Thursday, January 8, 2009

Budget woes at Princeton

I reprint below, in its entirety, a letter university president Shirley M. Tilghman sent to the entire staff at the university today.

So we have finally admitted that even the mighty can fall, yet still have difficulty admitting just how far. It would be great if, in fact, our endowment had only lost 11%, but where other peer institutions have announced cuts much earlier and others such as Harvard and Penn have shared a more realistic (albeit harsh) outlook, we remain "confident." Don't get me wrong, I think confidence is a great trait to have and I am pleased that our administrators are confident in the outlook, but I also wonder how realistic this outlook is.

I couldn't help but compare President Tilghman's letter to that from Richard Levin, president at Yale University since both letters mention salary increases for employees. It seems Yale has a definition ($75,000) of what Princeton only considers the "highest compensated staff." I guess I don't know whether I want to be considered among this possibly elite group until the salary pool is [not] announced.

The mood here among my colleagues this morning is still good and many are thankful that there is still some optimism. They are also grateful that we are not, at least at the moment, letting anyone go. I suppose there is always something to be thankful for.

The letter...


From: Shirley M. Tilghman
Sent: Thursday, January 08, 2009 9:06 AM
To: allemp@Princeton.EDU
Subject: Update on Princeton's Response to the Economic Downturn

January 8, 2009

To the Princeton campus community:

The New Year is traditionally a time for reviewing the past and anticipating the future. As we begin 2009, our thoughts cannot help but turn to the impact of the world’s turbulent economy. Many of you have asked me how Princeton has been affected and what lies ahead for our University. I want to take advantage of the pause between semesters to provide you with some information about Princeton’s economic condition and share with you my perspective on the months and years ahead. I have also had an opportunity to discuss these matters at length with the Trustees, who have been very supportive of the actions we are taking.

Let me begin by observing that despite the turmoil outside the FitzRandolph Gates, the University is flourishing. Professor Paul Krugman of the Department of Economics and the Woodrow Wilson School received the Nobel Prize in economics, and members of the classes of 2008 and 2009 earned three Rhodes and one Marshall Scholarship to study in the United Kingdom. These widely reported achievements were only the tip of the iceberg: faculty members and students throughout the University continue to perform brilliantly and garner national and international honors.

Moreover, our loyal alumni, parents and friends set a new record for Annual Giving last June and the Aspire campaign is making excellent progress, highlighted this year by the magnificent gift of Gerry Andlinger ’52 to launch the new Andlinger Center for Energy and the Environment. The Peter B. Lewis Library opened this fall, attracting rave reviews from both architecture critics and Princeton students, who have already made it one of the most popular study spaces on campus. A few blocks away, graceful and light-filled Sherrerd Hall has quickly become a campus landmark for the Department of Operations Research and Financial Engineering and the Center for Information Technology Policy. And this fall the women’s soccer team celebrated the inaugural year of the stunningly beautiful Roberts Stadium with an Ivy League title. I am truly grateful to be part of such a vibrant and healthy university, especially during such difficult times.

At the same time, Princeton is not immune from the effects of the turmoil gripping the world economy. In particular, our endowment, which has grown robustly in past years and now supplies more than 45% of the University’s operating revenue, has significantly lost value since the beginning of the current fiscal year last July 1. Through October 31, the University’s endowment had declined by 11%, based upon our standard reporting protocols, using information that is the best available as of the reporting date. However, given that values for non-marketable investments, which comprise more than half of the endowment portfolio, are reported only with lagged estimates until the end of each fiscal year, it is certain that 11% understates the actual economic loss the endowment suffered through October. And, of course, financial markets have continued to decline since then. Although we cannot know what the next six months will bring, we believe it is prudent for the University to plan for the possibility that its endowment will have declined by 25% at the end of the fiscal year.

