University suspends $1.3 billion in capital projects

L.A. Cicero Boxer and Keller

Chemistry Professor Steven Boxer, left, and Librarian Michael Keller listened as Provost John Etchemendy adressed a question about the budget at last week’s Faculty Senate meeting.

L.A. Cicero Etch

Provost John Etchemendy gave a one-hour presentation on Stanford’s budget to the Faculty Senate on Jan. 22.

Faced with an unprecedented decline in investment returns from its endowment, Stanford has announced plans to suspend or cancel proposed construction projects worth $1.3 billion.

Provost John Etchemendy made the announcement during a one-hour budget presentation to the Faculty Senate last Thursday, during its first meeting of winter quarter.

The moves come as the university looks to a variety of ways to cut expenses over the next two fiscal years by approximately 15 percent without impairing its core academic mission of teaching and research.

After the meeting, Etchemendy said Stanford will delay several construction projects, including new buildings for applied physics, biology and mechanical engineering; the East Campus Childcare Center; a new police station; the East Campus Dining Commons; the Medical School's Foundations in Medicine and Science Building; and an expansion of the Hoover Institution.

In addition, Stanford has suspended plans to renovate Memorial Auditorium, Frost Amphitheater and the old Chemistry Building on Lomita Drive. The university has canceled plans to build a parking garage near Maples Pavilion, to build a new wing at the Cantor Center for Visual Arts and to renovate Tresidder Memorial Union.

Stanford will proceed with $1.7 billion worth of construction, Etchemendy said.

"Any construction project that is currently in process we are going to finish," he said. "It would be crazy, financially and every other way, to simply stop the projects that are under construction. In fact, one good side of the downturn is that we are saving money. We saved many millions of dollars on steel for the Business School project because steel prices have gone down."

The $378 million Knight Management Center—the future home of the Graduate School of Business—is one of several major construction projects already under way. The $84 million Jen-Hsun Huang School of Engineering Center, located in the Science and Engineering Quadrangle, is expected to open in the first half of 2010, and construction is continuing on the $170.5 million Munger Graduate Residences on Campus Drive East.

Stanford also will proceed with proposed construction projects that have received significant funding from donors, such as the Law School Academic Building, Etchemendy said.

"We have an obligation to donors who have given us the bulk of the cost of a building to actually build the building they have funded," he said. "These are essential projects—things we need to build in order to move forward as a university."

Unprecedented endowment decline

Etchemendy began his senate presentation with a bar graph showing investment returns on the university's endowment from 1964 to 2009.

"As you can see, in the last 45 years, we have had a total of eight years in which the investment returns were negative, and in the worst of those years—in 1974—the returns were minus 8 percent," he said. "This year we're expecting anywhere between minus 20 to 30 percent. So that is an unprecedented decline in our endowment."

In 2008, the endowment was valued at $17.2 billion.

"This endowment decline, while the worst on record, puts us back to where we were roughly three years ago," Etchemendy said, referring to 2005, when the endowment was $12.4 billion. "We were a strong university then, and if we approach reductions right, we will emerge an even stronger university."

Etchemendy said the drop in the endowment would have a minimal impact on fiscal 2008-09, because the payout—about 5.5 percent, or $977 million—was set last year.

The main impact will be felt in fiscal 2009-10, which begins Sept. 1.

"Assuming we have a 25 percent drop in the value of the endowment, which is what we are assuming for planning purposes, the endowment payout will go down by 7.2 percent in fiscal 2010," he said. "Assuming that investment results return to normal—8 to 10 percent—next year, our endowment is still going to drop by another 7 percent in 2011."

Stanford depends on investment income—from the endowment and other investments—for 29 percent of its consolidated revenue; sponsored research grants and contracts account for 28 percent. Student income—tuition, room and board—constitutes 16 percent of the budget, and the remaining 27 percent comes from healthcare services, expendable gifts, special program fees and other income.

As a result of the decline in the endowment, Etchemendy said Stanford is expecting a $63.1 million drop in general funds in 2010, and a total shortfall of $89.3 million in 2011.

During the meeting, he reviewed the other steps the university has taken to accomplish its goal of trimming as much as $100 million in base expenses from the $800 million general funds budget over the next two fiscal years:

  • Most campus units have instituted hiring freezes for staff.

  • The Medical School, the Graduate School of Business and the School of Humanities and Sciences have canceled or significantly reduced faculty searches.

  • The Graduate School of Business recently laid off 49 people—about 12 percent of its staff.

  • Senior administrators, including the deans of all seven schools, have taken pay cuts of 5 to 10 percent.

  • Over the next three years, Stanford will reduce the number of vacation hours staff will be able to accrue.