Duke's 10 year return on endowment plummets

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✔Good day, my Fellow Dukies.

I am now convinced there are two places called Duke University.

A) One is in the second year of a wage freeze, the personal budgets of our employees crimped to the bone. At this place, the number of employees has been reduced by layoffs and three voluntary retirement programs that, despite administrators' praising each other, merely shuffled costs out of the annual budget and into the pension plan.

B) The other is a university that in the same time frame gave obscene bonuses to some employees. A few bonuses were three times annual salary. Other bonuses were scaled from an extra $1 million for the boss. Fact Checker is galloping ahead in revealing this tidbit, but Loyal Readers will have plenty of details in the next 48 hours.

A) One place named Duke University was revealed on September 16 by Alvin Crumbliss, interim Dean of the Arts and Sciences, who painted a bleak picture: the need to reduce the number of faculty in his domain from 645, the need to recruit cheaper assistant professors rather than senior people to fill any holes. He specifically said there is "less predicable gift income," and he projected a "significant deficit" into the 2012-13 academic year, which is one year later than anyone else has spoken of.

B) And last night, in an e-mail curiously made available only to faculty and staff, President Brodhead sure sounded different, cheering the "third best year ever" for giving to Duke. That was just one element leading to the conclusion "we find ourselves better off than we thought we'd be two years ago." He also said there's money for a "modest" salary increase in the academic year starting next July 1.

Now that our president has caught up with an interim dean in updating us on our fiscal crisis, Fact Checker is simply unable to reconcile what the President and Dean of Arts and Sciences told us.

Fellow Dukies, I have question after question, which of course I will now itemize at some length, about Brodhead's e-mail.


In the 2008-09 academic year, Duke took a bloodbath, its $6.1 billion endowment declining to an officially stated $4.4 billion (Ha ha, "Officially stated." Loyal Readers already know I will offer a different number, so keep reading). The news release put the investment results at minus 24.3 percent, never making clear if that was before or after we paid hefty fees to hedge fund and private equity managers, and leaving out the fact that -- quite apart from our investment losses -- we also routinely spent 5 percent of endowment.

Now, President Brodhead has updated for the 2009-2010 academic year, stating we had a return of 13 percent in the 2009-2010 academic year, choosing to say that this beat Harvard's 11 percent!!

Loyal Readers, stand up and shout, "I read Fact Checker. This is misleading!!"

Very few schools have reported their investment returns so far, but most have beaten us!!! Columbia for example, had a 17.3 percent gain. Barnard, Smith, Middlebury, Trinity, Dickinson and the University of Tulsa gained 15.2 to 17.7 percent.

Duke, its endowment heavily managed by a superbly paid staff, did 13 percent. We could have parked our treasure in index funds geared to the Dow Industrials, S and P 500 and Nasdaq and gained better than 14.

So FC's conclusion is: Mr Brodhead, you did not do your credibility any favors by comparing our return with the Harvard return.


Now Fellow Dukies, as I am sure you realize, the stock market bounces around like a loose basketball and a much better measure is the 10 year average of earnings. Duke has been very very proud of this statistic -- because up until this moment it has been favorable to the administration.

Thus the home page of the Duke Management Corporation, the arm of the university that handles such things: "Over the ten-year period ending June 30, 2009, the university's endowment assets earned an average of 10.1 percent per year — making Duke's one of the top-performing endowments in higher education over a ten-year horizon. During the same ten-year period, the average annualized rate of return for other $1 billion+ school endowments was 6.1 percent."

Well guess what, Brodhead forgot to tell us this statistic in his new e-mail -- one that has appeared in EVERY news release about our endowment earnings since he arrived. And with good reason.

Ten years ago, the dot.com boom on Wall Street, gave Duke a 58.8 percent increase in its endowment in one year. We've been riding on that aberration ever since, and now, with arrival of another year, it disappears from the average.

Fact Checker calculates the new average at 7.48 percent. I am willing to listen if Dr Trask has some other number but it will be close (this is more complicated than you would think).

