Financial Context
FAQs
The following are the Frequently Asked Questions we have compiled to date. We will add more periodically, so please check back. If you have a question or savings idea, please submit it via email at savings@princeton.edu.
1. What is meant by the term “new normal”?
2. What is the current state of the endowment? Why don’t we spend more of the endowment?
3. How long will the University’s new budgetary measures remain in effect?
4. How will the 10-year capital plan be affected by the performance of the endowment and the overall economic crisis?
5. Is the University going to increase its budget-cutting targets for FY10?
6. What are the FY11 targets anticipated to be?
7. What is the savings goal for faculty hiring?
8. What can departments do to meet their targets?
9. If a department exceeds its cost-cutting target for FY10, will those savings count towards the department’s FY11 goals?
10. Is it possible that even more cuts will be needed?
11. Is this budget planning likely to affect staff positions? Will units have specific targets for FTE reductions?
12. If voluntary reduction of duty time is a plan that would work for my department operationally, can it count toward my department's target?
13. Will the University be offering a voluntary early retirement or separation programs? If so, what types of incentives will be offered?
14. Will Vacancy Management Review continue?
15. Is the University considering cutting benefits?
16. What happens if there is a faster-than-anticipated economic recovery?
17. What can I do to help?
The “new normal” is a term that describes the new, reduced budgetary baseline from which Princeton University will conduct its business for the foreseeable future. The term is meant to suggest that we do not believe the current economic circumstances can be addressed by temporary or one-time measures, after which we can return to previous funding levels. Even under optimistic scenarios, it will likely be a decade or more before we return to the endowment levels we enjoyed a year or two ago.
Declines in endowment value, such as those the University currently is experiencing, do not automatically reduce the endowment’s contribution to next year’s operating budget. Our policy is to increase that contribution by 5% each year, as long as the amount falls between 4.0% and 5.75% of the value of the endowment, as determined on June 30 of the prior fiscal year. When our rate falls below that range we make upward adjustments in spending and when it rises above that range we must make downward adjustments. On five occasions in the past 11 years we have made special upward adjustments, and this year our spending rate is comfortably within the range at 4.76%. Looking ahead, however, a 30% decline in the value of the endowment would put our spending rate well above the upper limit of our range.
To bring spending closer to the upper limit, we are planning to reduce the endowment’s contribution to the University’s general funds operating budget. Even with this reduction, our spending rate would remain above our target range, but we believe this spending level represents a measured response to the current economic climate. If circumstances change, we have the flexibility to modify this plan.
We do not know how long the recession will last or how long it will take for the University to recover from it. Indeed, all of the financial experts with whom we have consulted have stressed that the financial outlook is exceedingly uncertain, and that we should do everything possible to preserve institutional flexibility. It is possible that current conditions will persist or worsen. We may also see new and different economic problems, such as high inflation. If so, different, but still difficult, measures will be required to address such changes. We are not dealing with a single year problem, but one that will almost certainly affect us for many years. For example, under one relatively optimistic set of assumptions—namely, that all the budget measures described throughout this website remain in effect and endowment returns rebound to 10.5% per year beginning in July 2009—it will take until FY2016 for the University’s spending rate to fall below 5.75%, the upper limit of our target spending range.
The revised downward estimate for the endowment’s performance will affect the 10-year capital plan. The slowdown in all new projects, which we put in place in January, remains in effect, and any decision to go forward with a renovation or new construction project will be made on a case-by-case basis, contingent on having 100% of the funding in hand. In the meantime we will continue to move forward with designs and approvals for the highest priorities in the plan: the new home for the Lewis Center for the Arts, the Neuroscience Institute and the Andlinger Center for Energy and the Environment. It is our intention to be “shovel ready” at the moment when funding becomes available.
President Tilghman’s letter announced that the University has eliminated raises that it previously planned for the vast majority of faculty members and for other employees making more than $75,000. In other respects, the FY2010 budget targets for academic and administrative departments remain unchanged. We continue, in particular, to anticipate an 8% drop in endowment payout, a 5% decrease in non-personnel administrative budgets, firm limitations on the hiring of discretionary faculty visitors, and a vacancy management review process designed to reduce labor costs through attrition.
The FY11 cuts will feel deeper. We are cutting (roughly) $88 million from the University’s budget in FY10 and another $82 million in FY11. As a result, the University’s FY11 expenditures will be down by $170 million from FY09 levels. In the first round of cuts, we identified the cuts that were easiest to make. We also looked for every lever we could pull in the University’s operating budget to limit the impact of the reductions. The second round of cuts will be more difficult, but we will continue our efforts to protect the University’s core commitments and to minimize the impact of the reductions on our talented workforce.
The combined two-year targets, including the cuts already made for FY10, average around 7.5% of each unit's total (personnel and non-personnel) budget.
We have a separate goal for savings in the faculty budget. These savings will be achieved through controls administered by the Dean of the Faculty, not through the budget targets now being distributed to academic units.
The Dean of the Faculty’s office will continue to impose firm restrictions on the hiring of discretionary visitors. In addition, the Dean of the Faculty will sharply limit searches for new faculty at both the junior and senior levels. Princeton will not have a complete freeze on faculty hiring, but any search request will have to clear a very high bar. Departments will be required to defer searches wherever possible. All search requests, and all retention packages, will be reviewed by a committee consisting of the President, the Dean of the Faculty, and the Provost.