Declines in endowment value do not automatically reduce the endowment’s contribution to next year’s operating budget. On the contrary, our policy is to increase that contribution by 5% each year, as long as the amount falls between 4.0% and 5.75% of the value of the endowment, as determined on June 30 of the prior fiscal year. When our rate falls below that range we make upward adjustments in spending and when it rises above that range, we must make downward adjustments. On five occasions in the past 11 years we have made special upward adjustments, and this year our spending rate is comfortably within the range at 4.76%. Looking ahead, however, a 25% decline in the value of the endowment would put our spending rate well above the upper limit of our range. To bring spending closer to the upper limit, we are planning to reduce the endowment’s contribution to the University’s general funds operating budget next year by $50 million. Even with this reduction, our spending rate would remain outside our target range, exceeding 6%, but we believe this spending level represents a measured response to the current economic climate. If circumstances change between now and June, we have the flexibility to modify this plan.

Fortunately, Princeton planned conservatively during the good years, knowing full well that markets go down as well as up. Though this year’s downturn is deeper than what anyone could have imagined, Princeton will be able to protect its key assets. Foremost among these is our human capital—the students, faculty and staff who are the vital heart of a great scholarly enterprise. One of Princeton’s signature commitments is our unsurpassed financial aid program, which led the way in 2001 as the first university program to replace student loans with grants. We are completely committed to meeting the full financial need of the students who will be admitted this year, as well as currently enrolled students, some of whose families have already been affected by the recession. In addition, we have approved some modest improvements to Princeton’s aid package this year, reducing the summer earnings requirement at a time when jobs will likely be hard to find. Happily, we have been able to fully meet an unanticipated increase of ~$5 million in demand for financial aid this year because of the extraordinary performance of the 2008 Annual Giving campaign.

It is also essential that we continue to recruit and retain the finest faculty in the world. In the past few years we have been enhancing our strength in high priority areas such as neuroscience, the creative and performing arts, African American studies and international relations, as well as sustaining excellence in disciplines where we are already preeminent. We should not put at risk the foundations we have so recently laid. Consequently, for this year the University will continue the searches for new faculty members that have already been authorized, with the goal of attracting to Princeton new colleagues who will sustain and enhance the quality of our research and teaching. However, any new requests to initiate or reopen a faculty search will be carefully reviewed by Dean of the Faculty David Dobkin, so that we can direct our limited resources to our most pressing needs.

In recognition of the important role that the University’s administration plays in our preeminence, we have been making strategic investments in our staff over the last several years to strengthen our effectiveness as a university. To reach our operating budget target for fiscal year 2010, we will need to slow this growth considerably. Beginning immediately, all new searches for term, temporary and regular employment must be approved in advance by a review committee composed of Provost Christopher Eisgruber, Executive Vice President Mark Burstein and Vice President for Human Resources Lianne Sullivan-Crowley. The committee will also review the status of searches currently under way to determine if any could be placed on hold. This scrutiny of new hiring will allow us to sustain our commitment to the dedicated staff currently working at Princeton.

If we are to devote Princeton’s resources to our core priorities and protect our human capital, all of us will have to work together to reduce expenses on other fronts. As you know, we have been reviewing the University’s 10-year capital plan, and earlier this semester we announced a series of project deferrals that reduced the cost of the plan by more than $300 million. While we continue to review opportunities for savings in the capital plan, we will complete the two major construction projects already under way; the exciting renewal of the Butler College dormitories and the new chemistry building on Washington Road. To ensure that we are poised to rebound rapidly when the economic climate improves, we will continue to design and seek public approvals for high priority projects such as the new home for the Lewis Center for the Arts, the new psychology and neuroscience buildings and the Andlinger Center for Energy and the Environment, but authorization to begin all construction and renovation projects will be made on a case-by-case basis, contingent on funding. The projects in the capital plan are critical to the future of the University, and we are hopeful that they will move forward as soon as economic conditions allow. Until that happens, however, we need to adjust our expectations appropriately, and I appreciate the support and good will that we have received from those whose projects have already been affected.

