Monday, March 9, 2009

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

True Blue will offer an essay each Monday. But check back often for readers' comments, updates and special postings. Thank you.


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So why did the President use outdated numbers and restrict his conversation to the endowment?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


  1. One wonders - Did Duke allow its endowment investments to participate in Wall Street's money party the past few years?

    Leveraged speculation has killed, so far, most of America's financial institutions. Did Duke succumb to the temptation?

    Perhaps there is an unhappy reason for Mr. Brodhead's and the BoT's secrecy.

    Jim Peterson

  2. As of 6/30/08 Duke's investment portfolio was allocated 42 % to hedge funds, 23 % to private equity investments, 9 % to real estate and the balance primarily to international and U.S. stocks. This means that about 3/4 of Duke's portfolio was invested in relatively illiquid, high risk/ high reward assets which have been particuarly hard hit by the financial crisis. And because these types of assets are more difficult to value, the resulting losses have likely not yet been fully recognized. As such, Duke's investment losses to date could actually be larger than the 33 % referred to in the post, with prospects of additional losses between now and the end of the fiscal year ( 6/30/09 ).


  3. I guess you people don't like Brodhead.

    Swell hatchet job on NCCU, looney Kristen.

    Did you learn anything at your little spin
    with the News & Observer?

    Yes, stick to law school. Dishonest
    lawyering pays much better than
    dishonest reporting.

  4. Pundits from Duke Admn. are so transparent i.e. 20 March 2009,2:20AM, day of atonement is coming, Judge Beaty rules.

  5. Ed & Kristin,

    It would seem there are a plethora of stories which need to be reported, and a dearth of reporters. Like, you are the only ones. Here are some suggested topics:

    1. A comparison of the response of the Duke administration and faculty to the false accusation of rape against some of their students (noisy and apocalyptic), versus their response to the genuine sexual assault on another of the students (silence, blame the victim). Why?

    A start would include trying to track down the author of the post on DiW alleging that Brodhead refused to meet with the father of the duke student who was sexually assaulted; that two prominent members of the G88 did not respond to communications from the family (why were they not "listening" to their own students?); the absence of any expression of comfort to the student/victim by any member of the administration; the apparent fact the only comments by the administration were Mr. Moneta's attempt to blame the victim for what happened to her, etc. From afar, this contrast is appalling and appears newsworthy.

    2. The evidence demonstrating a trend to give tenure to professors in certain departments (you know which ones) who have no demonstrable scholarship credentials. The case of Wahneema Lubiano comes to mind. According to her CV, her total scholarship produced by this tenured professor in the past decade consists of three interviews with her, her co-authored apologia for the G88, and a reprint of a short article published in 2006. Two other works have been listed on her CV as "forthcoming" for 12 years, which is a type of academic fraud.

    Again from afar, it would seem one would ask: "By what process did this individual get tenure at a top school like Duke?", and then, "What can be done to see this does not happen again?"

    3. Where are the alumni? Thousands have the education and life experience to recognize the effects on Duke of the Brodhead "Locust Years". Doesn't anyone care enough to do something about it?

    Jim Peterson

  6. I suspect the vast majority
    of Duke Alumni have long since
    moved on regarding the lacrosse
    scandal. Whatever sympathy
    there may have been for Duke
    athletes caught with their pants down
    certainly has given way to disgust
    with the shameless gang-raping
    of the University through the meritless
    lawsuits brought by the lax parents.

    If disgruntled ex-301 Flowers staff
    need stories, they need only do a little
    searching. However what they find
    will most likely not fit in with their
    "narrative". The last thing the world
    needs is another blog spreading the
    fictions of a hack Brooklyn academic.

  7. Well hell, this thing didn't last long.

  8. Every Monday a new post? Maybe they have decided to "move on".

  9. True Blue will offer an essay each Monday.

    Need to get FactChecker to check on this one

  10. Is True Blue related to Dan Blue?

  11. I don't think they share a common NCCU degree. I wonder if Dan was another of those Summa cum loony grads?

  12. They must have run out love for Duke.

    Say Ed, how many issues did The Chronicle
    publish per week in 1963? Did you ever
    get a bound volume?

    Now be nice to your fellow Duke Law alum Dan.

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