The university must tighten its fiscal belt a few notches in the face of a continuing slump in the U.S. economy, the board of trustees has decided.
Johns Hopkins remains in good shape financially, and does not foresee the need to lay off employees or cut programs to keep the budget in balance, as some other universities are planning to do, said James T. McGill, senior vice president for finance and administration.
But the national economy is having an impact on the university's budget in three key areas, McGill said:
The stock market downturn has affected the university's investments, particularly the endowment.
The state of Maryland is facing a serious budget shortfall, meaning that state aid to independent higher education institutions is likely to be cut both this fiscal year and next year.
Though donors to Johns Hopkins have continued to be very generous, short-term prospects for future philanthropic support are unclear in the current economy.
"When the economy softens, the university can take a triple hit," McGill said. "The trustees, with the advice and support of President Brody, have determined that we need to be conservative in our budgeting practices until the economy turns and strengthens."
The university's endowment has outperformed the stock market in the past two years and so far this year, but nevertheless--like virtually all investments--has fallen in value. Because of that decline, the payout--the roughly $100 million that the university budgeted this year to take out of endowment to pay for programs and operations--has increased to about 5.8 percent of a three-year average of the endowment's total market value.
The trustees' goal is a 5 percent payout, a policy intended to protect the long-term value of the endowment. To nudge the payout back toward the 5 percent goal, the trustees voted at their meeting last week to hold payout from existing endowment accounts flat in fiscal 2004. In other words, the total payout from those accounts next year will remain at about $100 million, rather than increasing by 3 percent or so to track inflation. The trustees also directed the administration to spend the next few months preparing a plan to return the payout rate back to 5 percent within the next few years.
At the same time that university investments have declined, the state of Maryland has come face to face with a budget shortfall. Gov. Parris Glendening has proposed a number of immediate cuts, including a 4.9 percent reduction this year in the Sellinger program, which provides unrestricted support to independent colleges and universities. That would cost the university nearly $1 million.
Governor-elect Robert Ehrlich, when he takes office next month, will make his own proposals to achieve the legally required balanced budget both this fiscal year and in fiscal 2004. Those proposals would require approval of the General Assembly or, in some cases, the Board of Public Works. Ehrlich could recommend up to a 25 percent cut in Sellinger aid in fiscal 2003, which would represent nearly a $5 million loss to Johns Hopkins. The deans have been asked to make contingency plans for a cut of that magnitude this year and to assume a 25 percent cut from 2003's budgeted amount in early planning for fiscal 2004.
The trustees also have voted to hold the budget for salary increases next year to 2.5 percent, down from the 3.5 percent rate of recent years. McGill said that individual divisions and offices will retain the flexibility they need to deal with equity, retention and recruitment issues.
All in all, McGill said, the university remains in relatively good shape financially and is not contemplating the layoffs or other dramatic cuts that some peer institutions are considering. Stanford University, for instance, announced in October that the university may face an 8 percent cut in general funds in fiscal 2004 and that layoffs might be necessary. Dartmouth College has said it expects to eliminate 80 jobs and will cancel its varsity swimming programs. Duke University has said its Trinity College of Arts and Sciences will have to impose "some combination of expenditure reductions and revenue enhancements to avoid a projected deficit" that could arise over the next few years.
"Johns Hopkins' five-year budget process really pays off at a time like this," McGill said, referring to the university's practice of planning the next five years of budgets each spring, revising and adding detail as a particular fiscal year comes closer. "This focus on not just a single year but on an entire five-year period allows us to work over time to resolve potential budget problems and address financial concerns."