Provost discusses budget challenges
Are there any significant changes in the budget forecast since your last letter to the campus community in December?
Not really. We still expect to be reducing the general funds budget by 15 percent over the next two years, with most of the reductions, about 10 percent, coming in the first year. But it's important to understand that different units, particularly the schools, also need to adjust for reductions in other, non-general funds revenue sources. For example, the Business School depends heavily on annual gifts and endowment income, both of which have been hit hard by the economic downturn. In contrast, the Medical School's clinical revenue should hold up pretty well, although their other sources of revenue have been affected like everyone else. The university is a very complex place, and as a result, different units are affected in different degrees by the downturn.
You are now in the process of reviewing budget plans. What is the timeline for announcing decisions?
This is an extraordinary year. Although the final decisions on the general funds budget will not come until March, the president and I have asked all of the deans and vice presidents to move as quickly as possible making their budget reductions. It is a mistake to delay cuts that are inevitable, since a delay is costly and prolongs the uncertainty for people who may be affected by the cuts. So, many units will be announcing their decisions in January and February.
How are decisions being made about what to cut?
We are a very decentralized organization, so most specific decisions are made in individual schools and administrative units. But the principles we will follow are clear. The highest priority is to maintain our excellence in teaching and research. So the more important an expense is to achieving that core mission, the less it will be reduced. For example, most units are cutting back on travel expenses and some are canceling conference attendance entirely. We used to allow employees to fly business class to meetings in Europe and Asia, if their departments or grant funds would cover it. We've decided that this permission must be suspended for the time being. If the savings can help fund a graduate student or buy an extra piece of research equipment, those dollars will more directly support our teaching and research mission.
Some people wonder why we aren't freezing salaries in order to avoid other cuts. What is the rationale there?
I think it is very important to maintain room in the budget for a small salary program. There is nothing more essential to achieving our mission than excellent faculty and staff. So we can't let salaries become less than competitive. But the salary program will be very small, primarily focused on people who have received a promotion or whose salaries are already below market, or who are simply at the lower end of the salary spectrum. I don't think anyone, faculty or staff, should expect a raise this coming year, particularly if you are relatively senior or relatively well paid. But it would be unfair if we did not recognize a young assistant professor who receives tenure this year with a healthy salary boost for that achievement. Equally so, it would be unfair for an outstanding staff member whose pay has fallen behind comparable positions outside Stanford not to have that disparity corrected.
But couldn't we avoid layoffs by forgoing any salary increases?
No, the savings from freezing salaries would not be enough to avoid all staff layoffs. Nor can we avoid eliminating some faculty positions through attrition. But you're right that we could reduce the job reductions slightly. Every decision involves tradeoffs. In the end, we have to make a judgment about what is better for the long-term health of the institution. Having slightly fewer faculty and staff, but paying those we do have fairly and competitively, will in the long run produce a stronger university.
What provisions are being made for employees who lose their jobs because of the cuts?
First, let me say that the hardest thing for any of us to do is lay off valued employees. The decision to do so is always agonizing, even when it is clearly right for the university. But in the current financial circumstances, layoffs are unavoidable.
To lessen the impact to individuals who are laid off, we recently announced an enhanced severance program that will be in effect until June 30, 2009. Our standard severance package is pretty generous for those who have been employed at Stanford for several years and is increasingly generous the longer you've been with the university. The standard severance payment is based on years of service, and ranges from zero to 12 months' salary. The enhanced program adds benefits above and beyond the standard program, both for new employees and for those who have been at Stanford a long time.
Under the enhanced program, anyone who is laid off will receive a 60-day notice period in which they remain on the payroll but do not have to work. At the end of that period, they will receive another month's salary as a lump sum, plus any payments they would receive under the standard severance plan. Finally, they will receive five months of support from an outplacement service to help them find a new job. You can find the details of the program online at http://hrweb.stanford.edu.
Can you give an example of what the plan would provide for a long-term employee who is laid off?
Suppose a staff member started working at Stanford when I did, 25 years ago, but is laid off because his or her job is eliminated. Under the new program, the employee would stay on the payroll for two full months after stopping work, and then would receive a lump sum payment of one month's salary from the new program, 11 months' salary for standard severance, plus payment for accrued vacation. In total, that is equivalent to 14 months of salary plus vacation. In addition, the staff member would receive five months of outplacement support.
Some people who are eligible to retire might find this package very attractive. Can an individual volunteer to be laid off?
Yes. You can tell your supervisor that you're interested in being laid off, and he or she can take that into consideration when deciding what positions to eliminate. That's not a guarantee you'll be laid off, but if you are, you'll get the full benefits of the severance program. And if you are eligible for retirement, being laid off doesn't affect your retirement benefits, which you'll also receive.
Will there also be a retirement incentive program for staff?
No. We decided that such a program was not in the best interests of most units on campus. But the enhanced severance program could serve a similar purpose for some retirement-eligible staff, if they inform their supervisor of their interest in being laid off and if eliminating the job meets the needs of the unit.
How about faculty? Could a faculty member who is eligible to retire request a layoff and receive severance?
No, faculty don't qualify for severance. But we are working on a modification of the Faculty Retirement Incentive Program that should make it attractive for some faculty to retire. We'll have more details soon.
In an earlier message, you mentioned that taking vacation time actually saves your unit money. How can that be?
I know it's a bit surprising, but here's why. Your unit pays your current salary for however many weeks you actually work during the year. In addition, it pays into a central fund for any vacation time you earn during the year. So let's suppose you accrue three weeks of vacation time per year. Now if you don't take any vacation this year, then your unit will be paying for 55 weeks of your salary: 52 weeks directly to you and three weeks into the vacation accrual fund. But if you use three weeks of vacation this year, then your unit pays only 52 weeks of salary: 49 weeks to you and three weeks into the vacation fund. The vacation fund then pays you while you are on vacation.
Now suppose you take five weeks of vacation this year, using up this year's time plus two additional weeks that you'd earned but not used in past years. Then this year, your department will save that extra two weeks of your salary. Your department will only have to pay 50 weeks of your salary: 47 weeks to you, plus three weeks into the vacation fund. Meanwhile, you get paid for your five weeks of vacation time out of the vacation fund.
This can add up to a lot of money. I know of one moderate-sized unit—about 60 employees—that is spending an extra $80,000 a year paying for vacation time that is being accrued rather than used. If they could fix that, they might be able to avoid a layoff they would otherwise have to make.
Is there anything else you think the community should know about our budget circumstances?
Actually, there are two things I hope people keep in mind during the budget-cutting process. The first is how extraordinary the present circumstances are. In the 45 years since 1964, there have been only eight years in which the endowment had negative returns. And in the worst of these years, 1974, the endowment declined just 8 percent. Though we obviously can't know where the endowment will end up next Sept. 1, we expect it to be down between 20 and 30 percent. Combine this with the steady decline in federal research funding, a decline in gift dollars and an increase in financial need on the part of our students, and the result is an unprecedented decline in the university's expected revenue.
That's the bad news. But I also hope people keep in mind how incredibly strong this university is, both academically and, yes, financially. I believe that in faculty reputation, program quality, student selectivity and alumni support, Stanford is second to no other university in the world. And although the immediate financial outlook has dimmed, it is helpful to realize that even if we experience a 20 to 30 percent investment decline, our endowment will still be about the size it was in 2005. We were a great university in 2005, and we will remain a great university in 2010.