Budget Update from Provost Etchemendy

March 9, 2009.

Dear Colleagues,

Over the course of the past month, we have been carefully evaluating the campus budget reduction proposals submitted by all of the schools and administrative units. The deepening and extended national and global economic downturn requires that we make some difficult decisions, and today, we will begin sharing with campus units their final general funds allocations for fiscal year 2009-2010. I am writing to provide all of you the context for these decisions.

When I last spoke to you in January via Stanford Report, the investment climate was difficult. You have all seen the worsening activity in recent weeks, with ongoing and precipitous declines on Wall Street, in real estate and private industry. Our budget planning assumptions estimated a loss in our endowment of 20 to 30 percent; that figure is now trending higher, and it is increasingly clear that it will be a long time before we see the endowment's value return to previous levels. Since the endowment is the university's primary source of investment income, the result will be a long-term decrease in university revenue.

Investment income supports about one-third of our campus operating costs. The other main revenue sources, federal research funding, tuition and clinical income, will not rise considerably. The trustees last month announced a 3.5 percent increase in tuition, room and board, and we believe at this time we cannot ask more from our students or their families. Their need for financial aid is rising and we are meeting those obligations. Federal economic stimulus programs that will increase research funding are encouraging, and we believe Stanford will be competitive in obtaining some of those funds. But any research stimulus the university receives will not be enough to counter other losses.

I am frequently asked why the university does not borrow or spend down the endowment to alleviate short-term budget pain. This in fact happens automatically due to our endowment spending policy and the "smoothing rule" I have described in earlier communications. In the current year, 2008-09, we will spend more than $900 million of the endowment to cover operating expenses, over and above the investment losses mentioned above. Next year we will spend nearly that much again. Clearly, spending even more than is allowed by our policy would be irresponsible. The endowment is meant to provide long-term support to the university for decades to come, not short-term relief for this difficult economic cycle. Consuming more now would simply delay unavoidable cuts by a year or two, and the cost would be long-term damage to the university's future resources.

Given the decline in the endowment, the president and I are convinced we must adjust to a reduced level of investment income as quickly as possible. Earlier this year, I asked schools and administrative units to submit a range of possible budget reductions to eliminate as much as $100 million in base expenses from the $800 million general funds budget over the next two years. This week, I will reduce next year's budget by almost that full amount. This will require virtually all units to take general funds cuts close to the 15 percent level and to achieve those reductions by September 1, the beginning of our 2010 fiscal year.

The impact of these reductions will vary from unit to unit, depending on what proportion of their budgets come from general funds. Most administrative units are entirely funded through general funds, while schools receive between seven and 35 percent of their revenue from this source. Schools that depend heavily on their own endowed funds will, of course, see declines in these revenues comparable to the general funds decline.

As I announced to the Faculty Senate last Thursday, we have also decided to reduce the university salary program. The university will not provide salary increases to either faculty or staff in fiscal year 2010. The only exceptions will be individuals promoted during the year, who will receive an increase appropriate to their promotion.

We hope that a salary freeze might help to preserve some jobs, although more layoffs are unavoidable. We understand that the cumulative impact of these decisions affects many loyal Stanford employees. These have been hard choices made very reluctantly, but we are convinced they are necessary.

We have also worked hard to identify other sources of savings. As announced earlier, we have cancelled or delayed $1.3 billion in proposed construction projects. We will move forward only on those projects that are already under way, or would be too costly to delay, or have significant sources of funding from outside the university budget.

Throughout the campus, many of you have looked for creative ways to achieve efficiencies: sharing office equipment, cutting back on energy usage, eliminating events, curtailing travel, using vacation balances. I commend all of you for your efforts. In these challenging circumstances, your help is extremely important. We know that this continual news is unsettling. I encourage you to take advantage of workshops being offered now to all Stanford employees encountering uncertainty and organizational changes. You can find more details at http://axess.stanford.edu/.

We also will continue our ongoing communication. President Hennessy will speak about the university's financial situation in his annual address to the Academic Council, to which you are invited. We will at the same time convene a panel of our own academic experts to discuss the recent economic events. Mark your calendars for 3:30 p.m. on April 30 in Kresge Auditorium.

We will continue to post specific employment-related information, including details about severance benefits, on our Human Resources Web site at http://hrweb.stanford.edu/. And information about the budget will be promptly posted to http://budget.stanford.edu/. There you will find all budget-related communications from the president and me, as well as news from individual campus units.

We are continually monitoring the economic situation and will take further actions as needed. We remain confident that our budget measures, while extremely difficult, are prudent to preserve the excellence of Stanford University in the years to come. We have weathered difficulties before and we have consistently emerged a stronger, more robust university. Thank you all for your ongoing patience and dedication.

Sincerely,

John Etchemendy
Provost