Financial Crisis Update

I am writing to the university community to give you an update on how the worldwide economic situation is affecting Rockefeller. As you know, the global financial situation remains serious and the markets continue to be unstable. I last wrote to you in December, and I presented some information and answered questions at the “town hall” meeting on February 4. In this letter, a copy of which was also sent to the community via e-mail last week, I will summarize where we stand now.

In the town hall meeting I outlined the basic principles that are guiding the university administration’s reaction to the financial crisis:

First, we will put in place appropriate responses to the situation, neither overreacting nor being complacent.

Second, given the volatility of the financial situation, we will defer making decisions that affect the long term until we have enough reliable information to be confident that we are taking the right course.

Third, we will engage the community, providing information as rapidly as we can and consulting and seeking the advice of the university community through the Academic Council and other groupings.

Sources of income. We have three main sources of revenue: fundraising or gifts from private individuals, trusts and foundations; sponsored program income (external grants); and income from the endowment.

Fundraising is so far this year performing well. In the first seven months of the fiscal year we have raised nearly $53 million in new gifts and pledges and are on track to exceed last year’s total of $58 million. This sum includes $26 million which Development raises annually as a contribution to the base operating budget. It is clear that our Board and benefactors continue to be generous and have made Rockefeller a philanthropic priority. However, fundraising for next year and for the next several years will be challenging because of the deep recession and the overall deterioration of the economy.

External grants contribute around one-third of our income and amount to about $116 million each year, including Howard Hughes Medical Institute funding. The last three years have seen a reduction in government funding and an increase in private funding to the university. With the arrival of new faculty members, we hope to see an increase in grants once they become established and are in a position to apply for government support, but we are still forecasting a modest reduction in this type of income for the next two years, followed by a recovery around 2012.

The university relies on income from the endowment for approximately one-third of its total revenue. This is one of the special features of the university, but it also explains why we are so vulnerable to downturns in the markets. In this budget year ending in June the planned income from this source is $104 million out of a total income of $308 million.

The university’s endowment lost approximately 21 percent of its value between July 1 and December 31, 2008. This has consequences for the annual income that we use to pay our running costs. The level of income received from the endowment each year is calculated by a formula based on endowment values over the previous 12 quarters. This system of taking into account fluctuations in the market is designed to smooth out short-term gains and losses and provide a relatively stable source of revenue. But the change in the value of the endowment in the first six months of this year has been dramatic, and we are anticipating that, by the end of this fiscal year in June, the value of the endowment may have dropped by 25 to 30 percent in total. The 12-quarter average formula means that the severe losses the endowment is suffering will have a serious effect on our income beginning in 2011.

While at present it is difficult to make a reliable prediction as to when the financial situation will improve, it appears unlikely that there will be an upturn this year. Our advisers suggest that it is more likely to be 2010 before the markets begin to show improvement. Once that happens, the value of the endowment should increase, enabling us eventually to restore income levels. But until that stabilization and improvement in the markets takes place, over several years we will have significant budget deficits.

The best we can do in this situation of great uncertainty is to use the information we have available now to make a plan and construct an appropriate budget for the university, neither overreacting nor being under-responsive. At the same time, we will make contingency plans that will allow us to respond rapidly to either positive or negative developments in the future. For example, if next year sees a recovery, we can modify our plans accordingly, or if the markets continue to fall rather than leveling out as we anticipate, we will be prepared to respond to this as well. This means that the plans we make, including budgetary plans, must be flexible so that we can respond to changes in the overall financial situation.

The fall in the markets affects not just our endowment: Our income from other sources is also bound to be affected. As you know, our donors have continued to be extraordinarily generous, but their own finances will be under great pressure in the future, too. The election of a new president who is more science friendly has to be welcomed, but President Obama’s scope for change will be limited, and we should not rely on a dramatic increase in federal funding to solve our financial problems.

The Finance Department has constructed a number of models based on possible percentages of loss of endowment income this fiscal year ranging from 15 to 30 percent. The model we are using at the present time indicates a loss of endowment returns of 25 percent in 2009, a neutral position in 2010 and small growth in 2011 of around eight or nine percent. This model produces a deficit of $15 million in 2011, and in subsequent years deficits of as much as $30 million or more each year. Faced with deficits at this level, we need to make plans to modify our spending.

July 1, 2009 to June 30, 2010. While we do not know when the situation will improve, we need to make decisions for the financial year from July 1, 2009 based on the information available now. The Executive Officers Group (EOG) met in December to discuss the impact of the change in financial climate on our future planning, in particular on the budget for 2009–10, and made the following decisions with respect to the year 2009–10:

• The budget will be based on zero percent growth in the university administration and overhead costs. Usually, an allowance is made for inflation, which in 2008 was 3.9 percent, but this year the budget will make no allowance for inflation. This means that we will need to cut back on spending from the level of the current year in these areas.

• With respect to laboratory funding, we have decided to maintain the formula at its current level for the year beginning July, 2009. We feel we can maintain support at this level for one more year. Protecting our ability to conduct research at the present standard is a priority for the university. Preserving the current formula is therefore extremely important, and we will do this for as long as it is possible.