Fellow Dukies, 7.48 percent is not good at all.

Fellow Dukies, 7.48 percent every year for a decade spells real trouble when your financial matrix counts on an 8.5 percent return.

Some big pools of money -- my examples are pension plans, not endowments, CALPERS and the NJ Pension System -- have cut their projections for the years ahead, and Duke better do the same thing. This of course will yield far less income to be spent in each annual budget, and my question, Mr. Brodhead, is, have you accounted for this in your future budgets.

Loyal Readers, stand up and ask, Mr. Brodhead, why aren't you telling us this year about the ten year average!!! Inform him he hurts his credibility when he buries important numbers because they take the shine off his money managers.


Our president left to FC the job of calculating how much is in our endowment as of June 30, 2010. At year end, we apparently had $4.9 billion.

Let's put that into some perspective. At the end of 2007-08, we had $6.1 billion. In today's dollars, we would need approximately $6.5 billion. So we are in today's dollars, $1.6 billion short, which is $400,000,000 different from Brodhead's calculation of what's missing.


When the financial crisis began, we found we did not have the cash flow from new gifts and from the sale of appreciated investments to meet our needs.

So we went out and borrowed $500 million, instead of spending money out of the endowment as we normally do.

We still owe all that money. In fact we are only paying interest on it, with no plan whatsoever to ever pay off the principal, which is true of most Duke debt.

This $500,000,000 of borrowing is not reflected at all in the endowment totals. We properly take $500 million off the endowment total.

Why did we borrow? Aside from the cash flow problem described above, there is an interesting if conspiratorial theory. Almost all of Duke's endowment is evaluated by guess-work. Very little is in stocks and bonds that can be immediately traded on Wall Street within a precise range of their current price.

A bit more -- in terms of dollar value -- is held in investments that have no ready market, but at least there are guideposts to tell us what they are worth. While Duke does not hold residential real estate, think of your family home. You want to sell, you can only estimate what it is worth, but you got pretty good guideposts because you know what the guy down the street and the guy next door got in their sales.

But most of our investments do not have any guideposts at all. All this REIT and hedge fund and private equity and derivative stuff. We only estimate. If we had sold some assets during the meltdown at a low price -- lower than we had estimated -- we would have had to adjust all the estimates because now we had a guidepost -- with the result that our endowment value really would have tumbled.


Now Mr. Brodhead, in your e-mail you state we received $345 million in "gifts" last year. Stop right there.

Stop. Stop. Stop.

Sir, this budget line is not only gifts, but all private support. In many instances these "gifts" require us to do work, like research. Stop calling this gifts.

And second, you know full well that the number you gave, $345 million, is compiled according to an accounting protocol favored by fund-raisers. No other number in Duke's financial reports follows this crazy protocol. Everything else is according to the Generally Accepted Accounting Principles (GAAP)

In the 2008-09 school year, the crazy method showed we had "gifts" of $301.6 million. Using GAAP the total was only $136.9 including pledges. And we all know from reading about Mr. Nicholas what sometimes happens to pledges.

Please be more candid and report back to us when you have the GAAP number for 2009-10 to go along with your totally misleading fund-raiser's dream total of "gifts."


Gifts are used for different things. Some spent immediately. Some put into buildings that have a useful life of 40 or more years. And some is added to perpetual endowment -- the most valuable dollars.

Mr. Brodhead, your administration has not consistently reported endowment gifts, and FC calls upon you now to give us a chart showing the last ten years. This is your best report card for fund-raising and a very crucial measure of the long term financial strength of Duke.


Mr. Brodhead, your e-mail adds more confusion to the precise number of Duke employees who have departed during the fiscal crisis. You state this time that the workforce shrank by more than 400 positions. This apparently includes reduced overtime, and administrative calculations of how many full-time equivalents would have been hired if it were not for the overtime; that's a device that administrators who do not meet their targets frequently use.

