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Stanford Report, January 15, 2003

Provost warns of hard financial times, but says not to panic


When Provost John Etchemendy last addressed the Faculty Senate in October about the budget, he silenced the room with sobering news of a hiring freeze and the prospect of 5 to 10 percent cuts from the general fund. At the Jan. 9 senate session his presentation was equally somber, though the provost did his best to be reassuring. "Don't panic!" he concluded. "I would much rather be Stanford than UC."

Outlining in a measured way the various elements that contribute to the university's financial position and some options for dealing with it, Etchemendy said the cold reality is that Stanford is looking at a $25 million budget deficit for next year. He cautioned from the outset that all the numbers in his presentation, both for the current year and the forecast for FY'04, are estimates and that the general funds forecast is a moving target that is constantly updated. While the provost reassured the senate that the budget group is working diligently to find solutions, the bottom line is still deeply in the red.

Etchemendy's special presentation to the senate last week was a response to concerns that have arisen since the severity of the pending budget cuts became clear last fall. The provost aimed to fill in the blanks surrounding the looming deficit by providing some historical context for the budget over the past decade. He also wanted to address some of the proposed cuts being examined -- and to debunk some "quick fixes" being discussed around campus water coolers. "I am trying to explain why we have a budget problem," he said. "There's no one thing that is giving rise to our budget problem." Nor is there one simple solution.

The economy is a big part of the problem. Three successive years of the worst stock market performance in recent history have taken their toll on endowment income and tightened university purse strings. Just last May, when there was still talk of an economic recovery by the end of the year, the provost had projected a $12.1 million deficit for FY'04. That figured has since doubled.

A budget primer

Etchemendy explained that the consolidated, or overall, budget consists of every dollar the university takes in and spends; it includes auxiliary units like athletics and housing and dining that are self-supporting, as well as grants and contracts, and restricted and designated funds. The much smaller general funds budget, roughly a quarter of the total, is the only part of the overall budget that the provost can actively manage.

Etchemendy noted that during the latter 1990s the consolidated budget grew tremendously, by 9.4 percent annually over the past six years. That was driven by factors like the doubling of the National Institutes of Health budget and the subsequent increased flow of grants to the university. The general fund, by comparison, increased by 6.7 percent during the same period, largely due to investment income. However, adjusted for inflation over the 1990s, the general funds budget was nearly flat.

Last year the university recorded its first consolidated budget deficit since 1992, which Etchemendy attributed to different factors. Prominent among them: non-teaching staff -- including research staff, staff positions in the Medical School and others -- grew by nearly 20 percent in just the last four years. The student body, on the other hand, has not grown, while the faculty -- with the exception of the School of Medicine -- has grown modestly. "Nonetheless, these growth rates are obviously unsustainable," Etchemendy said.

For the FY'04 general funds budget forecast, the provost projected an estimated 1.8 percent growth in net income against a 6.2 percent growth in expenses. Hence the $25 million deficit figure. In the current year, the general fund totals $627 million of a consolidated budget of $2.287 billion.

A tuition fluke

Tuition is the single largest income source of the general funds budget. Etchemendy said he hopes tuition (which is set by the trustees in May) will increase by 5 percent or less. For the sake of discussion, the forecast assumes a 4 percent increase. Etchemendy described a two-part problem with tuition. One, full-time enrollment of graduate students has dropped -- and markedly so over the past two years -- in favor of part-time enrollment. Thus, graduate tuition revenue has remained flat despite yearly increases. Second, through what he called a fluke, part-time students pay less in tuition to receive their degree. "This was not something we thought about back when most students were going full time. But now that we are seeing this shift, it becomes a problem," Etchemendy noted. The net result, he said, is that while "tuition has gone up, the revenue that we're collecting has not."

There was a glimmer of positive news in his presentation: Indirect cost recovery is projected to grow by 10 percent. That is due in large part to the forecasted growth in research volume, as well as to an increase in the indirect cost recovery rate from 58 to 60 percent. The unrestricted endowment and the "gifts and other income" categories, which both relate to the expendable funds pool (EFP), were forecast to drop by 3.8 and 2.8 percent, respectively. The EFP is the cash available at any given time in various university accounts. Etchemendy pointed out that it largely doesn't accrue interest; rather, its income goes toward salaries -- which, he added, are the primary expense of the university.

In a good year, the EFP earns from 4 to 6 percent in investment income. In a bad year, however, it earns less. "It may, in fact, actually earn less than zero," Etchemendy said. In such years, a portion of the endowment principal is used to cover the shortfall to the general funds. This is what is known as the smoothing formula, intended to shield the general funds budget from the yearly ups and downs in investment income. However, when this happens several years in a row, as is currently the situation, Etchemendy said, "we are significantly affected by the investment results."

Shifting to the expense side of the ledger, the forecast assumes a 3.5 increase in salary expenses next year. Etchemendy said that figure, like the rest, was only an assumption for the sake of discussion. Student scholarships are projected to grow by nearly 9 percent, thanks largely to the bad economy and families' increased need for tuition assistance. In addition, debt service is projected to grow 23 percent, partly due to an increase in the debt pool rate and also to newly built facilities that have been coming online.

Whatever the final decision on salaries, Etchemendy said the program percentage would be the same for faculty and staff. He pointed out that a hypothetical increase of just 1 percent in faculty salaries (excluding endowed chairs and research staff) would affect the general funds budget by $1.3 million; staff salaries, by $2.1 million. (There are approximately 1,700 faculty and 8,000 staff.) Likewise, each percentage point increase in tuition yields $2 million.

One possible way to curb the deficit is a zero percent salary program -- which Etchemendy acknowledged was "probably not workable" -- but that would yield nearly $12 million and help reduce the need for layoffs. But, he said, "we won't avoid [layoffs] entirely." Alternately, the administration could opt for a larger salary program, requiring more layoffs. The problem with the latter choice -- aside from more people losing their jobs -- is that much of the growth in staff was outside the general funds portion of the budget. Roughly half was in the Medical School.

Etchemendy concluded that there are no easy solutions. While unit directors had been asked to devise budget reduction plans of 5, 7.5 and 10 percent, Etchemendy stressed that cuts would not be made across the board.

"We will get through this," Etchemendy concluded. "It is a serious problem, but we will solve it." SR <<BR>