Monday, March 9, 2009

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So why did the President use outdated numbers and restrict his conversation to the endowment?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."

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.

Monday, March 2, 2009

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.

Sunday, March 1, 2009

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.