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Duke's losses top $4 billion as Brodhead tip-toes in

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Just four and a half months after assuring Dukies everywhere that university finances were "stable" and "secure," President Richard Brodhead sent out a new e-mail at midnight March 1.

Long on words (alumni got an abbreviated version) but short on specifics, Brodhead admitted Duke is being battered by an "unexpectedly severe downturn" and announced the need for "'creative, strategic, yet careful spirit" to see us through.

Alas, this is the prose of an English professor, not the plan of a leader.

Indeed, Brodhead's e-mail is most notable for what it leaves out: An up-to-date tally of losses in the endowment and other assets, a definitive program to make cuts and save money, and reassurances for distressed staff and faculty members.

The e-mail cites a December 31 figure, saying we had dropped "more than 20 percent" of our endowment. In fact, the loss as of that date was 24 percent.

Brodhead conspicuously ignored January and February – months that saw the Dow Jones Industrial Average tumble from about 9,000 to 7,000.

Surely the president knew what his executive vice president, Tallman Trask, was up to just hours before the e-mail: Trask briefed the Chronicle that our endowment, once $6.1 billion, has shrunk to "just north" of $4 billion as of the very day of the e-mail.

The Chronicle gave Trask no headline. Woven deep into a rambling story, the Chronicle did not even calculate that Trask's accounting brought us to an astonishing loss of 33 percent, which is more than any other university we are aware of.

Nor did the Chronicle expand to show how this percentage impacts beyond the endowment, across all of the university's investments, where the loss is now a staggering $3.5 billion.

So why did the President use outdated numbers and restrict his conversation to the endowment? We are left to wonder.

If you now factor in the Trustees’ decision to cover red ink by invading reserve funds (a decision that will eat into principal just as surely as investment losses) the total that has disappeared in the fiscal meltdown becomes north of $4 billion.

So far.

Now in his letter, Brodhead acknowledges that the years ahead will be tough. However, he comes up short on concrete ways in which the university will cope with its losses.

For the current year, Brodhead has decreed only small steps: that schools and departments must cut their entertainment budgets, trim the thermostats and cut back on electricity.

"Over several years," the annual budget (exclusive of the Health System's patient care and research) will be trimmed gradually from its current level of $2 billion to $1.875 billion a year, a cut of $125 million phased in.

Compare that to Princeton's immediate chop of $82 million out of next year's budget, which is only 60 percent as large as Duke's.

Duke's current, secret budget is believed to include $400 million in spending from the endowment. This is normally covered by earnings -- interest, dividends and capital gain.

But with interest rates low, dividends being eliminated and massive capital losses, there are no net earnings, nor prospect for any next year either.

How will we bridge the gap between tomorrow's expenses and yesterday’s losses? The Trustees now say they will spend "accumulated reserve funds" -- no amount specified -- that are part of our endowment. This will continue until the inevitable cuts are phased in, all the time further reducing the principal. Trask allowed that in this scenario, "the models (for future budgets several years from now) become rather terrifying."

Of equal concern, the proposed $125 million cutback will be actually more massive than it seems.

Let's consider the 2011-12 school year, three years from now. We'll not only have the $125 million cut, but inflation will have eaten at least ten percent more of the purchasing power. That means Duke will effectively be living on $1.675 billion, and not $2 billion as it does today. Ouch!

And how does Brodhead intend to live on this constricted budget? He does not say.

At a time when our peers are resorting to outright layoffs of staff and faculty as well, Brodhead only dances around the word, allowing only that "we have to assume that the number of people employed by Duke University in the future will be smaller than today."

Compare this to Harvard, where 1,600 support employees have received early retirement proposals that they must review in the next three weeks, knowing full well the option is retirement or the ax. Moreover, Harvard's president Drew Faust has stated an early retirement plan for faculty -- presumably with the ax threatened too -- is being formulated.

Harvard is so concerned that it’s even slashing its janitorial staff in half in some areas, reducing cleaning from daily to weekly. Elsewhere, Stanford has announced it will admit five percent fewer graduate students next year.