Trouble is, in the March 22 Chronicle, Trask said there were 400 retirements alone.

Can we please have one set of consistent numbers:

A) Number of layoffs

B) Number of people who took retirement incentives

C) Number of people who had to be replaced because of the mis-managed first incentive program, which allowed anyone of sufficient age and years of service to retire with vastly increased benefits, no matter how vital they were to Duke.

D) Number of people you are claiming because of reduced overtime and other gimmicks.

E) Number of people who left on their own.

F) Number of people who left on their own who had to be replaced.

G) Number of jobs vacant to start with that you eliminated.

Oh yes, Mr. President, you state that this past year, "the decision to forgo salary increases... protected over 100 jobs." Now I have never been able to find out, if the salary freeze affected everyone, including people in Duke Health, or just those on the educational side. Assume for a moment, we are only talking about the 8,057 "campus" jobs involved with education. Not the significantly larger number at Duke Health.

Let's assume everyone is making $50,000 a year. And they give up a 2.5 percent wage hike. That's $1,250 per person times 8,057 people. That's a little over $10 million that they have given up.

To employ 100 people -- the number of jobs saved according to you -- requires only $5 million.

I get the same result if I plug in higher salaries or lower. Please take me through your calculation of 100 jobs saved by the wage freeze.


Mr. President, you boast of "more than $200 million in new grants" from the 2009 economic stimulus program. Sir, let's get the number straight to start with so we can have an intelligent discussion.

In an excellent editorial on Sept 2, the Chronicle stated "out of the 854 proposals the University submitted, 237 received funding, totaling approximately $147 million."

$200 million. $147 million. Give or take $53 million, what the hell, it's a federal program.

Next, let's look forward. That money is going to expire. How will that impact our budget, what steps are you taking?


Mr. Brodhead, you reported "we have readjusted teaching loads."

This is news to Fact Checker. Can you be specific? Up til now, the only adjustments that have come to light were in Fuqua, with senior faculty dealing with new, profitable masters degree students, "volunteering" to teach an additional course -- so long as it was something they had recently taught anyway.


Sir, you did transmit some good news to Duke's employees, whose wages are now in the second year of a freeze. You said that starting next July 1, there will be "modest" increases.

Can you tell Fact Checker, please, if there will be an across the board adjustment?

Or -- just like the one-time payments in lieu of raises -- some recognition for people earning less. The one time payments had a cutoff in the first year of the freeze for anyone making $50,000 or more and in the second for anyone making $80,000 or more. So will wage increases be the same for everyone, or will lower paid employees get a larger percentage. It's a moral question. We watch to see if the right things id done.

Can your administration foresee the day when Duke will be able to make up the lost increments, bringing everyone back to where they would have been but for the meltdown. Or is meltdown the right word indeed, never to be made up.


Another fellow with an English Ph.D. from Yale, named Douglas Knight, was our president a long time back (before the Trustees ran him out of town, literally) and his solution to our financial problems at the moment was to bring in more undergraduates -- those who could pay full freight. FC hopes you are not thinking this way.

First, because it violates our fundamental commitment to have students at Duke regardless of the happenstance of their family's finances. We cannot go out cherry picking some people because they will pay full freight.

Second, because it puts stress on our facilities. I am very very very suspicious about the increase in the number of freshmen this year -- and have only heard a garbled explanation that does not jive with the fact that we had more early admissions, and thus fewer slots in the general pool where we had to take a chance whether people would show up or not. 50 extra freshmen puts 150 freshmen in sub-standard dorm living conditions.

Third, because we dilute a key measure of our future health, which is, the amount of endowment that we have per student. Per student. The failure to watch this was a key fault in the expansion of Pratt and Sanford.

✔IN CONCLUSION, I am sure after FC reviews the reports of Drs. Lange and Trask at this afternoon's meeting of the Academic Council, there will be more questions, and every stakeholder deeply appreciates your availability and candor in answering them.

FC had a complaint, that these essays are too long. 2,555 words today. Reading is voluntary.


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