Washington University needs to make significant cuts to address an anticipated $30 million shortfall in the fiscal year starting July 1, 2010, Chancellor Mark Wrighton wrote in an email to the university today.

Most of that shortfall, which largely affects the main Danforth campus and central administration (and not the School of Medicine), stems from major endowment losses. Wrighton said that the school’s endowment finished at $4.2 billion on June 30 — down about 30 percent from its peak value two years earlier.

To put a $30 million cut in perspective, the school had a total operating budget of about $1.9 billion the last school year.

And about 12 percent of its annual budget comes from the endowment. In recent years, the school has drawn between $209 and $220 million from its endowment. The exact amount is determined by a spending formula that is based on an average of the market’s performance over the last five years. The school expects to draw about $18 million less from the endowment in FY 2011, Wrighton said.

The school’s financial straits should not a complete surprise to faculty and staff. Wrighton wrote a similar letter in April in which he said the school expected a $20 to $25 million shortfall for the fiscal year 2011.

While the university’s shortfall is indeed significant, Wrighton noted that other research universities - both public and private - are facing even larger financial problems.

Planning began in earnest over the summer to find ways to make the cuts. Wrighton said the school has already slowed faculty and staff hiring. The math and biology libraries have been closed and the materials transferred to the school’s main Olin Library. Also, healthcare benefits have been altered and the third phase of refurbishing the residential halls on the South 40 as well as the renovation of Mallinckrodt Center have been postponed. The school is also continuing to try to reduce enegry consumption.

“The sobering fact is that we must reset our spending to a lower level in the schools and in central administrative areas, and we also need to prepare for an era of slower growth in revenue,” Wrighton wrote.

Decisions on cuts will be made by December and announced in the early part of 2010, he said. All schools will be affected, but to different degrees.

“Changes in scope, scale and expenditures will not be uniform across all areas,” Wrighton wrote. “While we face an era of constratint in the short term and slower growth in the future, Washington University has an underlying financial strength and talented, creative and dedicated faculty, students and staff. We have exciting aspirations for the future, and I remain confident abot the continuing progress of the University as we strive to strengthen our quality and impact.”

The school coped with financial challenges from the endowment in this current fiscal year by holding down salary increases, saving the school about $20 million.

Wrighton added that despite these financial difficulties, the school remains committed to boosting financial aid for students. The school has added 20 percent to its financial aid budget for undergraduates in the last few years and poured in another $2.3 million to help students this fall, he said.

And the Board of Trustees has recently approved an intiative called “Opening Doors to the Future: The Scholarship Initiative for Washington University” with the goal being to secure an additional $150 million in about four years.

It’s lengthy, but I’ve posted Wrighton’s full letter below:

Dear Colleagues:

I write to follow up on my last communication regarding the University’s finances dated April 14, 2009. First, a brief update on our new academic year. We have recruited outstanding entering students, and we have welcomed a very talented group of new faculty. Brauer Hall for Engineering on the Danforth Campus will be complete before the end of this academic year, and the new BJC Institute of Health on the Medical School Campus will be finished by the end of this calendar year. Programmatic initiatives developed through the Plan for Excellence effort are being implemented as resources become available. With new support from major corporations, we have launched an international research program to address environmental concerns from use of coal. Also, the first Master of Public Health degree candidates are now enrolled in the Brown School. Thus, the University remains committed to many important initiatives that build on our strength as one of the world’s leading universities.

Unfortunately, the financial challenges as set out in my earlier communication persist, and financial and programmatic planning has been initiated over the summer to address an annual shortfall of about $30 million per year for central administrative functions and Danforth Campus schools for FY11 and beyond. While a $30 million annual shortfall is significant, other research universities, public and private, are coping with even larger financial problems. One source of our financial problems is the loss of the value of our endowment. As of June 30, 2009 the market value of our endowment, about $4.2 billion, is down by 30% from its peak value of two years ago. This downturn is very significant and has resulted in a decrease in endowment payout of $9 million. We anticipate additional years of lowered payout, and are planning for another $9 million decrease in FY11. The result is that in FY11 payout will be down by $18 million compared to FY09. The Danforth Campus schools and the Central Fiscal Unit, with total operating revenue last year of about $600 million, are more adversely affected by the endowment downturn than the School of Medicine. The endowment in the last fiscal year provided about 20% of the revenue for the Danforth Campus vs. about 5% for the School of Medicine.

