CONTACT: Stanford University News Service (650) 723-2558

Finance, budget officials discuss Stanford's rich/poor dichotomy

STANFORD -- Why can Stanford appear rich, yet feel so poor?

Despite high total income from gifts and investments in recent years, a significant portion of revenues are not available for general purposes and infrastructure, according to Chief Financial Officer Peter Van Etten.

Speaking to more than 250 university managers at a forum on Wednesday, Jan. 12, Van Etten said Stanford's balance sheet shows a $2.5 billion endowment and $1.5 billion worth of real estate. Nevertheless, unrestricted revenues are "significantly constrained, whereas expenses continue to rise" at a rate that would exceed inflation if not held in check through budget cuts.

Addressing the managers just two days before many submitted scenarios with the potential for as much as 30 percent in budget cuts over three years, Van Etten said he could not use the session to answer specific questions about budget cuts.

Instead, he talked about criteria senior officers would apply in deciding on reductions. And he provided an overview of why the university must cut $18 million to $20 million over the next three years, despite cuts and revenue enhancements since 1990 totaling $65 million.

He also introduced Geoff Cox, vice provost for institutional planning, and Tim Warner, university budget director, who discussed their work in shifting the university from its long- time focus on the operating budget to a more inclusive "consolidated budget."

The new budget will include all of the university's financial activity and provide a single format for forecasting, budgeting and financial reporting.

In addition to Stanford's expense-revenue imbalance, Van Etten said, Stanford's problems have been exacerbated by three "seismic shocks": the 1989 Loma Prieta earthquake, which requires a $160 million investment to fix damaged buildings and bring others up to code; the "Dingell-Biddle earthquake," which led to changes in rules governing indirect costs and a resulting loss of $25 million annually; and fundamental changes in the 1990s economy that are putting pressure on management in business, government and virtually all institutions.

Income/expense imbalance

The crux of the problem, Van Etten said, is that revenue will not grow at past rates, and may even decline.

Because of social concerns, tuition can no longer increase as fast as it did in the 1980s, he said. The need to provide extensive financial aid would largely cancel the effect of significant tuition increases even if large increases were possible, Van Etten said.

He also said he expects that investment income will not increase as it did in the 1980s, when it grew by an average of 16 percent per year. The endowment also did well last year, he said, but he predicted 10 percent growth or less annually in endowment for the rest of the 1990s.

Stanford has averaged $180 million a year in gifts and nongovernment grants in the last two years, and just had its best- ever December, Van Etten said, but only about $5 million in annual gifts ends up in the unrestricted operating budget.

Of the remaining restricted philanthropy, some -- such as endowed chairs - supports the operating budget. Many gifts significantly benefit the university in other ways, he said, but do not directly support the operating budget. This highlights the issue of how Stanford can be rich in total assets and poor in spending money at the same time, he said.

In addition, between 60 percent and 70 percent of total gifts come from California, a worrisome trend if the state's economy does not improve, Van Etten said.

Despite budget pressures in Congress, Stanford is still doing "extremely well" getting government research contracts, but that could change, especially if the National Institutes of Health changes its research agenda as part of the Clinton health reform package.

Van Etten also said he was worried about proposals in Congress to further reduce research overhead through a 50 percent cap.

On the expense side, the university should be spending $10 million per year to avoid a huge deferred maintenance bill down the road, he said, citing the $1 billion-or-more problem Yale has accumulated in that area. Stanford now spends less than $2 million annually on planned maintenance.

The university also must invest in new information systems, and in infrastructure for academic programs, especially in science and technology, he said.

Planning principles for the '90s

Van Etten listed several overall principles to address issues of the 1990s:

"Many of you feel somewhat disillusioned with our commitment to this issue," he said, citing recent years of reorganization and budget cutting.

Three differences stand out this time:

"Individual faculty whims will not drive large portions of administrative activities. It's easy to say that," Van Etten said to wide laughter, but the environment is ripe for significant savings through standardization.

"Your cynicism is understandable, but it has to happen," he said.

Consolidated budget replaces operating budget

In his explanation of the new system he and his colleagues are developing, Warner said that the consolidated budget would replace the current operating-budget system and allow for greater flexibility in planning and budgeting.

In the past, attention in the annual budget cycle focused on the operating budget, which consists largely of unrestricted funds and now totals $469 million.

Until now, "consolidated budget" has been a term applied to all budgets of the university combined, but it was not used much as a planning tool.

The 1993-94 consolidated budget totals $1.2 billion and is made up of:

Each of Stanford's seven schools is developing a consolidated budget showing all income sources. Some administrative units informally have developed consolidated budgets, but most have not. The planning tool will be phased in for administrative units over three years, Warner said.

New budget: seeing everything at once

In his remarks about the new planning tool, Cox said the consolidated budget will enable administrators to see all parts of their budgets at once.

"We have to bring together planning for programs and facilities and all the other things we want to do in a single context," he said.

Unless all choices are on the table, he said, it is difficult to make decisions about how to use financial resources.

The consolidated budget is the most important planning tool now being developed, he said.

"It just simply doesn't make sense for an institution of this size and complexity to spend as much time and energy as it does on only 30 or 40 percent of the financial activity."

The new budget "is not an assault on autonomy of departments. It is not an effort to grab up restricted funds or anything of the sort," Cox said. "It is an effort to ask an honest question about which people can have full and honest discussions - what do we have to work with and what do we want to accomplish as an institution and how do we best marshal our resources to make those things happen?"

Budget and investment decisions must be made on programmatic grounds as opposed to "a sense of entitlement - just because I had an allocation last year I'm entitled to an allocation next year. We have to get away from that," Cox said.

Many parts of the budget are under very tight restriction, he said, and could not be reallocated in a new budget process. "But at the margin there are ways we can better use our resources to meet our objectives," he said.

Another planning tool, Cox said, is a new capital budget developed by Warner and his staff.

On the subject of restructuring, two teams are studying ways to reorganize research administration and the university's methods of buying and paying for goods and services.

Another team under Glen Mueller is studying ways to improve administrative information systems.

Cox also talked about a possible space charge as an allocation tool. He said officials hope to create a way to make space a sort of commodity so that people could make decisions about "how much space they are occupying or better ways to occupy it or whether to unload it to another department." Such a space charge, which would apply to projects supported with restricted funds, is a long way off, he said.

Finally, he said, academic schools have been working on strategic three-year plans, which are intended to highlight objectives and priorities of each unit. Those plans will be important during budget discussions "because the starting point for allocation decisions has to be agreement on objectives."



This is an archived release.

This release is not available in any other form. Images mentioned in this release are not available online.
Stanford News Service has an extensive library of images, some of which may be available to you online. Direct your request by EMail to newslibrary@stanford.edu.