In recent weeks, President Charles M. Vest has met frequently both with individuals and groups about MIT's budget imbalance and the efforts under way to cope with it. Here are his answers to the most frequently asked questions. [On Page 4, Vice President and Treasurer Glenn P. Strehle responds to questions about the MIT endowment.]
You have been talking about making big budget cuts over the next few years. Won't this affect the excellence of MIT and its reputation as a world class academic institution?
No, the contrary is true. The universities that face up to the endemic financial pressures by learning to operate more effectively and cost efficiently will be the winners in the coming century. By finding new ways to accomplish our work better, we will lead the nation in cutting-edge research and education and in providing broad access to it.
Every college and university in the country is facing financial challenges, and many have much deeper problems than we. They are approaching them in a variety of ways. Some campuses have seen unreasonable levels of antagonism and loss of collegiality. We are going to do better. We are going to do it the MIT way, by drawing on our strong sense of community, and by being leaders and innovators.
We will not permit ourselves to become unnecessarily focused on the negative aspects of budget reduction. Rather we will look to the future and undertake the improvement and strengthening of MIT as an exciting challenge. The sole objective of the actions that we are asking the community to undertake is to keep the Institute financially strong in order to retain and enhance our excellence and leadership in this time of change and transformation in the nation and the world.
How serious is the problem, really? Is a $10.1 million deficit cause for great concern when we have an operating budget of more than $1.1 billion?
First, let's define the operating budget. This is the cost of our education and teaching programs and the services that support them. (It does not include funds that we spend for capital purposes, such as the construction of a new building.)
For each year, we make a budget of what we plan to spend, as well as a budget of the revenues that we expect to meet these expenses. In recent years, our expenses have been rising more quickly than our revenues. And this is cause for concern. Anyone who has had to manage a household budget knows where that leads.
Although our total operating budget is very large, the deficit really affects only that portion of the budget that we are free to use as we see fit in teaching, services, and operations. That leaves out research, because the funding that we receive from outside sponsors of research must be spent on that research. We can't decide to use it for something else. So, from our $1.1 billion budget, we need to subtract $356 million for sponsored research at Lincoln Laboratory, and $350 million for sponsored research on campus. We also must subtract Housing, Dining, the MIT Press, and a few other operations whose expenses are supposed to be covered by the income that they generate. This leaves us with a "controllable" budget of under $400 million. A deficit of $10 million represents 2.5 percent of that budget. If left unchecked, the deficit is projected to double in just three to four years. We must act now to halt this escalating problem.
We hear the terms operating gap and deficit. Are they the same?
No. The operating gap is the difference between our total expenditures and our budgeted revenues, that is, the income that is supposed to fund the operation of MIT. These budgeted revenues are the sum of the following: tuition, research revenues, endowment income applied to operations, gifts and investment income targeted for specific purposes, and income from Housing, Dining, and the MIT Press.
When we have an operating gap, we must dip into other sources of money to pay our bills. We first use unrestricted gifts, grants and bequests that were donated to MIT during the year. If this is not sufficient, we are left with an actual deficit. This past year, our operating gap was $15.4 million and our deficit was $10.1 million.
How did we cover this past year's deficit?
Since we cannot end the year with an unpaid deficit, we had to pay the remaining bills by spending money that was not intended to be spent. We used up some funds that had been set aside to meet emergencies, and we used the principal of some funds that had been invested like endowment to build for the future. In other words, in a manner very much like-but not identical to-the federal government, we weakened our financial future in order to pay today's bills. If left unchecked, such deficit spending will accumulate and cause financial crisis for future students, faculty and staff.
Can't we cover the shortfall with income from endowment?
Each year we spend some of the income from endowment to help fund the cost of our operations. We also reinvest a portion of the endowment income so that the value of the endowment keeps up with inflation. If we spend more endowment income than we budget, the value of our endowed funds would diminish over time and the endowment could not be sustained to meet its intended purposes.
Do we use all the unrestricted gifts we receive to reduce the deficit?
Not always. Occasionally, as we did this year, we receive an unusually large, unrestricted gift (usually as a bequest from someone's estate), which we choose to invest as if it were endowment. We do so because gifts are the primary way, other than reinvesting a portion of the endowment income, that we can increase the size of our endowment. For example, if we had spent all of our unrestricted gifts over the past nine years rather than saving some of them, today we would have about $39 million less in funds functioning as endowment-an amount that translates into $1.9 million in investment income this year.
In addition, we don't like to count on using all of our unrestricted gifts to balance our budget. Why? Because the year-to-year level of unrestricted giving is quite unpredictable and we cannot assume that it will always be available. Also, and importantly, they are the most flexible resources we have. We would prefer to use them to increase our endowment or to support special activities in education, research and student life rather than to fund basic operations.
What exactly is causing the problem?