While the School of Medicine does not face acute financial challenges at this time, uncertainty in clinical and research revenue causes us to be conservative and to prepare for a potential downturn. Federal “stimulus” funding, in response to a large number of outstanding proposals, for this year and next already totals at least $34 million, and we anticipate additional research support from this program. Our success in this arena stems from the excellence of our faculty and research staff. The clinical faculty has also excelled and clinical revenue is strong. Our teaching hospitals, Barnes Jewish Hospital and St. Louis Children’s Hospital, have done well, too, bringing additional financial resources to the School of Medicine according to the partnership agreement we have with them. But the “stimulus” is only a two-year program. Further, continuing high unemployment and the associated loss of health insurance benefits will likely erode clinical revenue. Therefore, we must plan for a more financially constrained environment in Medicine, too.

Despite our financial challenges, we remain committed to supporting our core mission. We have set a priority to meet the financial aid needs of continuing students to enable them to complete their degree programs at Washington University. In the last few years we have added 20% to our financial aid budget for undergraduates. Further, we responded to new financial aid requests from students returning this fall with an additional $2.3 million for the financial aid budget. To address the critical and growing need for financial aid resources, the Board of Trustees approved a special effort to secure additional scholarship support: Opening Doors to the Future: The Scholarship Initiative for Washington University. The goal is to secure additional commitments of at least $150 million by June 30, 2014.

What has been done so far and what lies ahead in connection with reducing expenses and planning for an era of slower revenue growth? As most are aware, salaries were constrained very substantially for the year that started July 1, 2009. This constraint has avoided annual expenditures of at least $20 million. We have also lowered non-compensation administrative expenses for this year in the Central Fiscal Unit, saving another $3 million annually. Even with these avoided annual expenditures, we must reduce spending by another $30 million annually beginning July 1, 2010. Plans that reduce recurring and capital costs will involve administrative and academic functions, as well as building projects. We have already slowed faculty recruiting, and hiring of administrative staff, generally, has been tightly controlled. Danforth Campus libraries in Mathematics and Biology have been closed, with holdings consolidated in the Olin Library. In the face of increased health insurance costs, healthcare benefits have been altered to avoid University expenses of about $4.5 million annually, but the University will still support about 80% of the total healthcare insurance premiums of its employees. A third phase of the renewal of residential facilities on the South 40, as well as the renovation of Mallinckrodt Center, has been postponed. We are striving to reduce energy consumption and continue to seek suggestions regarding how to become more efficient in our work. I am appreciative of the more than 100 individual suggestions for cost savings measures that have been sent to me since April, and many of these are being considered for implementation. Please continue to provide input and suggestions, as your help will be valued.

Looking ahead to the next several months, our financial and program planning will be intense, but thorough, as we close the $30 million annual gap for the Danforth Campus. Central administrative areas and the six schools on the Danforth Campus will all be affected in closing this gap. There will be some opportunities to secure additional revenue through growth in degree programs and through philanthropic support. However, the sobering fact is that we must reset our spending to a lower level in the schools and in central administrative areas, and we also need to prepare for an era of slower growth in revenue.

We will review the overall scope and scale of all that we are doing. Decisions from our review will be made before the end of the calendar year and will be announced early in 2010 to prepare a final program and financial plan for FY11 and beyond. The review and planning is being led by Provost Ed Macias and Executive Vice Chancellor Hank Webber, and they will be working closely with Executive Vice Chancellors David Blasingame, Michael Cannon, Larry Shapiro and with Vice Chancellors Barbara Feiner and Ann Prenatt. School Deans will be working with their faculty and with the Provost to plan for the individual schools. All of our schools will be affected, because most of the payout from the endowment directly supports the schools and their programs. Accordingly, I have asked the school deans to work with their faculty to plan for less revenue and for slower growth in the years ahead.

Changes in scope, scale and expenditures will not be uniform across all areas. However, in every area we will be tightly managing expenses while working to achieve our goals for the University. While we face an era of constraint in the short term and slower growth in the future, Washington University has underlying financial strength and talented, creative, and dedicated faculty, students and staff. We have exciting aspirations for the future, and I remain confident about the continuing progress of the University as we strive to strengthen our quality and impact. Thank you in advance for your support and understanding as we move through this era.

Sincerely yours,

Mark S. Wrighton

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