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Dear Members of the Duke Community,
I am writing to address a subject that is on everyone’s mind: the economy, how it is affecting Duke University, and the steps we are taking to keep Duke strong in the future.
As we look forward, it is useful to recall that the past decade has been most unusual. Since the mid-1990’s we have lived through a period of wealth creation and economic expansion without historical precedent, a process that lasted year after year, establishing seemingly permanent new standards of economic expectation. Now we are watching something very different: a massive, rapid reduction of wealth and a downturn that may last for a sustained period. No doubt there will be an eventual recovery, but no one is predicting a rapid return to the recent prosperity.
Duke took advantage of the favorable economic conditions of recent years to create permanent and transformative change for this university. Through the skill of the DUMAC management, our endowment grew at a more rapid pace than almost any other in the country. Our philanthropic support reached a new level each year, surpassing even the most optimistic projections. Our research funding grew to the point where Duke was ranked second in the country in funding from the National Institutes of Health.
We used this record of success to make highly strategic investments in the University’s future. In the last decade we built a new library, a new art museum, significant new facilities for virtually every school, and hundreds of thousands of square feet of lab and research space. We raised significant new endowments for financial aid, created the signature civic engagement program DukeEngage, and founded interdisciplinary institutes that put Duke at the forefront in bringing knowledge to the service of society. Most important of all, we recruited top faculty in every discipline, and attracted to Duke the finest, most promising students from around the world.
As we used new resources to build enduring strengths, Duke also managed its funds prudently to ensure future stability. To help protect against inevitable downturns, the University placed a cap on spending from investment returns in years of unexpected plenty, limited long-term debt, and kept a tight lid on overhead and administrative expenses.
Now we face the challenge of dealing with an unexpectedly severe downturn with the same creative, strategic, yet careful spirit that brought Duke advantage in times of plenty.
In a contracting economy, the resources of the University are contracting as well. Our endowment, which stood at $6.1 billion last June, saw a decline of more than 20 percent through the end of 2008. The disappearance of short-term investment returns has removed a significant source of revenue for strategic initiatives. Philanthropy has declined and may stay depressed for some time. While the number of people giving to Duke is greater than at the same time last year, major new pledges are down and may continue to decline in the years ahead, reflecting national trends. Federal funding for research has also steadily eroded over the past five years. While the new economic stimulus bill provides needed relief in this area, it is uncertain whether there will be sustained, long-term
growth in funding for the NIH, the National Science Foundation, and other agencies.
Add up these exposures, factor in the more cautious projections for recovery that now seem warranted, and the estimated negative impact on Duke University’s operating budget will be on the order of $125 million. This means that over the next several years we will have to adjust to the reality that Duke’s budget, instead of growing steadily, will have to be approximately $125 million smaller than it is today. To make such an adjustment in one year would be enormously disruptive. With the approval of the trustees, we have chosen to use accumulated reserve funds to manage the transition to the new, smaller financial base. This will allow us to make changes to our operations in an orderly, strategic fashion.
A fixed across-the-board budget reduction would not make sense at Duke because of our decentralized management system. Different schools are exposed in different ways to different financial effects, and they have to manage them in somewhat different ways. There are, however, certain University-wide steps that can and must be taken. These actions were developed by the senior leadership after consultation with the deans, the directors of major operating units, the relevant University-wide planning committees, and the Academic Council. They have been reviewed by the Board of Trustees, which has been engaged in the planning process from the beginning, and which this weekend formally endorsed the University’s strategic direction after extensive discussion and deliberation. They
cover the following areas:
Compensation
In FY2010, there will be no salary increase for University employees making more than $50,000 per year. Employees making $50,000 and below will receive a one-time, $1,000 payment provided their performance reviews are satisfactory. There will be no change in the comprehensive benefits program—health, life, and dental insurance, tuition reimbursement and retirement plan—during the coming year. The Duke University Health System (DUHS) determines compensation issues on a different calendar from the University, and guidance for the next year will be provided to DUHS employees at a later date, as will be the case for employees of the PDC. Salary increases for employees covered by collective bargaining agreements will be governed by existing contracts.
