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To understand the university budget, one must first realize that there are many budgets in the university. Research grants, restricted gifts, endowment income, and general income cannot be commingled. They can be used only respecting the various purposes for which these funds are available. It thus is possible to experience substantial pressure in one part of the budget and relative wealth in another part, and not be able to transfer funds to even out the differences. This is the position in which Stanford found itself at the beginning of the 1990s. Deficits were forecast in that part of the budget supported by unrestricted general funds--primarily income from tuition, endowment, and indirect cost recoveries. In 1991, when the indirect cost recovery rate dropped virtually overnight from 78 percent to 55 percent, this meant a loss of about $25 million to the unrestricted portion of the budget. At the same time, gift income and research grants continued at a relatively healthy rate.

When I became dean of the Law School at the University of Chicago in 1979, I realized to my astonishment that the dean's budget discussions with the provost focused almost exclusively on the general unrestricted funds transfer from the university's center to the law school. Moneys that were raised by and restricted to the law school played only a minor role in the exchanges. This approach was, I think, fairly typical in American universities at the time. A university's operating budget focused mostly on the general funds received and expended by the center, while subordinated units, such as schools, often worked with substantial additional resources that, while known to the central administration, did not appear on its screen. In my later role as provost at Chicago, I worked for a "consolidated budget" that would take into consideration both the unrestricted and the restricted revenues and expenditures of all parts of the university.

Stanford also focused mostly on the unrestricted operating budget. Provost Rice, whom I appointed in the summer of 1993 and who has been an extraordinarily effective manager of the university's budget, as well as my deputy in every other respect, in the fall of 1993 put together a team led by Geoffrey Cox, vice provost and dean for institutional planning and operations (who had worked on these matters at Chicago), and Tim Warner, vice provost for budget and auxiliary management. The team collaborated with the provost and the deans to develop a consolidated budget that enables all of us (including the deans) to better track how money is spent throughout the institution. The effort to sort out our budgetary byways was very complex but succeeded over a two-year period.

The consolidated budget is an example of housekeeping reforms in a university that are time-consuming and, given the university's decentralization, difficult but little noticed when accomplished. Few things we did on the fiscal side of the university over the last five years have been more important. A consolidated budget helps identify programmatic opportunities, quite apart from the fact that it informs us about what we are doing and how. Having that knowledge was crucial as Stanford had to confront fiscal stringencies.

Beginning in 1989 Stanford began to experience a number of setbacks that caused budget deficits: the Loma Prieta earthquake, the financial repercussions of the indirect cost controversy, the economic recession, slowdown in sponsored research growth, and revenue-reducing changes in the rules governing indirect cost reimbursement. The Board of Trustees had to finance these deficits with reserves, unrestricted endowment, and debt.

In 1993, newly appointed Provost Rice announced a program of expense reductions totaling some $18 million over three years. This followed Provost James Rosse's $22 million "repositioning program" launched in 1990, and a budget cut/income enhancement effort consisting of a $26 million cut and $15 million in new revenues implemented by Provost Gerry Lieberman and mostly concluded in 1993-94. Every school and administrative area of the university was affected in these rounds. Stanford had joined the ranks of other American institutions heavily engaged in "re-engineering," "downsizing," and "right-sizing." And it had done so successfully: The deficits were eliminated by 1995.

Just as important as these adjustments, the provost also institutionalized "revenue-constrained" budgeting, meaning simply that allocations are strictly limited by the funds available regardless of the pressure on costs. Also, we have created reserves within the revenue forecast to protect against short-term fluctuations in income. The Board of Trustees, concerned that added costs of operations due to restricted funds not be borne entirely by tuition or other general income sources, instituted an infrastructure charge on restricted funds that went into effect in 1996.

The effect of these budget reforms is twofold. First, there is now a discipline in place that will help constrain the growth of expenses beyond what is prudent and sustainable. Continuing costs over the past three years have grown by only 1 percent per year in real terms. With growing pressure on major sources of income, such as tuition and indirect cost recoveries, we must be able to make necessary budget adjustments within a relatively fixed pool of resources from year to year. Second, we have been able to shift resources to important priorities of the institution: junior faculty salaries, and senior faculty salaries in areas where competitive pressure is intense; attending to deferred maintenance in campus buildings; substantial investments in new administrative systems to improve business processes and controls. At the same time, annual increases in tuition have been held to their lowest levels in more than two decades.

There are very real threats to the financial structures that have sustained American higher education over the past fifty years. Thus far, Stanford has weathered the storms it has encountered without substantial losses to its academic programs. Indeed, administration, especially central administration, has been the primary target of the budget cutting. It is not clear to me how long that can continue. Regulatory burdens are continuously increasing and adding costs. The various initiatives we have undertaken have added to the workload. It is not very popular for a university president to say so, but the fact of the matter is that administratively Stanford is stretched very thin.

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