Princeton Details Endowment Results and Spending-Reduction Plans

Princeton has detailed a prospective 25 percent decline in its endowment and resulting restraint in its operating and capital budgets--in line with the steps taken by Yale, and indicative of the actions Harvard administrators may formulate.

In a January 8 letter to the Princeton University community, that institution's president, Shirley M. Tilghman, outlined its financial status in the wake of declining endowment values, and the steps that will be taken to moderate spending for operating and capital purposes. The circumstances she described—an 11 percent decline in endowment value from July 1 through October 31 (based on marketable securities) and possible 25 percent decline for the year (taking into account illiquid endowment holdings); and "more than 45 percent" of operating revenue derived from the endowment—and the financial responses are similar to those at Yale as spelled out by President Richard C. Levin on December 16.

Both institutions' circumstances differ somewhat from Harvard's, in that Harvard is as a whole about 35 percent endowment-funded, but the degree of dependency among the academic units varies from as little as 13 percent to as much as 83 percent (as reported here). Furthermore,  the decentralized nature of Harvard's schools and their finances means that the University is proceeding case by case in arriving at budgets for fiscal year 2010, beginning July 1.

Harvard's Faculty of Arts and Sciences (FAS--see both the linked report and prior dispatches, accessible there), which faces the greatest apparent challenge and anticipates a funding shortfall of $100 million to $130 million in the new fiscal year, is in many respects similar to Princeton as a whole--a point made by FAS dean Michael D. Smith in recent briefings. (Princeton's endowment as of last June 30 was $16.3 billion, about the size of FAS's. Its current-year operating budget is $1.25 billion, with about 45 percent funded by endowment distributions [$535 million in the prior fiscal year, the latest available figure]; FAS's current operating budget is $1.115 billion, with $650 million derived from endowment distributions. Princeton has about 7,500 enrolled degree students; FAS has about 10,300 in the College and the Graduate School of Arts and Sciences.)

Tilghman said that Princeton would take the following steps in its next fiscal year:

•reduce by $50 million the endowment contribution to the university's "general funds operating budget," including 5 percent reductions in the non-personnel administrative budgets of all units; and reduce spending from restricted endowment funds by 8 percent--with possible further decreases in the subsequent fiscal year (Princeton's finances and the components of the operating budget--academic departments and programs, physical facilities, financial aid, administration, libraries, athletics, and the Plasma Physics Laboratory--are described in its annual treasurer's report);

•continue current searches for new faculty members, but subject requests for new or re-opened searches to review by the dean of the faculty;

•subject all searches for term, temporary, and regular staff employment to prior review and approval by a committee consisting of the provost, executive vice president, and vice president for human resources;

•following an earlier $300-million worth of deferrals in the university's 10-year building plan, proceed with existing capital projects (a dormitory renovation and a new chemistry building), and continue all design and permitting processes for other high-priority projects (an arts center, psychology and neuroscience buiildings, and a center for energy and the environment), but defer any new construction or renovation starts--all of which will be reviewed individually, and approved "contingent on funding";

•engage the provost in working with academic units "to ensure that all the funds they manage are being directed to core priorities rather than more discretionary ones" (one result will be to minimize the number of visiting faculty and fellows brought to campus next year); and

•focus increases in compensation on Princeton's "lowest paid employees." Accordingly, maximum increases for tenured faculty and upper-tier administrators will be $2,000. At the same time, graduate-student stipends will be increased 3 percent.

In most respects, these measures are similar to those Yale put in place. FAS, more dependent on endowment distributions and already operating at a deficit, has sharply reduced current faculty searches and indicated that compensation increases would be eliminated, among other measures.

Tilghman also disclosed the magnitude of two further factors worrying all administrators of institutions that educate undergraduates. She said Princeton had faced an "unanticipated increase" of approximately $5 million in the demand for financial aid this year alone, as family financial circumstances worsened. (FAS dean Smith estimated incremental costs of $20 million for fiscal year 2010, based on changing family needs and the funding of recent enhancements in the financial-aid package for lower- and midddle-income families).

The related issue is that economic conditions require schools to moderate their increases in tuition and fees (always an important source of unrestricted revenues). Princeton, Tilghman said, would seek a 2.9 percent increase in undergraduate tuition and fees for the coming year, the lowest percentage increase since 1966.

In light of the endowment pressures, known and unknown, and the broader economic pressures on matters such as financial aid, and tuition and other revenues, Tilghman said, "[It is] likely that we are at the beginning of a multiyear budgetary adjustment."

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