Major contributing factors include the following:
- The desire to increase salaries and wages faster than inflation in order to attract and keep our outstanding faculty and staff. Also contributing to our financial pressures is the policy decision, made for the long-term good of MIT, to reduce our dependence on sponsored research money to pay significant portions of faculty salaries.
- Rapid growth in financial aid needs - because of a substantial decline in federal support for scholarships and because the weak economy has hurt our students' families. We cannot counter this by increasing tuition at extraordinary rates.
- Leveling trends in federal support for research and technical changes in federal guidelines for reimbursing universities for the costs of research.
- Changing and growing needs in such areas as student services, and information technology to support teaching and research.
- Increased costs of government regulation.
What are the principal sources of our revenues? Can these be increased?
As a private university, we have only three significant sources of revenue: tuition, sponsored research, and gifts and endowment income. I believe that we should increase tuition only modestly, so we cannot count on it to fund growth or even to increase salaries and wages at the necessary rates. Our faculty will continue work to increase research funding, but they are doing so in an environment of leveling federal support for research, changing priorities, and increasing costs of conducting research. It must be emphasized that faculty seek funding for research that they consider to be intellectually important, and the basis for first-rate graduate education-not to bring money into the Institute. We have made great progress in attracting private gifts and endowment during the last decade, and we will continue to strive to keep gift income strong, but are doing so in a weak economy and against increasing competition for private funds. We will explore new opportunities to generate revenue, but only those that are consistent with our academic mission and values.
So then, how much do we have to cut in order to bring our expenses in line with our income?
Our goal is to reduce our annual operating expenditures by $40 million over the next three years. When the fraction that is paid as indirect costs by research sponsors is subtracted, we arrive at a net reduction of about $25 million.
To see what we are about to undertake simply as budget cutting is to miss the point, however. We must fundamentally examine what we do and how we accomplish it, set clear goals and priorities, and work more efficiently and effectively. I intend for MIT to be stronger and to enhance its excellence by the time we have completed these readjustments.
What functions will bear the brunt of the planned cutbacks?
Every area of the Institute, whether it is directly engaged in education, research, support or administration, will be considered for budgetary reallocation and for different ways of operating. We will not implement budget cuts across the board, but will rely on ongoing as well as some new processes to set priorities and make informed choices.
How much of the deficit reduction will be accomplished through staff cuts?
The vast majority of our budget is expended on salaries, wages and benefits, so it is inevitable that this is where most of the reductions will come from. We expect that three or four years from now, the overall employment among the administrative, support and service staff on campus will be about 400 (or 10 percent) smaller. That would bring us back to roughly the same the level of employment in these categories that we had ten years ago. In addition, we expect to reduce the size of the faculty through attrition by about 50 (or 5 percent) over the next decade. Changes affecting research staff will be governed largely by changes in the focus and level of sponsored research, as happens all the time. We need to take a look at our research activities, however, and see if there are ways in which we can streamline the support of these activities. Beyond staffing changes, other savings will come from reduction or elimination of some activities, and changes in the way we do things.
Are other options for staff reduction being considered, such as attrition?
We are studying the best way to achieve this reduction in the size of the staff. In particular, we hope that a significant fraction of the reduction can be achieved by attrition. (Each year, about 9 percent of the administrative staff, 17 percent of the support staff, and 15 percent of the service staff turns over.) We will assist those who are laid off with career counseling, exploration of other employment possibilities, some opportunities for retraining, and so forth. Through retraining, for example, some employees will be offered the opportunity to stay at MIT, but take different jobs.
Will a smaller staff be expected to do all the same things that are currently being done?
No. We need to take out some of the work as well. Despite the fact that we will reduce our workforce, we intend to work together as colleagues across the Institute in an effort to examine how we accomplish our tasks and find ways to do them better. We need to look at what we do, why we do it, and how we do it - and design ways to work differently and more effectively, not just longer or harder. Some areas of MIT have been using Total Quality Management (TQM) methodology on various projects to improve their services, and we expect such activities to proliferate as we move down the road. At the other end of the spectrum is the need to take a fundamental look at certain functions or programs with an eye to "reengineer" them, that is to come up with wholly different ways, not simply improved ways, to achieve the essential purpose. When finished, I believe we will have more interesting, more effective, more satisfying jobs.
With the anticipated layoffs, will there be a freeze on hiring from the outside?
No. There are two reasons that hiring freezes are not a good solution. First, we must retain the ability to attract talented new people to the Institute. If this is not done, over time we will not have a work force that is diverse, that has a wide range of talents and training, and that includes people across the age spectrum. Second, as the nature of work at the Institute evolves, we may need to bring people into our operations who have different educational, training and experience backgrounds.
Why don't we freeze or reduce salaries rather than lay people off?
Salary freezes or reductions only postpone the solution to the problem. They do not solve it. We would rather readjust our staffing to new realities so that in the long run we can compensate them appropriately. In the near term, however, salaries will not grow as rapidly as we might desire.
