University Will Maintain Budgetary Discipline

Dilshanie Perera

While the decline in Princeton University’s endowment was not as severe as expected, and some cost-savings measures that were implemented have been successful, the University’s fiscal plan for the year is to proceed with caution and continue to reduce spending, reported President Shirley M. Tilghman.

In a letter to the University community sent on Tuesday, Ms. Tilghman outlined the effects of the economic downturn on campus, and explained the endowment investment policies.

In April, the University decided to reduce its operating budget by $170 million over two years because of indications that returns on the endowment, which contributes 48 percent of the operating budget, would decrease by 30 percent.

President of Princeton University Investment Company (PRINCO) Andrew Golden announced last weekend at a meeting of the Board of Trustees that the return on the endowment during the 2008-2009 academic year was down only 23.7 percent.

The value of the endowment was $12.6 billion on June 30, 2009, whereas the previous year it was valued at $16.3 billion, Ms. Tilghman stated in the letter.

Strategies for achieving cost savings over the past year have included a salary freeze on faculty and staff earning more than $75,000 per year; pausing capital projects not already underway; slowing the recruitment of new faculty and staff; and eight percent reductions in endowment income spending over two years.

Over the summer the University offered a Voluntary Incentivized Retirement Program (VIRP) to 460 eligible members of the staff, of which 145 took part.

“While the outcome allowed a significant number of staff to retire at a time of tight financial conditions, it will not fully eliminate the need for additional layoffs this fall,” Ms. Tilghman predicted.

Those measures were paired with setting the tuition and fee increase at the lowest level since 1966, and increasing the budget for undergraduate financial aid by 13 percent.

University spokesperson Cass Cliatt said that this year’s financial aid budget was estimated at $104,000,000. “A record 60 percent of the Class of 2013 is on financial aid,” she noted.

Other expansions have also occurred, including the increase in the undergraduate student body, the opening of the new dormitories at Butler College, and the launch of the Bridge Year program.

Ms. Tilghman justified present and past PRINCO investment practices, saying that the overarching goals are “managing risk and maximizing returns.” The general policy involves a “broad diversification of asset classes, including relatively illiquid asset classes such as private equity, independent return, and real assets,” which she said had been effective up until last year’s economic crisis.

“PRINCO’s success at maximizing returns led to approximately 11.8 percent annualized returns on its investments over a 22-year period,” Ms. Tilghman reported, adding that “universities that employed a more conservative approach to investing may have had losses that were significantly lower than ours last year, but they also had much lower annualized returns over the last 10 years.”

“Our pre-eminence has depended on the risk/reward profile that PRINCO has adopted,” explained Ms. Tilghman, “Even after successive eight percent reductions in endowment spending this year and the next, the payout per unit of endowment in FY11 will still be more than 37 percent above the FY06 payout.”

With the budget for fiscal year 2010 projected at $1,337,680,000, according to Ms. Cliatt, Ms. Tilghman noted in her letter that “we will still be spending more than is prudent for the long-term wellbeing of the University.”

The trustees’ policy for sustainable spending is between 4 and 5.75 percent of the total endowment value, and this year the spending rate is 6.04 percent. “Thus, we have no choice but to continue implementing the two-year budget plan that we announced last spring, and it remains possible that we will have to ask for more cuts in FY12,” Ms. Tilghman said.

“This is clearly not a time to relax, but rather to sustain the budgetary discipline that will protect the University’s core programs now and in the future.”

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