2/26/2010 Major post : Duke's financial crisis

Fact Checker here
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For more than a year, as Duke grappled with what our Trustee chair called "this dire strait," we focused on only one side of the budget: what we spend.

In his recent appearance before employees, President Brodhead was able to report we have implemented and identified as much as $60 million in cuts. Not bad, although I wish there were greater transparency and accountability so we could all understand this total.

Properly, Brodhead is leading us to phase in the cuts over three years, to avoid major disruption as these impact on the campus.

But the big news from Brodhead was that the target is no longer to save $125 million, it's $100 million. The difference -- as best as Fact Checker can determine -- comes from the side of the budget equation that we have not focused on: greater income than anticipated.

With only sketchy information available, the increased revenue seems to be coming from four sources -- each with a great big caveat.

✔1 ) More masters programs. We make no bones about it: they are profitable and we want to milk them.

We are loading up on masters students because unlike undergraduates and Ph.D candidates, they are expected to pay full freight. And we are creating these programs on the cheap: Dr. Brodhead cited with pride faculty members in Fuqua who are taking on extra burden to teach and mentor the masters students. Earlier, the Dean of Fuqua had been quoted as saying each professor holding a chair had agreed to teach one extra course. Or more accurately, repeat a course that he or she had previously taught.

Let's not kid ourselves. The extra workload that a very few in the faculty are assuming is temporary. And some of the masters programs are so shaky that the Academic Council has appointed a special committee to monitor them to insure that they merit a Duke degree.

Take the profits now and run.

✔2) Another source of new revenue is a tuition hike. That's a Duke tradition more deeply embedded than K-Ville or any other.

Earlier there were whispers in Allen Building that the administration was going to push the Trustees at this weekend's meeting not only for a tuition hike, but for an emergency (fiscal meltdown) increment to yield extra income for a couple of years. Let's hope this idea is dead, because the regular tuition hikes will be more than enough burden.

✔3) Take more money out of the endowment. My fellow Dukies, this is one of the most dangerous ideas that has been discussed on this campus.

Trustees are considering abandoning the formula that controls how much we consume and how much we leave to future generations. This would yield more for the annual budget now -- a rather shortsighted solution.

Last year, the Trustees modified the formula, forgetting to tell anyone what they were doing. The result: Duke withdrew from that portion of its endowment devoted to student financial aid 28 percent more than the original formula allowed. There is no free lunch: we are eating thru money which we hold in trust for future generations.

Careful readers will note that many responsible philanthropic organizations are responding to the fiscal crisis in precisely the opposite way: taking less out of their endowments in order to fulfill obligations to future generations. One good example of this is The Duke Endowment -- separate from Duke U but often confused because of common heritage. The Duke Endowment has trimmed its withdrawals from its nest egg substantially, at the same time that university trustees are considering dipping deeper into our hoard. Folly. Folly.

Don't say the Fact Checker didn't sound the alarm. It is a major failing of the Chronicle that it mentioned brief mention of this in one news story, and never returned to it.

✔4) President Obama's stimulus plan has pumped more than $160 million into Duke this year and next. Duke did an excellent job completing and gobbling all it could from the federal trough.

Surprising no one, the academic world is starting to stir with desire to keep the trough filled even after the stimulus program expires.

There is no doubt that much of the research is valuable. Stronger word: invaluable. That's not the issue: our federal government is borrowing 40 cents every time it spends $1, almost enough to dig a Black Hole and provide for a new Big Bang.

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Fact Checker solution embracing all of the above: Dr. Brodhead should post full details -- line by line -- of his budgets.

OK loyal readers, all of us together, let's take the pledge to reassure our administration we are True Blue: "I promise not to reveal to the Taliban any numbers from Duke's budget."

At the start of the fiscal crisis, Duke created a special website to keep us informed: www.Duke.edu/economy. It is now pathetically out of date. For example the first link I clicked brought me to the 2007-08 financial report. The 2008-09 report (our fiscal year starts on July 1) has been available for almost six months.

