to laughter that President Gerhard Casper thought the term she had been using - "revenue driven" - made the university sound like "spendthrifts."

Capital budget plans

Rice also told the senate about a new five-year, $661 million capital plan for facilities and infrastructure to significantly reduce seismic risks, address a backlog of deferred maintenance, support academic programs and addres s code and compliance issues.

University officials will ask trustees to approve $192 million in capital expenditures for 1994-95.

This includes $126 million for program development for such projects as a new cancer and neurosciences building, the Gates Information Science Building, graduate housing and improvements in athletics facilities. Another $22 mil lion will be spent on deferred maintenance, including reconstruction of Palm Drive; $19 million on seismic repair and strengthening; $18 million on academic renovation, including support for faculty recruitment and retention; and $6 mi llion for miscellaneous required projects. Of the $192 million, $94 million will be financed by debt.

Of the total five-year plan of $661 million, about $258 million will come from debt and $148 million from donations to be raised. The remainder will come from funds already on hand or identified, including approximately $50 mil lion from the Federal Emergency Management Agency.

The university borrowed $150 million in March 1994, of which $100 million was earmarked for capital projects. Additional borrowing is anticipated in the future.

To support this, university trustees in April approved an additional 0.5 percent in endowment payout, which will provide $6 million to $8 million toward interest costs.

The five-year plan includes funds for renovations in Housing and Dining Services, improvements in Sand Hill Road, restoration of historic elements in the Main Quad, development of a Serra Street pedestrian mall, and compliance with workplace health and safety regulations.

Cost reductions

In the area of cost reductions, Rice said that the university would grow "largely through substitution and redeployment." This makes it important to "focus very hard on our strengths and weaknesses" rather than cut across the b oard. Deans were asked to make tough choices in evaluating their programs, Rice said.

Rice said she had been worried because in earlier three-year plans there was a tendency to "call every program excellent or just on the verge of excellent."

"We're trying to do a more rigorous look," she said.

Rice said that the schools would save $1 million next year by limiting growth in expendable materials and services budgets and by accruing turnover savings on faculty positions. Faculty billets that are vacated will return to t he provost, who will reassign them to deans at the assistant professor level and keep the salary differential.

Rice said she made some allocations back to the schools, largely to underwrite unfunded faculty billets and to make strategic salary adjustments in schools that have competitiveness problems.

Administrative units have net cost reductions totaling nearly $5 million, including a $1 million budget increase for Environmental Health and Safety.

Of the $5 million, $2.2 million will come from Finance, $1 million from Student Affairs, $497,000 from the President/Provost Office, $500,000 from the Legal Office, which is 20 percent of its general funds allocation, and $400 ,000 from Faculty/Staff Services.

Libraries and Information Resources is cutting $205,000, almost totally in information resources. Development, which underwent a major reorganization last year, is cutting $70,000 in its expendable materials and services budget . Rice said further cuts were not practical in the unit responsible for raising gift funds.

Looking ahead

Looking ahead, Rice said the university still needs to cut another $12 million total in 1996 and 1997. To do this, the university will rely more on contracting out, reorganization and on new systems and changes in processes.

"We have done as much traditional belt tightening as we're going to be able to do," she said.

Stanford's structural problem will persist in the unrestricted budget, with minimal real growth in salary, tuition and research volume, she said. This will mean continued budget constraints for some time.

Future budget cuts only will be possible through true reengineering of administrative processes, she said. One team is working on changes to the procurement and payment process (dubbed "buy/pay"), and another is working on rese arch administration.

A systems team is looking at investments in management information systems that will replace our "rather archaic ones," and at a retreat this summer deans and administrative associate deans will begin work on reorganization of units, she said.

Copies of the 80-page budget plan for 1994-95 will be available after the June 9-10 trustee meeting from the university Budget Office, 723-4567.

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