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Senior university administrators are considering ways to close a projected $5.8 million budget shortfall for fiscal year 2010, President Jehuda Reinharz and Chief Operating Officer and Executive Vice President Peter French announced at a Nov. 6 faculty meeting. The projected shortfall is based on current gift, endowment, and tuition trends.

The university faces a $10 million shortfall for the 2009 fiscal year, which will be resolved through one-time funds and emergency expenditure reductions, including reductions in department budgets and the suspension of position searches.

“It’s an ongoing deficit,” Vice President for Budget and Planning Frances Drolette told The Hoot.

The process to address the projected budget shortfall for FY2010 includes the consideration of recommendations from the faculty advisory committee that Provost Marty Krauss convened last month. Senior administrators will submit proposals and recommendations to close the budget gap by mid-December, Reinharz said.

A budget will then be presented to the Board of Trustees for approval in March. “We cannot present a deficit budget to the Board,” Reinharz emphasized.

“We need to know in March what increase there will be for tuition and salaries” in order to present a budget to the Board of Trustees, French explained. “There’s an incredible amount of uncertainty” due to the current financial crisis, and he added, “we have to make some educated judgments.”

When creating a budget projection, French considered tuition costs, enrollment, financial aid, endowment gifts, endowment returns, the endowment draw rate, operations gifts, and salary increases.

French projected a 4% increase in tuition and room and board costs for the upcoming academic year, which, while on par with inflation, is below the national increase last year and “below our average for the past few years,” French explained at the faculty meeting.

Furthermore, French projected the FY2010 tuition discount at 35%. The tuition discount refers to the percentage of tuition not paid because of financial aid; if all students paid full tuition, the discount would be 0%. “We’re under enormous pressure to keep that tuition discount number at that level,” French stated. This year, he explained, the tuition discount rose to 36.4%.

A 1% salary increase has also been projected for faculty and staff.

The university, French said, is also expecting to miss its $15 million endowment gifts target. “We’re looking at $13 million at best,” he said. The same is true for gifts for operations.

A lull in donations is compounded by current poor endowment returns. “Today our total endowment return is in the negative mid teens,” Reinharz explained.

French told the faculty he projected a 0% endowment return for FY2010. In turn, French projected a $40.4 million, or 6%, draw on the endowment for FY2010. The university usually aims for a 5% draw.

The projected $5.8 million deficit, however, cannot be fixed by increasing the draw on the endowment, which comprises 12% of the projected FY2010 budget, French explained in an interview. “There are state rules about how much you can take out of an endowment in a given year,” he said.

Furthermore, endowments, French explained, consists of the book value, or gifts given to the university which are meant to be invested and cannot be spent, and gains, which are the returns on those investments.

“The donor intention is that [their gift] remains in perpetuity,” Drolette said. Only the gains made on the book value are available for university use.

Traditionally, endowment draws in a given year are determined by taking the “three year average market value [of an endowment] delayed for a year times 5%,” French said. However, “in order to take that money out, you have to have gains,” he added.

“Historically, over decades,” French explained, “endowments tend to earn 8%.” Despite “gains above 8%” in the past, the university’s endowment return for fiscal year 2008 was 2.4%. Moreover, because of present negative endowment returns, much of the gains accrued in better years are gone, French said.

“We’re bumping up against that book value,” French commented. “Even if we wanted to [increase the endowment draw],” he continued, “the law says you can’t. You can only take the gains.”

Because increasing the draw on the endowment is not possible, other avenues must be explored.

“The magnitude of the fiscal 2010 gap requires that planning [to reduce it] be strategic,” Reinharz said. When considering expenditure reductions, “nothing is off the table,” he warned, adding that staff layoffs may become necessary.

“I don’t want to kid you about the results of this,” Reinharz told the faculty. “There will be pain – I guarantee.”