I had hopes this website would also give us a running total of the savings we have achieved, but alas, nyet. I am very uncomfortable with some of Dr. Trask's numbers, for example savings that he touts from early retirements. Has he factored in higher pension payments over the span of more years for people who accepted incentives?

While these boosted pension checks do not impact upon the annual budget, they sure do eat at other Duke money, namely our pension reserves. We cannot just look at one pocket which is saving money, when another pocket is being bled.

Why do I want to know these specifics and do my own calculations? Ronald Reagan answered that question when he dealt with the Soviets, quoting an old Russian proverb: "Trust, yet verify."

And one other point: I want to double check to see if we are all singing from the same hymnbook. On March 1, 2009 in his Email to all stakeholders, President Brodhead talked of a "smaller Duke" explaining we would experience three years of cuts so that by the 2011-2012 school year, the budget would be $125 million less than it was in 2008-2009. In other words, down from $1.85 billion -- excluding Duke Health which has its own revenue stream from patients. Is this still his thinking? I have heard too much fuzzy talk.
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Back to this weekend's Trustee meeting. If I am correct in reading a new spirit of transparency and accountability into Dr. Brodhead's annual address to the faculty and to his belated appearance before employees, there is the potential for this to end with a thud. The President must carry the new spirit to Trustees and help them adopt it.

Fact Checker's menu:

-- post the agenda along with a reasonable description of what is going on.

-- post the results of any vote, with the issue fully described and each Trustee's ballot listed individually.

-- post the full minutes. Honest, I do not represent the Taliban. I am not going to subvert you.

-- provide for open meetings -- if not of the full board then of committees. Notice I did not say that anyone who shows up should be able to speak. Just listen. It's been said that Trustees know their remarks are secret, then they will be more open. My response is that if current Trustees do not want to stand and be counted, then we find people with backbones.

Trustees, please note our Academic Council functions very effectively, posting its agenda and posting its full minutes. I have not heard one person say debate was stifled by letting some light in.
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Finally, let us not interpret the rosy pictured painted by Mr. Brodhead -- the budget gap is now down to $100 million, we have so far implemented or identified $60 million cuts -- to lull us into believing our crisis is over.

Not by a long shot. Please consider:

-- Last year Duke's investments lost 24.5 percent. That's not only endowment, but the pension plan and massive Health System reserves as well.

This only tells part of the story: Duke's net assets -- all the wealth accumulated through all the Trinity College years and more than eight decades of Duke University -- fell by 30 percent. 30 percent, poof in one year. Kaboom!!!!!

We were told not to worry about this. On average over the past decade, our investments returned 10.1 percent which is the 2nd highest of any major university.

AH hah. Fact Checker reminds you that the first year of that ten year average was the dot-com era, when our investments went up an amazing 58.8 percent.

On July 1 of this year, that amazing number disappears from the average.

The new average will be closer to 6 percent.

Duke plans on 8.5 percent sustained earnings year after year. So you do not need Fact Checker to point out the big big gulf.

-- Duke likes to boast of its gifts. Yes 100,000 people gave. But since we reached the 100,000 level, Duke has graduated more than 20,000 new alumni and lost an estimated 4 thousand through deaths and address changes. Net gain: 16,000 potential donors, not counting their parents and their employers, whom we also hit up. Net contributors none.

And yes Duke collected $301.6 million. A slide of 22 percent from the year before.

Fact Checker Truth in Reporting: that total comes from a rather unique accounting method used by fund-raisers. Every other number in Duke's financial reports is derived from the Generally Accepted Accounting Principles (GAAP). By this measure, as Dr. Trask pointed out in the fine print of a sub-note in his annual report, using the GAAP, Duke received and had pledges of only $136.9 million last year, off 61 percent from the year before. No decimal point is missing. Off 61 percent.

I should point out that our trouble with donations began well before the fiscal meltdown. The Annual Fund started to low-ball its targets and failed one year even to meet that. The Annual Fund's totals have barely crept up, have not kept pace with inflation and certainly have not kept pace with the university budget which is exploding at a faster than inflation pace.

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