Here at Duke, Brodhead said the concept of early retirement was being looked at -- with no explanation of how the pension fund, which has also suffered a 33 percent decline in value, will be able to bear the additional burden of more people collecting benefits earlier in their lives and for more years than anticipated.

Brodhead did announce a wage freeze for all employees not covered by union contracts, with a break for anyone making under $50,000. They will be eligible for a one-time $1,000 check, if their performance exceeds certain undefined standards. Here again, Brodhead compares unfavorably to a long list of schools that, recognizing the urgency of their financial crises, put freezes in place months ago.

But Brodhead kept most of Duke's lavish employment benefits intact, including the tuition assistance plan that expanded greatly this year.

These fuzzy words will only make skittish employees and faculty members more nervous about their jobs. As Brodhead notes, salaries make up about half of Duke's cost; by acknowledging that significant cutbacks are necessary but refusing to share how he will go about reducing Duke’s workforce, the president only fed to the climate of fear and uncertainty that existed before his e-mail.

And it’s worth remembering that a mass exodus of Duke employees could have a devastating impact upon Durham, if not North Carolina. Duke is presently the third largest private employer in the state, trailing only Wal-Mart and Food Lion.

Worse yet, by acknowledging what others in his administration have been hinting – i.e., that construction is grinding to a halt – Brodhead deals a further blow to the beleaguered regional construction industry. Now, Duke says that planning will continue, but "no new buildings will be initiated until external funds are identified and secured."

The word secured is important because pledges are sometimes delayed or not paid at all. At least he ruled out more borrowing to put up Central Campus.

Brodhead did say that Health System plans for a new cancer center and major hospital addition have their own budgets and are exempt from the general rule. However, he cautioned any green light to construct them will come "with care."

After being burned for months for excluding members of the Duke community from participation in its future -- and perhaps watching the campus forums at Princeton where the economic crisis is openly discussed and major news is broken -- Brodhead tacitly admits a mistake. He announces a website so "you can also join the conversation by offering your own suggestions about how Duke might improve efficiency and cut costs." http://www.duke.edu/economy/

Our initial examination of the website, however, shows it does not fulfill its promise. Asked to help cut the budget, you are never given a peek at it.

Other financial information on the website offers no new insight or depth; almost all is normally available in the Annual Report, though that's a document the Brodhead administration still has not presented for the last academic year.

What is striking too is how Brodhead communicates from the isolation of his office. He has appeared once before an open session of the faculty's Academic Council, the subject not announced in advance. And he appeared once at an executive session. For everyone else in the community, there has been only distance and no opportunity to question.

As Febuary ended, the Trustees met for two days. Chair Robert Steel who had proclaimed "good news" after the last meeting, was like the rest of the board. They met in secret and left in silence.

As the financial crisis continues, we hope the Trustees and Brodhead will be much more willing to provide those who care about Duke with the information we need to become committed, knowledgeable and engaged stakeholders in the University’s future. Anything less not only shortchanges us – it impoverishes Duke and prevents the kind of collaborative thinking that can help us endure this mess.

Duke crisis deepens. Endowment off 33 percent. Brodhead sees vastly smaller Duke

There are fast developments this morning....

Executive Vice President Trask has revealed the endowment -- once $6.1 billion -- has shrunk to "just north" of $4 billion, an astonishing 33 percent loss. In mid-February, Trask put the loss "in the mid 20's" percent.

For the first time, the Provost has stated faculty hires will be substantially reduced. Just weeks ago there was unofficial talk of hiring more than usual -- to exploit the availability of many scholars.

University wide, salaries are now frozen.

President Brodhead has written two emails -- one to the university as a whole that has been released, one to its medical component that will be available in the hours ahead -- dealing with the financial crisis and the future of Duke.

Brodhead says Duke will trim its budget gradually, with the Trustees authorizing dipping into reserves so there are no jolts. But he talked of inducing employees into early retirement and hinted at layoffs.

