World financial crisis impacts university budget

Turmoil in the world’s financial markets and a contraction of the national and local economies have begun to affect the university’s finances. In response, Rockefeller University’s administrators and trustees have initiated a review of the economic assumptions and models that drive the budget-planning process.

“In the past few months, there has been extraordinary volatility in the world’s financial markets and the broader economy,” says Jim Lapple, the university’s treasurer and vice president for finance. “The downturn is seen as likely the most serious in decades. Rockefeller is not invulnerable to these disruptions.”

The short-term cash flow problems that developed earlier this fall have been resolved (see “University funds temporarily frozen during banking crisis”), but longer-term budget issues will remain as proceeds from the endowment fall along with the decline of the stock market and revenue from federal grants and private donations becomes less predictable. “How the economy fares over the next several months will determine how we will have to adjust our expenditures,” says Paul Nurse, the university’s president. “Once there is some stabilization in the wider economy, we will be better able to assess what action is required to protect the university’s operations over the longer term.”

“The budget for the current year was prepared utilizing conservative assumptions, and we are confident that it remains stable,” says Mr. Lapple (see charts, right). “What we need to be prepared for is a further deterioration of the economy that may impact our ability to maintain our programs in future years.”

The administration is focused on both the university’s short-term needs and its long-term health. “We need to keep calm during this crisis,” Dr. Nurse says, “so that we can make considered and careful assessments of the plans we already have in place for 2009 and beyond in the light of the changed circumstances. We have the strong support of our trustees and we will not be making any hasty decisions which might impact negatively in a significant way on Rockefeller research in the long term.”

About one-third of the university’s revenue comes from proceeds of the endowment, valued at its peak at the end of 2007 at $2.19 billion. The university’s investments office, led by Chief Investment Officer Lisa Danzig, follows a strategy designed to protect the endowment in lean times. Still, with some financial markets down by 50 percent or more over the past several months, losses in the endowment have been felt. The endowment’s market value has fallen 17.4 percent between June 30 and October 31 (see chart, top). The endowment spending rate, which dictates how much of the endowment’s funds are made available for operating expenses each year, has been increased over the past few years, and in fiscal year 2010 it will be six percent of the average market value of the endowment over the previous 12 quarters. “This system, which takes into account fluctuations going back three years, is designed to help smooth out short-term gains and losses in the endowment and provide a more stable source of revenue,” says Mr. Lapple. “The effect in this climate is that the impact of a declining endowment will be felt less intensely, but over a longer period.”

Funding from federal and private grants makes up another third of the university’s income, and it is dependent on both the budgets of the organizations that fund the university — particularly the National Institutes of Health — and on the success individual faculty members have in their efforts to secure grants. Though the university’s scientists have competed well in an increasingly tight climate, government grants have fallen slightly over the past three years (see chart, bottom), largely due to the departure of several senior faculty members. “Grants from private foundations have picked up some of the slack, but private grants do not include nearly as much funding for administrative costs and overhead, which help pay for essential services like electricity and shared resource centers,” says Dr. Nurse. “So even if individual labs maintain their funding, the university as a whole remains under pressure.”

The final third of the university’s operating revenue is derived from fundraising, auxiliaries and other sources, such as rent, royalties and income related to food service, housing and subscriptions to Rockefeller University Press journals. Gifts in support of university operations remain robust and are on track for the current fiscal year. To date, the Development Office has raised one-half of the $26 million goal for this year’s operating budget. “The Development Office has been formulating a plan for fundraising during the recession, and one of our objectives is to raise additional unrestricted and flexible current-use gifts. While fundraising during today’s economic climate is daunting, Rockefeller remains a philanthropic priority for our trustees and for our many other generous benefactors,” says Marnie Imhoff, vice president for development.

“The university has a much broader base of support than we did five years ago, and individuals and foundations tend to invest in excellence, innovation and the best people during times of more limited resources. These are the characteristics that define The Rockefeller University,” says Dr. Nurse.

In an initial response to the financial downturn, there has been preliminary discussion among the trustees and the administration about operating with a budget deficit for a limited period of time. No firm decisions have yet been made, but the university’s policies on the endowment do allow some flexibility in times of financial difficulty.
The concern, however, is that this plan alone will not be a sufficient response. When income falls, reductions in expenses also become necessary. To help address this issue, the university’s administration has already begun implementing a series of cost-containment measures designed to help position the university to better withstand lean economic times. These measures include:

Reviewing vacant administrative positions. Beginning October 30, all vacant non-laboratory staff positions are being referred to a special staffing review committee consisting of the vice president for facility and scientific operations, the vice president for finance and the vice president for human resources. The committee reviews the justifications for recruiting new personnel and holds vacant any positions that are not essential to the university’s operations until the financial situation improves. To date, 16 vacant positions have not been filled.

Limiting future salary increases. Annual salary increases in past years have averaged three to four percent. The administration will be considering a range of options for fiscal year 2010 in the coming months, including providing a smaller than usual increase.

Assessing supplemental lab funding. Every effort will be made to preserve the lab-funding formula that has been put in place over the last several years. However, the administration will look very carefully at the costs of bridging laboratories when grants don’t come through, and at special projects and start-up costs. Fees and charge backs for resource centers will also be assessed.

Minimizing future maintenance projects. With the construction on the Collaborative Research Center well under way, modern new lab space will be coming on line in approximately 18 months. There may, therefore, be some maintenance projects that can be deferred without causing significant inconvenience. A planned renovation of Welch Hall and the Markus Library will be deferred unless there is a new gift made specifically for it. One gift already made will be used to repair the façade, which will reduce maintenance costs.

Both the major construction projects under way on campus — the Collaborative Research Center and the Comparative Bioscience Center — will continue as planned because the majority of funds needed for those projects has been secured already and if either project were halted now, restarting would be very expensive. “Through a combination of fundraising and borrowing, we’ve already acquired the majority of the resources necessary to finish these projects,” says Dr. Nurse. “In addition, we have until 2012 to raise the remaining funds needed.”

The faculty recruitment process, which has had several successes in the past few months resulting in a series of new appointments, will also continue. “We do not want to turn off recruitment, because it’s essential to maintaining the university’s scientific portfolio as we lose faculty members through retirement and relocation,” says Dr. Nurse. “It’s also an opportunity. If other scientific research institutions freeze new hires in order to make ends meet, this may give us the edge in attracting the very best scientists.” The emphasis will continue to be on recruitment of junior faculty.

This month, the university’s executive officer’s group will meet for a day-long discussion on the financial challenges with particular emphasis on planning for the 2010 budget. A second day-long meeting will take place in February, when the focus will be on longer-term planning. The administration hopes that by this time some stability will have entered the financial markets and the group will know whether they need to plan for additional cost reductions to ensure the university’s future prosperity.

In addition to future updates in BenchMarks, Dr. Nurse plans a series of “town hall” meetings — the first of which will take place on February 4 — to keep the community informed. “I’m hopeful that the markets may stabilize and that President-elect Barack Obama’s administration will be more committed to science than the current one,” says Dr. Nurse. “But it’s important to be prepared for whatever economic conditions develop over the next months and years. It is important to be open about the university’s finances and to discuss these issues not only with the Board, the faculty and the administration, but with the entire community at Rockefeller so that we are all engaged in looking for solutions to the present problems. By continuing to aggressively pursue grants and other funding opportunities, by supporting the efforts of our Development Office to attract donations and by making sensible decisions about spending, we can all help the university weather these difficult times.”