  The unprecedented seriousness of the shortfalls forecast for the future, however, is such that we might not be able to sustain core laboratory funding at the current level beyond next year. If the financial situation does not significantly improve, we will need to modify the formula in subsequent years. For this reason all heads of laboratory should start now to look at ways to increase their financial reserves in anticipation of such changes. They should aim not to spend all their allocation this year, keeping some in reserve. With respect to staff planning, the assumption should be that changes to formula are likely to be required in future years; therefore, now is the time to think ahead about staff. Heads of laboratory are advised not to increase lab size in these circumstances. In addition, the supplementary bridging funding that has been given to some labs that faced difficulties due to grant delays and failures will be given extremely sparingly, if at all, in the future.

• We decided that for the coming year the funds available for salary increases throughout the university will be reduced from the usual four percent of the salaries budget to two percent. Where in 2008 a pay rise of four percent might have been awarded, from July this will be capped at two percent. Some other institutions will have no pay increases at all next year whilst some such as our immediate neighbors are giving more. The administration, supported by the Board of Trustees, takes the view that it is important to help staff as far as possible to live in this expensive city; we are also mindful of the inflation rate for 2008 of 3.9 percent. However, in reducing the raise from the more usual figure close to inflation we are recognizing the seriousness of the challenges facing us. In future years it may not be possible to award a pay increase, and this situation may persist for some time. Much depends on the way the financial world changes in the future.

 
To help achieve reductions in spending, the following specific actions have been approved for the next financial year:

• The administrative staff review, introduced recently to assess whether vacant positions need to be filled, anticipates saving a minimum of $1 million for 2009–10 through “freezing” positions not considered essential in the short term to the operations of the university.

• The small number of “bridging” funding arrangements that were put in place to assist heads of laboratory to address temporary shortfalls in external funding will be curtailed and any bridging arrangements made in the future will be very limited. This will save around $1 million per year.

• With effect from 2010, deferred maintenance, the allowance made for upgrading equipment and renovations, will be reduced from $8 million to $5 million per year. Equipment replacement and renovations will be undertaken with less frequency.

• Resource center charge-backs will be revised, including the charges made for animal accommodation.

• With respect to energy costs, the administration is exploring the use of forward contracts to lock in the current favorable rates. About $1.25 million per year will be saved through this.

• A laboratory managers’ group is to be established with the brief of devising cost-saving schemes and disseminating cost-saving information.

• Plans to recruit additional specialist staff to the library have been suspended for the present time.

• The facility of paying rent for university housing using a credit card is to be removed, saving the university credit card charges amounting to approximately $145,000.

• Modifications will be made to the fee structure for the Child and Family Center, taking into account family income.

• Ways of modifying overtime arrangements to save costs will be explored.

 
Future years. Unfortunately, at the present time the picture we have of subsequent years does not look promising. If the global financial situation does not improve within the next year, it is possible that we will need to make more extensive reductions in spending, perhaps over a number of years, starting from July 2010. This may require some reduction in staff positions. Whenever practical, any reductions needed will be achieved through normal turnover of staff. The university community should be aware, though, that this might not be enough and that other measures such as retirement and voluntary separation packages may need to be explored. If this approach, in turn, is found to be insufficient, managers will be requested to make proposals and recommendations for involuntary separations.

This week the Executive Officers Group will meet again to consider options for making cost reductions beyond those I have described from the year starting July, 2010. After decisions are made as to which options to pursue, heads of laboratory and managers will be informed in detail and advised on the parameters for their future budgetary planning.

We will not be curtailing faculty recruitment. The priority for this institution, supported by the Board of Trustees, is to sustain our research. We have funds raised for this purpose and in the present climate, when many of our sister institutions have imposed a hiring freeze, we are in a good position to attract excellent new faculty. The faculty are the lifeblood of Rockefeller and strengthening the university through recruitment remains of paramount importance. Recruiting new lab heads will also put us in a stronger position financially when the economic recovery eventually takes effect as, by that time, these faculty will be sufficiently established at the university to start applying for grant support — which should by then be more plentiful than at present.

Nor are we going to stop the building program we have embarked on. Phase one of the Collaborative Research Center (CRC), Smith Hall and the bridging building, is funded, progressing well and is on track. Completing the CRC remains a priority and the state-of-the-art laboratory space that this building will provide will be a strong attraction for new faculty, as well as accommodating current faculty in better space. In the light of the financial situation, we will not begin the Welch Hall renovation project beyond making the outside of the building safe and watertight, work for which funds are available.

The challenges we face are considerable, but this is a strong institution and we can best weather this storm by working together to find solutions to our problems. Compared with many others, we are in the fortunate position of having a substantial endowment in relation to the size of the university. We have an enthusiastically supportive, committed body of trustees and chairman. We will keep the pressure on fundraising and I will be requesting the approval of the Board to operate in budget deficit to help us through these challenges in the coming years.

As the financial situation changes I intend to keep you informed of developments primarily through BenchMarks, but I will also hold town hall meetings, the next one in June. I encourage you to check this newsletter regularly for updates on the situation.