Brodhead said in a few years, Duke would be smaller, its education budget in the range of $1.75 billion. This is a step down from the current budget which is nearly $2 billion, and far far less than would have been spent if the fiscal melt-down not occurred.

Brodhead says Duke will only construct buildings like the new cancer center which has dedicated funding. New/Central Campus -- the vast expansion project -- is on indefinite hold. A month ago Trask talked about borrowing to finance this; that idea is dead.

This morning's rapid announcements establish the crisis at Duke is far far far deeper than officials had previously acknowledged.

More later.

Is Financial Aid Initiative out of reach?

The Associated Press is out tonight with an intriguing report about the effect of a little noticed North Carolina law on endowments held by universities and other institutions. While Duke is not mentioned, there is the possibility -- which we of course will check out -- that virtually all of the endowment money raised by the Financial Aid Initiative is off limits, that none can be used at this time for scholarships.

The state law prohibits trustees from spending if the value of an endowment fund dips below its "historic dollar value" -- which means the amount of the original gift. The purpose of course is to preserve the endowment for perpetuity, not just current use.

During the world-wide financial meltdown, money that Duke raised for the Initiative has lost value along with other university assets; Executive Vice President Trask put the loss "in the mid 20's" percent. So if a donor gave $100,000 two years ago, that fund is now down to $75,000 and -- beneath its original value -- cannot pay out any money.

Gifts that were given a long time ago have grown beyond their original size, because Duke spends only part of each year's dividends, interest and capital gain. These older funds are not endangered by the NC law.

Duke maintains thousands and thousands of individual accounts for gifts -- so determining the latest value is easy.

Before Duke became such a secret place -- back when faculty, students, parents and alumni were informed and were recognized as stakeholders -- Duke issued an annual report detailing the value of each fund.

However, Duke moved in new directions. It started selling professorships, for example, far cheaper than peer schools. Thus the Campaign for Duke conducted by President Nan Keohane was able to boast of 132 new endowed faculty positions -- but not one of them backed by enough money to create such a chair at our peer schools.

A listing of individual accounts would reveal this sham. Our attempts to get details of the value of each part of the endowment were repeatedly denied by former VP for Public Affairs and Government Relations John Burness in the past two years.

Brodhead to speak - but on what??

As happens every February, Trustees approved increases in the cost of attending Duke -- 3.9 percent higher for undergraduates next year. That's in line with inflation and it breaks a pattern of hikes in excess of a cost of living adjustment. Interestingly, the announcement was vague on financial aid, not at all like last year's boast and commitment with very specific numbers and percentages.

For those who read tea leaves, the job of announcing tuition hikes has fallen to the Provost. Just like Executive Vice President Trask has been sent out twice with news of the falling endowment.

That's the pattern -- Steel and Brodhead nowhere in sight when the news is considered bad. There's no shortage of praise for Brodhead though: congratulations to the PR staff for working the word "success" into mention of the Financial Aid Initiative in conjunction with the tuition hike.

Brodhead will be in New York on Thursday for a routine appearance at an alumni club. Don''t count on a briefing on the financial crisis, nor anything
substantial, nor a chance to ask real questions.

(Monday morning Update: Brodhead is ill. He even missed some of the Trustee meetings this weekend. There is no word on the nature of this, nor if he will be able to travel to NY)

Brodhead typically bars follow up questions when he does take them at all.

So what will Brodhead speak about? Depends on what you read.

Version A -- e-mail from Alumni House says Brodhead will lead Judy Woodruff '68, Hon '98, the TV presenter, and John Harwood '78, New York Times political writer, in a discussion of "the influence new forms of media have had on
politics and younger voters." Don't ask us what we think of this lame idea.

Version B -- The Duke Club of New York winter-spring newsletter says Brodhead will present "The Duke Idea: Education, Discovery and Service in the 21st Century." This sounds like a regurgitation of the slick dog and pony show that Brodhead, his PR staff and their consultants toured with two years ago, trying
to remake his image in the aftermath of his dismal handling of the lacrosse hoax.