Departments should use the budget planning cycle to reevaluate priorities and identify new ways to be both effective and efficient. In addition to reducing discretionary expenses such as food, printing, and travel, departments should think creatively about what programs, services, and other expenses could be eliminated entirely without compromising the University’s research and teaching mission. Here are some principles that managers should keep in mind as they go about this process:
- Seek opportunities to collaborate with other departments to share functions, eliminate duplicative assignments, and reduce costs.
- Avoid false savings that come from “moving around the budget bulge”—savings plans will not be approved if they move a cost from one unit to another without achieving new efficiencies.
- Consider whether long-standing practices or programs can be truncated or eliminated in light of changed circumstances.
- Think in terms of eliminating entire functions rather than simply trimming budgets for all operations: programs that continue must have enough funding to operate effectively.
- Avoid cuts that might compromise Princeton’s commitments to health, safety, and regulatory compliance.
- Recognize that space costs are among the biggest elements of the University’s operating budget. If you see an opportunity to return space to the University’s general inventory, please contact Vice Provost for Space Planning and Programming Paul LaMarche to see whether this change could reduce your budget targets.
- Keep an eye out for opportunities to increase revenue to your department from external (non-university) sources. Appropriate revenue-raising measures will count toward your budgetary target, provided that they are approved in advance by the provost or the executive vice president.
- Feel free to contact the budget office for help; it can provide tips and tools to assist managers in analyzing budget plans and modeling changes to them.
Yes. Department savings that exceed a department’s cost-cutting target for FY10 will count toward satisfying that department’s FY11 cost-cutting target. Departments will be encouraged to reach their two-year targets as quickly as possible.
Yes. The endowment declined 23.7% in FY09 and for the time being we are assuming that its value will remain flat in FY10. Therefore, the demanding budget targets we have set will still require the University to expend more than 6.0% of its endowment in FY11. That spend rate exceeds sustainable levels. Unless the markets recover more quickly than our planning scenario assumes, we will have to make additional cuts in FY12.
We have tried to make the two-year targets sufficiently aggressive so that we do not have to impose more cuts before FY12. Nevertheless, the past six months have taught us that things can get worse even when they already look bad. If that trend continues, we may have to readjust the two-year targets.
The two-year savings targets for units will average around 7.5% of their overall (staff and non-staff) budget. Unfortunately, mere belt-tightening cannot achieve such substantial budget reductions. Managers will have to think about reorganization and other ways to reduce expenses. Some of these changes will inevitably impact staffing levels; we hope that much of this contraction can be achieved through vacancy management and other voluntary mechanisms.
Units will not have specific targets for FTE reductions. Each unit will have a dollar target. It can achieve that reduction in whatever way is most consistent with its operational goals, provided that its savings plan receives approval from the office of the provost or the executive vice president.
Yes. Please keep in mind that a voluntary reduction in duty time is a permanent reduction to your budget, so the reduction in duty time must be made in consideration of operational needs. You must plan for how the work will stop or get done differently, and you must communicate the new work plan to your staff.
Employees may reduce their time voluntarily in other ways, if they wish to do so. For example, some employees may wish to convert their jobs from 12-month positions to 9-month or 10-month positions. Please speak to your Human Resources manager to determine what options are available to you and your department.
The Office of Human Resources offered a Voluntary Incentivized Retirement Program (VIRP) which is now complete.
14. Will Vacancy Management Review continue?
Vacancy management review is one of the University’s key tools for protecting human capital while driving toward budget targets. For that reason, authorization from the Vacancy Management Review Committee will continue to be required before a position can be posted.
Vacancy management review is one of the University’s key tools for protecting human capital while driving toward budget targets. For that reason, authorization from the Vacancy Management Review Committee will continue to be required before a position can be posted.
Not at this time, with one exception. A committee has been charged with reviewing the structure and implementation of our worker's compensation, short term disability and long term disability plans to ensure that we are comparable to our peers.
Let’s hope it does, but let’s also be clear about how robust such a recovery would have to be to impact our two-year planning. As previously noted, we currently believe that FY12 cuts may be required in addition to those we have already planned. The first benefit from a recovery would be to eliminate the need for FY12 reductions without affecting the FY11 targets. In order for us to take even that step, the recovery would have to be significant and sustained. For example, the Dow Jones Industrial Average rose 21% between March 9, 2009 and March 26, 2009—an impressive gain. Yet, even after that upswing, the markets were lower than they were on January 1, 2009, at which time the University was already preparing for multi-year budget cuts.
That said, we will continue to monitor the markets and the endowment’s performance. If we experience an unexpected recovery that affects our two-year targets, we will be in touch with managers as soon as possible.
The many expressions of support and offers of help that have been received during the past few months are deeply appreciated. Your questions and suggestions have already informed our efforts to cut costs and reduce budgets. We know that these significant changes to University operations will require continued adaptation as we learn more about the challenges we face and as we solve practical problems of implementation. We ask that you connect with us via email at savings@princeton.edu and offer your suggestions about how we can do things better.