President Hennessy addresses budget cuts and endowment

While the oft-cited Stanford bubble has kept students and faculty sheltered from the fallout of economic volatility in the university’s colorful history, the economic downturn of 2008 has squarely hit Stanford, and most other academic universities, with a sledgehammer.

On April 30, Stanford President John Hennessy gave his annual address to the University Academic Council and concerned members of the Stanford Community in a packed Kresge Auditorium. In his remarks, President Hennessy discussed Stanford’s achievements over the last year and the university’s response and outlook following the start of the recession.

Hennessy emphasized Stanford’s resiliency and its survival through earthquakes, the Great Depression, and other significant social and economic events throughout the 20th century. His remarks included quotes from President Obama regarding his focus on science and research universities as well as the importance that former Stanford President Gerhard Casper placed on ensuring the support of faculty and students at all levels of the university staff.

However, Hennessy was quick to comment that the research money from Obama’s recently-passed stimulus bill will not be permanent and is only for the short term. Hennessy went on to underscore the university’s commitment to the undergraduate financial aid program recently implemented for middle- and low-income families.

“Of course, we designed the new program under very different financial circumstances, and we now face challenges in funding it,” Hennessy remarked, “But, we should be steadfast in our commitment to this program, especially when so many Stanford families are facing personal financial challenges.”

The president cited the new financial aid program as a source for the remarkable twenty percent increase in applications this past year, resulting in an admittance rate of 7.6%, the lowest in Stanford’s history.

Hennessy spent most of the speech discussing the specific challenges faced by Stanford after the housing boom crashed and the financial crisis happened in late 2008. He discussed preventive elements such as ceasing the initiation of any capital improvement projects and salary freezes.

“We apply a smoothing formula to the endowment payout, thus reducing the volatility of the payout. Based on these steps, we thought we were well positioned to ride out normal fluctuations in the market,” stated Hennessy, “╔As the provost noted in an early communication to the campus community, we have been tracking endowment performance since 1964; 37 of those 45 years, it returned between 2 and 38 percent. In only eight years has the endowment produced a negative nominal return, and the lowest such downturn was -8 percent.”

“In the first few months of this fiscal year,” Hennessy continued, “we experienced an unprecedented 30 percent decline in the merged endowment pool. Although the economy may stabilize during the remainder of the fiscal year preventing further losses, we are projecting a total loss of 30 percent for the current fiscal year.”

Last fall, the provost made a decision to cut the university’s general funds budget by 15% to attempt to alleviate the sudden hit taken to Stanford’s income. In addition, faculty salaries were frozen and faculty hiring was put at a standstill or significantly downgraded. The endowment also supports financial aid programs and other program expenses. Hennessy defended the administration’s decision to make the 15% budget cuts.

“If we were to set the endowment payout by blindly applying the smoothing rule,” stated Hennessy, “we would likely see more than five years of decreasing annual payouts and several additional years where the endowment would grow by less than inflation. This would lead to many years of successive budget cutting, continuing long after the economy had recovered.”

Hennessy announced an enhanced severance plan for staff and the Faculty Retirement Incentive Program. He commented that employees should expect reductions in vacation hours and asked that vacation time be taken in the year it is earned as well as to expect modest growth in salary and benefits. However, the president was adamant in his commitment to keeping Stanford as the world’s most elite academic research institution.

“Maintaining the quality of our faculty and positioning Stanford to be a leader in important new areas remain priorities. While our faculty recruiting will necessarily be somewhat limited in the next few years, we will not stand still; instead we must use the resources we have strategically and with a focus on excellence,” Hennessy said in his speech to the Academic Council.

In addition to discussing various academic and athletic accomplishments from the university, the president discussed progress on The Stanford Challenge, the ambitious university fundraising initiative. President Hennessy expressed a need to expand the goals set by the program in order to maintain just the status quo.

In response to the university’s loss in expendable funds and liquid assets to the tune of nearly $1 billion, the university has placed a bond offering for $1 billion at a rate of 4.27 percent. Harvard, Princeton, Duke, Vanderbilt and Notre Dame have also raised $500 million to $1.5 billion each in bonds due to the economic downturn. However, Hennessy identified no current need to spend the bond money.

Hennessy stated, “Fortunately, we do not have a pressing need to spend the proceeds of this debt, but we believe that the added liquidity will enhance the university’s financial stability and provide insurance against a need to raise funds at a time when the market might be less attractive.”

An economic panel and question and answer session followed Hennessy’s speech. Topics discussed included the response to the recession by Stanford and the federal government and the state of our current economy. The panel featured finance professors Darrell Duffie and John Shoven, a Senior Hoover Fellow, as well as economics professor John Taylor, also Senior Hoover Fellow, and CEO and CIO of Hall Capital Partners, Kathryn Hall.

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