Whatever the topic, the alumni meeting is at an odd hour: 6:30 PM with no dinner. Dessert will be served afterward, however.

Duke has now lost $3 BILLION in financial crisis

Duke University has so far lost a staggering $3 billion (yes BILLION with a B) in the world-wide financial meltdown. And if you are asking right away why you are learning this from us, and why you did not hear it from the Brodhead Administration, you have identified an additional dimension of the crisis on this campus.

The communications debacle began with an October e-mail from President Richard Brodhead. As other universities were reporting huge declines in endowment, Brodhead pronounced Duke's finances "stable" and "secure." Chair Robert Steel echoed this reassurance after the December Trustee meeting, repudiating the "no reporter's" rule he initiated just two months earlier and beaming "good news" to The Chronicle.

That's why we were so shocked nine days later to hear again from Brodhead, this time under cover of the exam period, when he admitted our endowment -- once $6.1 billion -- had lost 19 percent.

Executive Vice President Tallman Trask has now been sent out twice with updates: the decline tweaked to 20 percent in mid-January and by early February it arrived "in the mid 20's." We'll say 25 percent to make our work easier, though our source tells us it's closer to 27.

Trask's percentages equal a loss of $1.5 billion in the endowment. Unfortunately, Steel, Brodhead and his administrators have given no nuggets of information about other classes of assets, which have also been hit hard. So we will calculate.

There are additional billions in the same investment pool as the endowment -- subject to the same percentage loss. One good source says $3.7 billion more, but we cannot confirm that. Here's what we do know:

-- Trask has confirmed the pool holds surplus (dare we say profits) from the health system. Total: $1.4 billion.

-- And the pool apparently includes Duke's pension fund, confirmed at $1.3 billion.

A 25 percent loss here $680 million.

There's an additional nugget of $651 million (as valued at the start of fiscal year on July 1, 2008) counted as a university asset, even though it technically is under the umbrella of a separate entity, The Duke Endowment, which holds approximately $3 billion for all its beneficiaries. The 25 percent loss applies here too, and that's an additional $163 million gone from the list of university assets.

Lastly, we want to consider the portion of the university endowment that we spend annually. We calculate that Duke used up $418 million in the last fiscal year, and it's believed this year's secret budget calls for $450 million. Normally this spending is covered by earnings -- dividends, interest and capital gains. But with current capital losses, there are no net earnings, meaning this year's endowment spending must come out of principal.

In a liquidity bind, Duke borrowed $500 million two weeks ago to meet this cost in the next 12 months. The alternative would have been to sell assets at current depressed prices. In retaining the assets, Duke is gambling prices won't go down more. And it's a further gamble that prices will go up enough to justify interest costs -- but that's an analysis for another post.

An invasion of principal will be repeated every year until the crisis is resolved; last week Trask said projections of where this might lead "become rather terrifying."

In addition to the $450 million invasion by June 30th, which is the same as a loss, interest on the five year bonds that Duke issued will be $80 million or more.

Trask did announce $150 million in spending cuts last week -- formulated with hardly any consultation with faculty, students and alumni. This move will hardly ameliorate Duke's crunch, because other sources of income -- contributions, grants for research, and on-time payments by patients in the health system, to cite just a few examples -- are also drying up. Initial plans for these cuts were laid weeks ago -- with no indication the intensifying deterioration in the economy has changed them.

Returning to Duke's assets -- so far we've discussed a loss just short of $3 billion and the hemorrhaging is not over. The pace of Trask's advancing our loss from 20 to 25 percent suggests we're dropping more than $100 million a week.

(We do not have the precise date of Trask's February update because The Chronicle did not bother to file a story when told of this deepening loss. Ten days ago we gave The Chronicle access to the information you are reading now and the newspaper has not utilized it in any way. We will review the newspaper's performance in a comprehensive, future post. Similarly, Steel has not reappeared since the "good news," and we will profile his actions separately at a later date.)