Do you know which positions will be eliminated? Who will decide this, and how, and when?
Rather than making across-the-board cuts in staffing, we are developing plans to study and improve our systems and processes across the Institute to make them more effective and efficient. This will involve the appointment of cross-functional teams to study certain functions that will be identified by the senior officers in consultation with each other. These studies will result in recommendations for reducing or reorganizing the way we do things, and decisions on staff reductions will derive from those studies.
Why don't we do the cuts or whatever is necessary in a year, and get on with our lives, rather than drag it out over 3-4 years?
Because we are taking a fundamental look at what we do and the way we do it. We are not simply cutting back on expenses. This takes time.
Why is MIT spending money on such things as planting flowers around campus during a budget crunch?
Deferring maintenance and allowing the appearance of the campus to degenerate is false economy. Our students, staff and faculty should have an attractive, professional environment in which to work and study. We will continue to slowly but surely maintain and improve our campus. It is part of remaining a great and competitive institution.
Given that the reductions in personnel will be, for the most part, in non-faculty positions, will the faculty be expected to take up the slack or suffer with less support?
The goal is to keep MIT excellent. There will be conscious, local decisions to be made by faculty regarding tradeoffs between numbers and ranges of activities and level of service provided. But in the larger picture, we must focus on studying our systems and processes to learn how to make them more efficient and effective in serving the faculty and students. By getting rid of redundancy, cutting out unnecessary steps in processes and allowing employees to make more decisions locally, we will be able to reduce the total number of employees and improve overall services. This can be done if we roll up our sleeves and take the matter seriously. If we do not go about this wisely as a community, then we could end up with lower support for our faculty and students.
Why do you want to reduce the number of academic visitors at MIT?
Academic visitors provide a welcome and important contribution to campus vitality, but their numbers have grown significantly over the past decade (from 900 to over 1300). This level of visitors has created a diversion of space, faculty time and other resources from our own core teaching and research, and we believe that this number should be trimmed back somewhat.
When and why will graduate enrollment be affected?
Because of changes in federal regulations, by 1999 we will not be able to charge the tuitions of graduate research and teaching assistants to the employee benefit pool. This will result in a substantial loss of funds for this purpose. We estimate that this and other factors make a reduction in the total number of graduate students likely, but such a decision will necessarily involve consultation with deans and department heads about the various options before us at that time.
Will undergraduate enrollment be affected at all? Will the reduced number of graduate students mean that fewer recitation sections will be available?
I do not anticipate any change in the undergraduate enrollment. It is too early to say what the effect on the number of recitation sections will be, but it is my hope to enhance the quality of undergraduate education, not reduce it, during this period. There likely will be a reduction in the number of subjects offered in some departments, but quality should not suffer.
Does the goal of trimming back the use of unrestricted funds for financial aid mean MIT is going to be spending less on financial aid?
Our goal is not to reduce the financial assistance available to our needy students. Rather, we intend to work to increase other sources of funds for this purpose, primarily through increased gifts that would be designated specifically for financial aid - rather than relying so heavily on "unrestricted" funds.
Why don't we cap undergraduate financial aid at a reasonable number and let the chips fall where they may?
The basic reason that MIT exists is to educate students. We are deeply dedicated to making an MIT education available to bright students regardless of their financial or social background. It is increasingly difficult for us, but also increasingly important. There was a period in American history when the best educations were available only to a small fraction of young people who were born to social and financial privilege. We do not want to start down the road of returning to that system. As a matter of fact, MIT never was part of it.
Are decisions going to be made unilaterally by the administration or do you intend to involve others in the process?
The framework for change-our evolving plan-is outlined in this special edition of Tech Talk. Much of the plan will be developed and implemented using the normal Institute channels for decision making and administration. My role is to establish the global philosophy and general plan together with the Academic Council, to lead the communications with the Institute community, and to interact with the MIT Corporation, our trustees.
The detailed development and implementation will be led by Provost Mark Wrighton and Senior Vice President Bill Dickson, working with a variety of faculty, staff and administrative committees and working groups. The Academic Council will review, discuss and monitor planning and implementation for fairness, effectiveness and consistency with institutional goals. Led by deans, directors and department heads, various faculty and administrative and support staff members will participate in specific studies and decisions.
The primary sources of planning to date have been the work of four Academic Council task forces, the report on financial operations for 1993, special administrative studies, the report of the Weinberg Committee on financing of graduate research assistants, the ad hoc faculty/staff working group on total quality management, and the many ideas that have come to the Provost's electronic mail suggestion box.
We will draw increasingly on the ideas of individuals throughout MIT, and will soon be identifying projects that will involve cross-functional teams of faculty and staff to re-examine, revise, and in some cases reengineer many of our systems and processes.
A version of this article appeared in the November 22, 1993 issue of MIT Tech Talk (Volume 38, Number 15).