We must also look for ways to conduct all aspects of the University’s operations more efficiently. All non-personnel administrative budget allocations will be reduced by 5% in fiscal year 2010. Furthermore, departments with restricted endowed funds must plan for an 8% decrease in their annual allocations from these funds, and it is possible that further decreases will be needed in fiscal year 2011. While it may provide small comfort today, it is helpful to remind ourselves that even with this decrease in income, the payout from endowment units in fiscal year 2010 will be 50% higher than it was just four years ago. For this we have to thank the tremendous success of PRINCO, our investment company, whose skillful investing allowed us to significantly increase endowment spending in 2006 and 2007.

In order to help managers achieve the savings that these decreases require, I have asked Mark Burstein and Vice President for Finance and Treasurer Carolyn Ainslie to design a set of tools that will assist departments in reducing their budgets. These include everything from renegotiating procurement contracts to reducing the amount of printed materials. A website that describes the cost-savings initiatives can be found at http://www.princeton.edu/savings . I also ask anyone with good ideas to submit them to Mark Burstein via a suggestion box on that website. I am confident that we will be able to call upon the ingenuity and competitiveness of the entire Princeton community to help us identify and deliver ways in which we can reduce non-essential costs.

I have also asked Provost Eisgruber to collaborate with academic units to ensure that all the funds they manage are being directed to core priorities rather than more discretionary ones. Unfortunately, the economic constraints confronting us will require that we reduce the number of visiting faculty and fellows whom we might otherwise bring to campus to enrich our scholarly community, and Dean Dobkin will work with academic units to minimize such appointments next year. All of us in Nassau Hall recognize that needs and opportunities will vary from one department to the next, and we will work with chairs and managers to implement these budgetary initiatives in ways that are sensitive to the differences among units.

I am very grateful this year to the members of the Priorities Committee, chaired by Provost Eisgruber, who have worked so thoughtfully and flexibly for the last several months to craft a set of budgetary recommendations during a time when the economic landscape was changing day-by-day. That committee, which is charged with recommending an operating budget for the University each year, includes representatives of the faculty, staff and the undergraduate and graduate student bodies.

The committee will bring to the Board of Trustees for approval later this month three important recommendations. First, the members will propose that in light of the very modest funding that will be available for increases in faculty and staff salaries next year, the largest percentage increases should be directed to the University’s lowest paid employees. To accomplish this important goal, the maximum increases for tenured faculty and the highest compensated staff will be capped at $2,000. Second, in recognition of the need to sustain the quality of the Graduate School at Princeton, the Priorities Committee will recommend a 3% increase to graduate student stipends. Third, the committee will recommend a 2.9% increase in the undergraduate fee package for the 2009-10 year, the lowest percentage increase since 1966. This increase, which will not affect any student on financial aid, reflects the fact that many of our tuition-paying families are experiencing financial setbacks of their own.

The committee’s proposed budget also recognizes the University’s confidence in the goals of our five-year Aspire campaign. The campaign continues energetically in its second year, and we plan to adhere to the announced timeline for it. The initiatives embodied within the campaign are the University’s highest priorities, and I am thankful for the energy that Princeton’s volunteers, donors and friends have brought to the achievement of these goals. A campaign is a marathon, not a sprint, and I remain very optimistic about the prospects for success.

The extraordinary depth of the economic downturn, coupled with the uncertainty of predicting its duration or impact, make it likely that we are at the beginning of a multiyear budgetary adjustment. As this academic year progresses, my colleagues and I will continue to watch economic developments carefully so that Princeton can adjust its response as circumstances warrant. All of us hope that an economic recovery will come sooner rather than later, but it is likely that this year’s downturn will require creative planning for not only the upcoming budget year but later ones. The University will weather this storm and emerge from it even stronger than ever if all of us pull together and contribute our energy, understanding and good will. While all of us would prefer a different set of challenges and a sunnier economic forecast, I am cheered by the commitment and spirit that the entire Princeton community has already shown in these difficult times. I cannot imagine a better group of partners with whom to approach the tasks ahead, and I very much look forward to working with all of you in the New Year.

Sincerely,


Shirley M. Tilghman

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