The news gets worse when we consider the Harvard Factor. In initially reporting a 21 percent loss on its endowment, Harvard officials noted that investments in private equity and hedge funds were still on its books at overly optimistic prices. When these investments are "marked" at true value, to use the Wall Street term, Harvard anticipates its loss will be 30 percent. Barrons, the weekend magazine of the Wall Street Journal, estimated many universities would see a 50 percent decline.

Beware. This is precisely where Duke has concentrated its investments. On July 1, 2008, just before the meltdown began, Duke had 42 percent in hedge funds and 23 percent in private equity situations. (There are minor variations on these percentages in various reports.) Typically such investments are locked in place for the long term by contracts.

Duke faces an ominous downside potential here, and it is going to grow. We believe Duke has contractual obligations to invest $2.3 billion of new money in hedge funds and private equity in the next two years. Such continued investments are routine in these kinds of deals.

Those are big numbers. Lest we become desensitized, we invite some perspective on how significant the losses really are. In a recent year, Duke added $125 million in contributions to its endowment. Our $1.5 billion loss in the endowment alone -- so far -- wipes out 12 years of giving.

Similarly, Brodhead's Financial Aid Initiative eked out $308 million over four years (three of them in public). Duke's endowment loss means that five times
as much has disappeared in the meltdown.

And more. The loss of $1.5 billion in endowment will reduce our annual spending under the Trustees' five percent rule by $75 million. The much ballyhooed increase in need-based undergraduate financial aid this year involved only $11 million.

A substantial loss in pension fund assets will necessitate larger annual contributions to maintain the funding status of the plan, putting more strain on the annual budget.

As the economy continues to droop, so does Brodhead's profile. He did speak at a meeting of the faculty senate at the start of the academic year, appending to his previously scheduled annual message in a open session that was held in a sub-sub basement room in the Divinity School, a room that seats 117.

Last week Brodhead returned for an executive session of the senate, known as Academic Council.

The president has not reached out at all to students, parents nor alumni.

The nadir of the leadership's response was a clandestine retreat that Brodhead and Steel put together ten days ago, with a rebuff to The Chronicle's request for names of principals and advisers. We can only hope the agenda embraced the increasing certainty that we will not somehow jolt out of this quickly.

Our commentaries about Duke's governance have had a consistent mantra: Let there be light. Let us have transparency and accountability. That message was important in boom periods, it is greatly magnified by current conditions.

By refusing to even acknowledge the extent of the calamity -- much less to discuss it openly and honestly with all stakeholders -- Duke's president and chair have eviscerated their credibility.

Note: the preparation of the above report was made more difficult by the Brodhead Administration's failure -- unprecedented in Trinity College and Duke University history -- to produce an annual report for the 2007-2008 school year; material that is on line is for the period ending June 30, 2007. Policy also made our work difficult: Vice President for Public Relations Michael Schoenfeld has consistently told us we are entitled only to public reports, with no help in understanding or interpreting them.

Introduction

Welcome to our blog! We hope to provide information and analysis that will empower students, parents, faculty, staff and alumni to participate more fully in the governance of Duke.

Some of our posts will be long because our material is very detailed. We will often post original documents. We will tell our readers when we seek information and cannot get it.

When we wrote a joint column in The Chronicle in the fall semester, President Brodhead and Executive Vice President Trask refused our requests for interviews. Vice President for PR Michael Schoenfeld said we were entitled to public reports -- and no help in understanding them. In this antagonistic atmosphere which some administrators created and continue, we do our best to carefully source all information.

You are encouraged to post comments: click on the title above our post, in this case the word "Introduction." Or click on the word "Comments" at the end. We welcome your thoughts indeed.

Our URL is www.ButlerRickards.blogspot.com and our e-mail for additional feedback and tips is Butler.Rickards@gmail.com