Academic Initiatives
Duke’s responsibility-center management system delegates significant budget authority to our schools. Given the diverse sources of their revenue, some units will see tighter constraints than others. In all cases, though, schools will be required to present balanced budgets, and thus may choose to implement cost savings and revenue enhancements in different ways. Faculty hiring will continue, though at a slower pace than in previous years.
Tuition and Financial Aid
We recognize that the families of our students are experiencing the same financial challenges as the University and we have sought to keep cost increases to a minimum. Undergraduate tuition, fees, room and board will increase by 3.9% for the 2009-10 academic year, one of the smallest tuition increases in recent years. The costs of graduate and professional programs will also rise more slowly than in the past. At the same time, Duke reaffirms its commitment to admitting the best undergraduates regardless of their ability to pay and to meeting the full demonstrated financial need for all students. The funds the University invests in undergraduate aid will continue to increase at a significantly greater rate than tuition. In addition, Ph.D. stipends will see a modest increase, and
financial aid for graduate and professional programs will remain strong.
Capital Projects
Duke has recently completed the most intense period of construction since the founding of the University, opening more than $1 billion in new facilities that added well more than one million square feet of new or renovated living, teaching and research space to the campus. Just this fall, Duke opened major new additions to the School of Business and the School of Law; in January 2009, we completed work on Few Quad, creating more than 800 renovated student rooms on the West Campus. Because construction projects incur long-term obligations during a period of great uncertainty, however, no new buildings will be initiated until external funds are identified and secured. Planning for certain developing projects, including New Campus, will continue, but the start of construction will be
deferred. Duke University Health System plans for a new cancer center and a major hospital addition have a different budgetary base, and decisions on these projects will also be made with care.
Administrative Expenses
The University will implement a new regimen to identify and control administrative expenses in schools and central departments. Filling staff vacancies and hiring contractors and consultants will require justification and approval within schools and units, as well as by the Provost, Executive Vice President or Chancellor for Health Affairs depending on the unit. All units will be required to reduce expenses for travel, entertainment, overtime, equipment purchases, and other goods and services. In addition, the University will undertake an intensive process of examining, consolidating and ultimately restructuring support programs and services, to ensure that we operate more efficiently and effectively.
Workforce
There is one question that requires as direct an answer as we can offer at this time: what will happen to the size of the workforce of this university? Given the scope of the challenge, and given the fact that compensation makes up 60% of the University’s operating budget, we have to assume that the number of people employed by Duke University in the future will be smaller than today. Making this transition will require us to demonstrate the same thoughtfulness and creativity that guided our decisions in more prosperous times. Before any involuntary layoffs are contemplated, we will thoroughly explore and implement steps including curtailing external hiring, eliminating vacant positions, making internal reassignments and exploring a retirement incentive program for University
staff. The deployment of these systematic strategies will significantly mitigate the impact of any workforce reduction. Our workforce is among our most important resources for ensuring our excellence going forward, and we must nurture its quality even as we make inevitable adjustments.
I conclude with a simple truth. We have entered a world very different from the one we have grown used to in recent years. In this new circumstance, Duke has no choice as to whether or not to reduce its expense base. This is the reality that we now face, together with every other university and virtually every American institution. The choice we have is in how to meet this problem. We could suffer our way together to a shrunken, dispirited status quo. Or we could use our collective energies to envision how to meet our goals and aspirations in new ways in face of this new situation.
I have often boasted that Duke’s special strength lies in the use of intelligence to devise solutions to real-world problems. Now is the time to apply this skill to our own institutional challenge. I am most grateful for the spirit of realism and constructiveness in which this community has embraced this challenge to date. Working together, I am confident that Duke will be able to navigate through these difficulties with our values and momentum intact.
Richard H. Brodhead
President
For more information, visit www.duke.edu/economy
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